Santarus 10Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 000-50651

SANTARUS, INC.

(Exact name of registrant as specified in its charter)


Delaware		33-0734433
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


3721 Valley Centre Drive, Suite 400, San Diego, CA		92130
(Address of principal executive offices)		(Zip Code)

(858) 314-5700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.þ Yeso No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filero		Accelerated filerþ		Non-accelerated filero (Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No

The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of April 30, 2010 was 58,396,833.

SANTARUS, INC.

FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

TABLE OF CONTENTS


	Page
	No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		1
Condensed Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009		1
Condensed Statements of Operations (unaudited) for the three months ended March 31, 2010 and 2009		2
Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009		3
Notes to Unaudited Condensed Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		23
Item 4. Controls and Procedures		24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3. Defaults Upon Senior Securities		51
Item 4. Reserved		51
Item 5. Other Information		51
Item 6. Exhibits		52
SIGNATURES		54
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION


Item 1.		Financial Statements

Santarus, Inc.
Condensed Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)


	March 31,			December 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	84,361		$	86,129
Short-term investments		6,459			7,815
Accounts receivable, net		15,095			16,253
Inventories, net		4,882			5,336
Prepaid expenses and other current assets		7,814			3,797

Total current assets		118,611			119,330

Long-term restricted cash		1,400			1,400
Property and equipment, net		970			875
Intangible assets, net		9,375			9,750
Other assets		6			6

Total assets	$	130,362		$	131,361


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities	$	52,898		$	58,676
Allowance for product returns		13,373			12,846
Current portion of deferred revenue		—			245

Total current liabilities		66,271			71,767

Deferred revenue, less current portion		2,727			2,678
Long-term debt		10,000			10,000
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at March 31, 2010 and December 31, 2009; no shares issued and outstanding at March 31, 2010 and December 31, 2009		—			—
Common stock, $0.0001 par value; 100,000,000 shares authorized at March 31, 2010 and December 31, 2009; 58,387,174 and 58,344,932 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		6			6
Additional paid-in capital		338,449			337,312
Accumulated other comprehensive loss		(1	)		(1	)
Accumulated deficit		(287,090	)		(290,401	)

Total stockholders’ equity		51,364			46,916

Total liabilities and stockholders’ equity	$	130,362		$	131,361

See accompanying notes.

Santarus, Inc.
Condensed Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)


	Three Months Ended
	March 31,
	2010			2009
Revenues:
Product sales, net	$	29,010		$	27,555
Promotion revenue		8,824			4,539
Royalty revenue		1,670			—
Other license revenue		245			2,716

Total revenues		39,749			34,810
Costs and expenses:
Cost of product sales		1,573			1,880
License fees and royalties		2,960			1,827
Research and development		5,017			3,111
Selling, general and administrative		26,539			26,718

Total costs and expenses		36,089			33,536

Income from operations		3,660			1,274
Other income (expense):
Interest income		22			92
Interest expense		(116	)		(113	)

Total other income (expense)		(94	)		(21	)

Income before income taxes		3,566			1,253
Income tax expense		255			100

Net income	$	3,311		$	1,153


Net income per share:
Basic	$	0.06		$	0.02

Diluted	$	0.05		$	0.02

Weighted average shares outstanding used to calculate net income per share:
Basic		58,355,965			57,821,921
Diluted		62,456,602			58,229,931

See accompanying notes.

Santarus, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)


	Three Months Ended
	March 31,
	2010			2009
Operating activities
Net income	$	3,311		$	1,153
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		497			538
Unrealized gain on trading securities, net		(2	)		(11	)
Stock-based compensation		1,039			948
Changes in operating assets and liabilities:
Accounts receivable, net		1,158			(966	)
Inventories, net		454			429
Prepaid expenses and other current assets		(4,017	)		(204	)
Accounts payable and accrued liabilities		(5,778	)		(4,071	)
Allowance for product returns		527			667
Deferred revenue		(196	)		(2,661	)
Net cash used in operating activities		(3,007	)		(4,178	)

Investing activities
Purchase of short-term investments		(2,347	)		(2,054	)
Maturities of short-term investments		2,335			3,538
Redemption of investments		1,350			—
Purchases of property and equipment		(196	)		(83	)
Net cash provided by investing activities		1,142			1,401

Financing activities
Exercise of stock options		97			44
Net cash provided by financing activities		97			44
Decrease in cash and cash equivalents		(1,768	)		(2,733	)
Cash and cash equivalents at beginning of the period		86,129			49,886
Cash and cash equivalents at end of the period	$	84,361		$	47,153

See accompanying notes.

Santarus, Inc.

Notes to Condensed Financial Statements

(unaudited)

1. Organization and Business

Santarus, Inc. (“Santarus” or the “Company”) is a specialty biopharmaceutical company focused on acquiring, developing and commercializing proprietary products that address the needs of patients treated by gastroenterologists, endocrinologists and other physicians. Santarus was incorporated on December 6, 1996 as a California corporation and did not commence significant business activities until late 1998. On July 9, 2002, the Company reincorporated in the State of Delaware.

2. Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) related to the preparation of interim financial statements and the rules and regulations of the U.S. Securities and Exchange Commission related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all information and disclosures required by GAAP for complete financial statements. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature.

Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for any future periods. For further information, please see the financial statements and related disclosures included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Revenue Recognition

The Company recognizes revenue when there is persuasive evidence that an arrangement exists, title has passed, the price is fixed or determinable, and collectibility is reasonably assured.

Product Sales, Net.The Company received approval from the U.S. Food and Drug Administration (“FDA”) to market Zegerid^® (omeprazole/sodium bicarbonate) Capsules in 2006 for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease (“GERD”), treatment and maintenance of healing of erosive esophagitis and treatment of duodenal and gastric ulcers. The Company received approval from the FDA to market Zegerid (omeprazole/sodium bicarbonate) Powder for Oral Suspension for these same indications in 2004. In addition, Zegerid Powder for Oral Suspension is approved for the reduction of risk of upper gastrointestinal bleeding in critically ill patients, and is currently the only proton pump inhibitor (“PPI”) product approved for this indication. The Company commercially launched Zegerid Capsules in early 2006 and launched Zegerid Powder for Oral Suspension 20 mg in late 2004 and the 40 mg dosage strength in early 2005.

The Company sells its Zegerid products primarily to pharmaceutical wholesale distributors. The Company is obligated to accept from customers products that are returned within six months of their expiration date or up to 12 months beyond their expiration date. The Company authorizes returns for expired or damaged products in accordance with its return goods policy and procedures. The Company issues credit to the customer for expired or damaged returned product. The Company rarely exchanges product from inventory for returned product. At the time of sale, the Company records its estimates for product returns as a reduction to revenue at full sales value with a corresponding increase in the allowance for

product returns liability. Actual returns are recorded as a reduction to the allowance for product returns liability at sales value with a corresponding decrease in accounts receivable for credit issued to the customer.

The Company recognizes product sales net of estimated allowances for product returns, estimated rebates in connection with contracts relating to managed care, Medicare, and patient coupons, and estimated chargebacks from distributors, wholesaler fees and prompt payment and other discounts. The Company establishes allowances for estimated product returns, rebates and chargebacks based primarily on the following qualitative and quantitative factors:

	•		the number of and specific contractual terms of agreements with customers;

	•		estimated levels of inventory in the distribution channel;

	•		estimated remaining shelf life of products;

	•		analysis of prescription data gathered by a third-party prescription data provider;

	•		direct communication with customers;

	•		historical product returns, rebates and chargebacks;

	•		anticipated introduction of competitive products or generics;

	•		anticipated pricing strategy changes by the Company and/or its competitors; and

	•		the impact of state and federal regulations.

In its analyses, the Company utilizes prescription data purchased from a third-party data provider to develop estimates of historical inventory channel pull-through. The Company utilizes a separate analysis which compares historical product shipments less returns to estimated historical prescriptions written. Based on that analysis, the Company develops an estimate of the quantity of product in the distribution channel which may be subject to various product return, rebate and chargeback exposures.

The Company’s estimates of product returns, rebates and chargebacks require management’s most subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. If actual future payments for returns, rebates, chargebacks and other discounts exceed the estimates the Company made at the time of sale, its financial position, results of operations and cash flows would be negatively impacted.

The Company’s allowance for product returns was $13.4 million as of March 31, 2010 and $12.8 million as of December 31, 2009. In order to provide a basis for estimating future product returns on sales to its customers at the time title transfers, the Company has been tracking its Zegerid products return history by individual production batches from the time of its first commercial product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into consideration product expiration dating and estimated inventory levels in the distribution channel. The Company recognizes product sales at the time title passes to its customers, and the Company provides for an estimate of future product returns at that time based upon these historical product returns trends, analysis of product expiration dating and inventory levels in the distribution channel, and the other factors discussed above. There may be a significant time lag between the date the Company determines the estimated allowance and when it receives the product return and issues credit to a customer. Due to this time lag, the Company records adjustments to its estimated allowance over several periods, which can result in a net increase or a net decrease in its operating results in those periods.

The Company’s allowance for rebates, chargebacks and other discounts was $33.5 million as of March 31, 2010 and $34.7 million as of December 31, 2009. These allowances reflect an estimate of the Company’s liability for rebates due to managed care organizations under specific contracts, rebates due to various organizations under Medicare contracts and regulations, chargebacks due to various organizations purchasing the Company’s products through federal contracts and/or group purchasing agreements, and other rebates and customer discounts due in connection with wholesaler fees and prompt payment and other discounts. The Company estimates its liability for rebates and chargebacks at each reporting period based on a combination of the qualitative and quantitative assumptions listed above. In each reporting period, the Company evaluates its outstanding contracts and applies the contractual discounts to the invoiced price of wholesaler shipments recognized. Although the total invoiced price of shipments to wholesalers for the reporting period and the contractual terms are known during the reporting period, the Company projects the ultimate disposition of the sale (e.g. future utilization rates of cash payors, managed care, Medicare or other contracted organizations). This estimate is based on historical trends adjusted for anticipated changes based on specific contractual terms of new agreements with customers, anticipated pricing strategy changes by the Company and/or its competitors and the other qualitative and quantitative factors described above. There may be a significant time lag between the date the Company determines the estimated allowance and when the Company makes the contractual payment or issues credit to a customer. Due to this time lag, the Company records

adjustments to its estimated allowance over several periods, which can result in a net increase or a net decrease in its operating results in those periods. To date, actual results have not materially differed from the Company’s estimates.

Promotion, Royalty and Other License Revenue.The Company analyzes each element of its promotion and licensing agreements to determine the appropriate revenue recognition. The Company recognizes revenue on upfront payments over the period of significant involvement under the related agreements unless the fee is in exchange for products delivered or services rendered that represent the culmination of a separate earnings process and no further performance obligation exists under the contract. The Company recognizes milestone payments upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement and (2) the fees are nonrefundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recognized as deferred revenue. Sales milestones, royalties and promotion fees are recognized as revenue when earned under the agreements.

4. Stock-Based Compensation

For the three months ended March 31, 2010 and 2009, the Company recognized approximately $1.0 million and $948,000 of total stock-based compensation, respectively. As of March 31, 2010, total unrecognized compensation cost related to stock options and employee stock purchase plan rights was approximately $12.7 million, and the weighted average period over which it was expected to be recognized was 3.1 years. In March 2010, the Company granted options to purchase an aggregate of 2,810,228 shares of its common stock in connection with annual option grants to all eligible employees. These stock options vest over a four-year period from the date of grant.

5. Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income, specifically unrealized gains and losses on securities available-for-sale. For the periods presented, comprehensive income was equal to reported net income.

6. Net Income Per Share

Basic income per share is calculated by dividing the net income by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted income per share is computed by dividing the net income by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, preferred stock, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted income per share when their effect is dilutive. Potentially dilutive securities totaling 7.1 million shares and 11.8 million shares for the three months ended March 31, 2010 and 2009, respectively, were excluded from the calculation of diluted income per share because of their anti-dilutive effect.


	Three Months Ended
	March 31,
	2010		2009
Numerator:
Net income (in thousands)	$	3,311	$	1,153

Denominator:
Weighted average common shares outstanding for basic net income per share		58,355,965		57,821,921

Net effect of dilutive common stock equivalents		4,100,637		408,010

Denominator for diluted net income per share		62,456,602		58,229,931


Net income per share
Basic	$	0.06	$	0.02

Diluted	$	0.05	$	0.02

7. Segment Reporting

Management has determined that the Company operates in one business segment which is the acquisition, development and commercialization of pharmaceutical products.

8. Available-for-Sale Securities

The Company has classified its debt securities, other than its auction rate securities (“ARS”) and Auction Rate Securities Rights (“ARS rights”), as available-for-sale and, accordingly, carries these investments at fair value, and unrealized holding gains or losses on these securities are carried as a separate component of stockholders’ equity. The cost of debt securities is adjusted for amortization of premiums or accretion of discounts to maturity, and such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary (of which there have been none to date) on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method.

The following is a summary of the Company’s available-for-sale investment securities as of March 31, 2010 and December 31, 2009 (in thousands). All available-for-sale securities held as of March 31, 2010 and December 31, 2009 have contractual maturities within one year. There were no gross realized gains or losses on sales of available-for-sale securities for the three months ended March 31, 2010 and the year ended December 31, 2009.


	Amortized		Market		Unrealized
	Cost		Value		Loss
March 31, 2010:
U.S. government-sponsored enterprise securities	$	3,511	$	3,510	$	(1	)
U.S. Treasury securities		1,849		1,849		—

	$	5,360	$	5,359	$	(1	)

December 31, 2009:
U.S. government-sponsored enterprise securities	$	3,852	$	3,852	$	—
U.S. Treasury securities		1,516		1,515		(1	)

	$	5,368	$	5,367	$	(1	)

The classification of available-for-sale securities in the Company’s balance sheets is as follows (in thousands):


	March 31,		December 31,
	2010		2009
Short-term investments	$	3,959	$	3,967
Restricted cash		1,400		1,400

	$	5,359	$	5,367

The Company holds ARS and ARS Rights which are classified as trading securities. The Company classified the balance of its ARS and ARS Rights totaling $2.5 million and $3.8 million in aggregate as short-term investments in the balance sheets as of March 31, 2010 and December 31, 2009, respectively.

9. Fair Value Measurements

The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s financial assets measured at fair value on a recurring basis at March 31, 2010 are as follows (in thousands):


	Fair Value Measurements at Reporting Date Using
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Money market funds	$	23,426	$	—	$	—	$	23,426
U.S. Treasury securities		1,849		—		—		1,849
U.S. government-sponsored enterprise securities		—		64,445		—		64,445
Municipal debt obligations – auction rate securities		—		—		2,313		2,313
Auction rate securities rights		—		—		187		187

	$	25,275	$	64,445	$	2,500	$	92,220

Level 3 assets held as of March 31, 2010 include municipal debt obligations with an auction rate reset mechanism issued by state municipalities. These ARS are AAA-rated debt instruments with long-term maturity dates ranging from 2034 to 2042 and interest rates that are reset at short-term intervals (every 28 days) through auctions. Due to conditions in the global credit markets, these securities, representing a par value of approximately $2.5 million at March 31, 2010, had insufficient demand resulting in multiple failed auctions since early 2008. As a result, these affected securities are currently not liquid.

In October 2008, the Company received an offer of ARS Rights from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”), and in November 2008, the Company accepted the ARS Rights offer. The ARS Rights permit the Company to require UBS to purchase the Company’s ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If the Company does not exercise its ARS Rights, the ARS will continue to accrue interest as determined by the auction process, or if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised before July 2, 2012 they will expire and UBS will have no further obligation to buy the Company’s ARS. UBS has the discretion to purchase or sell the Company’s ARS at any time without prior notice so long as the Company receives a payment at par upon any sale or disposition. UBS has agreed to only exercise its discretion to purchase or sell the Company’s ARS for the purpose of restructurings, dispositions or other solutions that will provide the Company with par value for its ARS. As a condition to accepting the offer of ARS Rights, the Company released UBS from all claims except claims for consequential damages relating to its marketing and sales of ARS. The Company also agreed not to serve as a class representative or receive benefits under any class action settlement or investor fund.

Typically the fair value of ARS approximates par value due to the frequent resets through the auction process. While the Company continues to earn interest on its ARS at the maximum contractual rates, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS and its ARS Rights as of March 31, 2010. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding period of the ARS and ARS Rights.

In 2008, the Company elected to measure the ARS Rights under the authoritative guidance for the fair value option for financial assets and financial liabilities. Reflecting management’s intent to exercise its ARS Rights during the period of June 30, 2010 through July 2, 2012, the Company transferred its ARS from investments available-for-sale to trading securities in 2008. Changes in the fair values of the Company’s ARS and ARS Rights are recognized as an increase or decrease in interest income. The ARS Rights will continue to be measured at fair value utilizing Level 3 inputs until the earlier of their maturity or exercise. The Company has classified the balance of its ARS and ARS Rights as short-term investments in the balance sheet as of March 31, 2010 reflecting management’s intent to exercise its ARS Rights within the next 12 months.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of March 31, 2010 and 2009 (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Auction Rate Securities and Rights:
Beginning balance	$	3,848		$	4,250
Redemptions at par		(1,350	)		—
Net unrealized gain included in net income		2			11

Ending balance	$	2,500		$	4,261

10. Balance Sheet Details

Inventories, net consist of the following (in thousands):


	March 31,			December 31,
	2010			2009
Raw materials	$	1,147		$	1,071
Finished goods		3,738			4,269

		4,885			5,340
Allowance for excess and obsolete inventory		(3	)		(4	)

	$	4,882		$	5,336

Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and raw materials used in the manufacture of the Company’s Zegerid Capsules and Zegerid Powder for Oral Suspension products. Also included in inventories are product samples of Glumetza^® (metformin hydrochloride extended release tablets) which the Company purchases from Depomed, Inc. (“Depomed”) under its promotion agreement. The Company provides reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and on firm purchase commitments, compared to forecasts of future sales.

Accounts payable and accrued liabilities consist of the following (in thousands):


	March 31,		December 31,
	2010		2009
Accounts payable	$	4,476	$	8,782
Accrued compensation and benefits		4,687		7,525
Accrued rebates		31,015		31,268
Accrued license fees and royalties		2,537		1,831
Accrued contract sales organization expenses		1,979		1,573
Accrued research and development expenses		3,877		3,421
Income taxes payable		496		1,267
Other accrued liabilities		3,831		3,009

	$	52,898	$	58,676

11. Long-Term Debt

On July 11, 2008, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Comerica Bank (“Comerica”). The Amended Loan Agreement amends and restates the terms of the original Loan and Security Agreement entered into between the Company and Comerica in July 2006. In December 2008, the Company drew down $10.0 million under the Amended Loan Agreement. The credit facility under the Amended Loan Agreement consists of a revolving line of credit, pursuant to which the Company may request advances in an aggregate outstanding amount not to exceed $25.0 million. Under the Amended Loan Agreement, the revolving loan

bears interest, as selected by the Company, at either the variable rate of interest, per annum, most recently announced by Comerica as its “prime rate” plus 0.50% or the LIBOR rate (as computed in the Amended and Restated LIBOR Addendum to the Amended Loan Agreement) plus 3.00%. The Company has selected the “prime rate” plus 0.50% interest rate option, which as of March 31, 2010 was 3.75%. Interest payments on advances made under the Amended Loan Agreement are due and payable in arrears on the first calendar day of each month during the term of the Amended Loan Agreement. Amounts borrowed under the Amended Loan Agreement may be repaid and re-borrowed at any time prior to July 11, 2011. There is a non-refundable unused commitment fee equal to 0.50% per annum on the difference between the amount of the revolving line and the average daily balance outstanding thereunder during the term of the Amended Loan Agreement, payable quarterly in arrears. The Amended Loan Agreement will remain in full force and effect for so long as any obligations remain outstanding or Comerica has any obligation to make credit extensions under the Amended Loan Agreement.

Amounts borrowed under the Amended Loan Agreement are secured by substantially all of the Company’s personal property, excluding intellectual property. Under the Amended Loan Agreement, the Company is subject to certain affirmative and negative covenants, including limitations on the Company’s ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and make investments. In addition, under the Amended Loan Agreement the Company is required to maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances with either Comerica or another financial institution covered by a control agreement for the benefit of Comerica. The Company is also subject to specified financial covenants with respect to a minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements as defined in the Amended Loan Agreement. The Company believes it has currently met all of its obligations under the Amended Loan Agreement.

12. Contingencies

Par Pharmaceutical, Inc. — Zegerid Patent Litigation

The Company plans to file an appeal of the District Court’s ruling to the U.S. Court of Appeals for the Federal Circuit by no later than May 21, 2010, which is 30 days following the date of judgment entry. Although the Company intends to vigorously defend and enforce its patent rights, the Company is not able to predict the timing or outcome of the appeal.

The Company is also not able to predict the timing of launch of one or more generic versions of its Zegerid prescription products. To the Company’s knowledge, prior to the District Court’s ruling, Par had received tentative approval from the FDA of its generic version of Zegerid Capsules, but had not received tentative approval from the FDA of its generic version of Zegerid Powder for Oral Suspension. The Company is not able to predict when Par might receive final FDA approval for one or both of these products. The Company is not aware that any other generic companies have filed for or received approval to market generic versions of its Zegerid prescription products. Subject to receipt of final FDA approval, Par may choose to launch its generic products before the appeal is concluded. Pursuant to FDA rules and regulations, the Company believes that Par, as the first ANDA filer with respect to the Company’s Zegerid prescription products, will have a six-month period of exclusivity from the date it launches its generic products during which all other ANDA filers will not be allowed to market or sell their generic products. After the expiration of this six-month period, additional FDA-approved generic versions, if any, of these Zegerid products may become available.

cease promotion of its Zegerid prescription products and significantly restructure and reduce its commercial organization and other impacted operations. In addition, the Company is preparing to launch an authorized generic version of its Zegerid prescription products, however, the Company cannot be certain of the degree to which this strategy will be successful.

The District Court’s ruling also negatively impacts the patent protection for the products being commercialized in the U.S. and its territories pursuant to the Company’s over-the-counter license with Schering-Plough HealthCare Products, Inc., a subsidiary of Merck & Co., Inc., and the Company’s distribution agreement with Glaxo Group Limited, an affiliate of GlaxoSmithKline, plc (“GSK”), for Puerto Rico and the U.S. Virgin Islands, which in turn may impact the amount of, or the Company’s ability to receive, milestone payments and royalties under these agreements. The ruling may also negatively impact the patent protection for the products being commercialized pursuant to the Company’s ex-US licenses with GSK and Norgine B.V. Although the U.S. ruling is not binding in countries outside the U.S., similar challenges to those raised in the U.S. litigation may be raised in territories outside the U.S.

Regardless of how the litigation is ultimately resolved, the litigation has been and will continue to be costly, time-consuming and distracting to management, which could have a material adverse effect on the Company.

University of Missouri — Application for Patent Reissue

In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent No. 5,840,737 (the “‘737 patent”) with the U.S. Patent and Trademark Office (“PTO”). The ‘737 patent is one of six issued patents listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book, for Zegerid Powder for Oral Suspension. The ‘737 patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not feasible to predict the impact that the reissue proceeding may have on the scope and validity of the ‘737 patent claims. If the claims of the ‘737 patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to the Company’s Zegerid family of products could be further impaired, which could potentially harm the Company and its operating results. In addition, the Company expects the University of Missouri will disclose to the PTO the District Court’s ruling described above, and the Company cannot predict the impact such disclosure will have on the reissue proceedings.

C.B. Fleet Co., Inc. — Phospho-soda^{^®} Product Liability Litigation

In October 2009, the Company became aware of two lawsuits filed by individual plaintiffs in Ohio state court relating to C.B. Fleet Co., Inc. (“Fleet”) and claiming injuries purportedly caused by Fleet’s Phospho-soda^®, sodium phosphate oral solution product. The complaints name Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American Society of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic Surgeons and several other individuals as defendants. The complaints allege, among other things, that the defendants fraudulently concealed, misrepresented and suppressed material medical and scientific information about Fleet’s Phospho-soda product. The plaintiffs are seeking compensatory damages, exemplary damages, damages for loss of consortium, damages under the Ohio Consumer Protection Act, and attorneys’ fees and expenses. The Company co-promoted Fleet’s Phospho-soda^® EZ-Prep™ Bowel Cleansing System, a different sodium phosphate oral solution product manufactured by Fleet, under a co-promotion agreement, which the Company and Fleet entered into in August 2007 and which expired in October 2008. In November 2009, the Company filed notices to remove the lawsuits to the United States District Court for the Northern District of Ohio, and plaintiffs filed motions to remand the actions back to Ohio state court. In April 2010, the Company filed motions requesting that it be dismissed from these lawsuits, as well as responses to plaintiffs’ motions to remand.

Under the terms of the co-promotion agreement, the Company has requested that Fleet indemnify the Company in connection with these matters. In addition, the Company has tendered notice of these matters to its insurance carriers pursuant to the terms of its insurance policies. Due to the uncertainty of the ultimate outcome of these matters and the Company’s ability to maintain indemnification and/or insurance coverage, the Company cannot predict the effect, if any, this matter will have on its business. Regardless of how this litigation is ultimately resolved, this matter may be costly, time-consuming and distracting to management, which could have a material adverse effect on the Company.

Depomed, Inc. — Glumetza Patent Litigation

of the patents listed in the Orange Book for Glumetza. The lawsuit is in response to an ANDA and Paragraph IV certification filed with the FDA by Lupin regarding Lupin’s intent to market generic versions of 500 mg and 1000 mg tablets for Glumetza prior to the expiration of the Orange Book patents. Depomed commenced the lawsuit within the required 45 day time period, automatically placing a stay on the FDA from approving Lupin’s proposed generic products for 30 months or until a decision is rendered by the District Court, which is adverse to the Orange Book patents, whichever may occur earlier. Absent a court decision, the 30-month stay is expected to expire in May 2012. Lupin has prepared and filed an answer in the case, principally asserting non-infringement and invalidity, and has also filed counterclaims. Discovery is underway and a hearing for claim construction, or Markman hearing, is scheduled for January 2011.

Under the terms of the Company’s promotion agreement with Depomed, Depomed has assumed responsibility for managing and paying for this action, subject to certain consent rights held by the Company regarding any potential settlements or other similar types of dispositions. Although Depomed has indicated that it intends to vigorously defend and enforce its patent rights, the Company is not able to predict the timing or outcome of this action.

13. Accounting Pronouncements

Pending Adoption of Recent Accounting Pronouncements

In October 2009, the Emerging Issues Task Force (“EITF”) issued authoritative guidance on revenue recognition with regard to multiple element arrangements. The consensus in this recently issued guidance supersedes certain prior guidance and requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (i.e., the relative selling-price method). The consensus eliminates the use of the residual method of allocation (i.e., in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration) and requires the relative selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables subject to the issued guidance. This guidance requires both ongoing disclosures regarding an entity’s multiple-element revenue arrangements as well as certain transitional disclosures during periods after adoption. This guidance is effective for the first fiscal year beginning on or after June 15, 2010. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors.” The interim condensed financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2009 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report onForm 10-K for the year ended December 31, 2009.

Overview

We are a specialty biopharmaceutical company focused on acquiring, developing and commercializing proprietary products that address the needs of patients treated by gastroenterologists, endocrinologists and other physicians.

Our commercial organization is currently promoting Zegerid^® (omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension, which are formulations that combine omeprazole, which is a proton pump inhibitor, or PPI, and an antacid. We developed these products as the first immediate-release oral PPIs for the U.S. prescription market, and they have been approved by the U.S. Food and Drug Administration, or FDA, to treat or reduce the risk of a variety of upper gastrointestinal, or GI, diseases and disorders, including gastroesophageal reflux disease, or GERD. Our Zegerid products utilize antacids, which raise the gastric pH and thus protect the PPI, omeprazole, from acid degradation in the stomach, allowing the omeprazole to be quickly absorbed into the bloodstream and to provide continued acid control. We commercially launched Zegerid Capsules in early 2006 and Zegerid Powder for Oral Suspension in late 2004 and early 2005.

On April 14, 2010, the U.S. District Court for the District of Delaware ruled that five patents covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were the subject of lawsuits we filed in 2007 against Par Pharmaceutical, Inc., or Par, for infringement. The University of Missouri, licensor of the patents, was joined in the litigation as a co-plaintiff. The lawsuits were filed in response to abbreviated new drug applications, or ANDAs, filed by Par with the FDA regarding Par’s intent to market generic versions of our Zegerid prescription products prior to the July 2016 expiration of the asserted patents. We plan to file an appeal of the District Court’s ruling to the U.S. Court of Appeals for the Federal Circuit by no later than May 21, 2010, which is 30 days following the date of judgment entry. Although we intend to vigorously defend and enforce our patent rights, we are not able to predict the timing or outcome of the appeal.

We are also not able to predict the timing of launch of one or more generic versions of our Zegerid prescription products. To our knowledge, prior to the District Court’s ruling, Par had received tentative approval from the FDA of its generic version of Zegerid Capsules, but had not received tentative approval from the FDA of its generic version of Zegerid Powder for Oral Suspension. We are not able to predict when Par might receive final FDA approval for one or both of these products. We are not aware that any other generic companies have filed for or received approval to market generic versions of our Zegerid prescription products. Subject to receipt of final FDA approval, Par may choose to launch its generic products before the appeal is concluded. Pursuant to FDA rules and regulations, we believe that Par, as the first ANDA filer with respect to our Zegerid prescription products, will have a six-month period of exclusivity from the date it launches its generic products during which all other ANDA filers will not be allowed to market or sell their generic products. After the expiration of this six-month period, additional FDA-approved generic versions, if any, of these Zegerid products may become available.

The District Court’s ruling could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched in the near term, before the outcome of the planned appeal and/or before the expiration of the applicable patents in July 2016, which would adversely impact sales of these products and have a negative impact on our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. Even if physicians prescribe Zegerid products, third-party payors and pharmacists can substitute generic versions of Zegerid, once they become available. In many cases, insurers and other healthcare payment organizations encourage the use of less expensive generic brands through their prescription benefits coverage and payment or reimbursement policies. Insurers and other healthcare payment organizations may make generic alternatives of Zegerid more attractive to patients by providing different amounts of coverage or out-of-pocket expenses so that the net cost of the generic product to the patient is less than the net cost of our branded product. In connection with the potential for generic launch, we are currently assessing plans to cease promotion of our Zegerid prescription products and significantly restructure and reduce our commercial organization and other impacted operations. In addition, we are preparing to launch an authorized generic version of our Zegerid prescription products, however, we cannot be certain of the degree to which this strategy will be successful. Even if an authorized generic version of our Zegerid prescription products is offered for sale, we would expect the authorized generic products’ market share to be less than the existing market share for our Zegerid prescription products, and we would expect to receive only a portion of the gross margin on sales of the authorized generic products as opposed to the entire gross margin on sales of our existing Zegerid prescription products.

Our commercial organization also promotes Glumetza^® (metformin hydrochloride extended release tablets) prescription products in the U.S., under the terms of an exclusive promotion agreement that we entered into with Depomed, Inc., or Depomed, in July 2008. Glumetza is a once-daily, extended-release formulation of metformin that incorporates patented drug delivery technology and is indicated as an adjunct to diet and exercise to improve glycemic control in adult patients with type 2 diabetes. The extended-release delivery system is designed to offer patients with diabetes an ability to reach their optimal dose of metformin with fewer GI side effects. We began our promotion of the Glumetza products in October 2008.

We are developing two product candidates targeting lower GI conditions under the terms of a strategic collaboration that we entered into with Cosmo Technologies Limited, or Cosmo. The product candidates utilize Cosmo’s patented MMX^® technology, which is a proprietary multi-matrix system that is designed to deliver a drug substance to the colon. The goal of the MMX technology is to enhance clinical efficacy while limiting side effects typically associated with systemic absorption. Budesonide MMX is an oral corticosteroid and is currently being investigated in a phase III clinical program for the induction of remission of mild or moderate active ulcerative colitis. Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been investigated in a phase II clinical program in patients with infectious diarrhea. We plan to initiate a phase III clinical program evaluating rifamycin SV MMX in patients with travelers’ diarrhea

in the second quarter of 2010. Under the strategic collaboration, we were granted exclusive rights to develop and commercialize these product candidates in the U.S.

To further leverage our proprietary PPI technology and diversify our sources of revenue, we have licensed exclusive rights to Schering-Plough HealthCare Products, Inc., or Schering-Plough, a subsidiary of Merck & Co., Inc., to develop, manufacture and sell Zegerid OTC™ products in the lower dosage strength of 20 mg of omeprazole in the U.S. and Canada. We have also entered into license and distribution agreements granting exclusive rights to Glaxo Group Limited, an affiliate of GlaxoSmithKline, plc, or GSK, to develop, manufacture and commercialize prescription and over-the-counter, or OTC, products in up to 114 specified countries (including markets within Africa, Asia, the Middle-East, and Central and South America), and to distribute and sell Zegerid brand prescription products in Puerto Rico and the U.S. Virgin Islands. In addition, we have entered into a license agreement granting certain exclusive rights to Norgine B.V., or Norgine, to develop, manufacture and commercialize prescription immediate-release omeprazole products in specified markets in Western, Central and Eastern Europe and in Israel.

The District Court’s ruling also negatively impacts the patent protection for the products being commercialized in the U.S. and its territories pursuant to our over-the-counter license with Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and royalties under our agreements with these strategic partners. The ruling may also negatively impact the patent protection for the products being commercialized pursuant to our ex-US licenses with GSK and Norgine. Although the U.S. ruling is not binding in countries outside the U.S., similar challenges to those raised in the U.S. litigation may be raised in territories outside the U.S.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenue when there is persuasive evidence that an arrangement exists, title has passed, the price is fixed or determinable, and collectibility is reasonably assured.

Product Sales, Net.We sell our Zegerid products primarily to pharmaceutical wholesale distributors. We are obligated to accept from customers products that are returned within six months of their expiration date or up to 12 months beyond their expiration date. We authorize returns for expired or damaged products in accordance with our return goods policy and procedures. We issue credit to the customer for expired or damaged returned product. We rarely exchange product from inventory for returned product. At the time of sale, we record our estimates for product returns as a reduction to revenue at full sales value with a corresponding increase in the allowance for product returns liability. Actual returns are recorded as a reduction to the allowance for product returns liability at sales value with a corresponding decrease in accounts receivable for credit issued to the customer.

We recognize product sales net of estimated allowances for product returns, estimated rebates in connection with contracts relating to managed care, Medicare, and patient coupons, and estimated chargebacks from distributors, wholesaler fees and prompt payment and other discounts. We establish allowances for estimated product returns, rebates and chargebacks based primarily on the following qualitative and quantitative factors:

•

the number of and specific contractual terms of agreements with customers;

•

estimated levels of inventory in the distribution channel;

•

estimated remaining shelf life of products;

•

analysis of prescription data gathered by a third-party prescription data provider;

•

direct communication with customers;

•

historical product returns, rebates and chargebacks;

•

anticipated introduction of competitive products or generics;

•

anticipated pricing strategy changes by us and/or our competitors; and

•

the impact of state and federal regulations.

In our analyses, we utilize prescription data purchased from a third-party data provider to develop estimates of historical inventory channel pull-through. We utilize a separate analysis which compares historical product shipments less returns to estimated historical prescriptions written. Based on that analysis, we develop an estimate of the quantity of product in the distribution channel which may be subject to various product return, rebate and chargeback exposures.

Our estimates of product returns, rebates and chargebacks require our most subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. If actual future payments for returns, rebates, chargebacks and other discounts exceed the estimates we made at the time of sale, our financial position, results of operations and cash flows would be negatively impacted.

Our allowance for product returns was $13.4 million as of March 31, 2010 and $12.8 million as of December 31, 2009. In order to provide a basis for estimating future product returns on sales to our customers at the time title transfers, we have been tracking our Zegerid products return history by individual production batches from the time of our first commercial product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into consideration product expiration dating and estimated inventory levels in the distribution channel. We recognize product sales at the time title passes to our customers, and we provide for an estimate of future product returns at that time based upon these historical product returns trends, our analysis of product expiration dating and estimated inventory levels in the distribution channel, and the other factors discussed above. There may be a significant time lag between the date we determine the estimated allowance and when we receive the product return and issue credit to a customer. Due to this time lag, we record adjustments to our estimated allowance over several periods, which can result in a net increase or a net decrease in our operating results in those periods.

Our allowance for rebates, chargebacks and other discounts was $33.5 million as of March 31, 2010 and $34.7 million as of December 31, 2009. These allowances reflect an estimate of our liability for rebates due to managed care organizations under specific contracts, rebates due to various organizations under Medicare contracts and regulations, chargebacks due to various organizations purchasing our products through federal contracts and/or group purchasing agreements, and other rebates and customer discounts due in connection with wholesaler fees and prompt payment and other discounts. We estimate our liability for rebates and chargebacks at each reporting period based on a combination of the qualitative and quantitative assumptions listed above. In each reporting period, we evaluate our outstanding contracts and apply the contractual discounts to the invoiced price of wholesaler shipments recognized. Although the total invoiced price of shipments to wholesalers for the reporting period and the contractual terms are known during the reporting period, we project the ultimate disposition of the sale (e.g. future utilization rates of cash payors, managed care, Medicare or other contracted organizations). This estimate is based on historical trends adjusted for anticipated changes based on specific contractual terms of new agreements with customers, anticipated pricing strategy changes by us and/or our competitors and the other qualitative and quantitative factors described above. There may be a significant time lag between the date we determine the estimated allowance and when we make the contractual payment or issue credit to a customer. Due to this time lag, we record adjustments to our estimated allowance over several periods, which can result in a net increase or a net decrease in our operating results in those periods. To date, actual results have not materially differed from our estimates.

Promotion, Royalty and Other License Revenue.We analyze each element of our promotion and licensing agreements to determine the appropriate revenue recognition. We recognize revenue on upfront payments over the period of significant involvement under the related agreements unless the fee is in exchange for products delivered or services rendered that represent the culmination of a separate earnings process and no further performance obligation exists under the contract. We recognize milestone payments upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement and (2) the fees are nonrefundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recognized as deferred revenue. Sales milestones, royalties and promotion fees are recognized as revenue when earned under the agreements.

Inventories and Related Reserves

Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and raw materials used in the manufacture of our Zegerid Capsules and Zegerid Powder for Oral Suspension products. Also included in inventories are product samples of the Glumetza products which we purchase from Depomed under our promotion agreement. We provide reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and on firm purchase commitments compared to forecasts of future sales.

Stock-Based Compensation

We estimate the fair value of stock options and employee stock purchase plan rights granted using the Black-Scholes valuation model. This estimate is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the expected volatility of our stock price, the expected term of the stock option, the risk-free interest rate and expected dividends. In determining our volatility factor, we consider the expected volatility of similar entities as well as our historical volatility since our initial public offering in April 2004. In evaluating similar entities, we consider factors such as industry, stage of development, size and financial leverage. In determining the expected life of the options, we use the “simplified” method. Under this method, the expected life is presumed to be the mid-point between the vesting date and the end of the contractual term. We will continue to use the “simplified” method until we have sufficient historical exercise data to estimate the expected life of the options.

The fair value of options granted is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period ranging from one to four years. Pre-vesting forfeitures were estimated to be approximately 0% for the three months ended March 31, 2010 and 2009 as the majority of options granted contain monthly vesting terms. In 2008, certain stock options were granted to employees at or above the vice president level that vest upon the attainment of specific financial performance targets. The measurement date of stock options containing performance-based vesting is the date the stock option grant is authorized and the specific performance goals are communicated. Compensation expense is recognized based on the probability that the performance criteria will be met. The recognition of compensation expense associated with performance-based vesting requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. The continued assessment of probability may result in additional expense recognition or expense reversal depending on the level of achievement of the performance goals. We did not record compensation expense related to stock options containing performance-based vesting for the three months ended March 31, 2010 and 2009.

The following table includes stock-based compensation recognized in our condensed statements of operations (in thousands):


	Three Months Ended
	December 31,
	2010		2009
Cost of product sales	$	17	$	19
Research and development		142		118
Selling, general and administrative		880		811

Total	$	1,039	$	948

As of March 31, 2010, total unrecognized compensation cost related to stock options was approximately $12.7 million, and the weighted average period over which it was expected to be recognized was 3.1 years.

Income Taxes

We provide for income taxes under the liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or if future deductibility is uncertain.

On January 1, 2007, we adopted the authoritative guidance relating to accounting for uncertainty in income taxes. This guidance clarifies the recognition threshold and measurement attributes for financial statement disclosure of tax positions

taken or expected to be taken on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited financial statements and notes thereto included in our annual report on Form 10-K, which contain accounting policies and other disclosures required by GAAP.

Results of Operations

Comparison of Three Months Ended March 31, 2010 and 2009

Product Sales, Net.Product sales, net were $29.0 million for the three months ended March 31, 2010 and $27.6 million for the three months ended March 31, 2009 and consisted of sales of Zegerid Capsules and Zegerid Powder for Oral Suspension. The $1.4 million increase in product sales, net was comprised of approximately $6.5 million related to increased average selling prices offset in part by approximately $5.1 million related to a decrease in the sales volume of our Zegerid products, primarily driven by Zegerid Capsules.

Promotion Revenue.Promotion revenue was $8.8 million for the three months ended March 31, 2010 and $4.5 million for the three months ended March 31, 2009 and was comprised primarily of fees earned under our promotion agreement with Depomed related to the promotion of Glumetza products.

Royalty Revenue.Royalty revenue was $1.7 million for the three months ended March 31, 2010 and was comprised of royalty revenue earned under our license agreement with Schering-Plough for Zegerid OTC. Schering-Plough commenced commercial sales of Zegerid OTC in March 2010. There was no royalty revenue for the three months ended March 31, 2009.

Other License Revenue.Other license revenue was $245,000 for the three months ended March 31, 2010 and $2.7 million for the three months ended March 31, 2009. For the three months ended March 31, 2010, other license revenue was comprised of the remaining amortization of the upfront payment we received in October 2009 in connection with our license agreement with Norgine. For the three months ended March 31, 2009, license revenue was comprised of the amortization of upfront payments we received from GSK in December 2007 and Schering-Plough in November 2006. Additional information related to the upfront payments we received from Norgine, GSK and Schering-Plough is provided below:

•

In October 2009, we received a nonrefundable $2.5 million upfront payment in connection with our license agreement with Norgine. The $2.5 million upfront payment was amortized on a straight-line basis over a three-month period through early January 2010, which represented the period during which we had significant responsibilities under the agreement.

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In December 2007, we received a nonrefundable $11.5 million upfront payment in connection with our license and distribution agreements with GSK. To support GSK’s initial launch costs, we agreed to waive the first $2.5 million of aggregate royalties payable under the agreements. Of the total $11.5 million upfront payment, the $2.5 million in waived royalty obligations was recorded as deferred revenue and is being recognized as revenue as the royalties are earned. The remaining $9.0 million was also recorded as deferred revenue and was amortized to revenue on a straight-line basis over an 18-month period through May 2009, which represented the period we were obligated to supply Zegerid products to GSK for sale in Puerto Rico and the U.S. Virgin Islands under the distribution agreement.

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In November 2006, we received a nonrefundable $15.0 million upfront license fee in connection with our license agreement with Schering-Plough. The $15.0 million upfront payment was amortized to revenue on a straight-line basis over a 37-month period through the end of 2009, which represented the period during which we had significant responsibilities under the agreement.

Cost of Product Sales.Cost of product sales was $1.6 million for the three months ended March 31, 2010 and $1.9 million for the three months ended March 31, 2009, or approximately 5% and 7% of net product sales, respectively. Cost of product sales consists primarily of raw materials, third-party manufacturing costs, freight and indirect personnel and other overhead costs associated with the sales of our Zegerid products. Cost of product sales also includes reserves for excess, dated or obsolete commercial inventories based on an analysis of inventory on hand and on firm purchase commitments compared to forecasts of future sales. The decrease in our cost of product sales as a percentage of net product sales was primarily attributable to increased average selling prices.

License Fees and Royalties.License fees and royalties were $3.0 million for the three months ended March 31, 2010 and $1.8 million for the three months ended March 31, 2009. License fees and royalties consisted of royalties due to the University of Missouri based upon our net product sales and products sold by GSK under our license and distribution agreements. Beginning in the three months ended March 31, 2010, license fees and royalties also consisted of royalties due to the University of Missouri based upon sales of Zegerid OTC by Schering-Plough under our license agreement. License fees and royalties in both periods also included license fee amortization from the $12.0 million upfront fee paid to Depomed under our promotion agreement entered into in July 2008. The $12.0 million upfront fee has been capitalized and is being amortized to license fee expense over the estimated useful life of the asset on a straight-line basis through mid-2016.

Research and Development.Research and development expenses were $5.0 million for the three months ended March 31, 2010 and $3.1 million for the three months ended March 31, 2009. The $1.9 million increase in our research and development expenses was primarily attributable to the ongoing budesonide MMX phase III clinical program currently being conducted under our strategic collaboration with Cosmo entered into in December 2008. We are responsible for one-half of the total out-of-pocket costs associated with this program. In addition, the increase was attributable to costs associated with our phase III clinical program evaluating rifamycin SV MMX in patients with travelers’ diarrhea. In addition to the costs associated with our strategic collaboration with Cosmo, the increase in our research and development expenses was attributable to increased compensation costs associated with an increase in research and development personnel and annual merit increases. These increases were offset in part by a decrease in our research and development expenses due to payment of the user fee associated with the submission of our 505(b)(2) new drug application, or NDA, to the FDA for our new immediate-release omeprazole prescription product in a tablet formulation in the three months ended March 31, 2009.

Research and development expenses have historically consisted primarily of costs associated with clinical studies of our products under development as well as clinical studies designed to further differentiate our Zegerid products from those of our competitors, development of and preparation for commercial manufacturing of our products, compensation and other expenses related to research and development personnel and facilities expenses. In connection with our strategic collaboration with Cosmo entered into in December 2008, we are developing two product candidates targeting lower GI conditions. Budesonide MMX is an oral corticosteroid and is currently being evaluated for the induction of remission of mild or moderate active ulcerative colitis in a phase III clinical program. Assuming successful and timely completion of the clinical program, we plan to submit an NDA for budesonide MMX to the FDA in the second half of 2011. Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been investigated in a phase II clinical program for patients with infectious diarrhea. We expect to begin the first phase III study in travelers’ diarrhea in the second quarter of 2010. Assuming timely and successful completion, we plan to initiate a second phase III clinical study in travelers’ diarrhea in the first half of 2011. We are unable to estimate with any certainty the research and development costs that we may incur in the future. We have also committed, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, to evaluate the product in pediatric populations, including pharmacokinetic/pharmacodynamic, or PK/PD, and safety studies. In the future, we may conduct additional clinical studies to further differentiate our marketed products and products under development, as well as conduct research and development related to any future products that we may in-license or otherwise acquire. Although we are currently focused primarily on development of the budesonide MMX and rifamycin SV MMX product candidates, we anticipate that we will make determinations as to which development projects to pursue and how much funding to direct to each project on an ongoing basis in response to the scientific, clinical and commercial merits of each project.

Selling, General and Administrative.Selling, general and administrative expenses were $26.5 million for the three months ended March 31, 2010 and $26.7 million for the three months ended March 31, 2009. The $179,000 decrease in our selling, general and administrative expenses was primarily attributable to a decrease in legal fees associated with the patent infringement litigation against Par offset in part by increases in costs associated with advertising and promotional activities related to our Zegerid products.

Interest Income.Interest income was $22,000 for the three months ended March 31, 2010 and $92,000 for the three months ended March 31, 2009. The $70,000 decrease in interest income was primarily attributable to a lower rate of return on our cash, cash equivalents and short-term investments.

Interest Expense.Interest expense was $116,000 for the three months ended March 31, 2010 and $113,000 for the three months ended March 31, 2009. Interest expense for both years was comprised primarily of interest due in connection with our revolving credit facility with Comerica Bank, or Comerica.

Income Tax Expense.Income tax expense was $255,000 for the three months ended March 31, 2010 and $100,000 for the three months ended March 31, 2009. The provision for income taxes reflects our estimate of the effective tax rate expected to be applicable for the full fiscal year. Our effective tax rate for the three months ended March 31, 2010 and March 31, 2009 is impacted by anticipated utilization of Federal and state income tax net operating loss carryforwards.

Liquidity and Capital Resources

As of March 31, 2010, cash, cash equivalents and short-term investments were $90.8 million, compared to $93.9 million as of December 31, 2009, a decrease of $3.1 million.

Net cash used in operating activities was $3.0 million for the three months ended March 31, 2010 and $4.2 million for the three months ended March 31, 2009. Significant working capital uses of cash for the three months ended March 31, 2010 included decreases in accounts payable and accrued liabilities related to payment of annual corporate bonuses and other expenses accrued in 2009. Additional significant working capital uses of cash for the three months ended March 31, 2010 included increases in prepaid expenses and other current assets, offset in part by decreases in accounts receivable. Significant working capital uses of cash for the three months ended March 31, 2009 included decreases in accounts payable and accrued liabilities and decreases in deferred revenue. The working capital uses of cash for each period were offset in part by our net income for these periods, adjusted for non-cash expenses, including $1.0 million for the three months ended March 31, 2010 and $948,000 for the three months ended March 31, 2009 in stock-based compensation.

Net cash provided by investing activities was $1.1 million for the three months ended March 31, 2010 and $1.4 million for the three months ended March 31, 2009. These activities included purchases and maturities/redemptions of short-term investments.

Net cash provided by financing activities was $97,000 for the three months ended March 31, 2010 and $44,000 for the three months ended March 31, 2009 consisting of net proceeds received from the exercise of stock options.

We currently rely on Norwich Pharmaceuticals, Inc. as our manufacturer of Zegerid Capsules and Patheon, Inc., or Patheon, as our manufacturer of Zegerid Powder for Oral Suspension. Additionally, we have amended our agreement with Patheon to provide that Patheon will serve as a second commercial supplier of Zegerid Capsules, and we are performing certain activities to qualify Patheon as a supplier for this product, which will ultimately require regulatory approval of an NDA supplement. We purchase commercial quantities of omeprazole, an active ingredient in our Zegerid products, from Union Quimico Farmaceutica, S.A. At March 31, 2010, we had finished goods and raw materials inventory purchase commitments of approximately $3.4 million.

The following summarizes our long-term contractual obligations as of March 31, 2010, excluding potential sales-based royalty obligations and milestone payments under our agreements with the University of Missouri, Depomed and Cosmo which are described below:


	Payments Due by Period
			Less than		One to		Four to
Contractual Obligations	Total		One Year		Three Years		Five Years		Thereafter
	(in thousands)
Operating leases	$	4,157	$	1,409	$	2,748	$	—	$	—
Long-term debt		10,483		283		10,200
Other long-term contractual obligations		3,211		802		2,409		—		—

Total	$	17,851	$	2,494	$	15,357	$	—	$	—

Under our exclusive worldwide license agreement with the University of Missouri entered into in January 2001 relating to specific formulations of PPIs with antacids and other buffering agents, we are required to make milestone payments to the University of Missouri upon initial commercial sale in specified territories outside the U.S., which may total up to $3.5 million in the aggregate. We are also required to make milestone payments based on first-time achievement of significant sales thresholds, up to a maximum of $83.8 million remaining under the agreement, which includes sales by us, GSK, Schering-Plough and Norgine. We are also obligated to pay royalties on net sales of our products and any products commercialized by GSK, Schering-Plough and Norgine under our existing license and distribution agreements.

Under our promotion agreement with Depomed entered into in July 2008, we may be required to pay Depomed one-time sales milestones totaling up to $16.0 million in aggregate, the first of which milestones is in the amount of $3.0 million and is payable if annual Glumetza net product sales exceed $50.0 million. Under the promotion agreement, we are required to meet certain minimum promotion obligations during the term of the agreement. On an annual basis, we are required to make “sales force expenditures” at least equal to an agreed-upon percentage of the prior year’s net sales, where sales force expenditures for purposes of the promotion agreement are sales calls with specified assigned values (indexed to inflation in future years) depending on the relative position of the call and the number of other products promoted by the sales representatives promoting Glumetza. In addition, during the term of the agreement, we are required to make certain minimum marketing, advertising, medical affairs and other commercial support expenditures.

Under our license agreement, stock issuance agreement and registration rights agreement with Cosmo entered into in December 2008, Cosmo is entitled to receive up to a total of $9.0 million in clinical and regulatory milestones for the initial indications for the licensed products, up to $6.0 million in clinical and regulatory milestones for a second indication for rifamycin SV MMX and up to $57.5 million in commercial milestones. The clinical milestones include an obligation to pay Cosmo $3.0 million upon achievement of the primary endpoints in the EU and U.S. phase III studies for budesonide MMX with statistical significance and demonstrated adequate safety. The milestones may be paid in cash or through issuance of additional shares of our common stock, at Cosmo’s option, subject to certain limitations. We will pay tiered royalties to Cosmo ranging from 12% to 14% on net sales of any licensed products we sell. We are responsible for one-half of the total out-of-pocket costs associated with the ongoing budesonide MMX phase III clinical program, for all of the out-of-pocket costs for the first planned rifamycin SV MMX phase III U.S. registration study and for one-half of the out-of-pocket costs for the second planned rifamycin SV MMX phase III U.S. registration study. In the event that additional clinical work is required to obtain U.S. regulatory approval for either of the licensed products, the parties will agree on cost sharing.

The amount and timing of cash requirements will depend on our ability to continue to generate sales of our Zegerid prescription products and maintain and increase market demand for, and sales of, our Glumetza prescription products, despite the potential for generic competition. In addition, our cash requirements will depend on market acceptance of any other products that we may market in the future, the success of our strategic alliances, the resources we devote to researching, developing, formulating, manufacturing, commercializing and supporting our products, and our ability to enter into third-party collaborations.

decrease in our revenues and cash flows. In connection with the potential for generic launch, we are currently assessing plans to cease promotion of our Zegerid prescription products and significantly restructure and reduce our commercial organization and other impacted operations. A restructuring of our operations would include a workforce reduction, which would require us to incur significant severance and other restructuring expenses before we realize any longer term cost savings. In addition, a workforce reduction would reduce our sales force capabilities and result in a reduced commercial presence with physicians due to smaller personnel resources and may also impact the productivity of our remaining sales force. We may also lose future potential partnering opportunities for both commercial-stage and development-stage products due to the perception by potential pharmaceutical industry partners that our operations are less robust. Although we are currently evaluating our alternatives to reduce operating expenses, we cannot be certain that any future restructuring will allow us to preserve sufficient cash resources to fund our operations as planned.

We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our current operations for at least the next 12 months; however, our projected revenue may decrease or our expenses may increase and that would lead to our cash resources being consumed earlier than we expect. Although we do not believe that we will need to raise additional funds to finance our current operations over the next 12 months, we may pursue raising additional funds in connection with in-licensing or acquisition of new products or companies. Sources of additional funds may include funds generated through equity and/or debt financings.

In November 2008, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, which was declared effective in December 2008. The universal shelf registration statement replaced our previous universal shelf registration statement that expired in December 2008. The universal shelf registration statement may permit us, from time to time, to offer and sell up to an additional approximately $75.0 million of equity or debt securities. However, there can be no assurance that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include the progress of our commercial and development activities, investor perception of our prospects and the general condition of the financial markets, among others.

In July 2006, we entered into our loan agreement with Comerica, which was subsequently amended in July 2008, pursuant to which we may request advances in an aggregate outstanding amount not to exceed $25.0 million. In December 2008, we drew down $10.0 million under the loan agreement. The revolving loan bears interest at a variable rate of interest, per annum, most recently announced by Comerica as its “prime rate” plus 0.50%, which as of March 31, 2010 was 3.75%. Interest payments on advances made under the loan agreement are due and payable in arrears on the first calendar day of each month during the term of the loan agreement. Amounts borrowed under the loan agreement may be repaid and re-borrowed at any time prior to July 11, 2011. There is a non-refundable unused commitment fee equal to 0.50% per annum on the difference between the amount of the revolving line and the average daily balance outstanding thereunder during the term of the loan agreement, payable quarterly in arrears. The loan agreement will remain in full force and effect for so long as any obligations remain outstanding or Comerica has any obligation to make credit extensions under the loan agreement.

Amounts borrowed under the loan agreement are secured by substantially all of our personal property, excluding intellectual property. Under the loan agreement, we are subject to certain affirmative and negative covenants, including limitations on our ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and make investments. In addition, under the loan agreement, we are required to maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances with either Comerica or another financial institution covered by a control agreement for the benefit of Comerica. We are also subject to specified financial covenants with respect to a minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements. We believe we have currently met all of our obligations under the loan agreement.

We cannot be certain that our existing cash and marketable securities resources will be adequate to sustain our current operations. To the extent we require additional funding, we cannot be certain that such funding will be available to us on acceptable terms, or at all. To the extent that we raise additional capital by issuing equity or convertible securities, our stockholders’ ownership will be diluted. Any debt financing we enter into may involve covenants that restrict our operations. If adequate funds are not available on terms acceptable to us at that time, our ability to continue our current operations or pursue new product opportunities would be significantly limited.

In addition, our results of operations could be materially affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operations could be adversely affected by those factors in many negative ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.

In March 2010, the President signed the Patient Protection and Affordable Care Act, which makes extensive changes to the delivery of health care in the United States. This act includes numerous provisions that affect pharmaceutical companies, some of which are effective immediately and others of which will be taking effect over the next several years. For example, the act seeks to expand health care coverage to the uninsured through private health insurance reforms and an expansion of Medicaid. The act will also impose substantial costs on pharmaceutical manufacturers, such as an increase in liability for rebates paid to Medicaid, new drug discounts that must be offered to certain enrollees in the Medicare prescription drug benefit, an annual fee imposed on all manufacturers of brand prescription drugs in the United States, and an expansion of an existing program requiring pharmaceutical discounts to certain types of hospitals and federally subsidized clinics. The act also contains cost-containment measures that could reduce reimbursement levels for health care items and services generally, including pharmaceuticals. It also will require reporting and public disclosure of payments and other transfers of value provided by pharmaceutical companies to physicians and teaching hospitals. These measures could result in decreased net revenues from our pharmaceutical products and decreased potential returns from our development efforts.

As of March 31, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Accounting Pronouncements

Pending Adoption of Recent Accounting Pronouncements

In October 2009, the Emerging Issues Task Force, or EITF, issued authoritative guidance on revenue recognition with regard to multiple element arrangements. The consensus in this recently issued guidance supersedes certain prior guidance and requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (i.e., the relative selling-price method). The consensus eliminates the use of the residual method of allocation (i.e., in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration) and requires the relative selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables subject to the issued guidance. This guidance requires both ongoing disclosures regarding an entity’s multiple-element revenue arrangements as well as certain transitional disclosures during periods after adoption. This guidance is effective for the first fiscal year beginning on or after June 15, 2010. We do not expect the adoption of this guidance will have a material impact on our financial statements.

Caution on Forward-Looking Statements

Any statements in this report and the information incorporated herein by reference about our expectations, beliefs, plans, objectives, assumptions or future events or performance that are not historical facts are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” or “would.” Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and

uncertainties inherent in our business including, without limitation: our ability to maintain and/or increase market demand for, and sales of, the Zegerid^{^®}and Glumetza^® prescription products, including the potential and timing for launch of generic versions of the Zegerid prescription products; the scope and validity of patent protection for our products, including whether favorable outcomes are obtained in the planned appeal relating to our Zegerid prescription products and the pending litigation concerning the Glumetza prescription products we promote, and our ability to commercialize products without infringing the patent rights of others; whether we are successful in generating revenue under our strategic alliances, including our over-the-counter, or OTC, license agreement with Schering-Plough HealthCare Products, Inc., or Schering-Plough, a subsidiary of Merck & Co., Inc., our license and distribution agreements with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, and our license agreement with Norgine B.V.; our ability to successfully develop (including successful completion of the ongoing and planned phase III clinical studies) and obtain regulatory approval for our budesonide MMX^® and rifamycin SV MMX product candidates in a timely manner or at all; adverse side effects or inadequate therapeutic efficacy of our products or products we promote that could result in product recalls, market withdrawals or product liability claims; competition from other pharmaceutical or biotechnology companies and evolving market dynamics; our ability to further diversify our sources of revenue and product portfolio; other difficulties or delays relating to the development, testing, manufacturing and marketing of, and obtaining and maintaining regulatory approvals for, our and our strategic partners’ products; fluctuations in quarterly and annual results; our ability to obtain additional financing as needed to support our operations or future product acquisitions; the impact of healthcare reform legislation and the recent turmoil in the financial markets; and other risks detailed below under Part II — Item 1A — Risk Factors.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Under the terms of our loan agreement with Comerica Bank, or Comerica, the interest rate applicable to any amounts borrowed by us under the credit facility will be, at our election, indexed to either Comerica’s prime rate or the LIBOR rate. If we elect Comerica’s prime rate for all or any portion of our borrowings, the interest rate will be variable, which would expose us to the risk of increased interest expense if interest rates rise. If we elect the LIBOR rate for all or any portion of our borrowings, such LIBOR rate will remain fixed only for a specified, limited period of time after the date of our election, after which we will be required to repay the borrowed amount, or elect a new interest rate indexed to either Comerica’s prime rate or the LIBOR rate. The new rate may be higher than the earlier interest rate applicable under the loan agreement. As of March 31, 2010, the balance outstanding under the credit facility was $10.0 million, and we had elected the “prime rate” plus 0.50% interest rate option, which was 3.75% as of March 31, 2010. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. A hypothetical 1% increase or decrease in the interest rate under the loan agreement would not materially affect our interest expense at our current level of borrowing.

In addition to market risk related to our loan agreement with Comerica, we are exposed to market risk primarily in the area of changes in U.S. interest rates and conditions in the credit markets, particularly because the majority of our investments are in short-term marketable securities. We do not have any material foreign currency or other derivative financial instruments. Our short-term investment securities have consisted of corporate debt securities, government agency securities and U.S. Treasury securities which are classified as available-for-sale and therefore reported on the balance sheet at estimated market value. As of March 31, 2010, our short-term investments also included AAA-rated auction rate securities, or ARS, issued by state municipalities. Our ARS are debt instruments with a long-term maturity and an interest rate that is reset in short-term intervals through auctions. The conditions in the global credit markets have prevented many investors from liquidating their holdings of ARS because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined higher rates. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.

Due to conditions in the global credit markets, our ARS, representing a par value of approximately $2.5 million at March 31, 2010, had insufficient demand resulting in multiple failed auctions since early 2008. As a result, these affected securities are currently not liquid.

In October 2008, we received an offer of Auction Rate Securities Rights, or ARS Rights, from our investment provider, UBS Financial Services, Inc., a subsidiary of UBS AG, or UBS. In November 2008, we accepted the ARS Rights offer. The ARS Rights permit us to require UBS to purchase our ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If we do not exercise our ARS Rights, the ARS will continue to accrue interest as determined by the auction process or, if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised before July 2, 2012 they will expire and UBS will have no further obligation to buy our ARS. UBS has the discretion to purchase or sell our ARS at any time without prior notice so long as we receive a payment at par upon any sale or disposition. UBS has agreed to exercise its discretion to purchase or sell our ARS only for the purpose of restructurings, dispositions or other solutions that will provide us with par value for our ARS. As a condition to accepting the offer of ARS Rights, we released UBS from all claims except claims for consequential damages relating to its marketing and sales of ARS. We also agreed not to serve as a class representative or receive benefits under any class action settlement or investor fund. We intend to exercise the ARS Rights within the next 12 months.

In the event we need to access the funds that are in an illiquid state, we will not be able to do so without the likely loss of principal, until a future auction for these investments is successful or they are redeemed by the issuer or they mature. If we are unable to sell these securities in the market or they are not redeemed, then we may be required to hold them to maturity. We do not believe we have a need to access these funds for operational purposes for the foreseeable future. We will continue to monitor and evaluate these investments on an ongoing basis for impairment. Based on our ability to access our cash, cash equivalents and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate that the potential illiquidity of these investments will affect our ability to execute our current business plan.

Our results of operations could be materially affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operations could be adversely affected by those factors in many negative ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.		Legal Proceedings

Par Pharmaceutical, Inc. — Zegerid^{^®} Patent Litigation

On April 14, 2010, the U.S. District Court for the District of Delaware ruled that five patents covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were the subject of lawsuits we filed in 2007 against Par Pharmaceutical, Inc., or Par, for infringement. The University of Missouri, licensor of the patents, was joined in the litigation as a co-plaintiff. The lawsuits were filed in response to abbreviated new drug applications, or ANDAs, filed by Par with the U.S. Food and Drug Administration, or FDA, regarding Par’s intent to market generic versions of our Zegerid prescription products prior to the July 2016 expiration of the asserted patents.

We plan to file an appeal of the District Court’s ruling to the U.S. Court of Appeals for the Federal Circuit by no later than May 21, 2010, which is 30 days following the date of judgment entry. Although we intend to vigorously defend and enforce our patent rights, we are not able to predict the timing or outcome of the appeal.

The District Court’s ruling also negatively impacts the patent protection for the products being commercialized in the U.S. and its territories pursuant to our over-the-counter license with Schering-Plough HealthCare Products, Inc., a subsidiary of Merck & Co., Inc., and our distribution agreement with Glaxo Group Limited, an affiliate of GlaxoSmithKline, plc, or GSK, for Puerto Rico and the U.S. Virgin Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and royalties under these agreements. The ruling may also negatively impact the patent protection for the products being commercialized pursuant to our ex-US licenses with GSK and Norgine B.V. Although the U.S. ruling is not binding in countries outside the U.S., similar challenges to those raised in the U.S. litigation may be raised in territories outside the U.S.

University of Missouri — Application for Patent Reissue

feasible to predict the impact that the reissue proceeding may have on the scope and validity of the ‘737 patent claims. If the claims of the ‘737 patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to our Zegerid family of products could be further impaired, which could potentially harm our business and operating results. In addition, we expect the University of Missouri will disclose to the PTO the District Court’s ruling described above, and we cannot predict the impact such disclosure will have on the reissue proceedings.

C.B. Fleet Co., Inc. — Phospho-soda^{^®} Product Liability Litigation

In October 2009, we became aware of two lawsuits filed by individual plaintiffs in Ohio state court relating to C.B. Fleet Co., Inc., or Fleet, and claiming injuries purportedly caused by Fleet’s Phospho-soda^®, sodium phosphate oral solution product. The complaints name Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American Society of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic Surgeons and several other individuals as defendants. The complaints allege, among other things, that the defendants fraudulently concealed, misrepresented and suppressed material medical and scientific information about Fleet’s Phospho-soda product. The plaintiffs are seeking compensatory damages, exemplary damages, damages for loss of consortium, damages under the Ohio Consumer Protection Act, and attorneys’ fees and expenses. We co-promoted Fleet’s Phospho-soda^® EZ-Prep™ Bowel Cleansing System, a different sodium phosphate oral solution product manufactured by Fleet, under a co-promotion agreement, which we and Fleet entered into in August 2007 and which expired in October 2008. In November 2009, we filed notices to remove the lawsuits to the United States District Court for the Northern District of Ohio, and plaintiffs filed motions to remand the actions back to Ohio state court. In April 2010, we filed motions requesting that we be dismissed from these lawsuits, as well as responses to plaintiffs’ motions to remand.

Under the terms of the co-promotion agreement, we have requested that Fleet indemnify us in connection with these matters. In addition, we have tendered notice of these matters to our insurance carriers pursuant to the terms of our insurance policies. Due to the uncertainty of the ultimate outcome of these matters and our ability to maintain indemnification and/or insurance coverage, we cannot predict the effect, if any, this matter will have on our business. Regardless of how this litigation is ultimately resolved, this matter may be costly, time-consuming and distracting to our management, which could have a material adverse effect on our business.

Depomed, Inc. — Glumetza Patent Litigation

In November 2009, Depomed, Inc., or Depomed, filed a lawsuit in the United States District Court for the Northern District of California against Lupin Limited and its wholly-owned subsidiary, Lupin Pharmaceutical, Inc., collectively referred to herein as Lupin, for infringement of the patents listed in the Orange Book for Glumetza. The lawsuit is in response to an ANDA and Paragraph IV certification filed with the FDA by Lupin regarding Lupin’s intent to market generic versions of 500 mg and 1000 mg tablets for Glumetza prior to the expiration of the Orange Book patents. Depomed commenced the lawsuit within the required 45 day time period, automatically placing a stay on the FDA from approving Lupin’s proposed generic products for 30 months or until a decision is rendered by the District Court, which is adverse to the Orange Book patents, whichever may occur earlier. Absent a court decision, the 30-month stay is expected to expire in May 2012. Lupin has prepared and filed an answer in the case, principally asserting non-infringement and invalidity, and has also filed counterclaims. Discovery is underway and a hearing for claim construction, or Markman hearing, is scheduled for January 2011.

Under the terms of our promotion agreement with Depomed, Depomed has assumed responsibility for managing and paying for this action, subject to certain consent rights held by us regarding any potential settlements or other similar types of dispositions. Although Depomed has indicated that it intends to vigorously defend and enforce its patent rights, we are not able to predict the timing or outcome of this action.


Item 1A.		Risk Factors

Certain factors may have a material adverse effect on our business, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors in its entirety, in addition to other information contained in this report as well as our other public filings with the Securities and Exchange Commission, or SEC.

In the near-term, the success of our business will depend on many factors, including:

•

Our ability to continue to generate sales of our Zegerid^® (omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension prescription products and the potential and timing for launch of generic versions of these products by Par Pharmaceutical, Inc., or Par, following the recent District Court ruling that five patents covering those products are invalid due to obviousness;

•

our ability to maintain and increase market demand for, and sales of, the Glumetza^® (metformin hydrochloride extended release tablets) prescription products we promote;

•

our ability to maintain patent protection for our products, including whether favorable outcomes are obtained in the planned appeal relating to our Zegerid prescription products and the pending litigation concerning the Glumetza prescription products we promote;

•

our ability to successfully progress the development (including successful completion of the ongoing and planned phase III clinical studies), obtaining regulatory approval for and advancing the commercialization of our development product candidates, budesonide MMX^® and rifamycin SV MMX;

•

our ability to achieve continued progress under our strategic alliances, including our over-the-counter, or OTC, license agreement with Schering-Plough HealthCare Products, Inc., or Schering-Plough, a subsidiary of Merck & Co., Inc., our license and distribution agreements with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, or GSK, and our license agreement with Norgine B.V., or Norgine, and the potential for early termination of, or reduced payments under, these agreements; and

•

our ability to in-license or acquire additional products, including our ability to in-license or acquire such products on favorable terms or at all, the impact of any such transactions on our financial resources and our ability to successfully integrate any potential new products into our existing operations.

Each of these factors, as well as other factors that may impact our business, are described in more detail in the following discussion. Although the factors highlighted above are among the most significant, any of the following factors could materially adversely affect our business or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time, and you should consider all of the factors described when evaluating our business.

Risks Related to Our Business and Industry

We are likely to face significant generic competition in the near future for our Zegerid products as a result of a negative district court ruling in our patent litigation, which would adversely impact sales of these products and could negatively impact our overall financial results and strategic alliances.

On April 14, 2010, the U.S. District Court for the District of Delaware ruled that five patents covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were the subject of lawsuits we filed in 2007 against Par Pharmaceutical, Inc., or Par, for infringement. The University of Missouri, licensor of the patents, was joined in the litigation as a co-plaintiff. The lawsuits were filed in response to abbreviated new drug applications, or ANDAs, filed by Par with the U.S. Food and Drug Administration, or FDA, regarding Par’s intent to market generic versions of our Zegerid prescription products prior to the July 2016 expiration of the asserted patents. We plan to file an appeal of the District Court’s ruling to the U.S. Court of Appeals for the Federal Circuit by no later than May 21, 2010, which is 30 days following the date of judgment entry. Although we intend to vigorously defend and enforce our patent rights, we are not able to predict the timing or outcome of the appeal.

versions of our Zegerid prescription products. Subject to receipt of final FDA approval, Par may choose to launch its generic products before the appeal is concluded. Pursuant to FDA rules and regulations, we believe that Par, as the first ANDA filer with respect to our Zegerid prescription products, will have a six-month period of exclusivity from the date it launches its generic products during which all other ANDA filers will not be allowed to market or sell their generic products. After the expiration of this six-month period, additional FDA-approved generic versions, if any, of these Zegerid products may become available.

In addition to the risks associated with the potential for generic competition, our ability to maintain sales of our Zegerid prescription products may also be impacted by various long-standing commercial risks, including risks associated with: the effectiveness of our promotional efforts; our ability to obtain greater acceptance of the products by physicians and patients and obtain and maintain distribution at the retail level; the availability of adequate levels of reimbursement coverage for our products from third-party payors; our ability to establish and maintain agreements with wholesalers and distributors on commercially reasonable terms; and the performance of third-party manufacturers and our ability to maintain commercial manufacturing arrangements necessary to meet commercial demand for the products. The occurrence of adverse side effects or inadequate therapeutic efficacy of the Zegerid products, and any resulting product liability claims or product recalls, could also impact our ability to increase sales of these products. As a result, we cannot be certain that we will be able to maintain sales of our Zegerid prescription products. If we are unable to maintain such sales, we may be unable to generate sufficient revenues to grow our business and sustain profitability, and our business, financial condition and results of operations will be materially adversely affected.

As a result of recent developments relating to our Zegerid patent litigation, we may choose to significantly restructure and reduce our commercial organization and other impacted operations.

The District Court’s ruling in our patent litigation with Par could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched in the near term, before the outcome of the planned appeal and/or before the expiration of the applicable patents in July 2016, which would adversely impact sales of these products and have a negative impact on our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. In connection with the potential for generic launch, we are currently assessing plans to cease promotion of our Zegerid prescription products and significantly restructure and reduce our commercial organization and other impacted operations. A restructuring of our operations would include a workforce reduction, which

would require us to incur significant severance and other restructuring expenses before we realize any longer term cost savings. In addition, a workforce reduction would reduce our sales force capabilities and result in a reduced commercial presence with physicians due to smaller personnel resources and may also impact the productivity of our remaining sales force. We may also lose future potential partnering opportunities for both commercial-stage and development-stage products due to the perception by potential pharmaceutical industry partners that our operations are less robust. Although we are currently evaluating our alternatives to reduce operating expenses, we cannot be certain that any future restructuring will allow us to preserve sufficient cash resources to fund our operations as planned.

We are dependent upon our ability to maintain and increase sales of the Glumetza prescription products as a source of revenue.

Our ability to maintain and increase sales of the Glumetza products we promote will depend on several factors, including:

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whether a favorable outcome is obtained in the pending patent infringement lawsuit relating to Glumetza;

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our ability to successfully maintain and increase market demand for, and sales of, the Glumetza prescription products through the promotional efforts of our field sales representatives;

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the potential to obtain greater acceptance of the products by physicians and patients and obtain and maintain distribution at the retail level;

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the occurrence of adverse side effects or inadequate therapeutic efficacy of the Glumetza products, and any resulting product liability claims or product recalls;

•

the availability of adequate levels of reimbursement coverage for the products from third-party payors, particularly in light of the availability of other branded and generic competitive products; and

•

the performance of third-party manufacturers and our ability to maintain commercial manufacturing arrangements necessary to meet commercial demand for the products.

We promote the Glumetza products under a promotion agreement that we entered into with Depomed, Inc., or Depomed, in July 2008. As a result, our ability to increase sales of the Glumetza products is also subject to risks associated with that agreement, including the potential for termination of the promotion arrangement and Depomed’s ability to maintain commercial supply and patent protection for the Glumetza products. In addition, if our Zegerid promotional efforts are negatively impacted by generic competition, we currently plan to cease promotion of our Zegerid prescription products and significantly restructure and reduce our commercial organization and other impacted operations, which in turn could reduce the level of our promotional effort on Glumetza and our revenues.

We cannot be certain that our continued marketing of the Glumetza products will result in increased demand for, and sales of, those products. If we fail to successfully commercialize the Glumetza products, we may be unable to generate sufficient revenues to grow our business and sustain profitability, and our business, financial condition and results of operations would be adversely affected.

Our budesonide MMX and rifamycin SV MMX product candidates will require significant development activities and ultimately may not be approved by the U.S. Food and Drug Administration, or FDA, and any failure or delays associated with these activities or the FDA’s approval of such products would increase our costs and time to market.

We are currently developing our budesonide MMX and rifamycin SV MMX product candidates under a strategic collaboration with Cosmo Technologies Limited, or Cosmo, and in connection with those development programs we face substantial risks of failure that are inherent in developing pharmaceutical products. The pharmaceutical industry is subject to stringent regulation by many different agencies at the federal, state and international levels. For example, our product candidates must satisfy rigorous standards of safety and efficacy before the FDA will approve them for commercial use.

Product development is generally a long, expensive and uncertain process. Successful development of product formulations depends on many factors, including our ability to select key components, establish a stable formulation (for

both development and commercial use), develop a product that demonstrates our intended safety and efficacy profile, and transfer from development stage to commercial-scale operations. Any delays we encounter during our product development activities would in turn adversely affect our ability to commercialize the product under development.

Once we have manufactured formulations of our product candidates that we believe will be suitable for clinical testing, we then must complete our clinical testing, and failure can occur at any stage of testing. These clinical tests must comply with FDA and other applicable regulations. We may encounter delays based on our inability to timely enroll enough patients to complete our clinical studies. We may suffer significant setbacks in advanced clinical studies, even after showing promising results in earlier studies. The results of later clinical studies may not replicate the results of prior clinical studies. Based on results at any stage of clinical studies, we may decide to discontinue development of a product candidate. We or the FDA may suspend clinical studies at any time if the patients participating in the studies are exposed to unacceptable health risks or if the FDA finds deficiencies in our applications to conduct the clinical studies or in the conduct of our studies. Moreover, not all product candidates in clinical studies will receive timely, or any, regulatory approval.

In addition, before the FDA approves one of our product candidates, the FDA may choose to conduct an inspection of one or more clinical sites where our clinical studies were conducted. These inspections may be conducted by the FDA both at U.S. clinical sites as well as overseas. Any restrictions on the ability of FDA investigators to travel overseas to conduct such inspections, either because of financial or other reasons including political unrest, disease outbreaks or terrorism, could delay the inspection of our overseas sites and consequently delay FDA approval of our product candidates.

Even if clinical studies are completed as planned, their results may not support our assumptions or our product claims. The clinical study process may fail to demonstrate that our products are safe for humans or effective for their intended uses. Our product development costs will increase and our product revenues will be delayed if we experience delays in testing or regulatory approvals or if we need to perform more or larger clinical studies than planned. In addition, such failures could cause us to abandon a product entirely. If we fail to take any current or future product from the development stage to market, we will have incurred significant expenses without the possibility of generating revenues, and our business will be adversely affected.

Budesonide MMX is currently being evaluated for the treatment of ulcerative colitis in a phase III clinical program. Two multicenter, double-blind phase III clinical studies to evaluate budesonide MMX for the induction of remission in patients with mild or moderate active ulcerative colitis are underway in North America and Europe, both of which are intended to support U.S. regulatory approval. Enrollment in the European phase III clinical study induction phase was completed in December 2009 and enrollment in the U.S. clinical program induction phase was completed in March 2010. Additionally, up to approximately 150 patients from the European and U.S. programs are expected to continue in a 12-month, double-blind, extended use study, the results of which the FDA requested be included in the phase III clinical program to support a U.S. regulatory submission.

We currently anticipate that we will have preliminary results from both the European phase III clinical program and the U.S. phase III clinical program, excluding the extension study, in July or August 2010. Assuming successful and timely completion of the phase III clinical program and extension study, we plan to submit an NDA for budesonide MMX to the FDA in the second half of 2011.

We plan to initiate a phase III clinical program evaluating rifamycin SV MMX in patients with travelers’ diarrhea in the second quarter of 2010. Assuming timely and successful completion of the first study, we plan to initiate a second phase III clinical study in travelers’ diarrhea in the first half of 2011. It is anticipated that a European phase III clinical study in the same indication will be conducted by Cosmo’s European partner Dr. Falk Pharma GmbH, or Dr. Falk. Assuming successful and timely completion of the phase III clinical program, Santarus and Dr. Falk plan to share their clinical data for inclusion in each company’s respective regulatory submissions, and Santarus plans to submit an NDA for rifamycin SV MMX to the FDA in 2012.

We cannot be certain that the ongoing and planned clinical development programs will proceed in a timely manner. We also cannot be certain that the budesonide MMX and rifamycin SV MMX product candidates will achieve the desired safety and efficacy profile in one or more of the ongoing or future clinical studies or that the other development activities will be completed in a successful and timely manner. For example, the phase II clinical study for the budesonide MMX product candidate was pilot in nature and involved a different design than the currently ongoing phase III clinical studies.

In addition, each of the two ongoing phase III clinical studies is evaluating two dosage strengths of budesonide MMX. Each study was statistically powered at 80 percent, and the goal of the primary statistical analysis will be to evaluate the incidence of clinical remission after eight weeks using a p-value of 0.025 to assess whether a treatment difference in clinical remission is achieved between the budesonide MMX treatment groups and placebo. As a result of the study design, there may be a higher degree of uncertainty regarding the potential outcome of the phase III clinical studies.

Any failures or delays in the product development or clinical programs relating to our product candidates could adversely affect our ability to commercialize one or more of our development-stage products and the timing for commercial availability, which in turn could adversely affect our business.

Our reliance on third-party clinical investigators and clinical research organizations may result in delays in completing, or a failure to complete, clinical studies or we may be unable to use the clinical data gathered if they fail to comply with our patient enrollment criteria, our clinical protocols or regulatory requirements, or otherwise fail to perform under our agreements with them.

As an integral component of our clinical development programs, we engage clinical investigators and clinical research organizations, or CROs, to enroll patients and conduct and manage our clinical studies, including CROs located both within and outside the U.S. In addition, it is anticipated that U.S. regulatory approval for each of the budesonide MMX and rifamycin SV MMX product candidates will be supported in part by clinical studies being conducted by Cosmo or its European partners, in addition to the clinical studies that we will oversee or conduct. As a result, many key aspects of this process have been and will be out of our direct control. If the CROs and other third parties that we rely on for patient enrollment and other portions of our clinical studies fail to perform the clinical studies in a timely and satisfactory manner and in compliance with applicable U.S. and foreign regulations, we could face significant delays in completing our clinical studies or we may be unable to rely in the future on the clinical data generated. If these clinical investigators and CROs do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our patient enrollment criteria, our clinical protocols, regulatory requirements or for other reasons, our clinical studies may be extended, delayed or terminated, we may be required to repeat one or more of our clinical studies and we may be unable to obtain or maintain regulatory approval for or successfully commercialize our products.

Our ability to generate revenues also depends on the success of our strategic alliances with GSK, Schering-Plough and Norgine, many aspects of which are out of our control.

Our ability to generate revenues in the longer term will also depend on whether our strategic alliances with GSK, Schering-Plough and Norgine lead to the successful commercialization of additional omeprazole products using our proprietary proton pump inhibitor, or PPI, technology, and we cannot be certain that we will receive any additional milestone payments or sales-based royalties from these alliances. In October 2006, we entered into an OTC license agreement with Schering-Plough, pursuant to which we granted exclusive rights under our proprietary PPI technology to develop, manufacture, market and sell omeprazole products for the OTC market in the U.S. and Canada. Schering-Plough received FDA approval to market Zegerid OTC™ (omeprazole 20 mg/sodium bicarbonate 1100 mg capsules), its first Zegerid formulation under the license agreement, in December 2009. Schering-Plough commenced commercial sales of Zegerid OTC in March 2010. In November 2007, we entered into a license agreement and a distribution agreement granting exclusive rights to GSK under our proprietary PPI technology to develop, manufacture and commercialize prescription and OTC products in up to 114 specified countries within Africa, Asia, the Middle-East, and Central and South America, and to distribute and sell Zegerid brand prescription products in Puerto Rico and the U.S. Virgin Islands. GSK is currently distributing and selling our Zegerid prescription products in Puerto Rico and the U.S. Virgin Islands and is working to prepare the filings necessary to obtain marketing approval authorization in various countries covered by the license agreement. In October 2009, we entered into a license agreement granting certain exclusive rights to Norgine under our proprietary PPI technology to develop, manufacture and commercialize prescription products in specified markets in Western, Central and Eastern Europe and in Israel.

Under these agreements, we depend on the efforts of Schering-Plough, GSK and Norgine, and we have limited control over their commercialization efforts. We are also subject to the risk of termination of each of these agreements. Schering-Plough may terminate its license agreement in its entirety on 180 days’ prior written notice to us at any time. The Schering-Plough license agreement also may be terminated by either party if the other party is in material breach of its material obligations, subject to certain limitations. The GSK license and distribution agreements may be terminated by either party

in the event of the other party’s uncured material breach or bankruptcy or insolvency. In addition, GSK may terminate the license and distribution agreements on six months’ prior written notice to us at any time. The Norgine license agreement may be terminated by either party in the event of the other party’s uncured material breach or bankruptcy or insolvency. In addition, Norgine may terminate the license agreement on 12 months’ prior written notice to us at any time.

The recent negative District Court ruling in the patent litigation involving our Zegerid prescription products also negatively impacts the patent protection for the products being commercialized in the U.S. and its territories pursuant to our OTC license with Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin Islands. With regard to our OTC license with Schering-Plough, we are not currently aware that any ANDAs have been filed proposing to market generic versions of Zegerid OTC. With regard to our distribution agreement with GSK, in the event that Par launches generic versions of our Zegerid prescription products, we and GSK have agreed to terminate and wind-down activities under the distribution agreement for Puerto Rico and the U.S. Virgin Islands. The ruling may also negatively impact the patent protection for the products being commercialized pursuant to our ex-US licenses with GSK and Norgine. Although the U.S. ruling is not binding in countries outside the U.S., similar challenges to those raised in the U.S. litigation may be raised in territories outside the U.S.

We cannot be certain that these strategic partners will continue to devote significant resources to the sale or development of products under the agreements. Any determination by Schering-Plough, GSK or Norgine to cease promotion or development of products under our strategic alliances would limit our potential to receive additional payments under these agreements, and adversely affect our ability to generate sufficient revenues to grow our business and sustain profitability. Even if these strategic partners determine to continue to pursue our alliances, we will only receive specified milestone payments and royalties on net sales and may not enjoy the same financial rewards as we would have had we developed and launched the related products ourselves. In addition, the royalties payable to us under our license agreement with Schering-Plough are subject to reduction in the event it is ultimately determined by the courts (with the decision being unappealable or unappealed within the time allowed for appeal) that there is no valid claim of the licensed patents covering the manufacture, use or sale of the Zegerid OTC product and third parties have received marketing approval for, and are conducting bona fide on-going commercial sales of, generic versions of the licensed products. Any of these limitations on our ability to continue to receive anticipated revenue under our strategic alliances could have a material adverse effect on our business, financial condition and results of operations.

Our pending NDA supplement relating to the brand name for our recently approved immediate-release omeprazole tablet product may not be approved by the FDA in a timely manner, or at all, which would adversely impact our ability to commercialize this product.

In December 2009, the FDA approved our NDA for our new immediate-release omeprazole tablet product, which combines omeprazole with a mix of buffers; however, the FDA has not yet approved a trade name for the new product. We submitted an NDA supplement requesting approval of a proposed trade name that includes the “Zegerid” brand name and anticipate that the FDA will complete its review of this NDA supplement in June 2010. Ultimately, the FDA may not approve our proposed trade name for the tablet product in a timely manner or at all, and we may be forced to utilize a trade name that does not reference the Zegerid family of products. Any failure to obtain FDA approval of our proposed trade name or delay associated with the FDA’s review process could adversely impact our ability to commercialize this product, which in turn could adversely impact our business, financial condition and results of operations. In addition, the recent District Court ruling in our patent litigation involving our Zegerid prescription products negatively impacts the patent coverage for this new tablet product and such ruling and the outcome in our planned appeal may further adversely impact our ability to commercialize this product.

The markets in which we compete are intensely competitive and many of our competitors have significantly more resources and experience, which may limit our commercial opportunity.

The pharmaceutical industry is intensely competitive, particularly in the gastrointestinal, or GI, and diabetes fields in which our currently marketed products compete and our development-stage products may compete, and there are many other currently marketed products that are well-established and successful, as well as development programs underway. In addition, many of our competitors are large, well-established companies in the pharmaceutical field. Given our relatively small size and the nature of the GI and diabetes markets, we may not be able to compete effectively.

In addition, many of our competitors, either alone or together with their collaborative partners, may have significantly greater experience in:

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developing prescription and OTC drugs;

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undertaking preclinical testing and human clinical studies;

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formulating and manufacturing drugs;

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obtaining FDA and other regulatory approvals of drugs;

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launching, marketing, distributing and selling drugs; and

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enforcing and maintaining patent rights.

As a result, they may have a greater ability to undertake more extensive research and development, manufacturing, marketing and other programs. Many of these companies may succeed in developing products earlier than we do, completing the regulatory process and showing safety and efficacy of products more rapidly than we do or developing products that are more effective than our products. Additionally, many of our competitors have greater resources to conduct clinical studies differentiating their products, as compared to our limited resources. Further, the products they develop may be based on new and different technology and may exhibit benefits relative to our products.

Many of these companies with which we compete also have significantly greater financial and other resources than we do. Larger pharmaceutical companies typically have significantly larger field sales force organizations and invest significant amounts in advertising and marketing their products, including through the purchase of television advertisements and the use of other direct-to-consumer methods. As a result, these larger companies are able to reach a greater number of physicians and consumers and reach them more frequently than we can with our smaller sales organization.

If we are unable to compete successfully, our business, financial condition and results of operations will be materially adversely affected.

Our marketed products currently compete with many other drug products and will likely soon face competition from generic equivalents, which will negatively impact our market share and limit our ability to generate revenues.

Our Zegerid prescription products compete with many other products, including:

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branded PPI prescription products (such as Nexium^®, Aciphex^{^®}and Kapidex^™/Dexliant^™);

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generic PPI prescription products (such as delayed-release omeprazole, delayed-release lansoprazole and delayed-release pantoprazole);

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OTC PPI products (such as Prilosec OTC^®, Prevacid^® 24HR and store-brand versions); and

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other prescription and/or OTC acid-reducing agents (such as histamine-2 receptor antagonists and antacids).

In addition, the April 2010 invalidity ruling in our litigation relating to our Zegerid prescription products may result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched in the near future, before the outcome of the planned appeal and/or before the expiration of the applicable patents in July 2016, which would adversely impact sales of these products and have a negative impact on our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows.

Furthermore, the availability of Zegerid OTC and any other products developed by Schering-Plough using our proprietary PPI technology for the U.S. OTC market could decrease demand or negatively impact reimbursement coverage for our prescription products in the U.S. In addition, various companies are developing new products that may compete with our Zegerid prescription and OTC products in the future, including new PPIs, motility agents, reversible acid inhibitors, cytoprotective compounds and products that act on the lower esophageal sphincter, or LES.

Similarly, the Glumetza prescription products compete with many other products, including:

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other branded immediate-release and extended-release metformin products (such as Fortamet^®, Glucophage^® and Glucophage XR^®);

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generic immediate-release and extended-release metformin products; and

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other prescription diabetes treatments.

In addition, various companies are developing new products that may compete with the Glumetza products in the future. For example, Depomed has announced that it has licensed rights to Merck to develop products combining sitagliptin, the active ingredient in Merck’s Januvia^® product, with extended-release metformin utilizing Depomed’s extended-release technology. The Glumetza prescription products are also the subject of a pending ANDA and related patent infringement litigation. If the litigation is resolved unfavorably to our licensor, Depomed, we may face competition from generic versions of 500 mg and 1000 mg dosage strengths of Glumetza prior to patent expiry.

We or our strategic partners may also face competition for our products from lower-priced products from foreign countries that have placed price controls on pharmaceutical products. Proposed federal legislative changes may expand consumers’ ability to import lower-priced versions of our products and competing products from Canada and other developed countries. Further, several states and local governments have implemented importation schemes for their citizens, and, in the absence of federal action to curtail such activities, we expect other states and local governments to launch importation efforts. The importation of foreign products that compete with our own products could negatively impact our business and prospects.

The existence of numerous competitive products may put downward pressure on pricing and market share, which in turn may adversely affect our business, financial condition and results of operations.

If we are unable to maintain adequate levels of reimbursement for our products on reasonable pricing terms, the commercial success of our products may be severely hindered.

Our ability to sell our products may depend in large part on the extent to which reimbursement for the costs of our products is available from private health insurers, managed care organizations, government entities and others. Third-party payors are increasingly attempting to contain their costs. We cannot predict actions third-party payors may take, or whether they will limit the coverage and level of reimbursement for our products or refuse to provide any coverage at all. Reduced or partial reimbursement coverage could make our products less attractive to patients, suppliers and prescribing physicians and may not be adequate for us to maintain price levels sufficient to realize an appropriate return on our investment in our products or compete on price.

Based on our assessment of the overall cost associated with continued participation, we have recently elected to terminate our existing Medicaid drug rebate agreements, effective as of October 2009. Although we believe the termination of these agreements will not have an unfavorable impact on our business and financial results, we cannot be certain. Since we are no longer participating in the Medicaid segment of the market, as expected, we experienced a reduction in Zegerid prescription levels. Termination of these agreements may also negatively impact physician prescribing practices over a longer term period. In addition, we will incur additional costs to the extent we decide to participate in Medicaid in the future.

In many cases, insurers and other healthcare payment organizations encourage the use of less expensive alternative generic brands and OTC products through their prescription benefits coverage and reimbursement policies. For example, in the case of our Zegerid prescription products, the availability of generic prescription and OTC PPI products has created, and will continue to create, a competitive reimbursement environment. The potential availability of generic bioequivalent products to our Zegerid products will likely further limit our ability to obtain adequate reimbursement. Insurers and other healthcare payment organizations frequently make the generic or OTC alternatives more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic or OTC product to the patient is less than the net cost of a prescription branded product. Aggressive pricing policies by our generic or OTC product competitors and the prescription benefit policies of insurers could have a negative effect on our product revenues and profitability. In addition, even though we are eligible to receive sales-based royalties on OTC products under our Zegerid OTC license agreement with Schering-Plough, those potential revenues could be offset by the impact of lost sales of our prescription products to the extent the OTC products are preferred by customers over our current prescription products.

The competition among pharmaceutical companies to have their products approved for reimbursement also results in downward pricing pressure in the industry and in the markets where our products compete. In some cases, we aggressively discount our products in order to obtain reimbursement coverage, and we may not be successful in any efforts we take to mitigate the effect of a decline in average selling prices for our products. Declines in our average selling prices also reduce our gross margins.

If our Zegerid products or any other products are not included within an adequate number of formularies or adequate payment or reimbursement levels are not provided, or if those policies increasingly favor generic products, we will have difficulty sustaining market acceptance of our products and our business will be materially adversely affected.

We depend on a limited number of wholesaler customers for retail distribution of our Zegerid products, and if we lose any of our significant wholesaler customers, our business could be harmed.

Our wholesaler customers for our Zegerid products include some of the nation’s leading wholesale pharmaceutical distributors, such as Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, and major drug chains. Sales to Cardinal, McKesson and AmerisourceBergen accounted for approximately 27%, 24% and 15%, respectively, of our annual revenues during 2009 and 30%, 22% and 17%, respectively, of our revenues for the three months ended March 31, 2010. The loss of any of these wholesaler customers’ accounts or a material reduction in their purchases could harm our business, financial condition or results of operations. In addition, we may face pricing pressure from our wholesaler customers.

We do not currently have any manufacturing facilities and instead rely on third-party manufacturers.

We rely on third-party manufacturers to provide us with an adequate and reliable supply of our products on a timely basis, and we do not currently have any of our own manufacturing or distribution facilities. Our manufacturers must comply with U.S. regulations, including the FDA’s current good manufacturing practices, applicable to the manufacturing processes related to pharmaceutical products, and their facilities must be inspected and approved by the FDA and other regulatory agencies on an ongoing basis as part of their business. In addition, because several of our key manufacturers are located outside of the U.S., they must also comply with applicable foreign laws and regulations.

We have limited control over our third-party manufacturers, including with respect to regulatory compliance and quality assurance matters. Any delay or interruption of supply related to a third-party manufacturer’s failure to comply with regulatory or other requirements would limit our ability to make sales of our products. Any manufacturing defect or error discovered after products have been produced and distributed could result in even more significant consequences, including costly recall procedures, re-stocking costs, damage to our reputation and potential for product liability claims. With respect to any future products under development, if the FDA finds significant issues with any of our manufacturers during the pre-approval inspection process, the approval of those products could be delayed while the manufacturer addresses the FDA’s concerns, or we may be required to identify and obtain the FDA’s approval of a new supplier. This could result in significant delays before manufacturing of our products can begin, which in turn would delay commercialization of our products. In addition, the importation of pharmaceutical products into the U.S. is subject to regulation by the FDA, and the FDA can refuse to allow an imported product into the U.S. if it is not satisfied that the product complies with applicable laws or regulations.

For our Zegerid prescription products, we currently rely on Norwich Pharmaceuticals, Inc., located in New York, as the sole third-party manufacturer of Zegerid Capsules. In addition, we rely on a single third-party manufacturer, Patheon Inc., using a manufacturing facility located in Canada, for the supply of Zegerid Powder for Oral Suspension. We recently amended our agreement with Patheon to provide that Patheon will serve as a second commercial supplier of Zegerid Capsules, and we are performing certain activities to qualify Patheon as a supplier for this product, which will ultimately require regulatory approval of an NDA supplement. We currently rely on a single third-party supplier located outside of the U.S., Union Quimico Farmaceutica, S.A., or Uquifa, for the supply of omeprazole, which is an active pharmaceutical ingredient in each of our current Zegerid products. We are obligated under our supply agreement with Uquifa to purchase all of our requirements of omeprazole from this supplier.

For the Glumetza products, we rely on Depomed to oversee product manufacturing and supply. In turn, Depomed relies on a single third-party manufacturer for each of the Glumetza products. For our budesonide MMX and rifamycin SV MMX product candidates, we rely on Cosmo to manufacture and supply all of our drug product requirements.

Any significant problem that our sole source manufacturers or suppliers experience could result in a delay or interruption in the supply to us until the manufacturer or supplier cures the problem or until we locate an alternative source of supply. In addition, because our sole source manufacturers and suppliers provide services to a number of other pharmaceutical companies, they may experience capacity constraints or choose to prioritize one or more of their other customers over us. In addition, to the extent one or more of our strategic partners utilizes our suppliers for our Zegerid prescription products, capacity at those suppliers may become further constrained.

Although alternative sources of supply exist, the number of third-party manufacturers with the manufacturing and regulatory expertise and facilities necessary to manufacture the finished forms of our pharmaceutical products or the key ingredients in our products is limited, and it would take a significant amount of time to arrange for alternative manufacturers. Any new supplier of products or key ingredients would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing such products or ingredients. The FDA may require us to conduct additional clinical studies, collect stability data and provide additional information concerning any new supplier before we could distribute products from that supplier. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new supplier to bear significant additional costs which may be passed on to us.

Our reporting and payment obligations under governmental purchasing and rebate programs are complex and may involve subjective decisions, and any failure to comply with those obligations could subject us to penalties and sanctions, which in turn could have a material adverse effect on our business and financial condition.

As a condition of reimbursement by various federal and state healthcare programs, we must calculate and report certain pricing information to federal and state healthcare agencies. The regulations regarding reporting and payment obligations with respect to governmental programs are complex. Our calculations and methodologies are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in material changes. In addition, because our processes for these calculations and the judgments involved in making these calculations involve subjective decisions and complex methodologies, these calculations are subject to the risk of errors. Any failure to comply with the government reporting and payment obligations could result in civil and/or criminal sanctions.

Regulatory approval for our currently marketed products is limited by the FDA to those specific indications and conditions for which clinical safety and efficacy have been demonstrated.

Any regulatory approval is limited to those specific diseases and indications for which our products are deemed to be safe and effective by the FDA. In addition to the FDA approval required for new formulations, any new indication for an approved product also requires FDA approval. If we are not able to obtain FDA approval for any desired future indications for our products, our ability to effectively market and sell our products may be reduced and our business may be adversely affected.

While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved by the FDA. These “off-label” uses are common across medical specialties and may constitute an appropriate treatment for many patients in varied circumstances. Regulatory authorities in the U.S. generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion and advertising may cause the FDA to delay its approval or refuse to approve a product, the suspension or withdrawal of an approved product from the market, recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution, any of which could harm our business.

We are subject to ongoing regulatory review of our currently marketed products.

Following receipt of regulatory approval, any products that we market continue to be subject to extensive regulation. These regulations impact many aspects of our operations, including the manufacture, labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion and record keeping related to the products. The FDA also frequently requires post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. For example, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, we committed to commence clinical studies to evaluate the product in pediatric populations in 2005. We have not yet commenced any of the studies and, prior to doing so, will need to finalize study designs, including receiving FDA input on one of the proposed study designs, engage clinical research organizations and undertake other related activities. In addition, the subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, disgorgement of money, operating restrictions and criminal prosecution.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

The Patient Protection and Affordable Care Act, enacted in 2010, imposes new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to physicians and teaching hospitals, effective March 30, 2013. Such information will be made publicly available in a searchable format beginning September 30, 2013. In addition, pharmaceutical and device manufacturers will also be required to report and disclose investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to $150,000 per year (and up to $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission.

If not preempted by this federal law, several states require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states prohibit providing various other marketing related activities. Still other states require the posting of information relating to clinical studies and their outcomes. In addition, certain states, such as California, Nevada, and Massachusetts, require pharmaceutical companies to implement compliance programs or marketing codes. Currently, several additional states are considering similar proposals. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties. Because of the breadth of these laws and the

narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning record keeping and control procedures. Any failure to comply with the regulations may result in significant criminal and civil penalties as well as damage to our credibility in the marketplace.

We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs and adversely affect our ability to market our products.

In addition, there have been a number of other legislative and regulatory proposals aimed at changing the pharmaceutical industry. These include proposals to permit reimportation of pharmaceutical products from other countries and proposals concerning safety matters. For example, in an attempt to protect against counterfeiting and diversion of drugs, a bill was introduced in the previous Congress that would establish an electronic drug pedigree and track-and-trace system capable of electronically recording and authenticating every sale of a drug unit throughout the distribution chain. The sponsors of that bill have stated that they intend to reintroduce a similar bill in the current Congress. California has already enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level through the distribution system (an electronic pedigree would be generated by the attachment of a device incorporating a unique identifier to each container of prescription drugs, which would be read electronically and tracked through a database as it passes through each stage of the distribution chain). California’s electronic pedigree requirement is scheduled to take effect beginning in January 2015. Compliance with California and any future federal or state electronic pedigree requirements will likely require an increase in our operational expenses and will likely be administratively burdensome. As a result of these and other new proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations.

We face a risk of product liability claims and may not be able to obtain adequate insurance.

Our business exposes us to potential liability risks that may arise from the clinical testing, manufacture and sale of our products and product candidates. These risks exist even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Any product liability claim or series of claims brought against us could significantly harm our business by, among other things, reducing demand for our products, injuring our reputation and creating significant adverse media attention and costly litigation. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Any judgment against us that is in excess of our insurance policy limits would have to be paid from our cash reserves, which would reduce our capital resources. Although we have product and clinical study liability insurance with a coverage limit of $15.0 million, this coverage may prove to be inadequate. Furthermore, we cannot be certain that our current insurance coverage will continue to be available for our commercial or clinical study activities on reasonable terms, if at all. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets, including our intellectual property.

We rely on third parties to perform many necessary services for our commercial products, including services related to the distribution, storage and transportation of our products.

We have retained third-party service providers to perform a variety of functions related to the sale and distribution of our products, key aspects of which are out of our direct control. For example, we rely on one third-party service provider to provide key services related to warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivable management and call center management, and, as a result, most of our inventory is stored at a single warehouse maintained by the service provider. We place substantial reliance on this provider as well as other third-party providers that perform services for us, including entrusting our inventories of products to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical or natural damage at their facilities, our ability to deliver product to meet commercial demand would be significantly impaired. In addition, we utilize third parties to perform various other services for us relating to sample accountability and regulatory monitoring, including adverse event reporting, safety database management and other product maintenance services. If the quality or accuracy of the data maintained by these service providers is insufficient, our ability to continue to market our products could be jeopardized or we could be subject to regulatory sanctions. We do not currently have the internal capacity to perform these important commercial functions, and we may not be able to maintain commercial arrangements for these services on reasonable terms.

If we are unable to attract and retain key personnel, our business will suffer.

We are a small company and, as of March 31, 2010, had 339 employees. Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical, manufacturing, product development, business development and sales and marketing personnel. We, as well as inVentiv, our contract sales provider, may not be able to recruit and retain qualified personnel in the future, due to competition for personnel among pharmaceutical businesses, and the failure to do so could have a significant negative impact on our future product revenues and business results. Furthermore, the perception that we may find it necessary or advisable to implement a corporate restructuring stemming from the District Court ruling in our patent litigation with Par, including the potential for a significant restructuring and reduction of our commercial organization and other impacted operations, may make it even more difficult for us to attract, retain and motivate personnel, including our field sales representatives.

Our success depends on a number of key senior management personnel, particularly Gerald T. Proehl, our President and Chief Executive Officer. Although we have employment agreements with our executive officers, these agreements are terminable at will at any time with or without notice and, therefore, we cannot be certain that we will be able to retain their

services. In addition, although we have a “key person” insurance policy on Mr. Proehl, we do not have “key person” insurance policies on any of our other employees that would compensate us for the loss of their services. If we lose the services of one or more of these individuals, replacement could be difficult and may take an extended period of time and could impede significantly the achievement of our business objectives.

Our future growth may depend on our ability to identify and in-license or acquire additional products, and if we do not successfully do so, or otherwise fail to integrate any new products into our operations, we may have limited growth opportunities.

We are seeking to acquire or in-license products, businesses or technologies that we believe are a strategic fit with our business strategy. Future in-licenses or acquisitions, however, may entail numerous operational and financial risks, including:

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exposure to unknown liabilities;

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disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;

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a reduction of our current financial resources;

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difficulty or inability to secure financing to fund development activities for such acquired or in-licensed technologies;

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incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions; and

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higher than expected acquisition and integration costs.

We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. In particular, we may compete with larger pharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.

Risks Related to Our Intellectual Property

The protection of our intellectual property rights is critical to our success and any failure on our part to adequately maintain such rights would materially affect our business.

We regard the protection of patents, trademarks and other proprietary rights that we own or license as critical to our success and competitive position. Laws and contractual restrictions, however, may not be sufficient to prevent unauthorized use or misappropriation of our technology or deter others from independently developing products that are substantially equivalent or superior to our products.

Patents

Our commercial success will depend in part on the patent rights we have licensed or will license and on patent protection for our own inventions related to the products that we market and intend to market. Our success also depends on maintaining these patent rights against third-party challenges to their validity, scope or enforceability. Our patent position is subject to uncertainties similar to other biotechnology and pharmaceutical companies. For example, the U.S. Patent and Trademark Office, or PTO, or the courts may deny, narrow or invalidate patent claims, particularly those that concern biotechnology and pharmaceutical inventions.

We may not be successful in securing or maintaining proprietary or patent protection for our products, and protection that we have and do secure may be challenged and possibly lost. In addition, our competitors may develop products similar to ours using methods and technologies that are beyond the scope of our intellectual property rights. Other drug companies

may challenge the scope, validity and enforceability of our patent claims and may be able to develop generic versions of our products if we are unable to maintain our proprietary rights. For example, our ability to maintain patent protection for our products, including whether favorable outcomes are obtained in the planned appeal relating to our Zegerid prescription products and the pending litigation concerning the Glumetza prescription products we promote, as further described below, could result in introduction of generic versions of these products prior to the patents expiring. It is also possible that other generic drug makers will attempt to introduce generic versions of our Zegerid products or the Glumetza products prior to the expiration of the applicable patents. We also may not be able to protect our intellectual property rights against third-party infringement, which may be difficult to detect.

Zegerid Products and Related PPI Technology and Pending Patent Litigation

We have entered into an exclusive, worldwide license agreement with the University of Missouri for patents and pending patent applications relating to specific formulations of PPIs with antacids and other buffering agents and methods of using these formulations. Currently, there are six issued U.S. patents that provide coverage for our Zegerid products (U.S. Patent Nos. 5,840,737; 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772), all of which are subject to the University of Missouri license agreement. There are also several pending U.S. patent applications relating to our Zegerid products and technology, some of which are subject to the University of Missouri license agreement and some of which we own. The issued patents generally cover pharmaceutical compositions combining PPIs with buffering agents, such as antacids, and methods of treating GI disorders by administering solid or liquid forms of such compositions, and each of the patents expires in July 2016. In addition to the U.S. patent coverage, several international patents have been issued, including in Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Israel, Italy, Luxembourg, Mexico, Monaco, Netherlands, New Zealand, Poland, Portugal, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey and the United Kingdom, all of which are subject to the University of Missouri license agreement. There are also several pending international patent applications, some of which are subject to the University of Missouri license agreement and some of which we own. The issued claims in these international patents vary between the different countries and include claims covering pharmaceutical compositions combining PPIs with buffering agents and the use of these compositions in the manufacture of drug products for the treatment of GI disorders.

We consult with the University of Missouri in its pursuit of the patent applications that we have licensed, but the University of Missouri remains primarily responsible for prosecution of the applications. We cannot control the amount or timing of resources that the University of Missouri devotes on our behalf. It may not assign as great a priority to prosecution of patent applications relating to technology we license as we would if we were undertaking such prosecution ourselves. As a result of this lack of control and general uncertainties in the patent prosecution process, we cannot be sure that any additional patents will ever be issued. Issued patents generally require the payment of maintenance or similar fees to continue their validity. We rely on the University of Missouri to do this, subject to our obligation to provide reimbursement, and the University’s failure to do so could result in the forfeiture of patents not maintained. In addition, the initial U.S. patent from the University of Missouri does not have corresponding international or foreign counterpart applications and there can be no assurance that we will be able to obtain foreign patent rights to protect each of our products in all foreign countries of interest.

Par Pharmaceutical, Inc. — Zegerid^{^®} Patent Litigation

Powder for Oral Suspension. We are not able to predict when Par might receive final FDA approval for one or both of these products. We are not aware that any other generic companies have filed for or received approval to market generic versions of our Zegerid prescription products. Subject to receipt of final FDA approval, Par may choose to launch its generic products before the appeal is concluded. Pursuant to FDA rules and regulations, we believe that Par, as the first ANDA filer with respect to our Zegerid prescription products, will have a six-month period of exclusivity from the date it launches its generic products during which all other ANDA filers will not be allowed to market or sell their generic products. After the expiration of this six-month period, additional FDA-approved generic versions, if any, of these Zegerid products may become available.

The District Court’s ruling also negatively impacts the patent protection for the products being commercialized in the U.S. and its territories pursuant to our over-the-counter license with Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and royalties under our these agreements. The ruling may also negatively impact the patent protection for the products being commercialized pursuant to our ex-US licenses with GSK and Norgine. Although the U.S. ruling is not binding in countries outside the U.S., similar challenges to those raised in the U.S. litigation may be raised in territories outside the U.S.

University of Missouri — Application for Patent Reissue

In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent No. 5,840,737, or the ‘737 patent, with the U.S. Patent and Trademark Office, or PTO. The ‘737 patent is one of six issued patents listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book, for Zegerid Powder for Oral Suspension. The ‘737 patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not feasible to predict the impact that the reissue proceeding may have on the scope and validity of the ‘737 patent claims. If the claims of the ‘737 patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to our Zegerid family of products could be further impaired, which could potentially harm our business and operating results. In addition, we expect the University of Missouri will disclose to the PTO the District Court’s ruling described above, and we cannot predict the impact such disclosure will have on the reissue proceedings.

Glumetza Extended Release Tablets and Pending Patent Litigation

We have exclusive rights to promote the Glumetza products in the U.S. under our promotion agreement with Depomed. Currently, there are 4 issued U.S. patents that provide coverage for the Glumetza 500 mg dose product (U.S. Patent Nos. 6,340,475 (expires in September 2016); 6,635,280 (expires in September 2016); 6,488,962 (expires in June 2020); and 6,723,340 (expires in October 2021)). There is one issued U.S. patent that provides coverage for the Glumetza 1000 mg dose product (U.S. Patent No. 6,488,962 (expires in June 2020)). The issued patents generally cover various aspects of the delivery technology utilized in each of the Glumetza products. In addition, there is one pending U.S. patent application that covers the Glumetza 1000 mg dose product.

We consult with Depomed concerning the patent rights relating to the Glumetza products, but Depomed remains primarily responsible for prosecution of the applications. We cannot control the amount or timing of resources that Depomed devotes to these activities. It may not assign as great a priority to prosecution of patent applications as we would if we were undertaking such prosecution ourselves. As a result of this lack of control and general uncertainties in the patent prosecution process, we cannot be sure that any additional patents will ever be issued. Issued patents generally require the

payment of maintenance or similar fees to continue their validity. We rely on Depomed to do this, and Depomed’s failure to do so could result in the forfeiture of patents not maintained.

Depomed, Inc. — Glumetza Patent Litigation

In November 2009, Depomed filed a lawsuit in the United States District Court for the Northern District of California against Lupin Limited and its wholly-owned subsidiary, Lupin Pharmaceutical, Inc., collectively referred to herein as Lupin, for infringement of the patents listed in the Orange Book for Glumetza. The lawsuit is in response to an ANDA and Paragraph IV certification filed with the FDA by Lupin regarding Lupin’s intent to market generic versions of 500 mg and 1000 mg tablets for Glumetza prior to the expiration of the Orange Book patents. Depomed commenced the lawsuit within the required 45 day time period, automatically placing a stay on the FDA from approving Lupin’s proposed generic products for 30 months or until a decision is rendered by the District Court, which is adverse to the Orange Book patents, whichever may occur earlier. Absent a court decision, the 30-month stay is expected to expire in May 2012. Lupin has prepared and filed an answer in the case, principally asserting non-infringement and invalidity, and has also filed counterclaims. Discovery is underway and a hearing for claim construction, or Markman hearing, is scheduled for January 2011.

Budesonide MMX and Rifamycin SV MMX

We have exclusive rights to develop and commercialize the budesonide MMX and rifamycin SV MMX product candidates in the U.S. under our strategic collaboration with Cosmo. Currently, there are two issued U.S. patents that provide coverage for the budesonide MMX product candidate (U.S. Patent Nos. 7,431,943 and 7,410,651), as well as one pending U.S. patent application. The issued patents cover the MMX technology generally and the MMX technology with budesonide, and each of these patents expires in June 2020. There is one issued U.S. patent that provides coverage for the rifamycin SV MMX product candidate (U.S. Patent No. 7,431,943), which expires in June 2020, and one pending U.S. patent application. The issued patent covers the MMX technology generally.

We consult with Cosmo concerning the patent rights relating to the budesonide MMX and rifamycin SV MMX product candidates, but Cosmo remains primarily responsible for prosecution of the applications. We cannot control the amount or timing of resources that Cosmo devotes to these activities. It may not assign as great a priority to prosecution of patent applications as we would if we were undertaking such prosecution ourselves. As a result of this lack of control and general uncertainties in the patent prosecution process, we cannot be sure that any additional patents will ever be issued. Issued patents generally require the payment of maintenance or similar fees to continue their validity. We rely on Cosmo to do this, and Cosmo’s failure to do so could result in the forfeiture of patents not maintained.

Trade Secrets and Proprietary Know-how

We also rely upon unpatented proprietary know-how and continuing technological innovation in developing our products. Although we require our employees, consultants, advisors and current and prospective business partners to enter into confidentiality agreements prohibiting them from disclosing or taking our proprietary information and technology, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how. Further, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. Others may independently develop similar or equivalent trade secrets or know-how. If our confidential, proprietary information is divulged to third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfully penetrate our target markets could be severely compromised.

Trademarks

Our trademarks are important to our success and competitive position. We have received U.S. and European Union, or EU, trademark registration for our corporate name, Santarus^®. We also have received trademark registration in the U.S., EU, Canada and Japan for our brand name, Zegerid^®, and have applied for trademark registration for various other names

and logos. We have licensed to Schering-Plough the right to use various Zegerid related trademarks, including Zegerid OTC™, in connection with their licensed OTC products. Any objections we receive from the PTO, foreign trademark authorities or third parties relating to our registered trademarks and pending applications could require us to incur significant expense in defending the objections or establishing alternative names. There is no guarantee we will be able to secure any of our pending trademark applications with the PTO or comparable foreign authorities.

If we do not adequately protect our rights in our various trademarks from infringement, any goodwill that has been developed in those marks would be lost or impaired. We could also be forced to cease using any of our trademarks that are found to infringe upon or otherwise violate the trademark or service mark rights of another company, and, as a result, we could lose all the goodwill which has been developed in those marks and could be liable for damages caused by any such infringement or violation.

Third parties may choose to file patent infringement claims against us, which litigation would be costly, time-consuming and distracting to management and could be materially adverse to our business.

The products we currently market, and those we may market in the future, may infringe patent and other rights of third parties. In addition, our competitors, many of which have substantially greater resources than us and have made significant investments in competing technologies or products, may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use and sell products either in the U.S. or international markets. Intellectual property litigation in the pharmaceutical industry is common, and we expect this to continue.

If we or our third-party manufacturers or suppliers are unsuccessful in any challenge to our rights to manufacture, market and sell our products, we may be required to license the disputed rights, if the holder of those rights is willing, or to cease manufacturing and marketing the challenged products, or, if possible, to modify our products to avoid infringing upon those rights. If we or our third-party manufacturers or suppliers are unsuccessful in defending our rights, we could be liable for royalties on past sales or more significant damages, and we could be required to obtain and pay for licenses if we are to continue to manufacture and sell our products. These licenses may not be available and, if available, could require us to pay substantial upfront fees and future royalty payments. Any patent owner may seek preliminary injunctive relief in connection with an infringement claim, as well as a permanent injunction, and, if successful in the claim, may be entitled to lost profits from infringing sales, attorneys’ fees and interest and other amounts. Any damages could be increased if there is a finding of willful infringement. Even if we and our third-party manufacturers and suppliers are successful in defending an infringement claim, the expense, time delay and burden on management of litigation could have a material adverse effect on our business.

Our Zegerid products depend on technology licensed from the University of Missouri and any loss of our license rights would harm our business and affect our ability to market our products.

Our Zegerid products are based on technology for which patent applications are pending that we have exclusively licensed from the University of Missouri. A loss or adverse modification of our technology license from the University of Missouri would materially harm our ability to develop and commercialize our current Zegerid products and other products based on that licensed technology that we may attempt to develop or commercialize in the future. The University of Missouri may claim that new patents or new patent applications that result from new research performed by the University of Missouri are not part of the licensed technology.

The licenses from the University of Missouri expire in each country when the last patent for licensed technology expires in that country and the last patent application for licensed technology in that country is abandoned. In addition, our rights under the University of Missouri license are subject to early termination under specified circumstances, including our material and uncured breach of the license agreement or our bankruptcy or insolvency. Further, we are required to use commercially reasonable efforts to develop and sell products based on the technology we licensed from the University of Missouri to meet market demand. If we fail to meet these obligations in specified countries, after giving us an opportunity to cure the failure, the University of Missouri can terminate our license or render it nonexclusive with respect to those countries. To date, we believe we have met all of our obligations under the University of Missouri agreement. However, in the event that the University of Missouri is able to terminate the license agreement for one of the reasons specified in the license agreement, we would lose our rights to develop, market and sell our current Zegerid products and we would not be able to develop, market and sell future products based on those licensed technologies.

Risks Related to Our Financial Results and Need for Financing

We may incur operating losses in the future and may not be able to sustain profitability.

The extent of our future operating losses and our ability to sustain profitability are highly uncertain. We have been engaged in developing and commercializing drugs and have generated significant operating losses since our inception in December 1996. Our commercial activities and continued product development and clinical activities will require significant expenditures. For the three months ended March 31, 2010, we recognized $39.7 million in total revenues, and, as of March 31, 2010, we had an accumulated deficit of $287.1 million. We may incur additional operating losses and capital expenditures as we support the continued marketing of the Zegerid and Glumetza products and any other products we commercialize, and continue our product development and clinical research programs.

The District Court’s ruling in the patent litigation involving our Zegerid prescription products could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched in the near term, before the outcome of the planned appeal and/or before the expiration of the applicable patents in July 2016, which would adversely impact sales of these products and have a negative impact on our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. Similarly, any adverse outcome in the pending patent litigation involving Glumetza could also have a negative impact on our financial condition and results of operations.

Our quarterly financial results are likely to fluctuate significantly due to uncertainties about future sales levels for our currently marketed products and future costs associated with our development-stage products.

Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because the commercial success of, and demand for, currently marketed products, as well as the success and costs of our development programs are uncertain and therefore our future prospects are uncertain. The level of our revenues and results of operations at any given time will be based primarily on the following factors:

•

the potential launch of generic versions of Zegerid Capsules and Powder for Oral Suspension by Par stemming from a recent District Court ruling that five patents covering the products are invalid due to obviousness;

•

whether we are able to maintain patent protection for our products, including whether favorable outcomes are obtained in our planned appeal relating to our Zegerid prescription products and a pending patent infringement lawsuit relating to our Glumetza prescription product;

•

commercial success of the Zegerid and Glumetza prescription products;

•

results of clinical studies and other development programs, including the ongoing and planned clinical programs for the budesonide MMX and rifamycin SV MMX product candidates;

•

progress under our strategic alliances with Schering-Plough, GSK and Norgine, including the impact on these alliances from potential generic competition and the potential for early termination of, or reduced payments under, the related agreements;

•

our ability to obtain regulatory approval for any future products we develop or in-license;

•

interruption in the manufacturing or distribution of our products;

•

timing of new product offerings, acquisitions, licenses or other significant events by us, our strategic partners or our competitors;

•

legislative changes, including healthcare reform, affecting the products we may offer or those of our competitors; and

•

the effect of competing technological and market developments.

Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.

To the extent we need to raise additional funds in connection with the licensing or acquisition of new products or to continue our operations, we may be unable to raise capital when needed.

We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our current operations for at least the next 12 months; however, our projected revenue may decrease or our expenses may increase and that would lead to our cash resources being consumed earlier than we expect. Although we do not believe that we will need to raise additional funds to finance our current operations over the next 12 months, we may pursue raising additional funds in connection with licensing or acquisition of new products. Sources of additional funds may include funds generated through equity and/or debt financing.

In November 2008, we filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective in December 2008. The universal shelf registration statement replaced our previous universal shelf registration statement that expired in December 2008. The universal shelf registration statement may permit us, from time to time, to offer and sell up to approximately $75.0 million of equity or debt securities. However, there can be no assurance that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include the progress of our commercial and development activities, investor perception of our prospects and the general condition of the financial markets, among others.

In July 2006, we entered into a loan agreement with Comerica Bank, or Comerica, which we subsequently amended in July 2008, pursuant to which we may request advances in an aggregate outstanding amount not to exceed $25.0 million. Amounts borrowed under the loan agreement may be repaid and re-borrowed at any time prior to July 11, 2011. In December 2008, we borrowed $10.0 million under the loan agreement. Our ability to borrow additional amounts under the loan agreement depends upon a number of conditions and restrictions, and we cannot be certain that we will satisfy all borrowing conditions at a time when we desire to borrow such amounts under the loan agreement. For example, we have made comprehensive representations and warranties to Comerica as our lender, and all of these representations and warranties generally must be true and correct at the time of any proposed borrowing. Furthermore, we are subject to a number of affirmative and negative covenants, each of which must be satisfied at the time of any proposed borrowing. If we have not satisfied these various conditions, or an event of default otherwise has occurred, we may be unable to borrow additional amounts under the loan agreement, and may be required to repay any amounts previously borrowed. In addition, given the current financial market conditions, our continued ability to borrow under the loan agreement may be dependent on the financial solvency of banks in general, including Comerica.

Our current and any future indebtedness under our loan agreement with Comerica could adversely affect our financial health.

Under our loan agreement with Comerica, we may incur a significant amount of indebtedness. Such indebtedness could have important consequences. For example, it could:

•

impair our ability to obtain additional financing in the future for working capital needs, capital expenditures and general corporate purposes;

•

increase our vulnerability to general adverse economic and industry conditions;

•

make it more difficult for us to satisfy other debt obligations we may incur in the future;

•

require us to dedicate a substantial portion of our cash flows from operations to the payment of principal and interest on our indebtedness, thereby reducing the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

place us at a disadvantage compared to our competitors that have less indebtedness; and

•

expose us to higher interest expense in the event of increases in interest rates because our indebtedness under the loan agreement with Comerica bears interest at a variable rate.

If an event of default occurs under the loan agreement, we may be unable to borrow additional amounts, and may be required to repay any amounts previously borrowed. The events of default under the loan agreement include, among other things, a material adverse effect on (i) our business operations, condition (financial or otherwise) or prospects, (ii) our ability to repay the obligations under the loan agreement or otherwise perform our obligations under the loan agreement, or (iii) our interest in, or the value, perfection or priority of Comerica’s security interest in the collateral, which generally includes all of our cash and accounts receivable, but excludes intellectual property. At this time, Comerica has not taken any action to declare an event of default under the loan agreement stemming from the Par litigation, but we cannot be certain that Comerica will not seek to declare an event of default in the future for this or another reason. For a description of the loan agreement, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

Covenants in our loan agreement with Comerica may limit our ability to operate our business.

Under our loan agreement with Comerica, we are subject to specified affirmative and negative covenants, including limitations on our ability: to undergo certain change of control events; to convey, sell, lease, license, transfer or otherwise dispose of assets; to create, incur, assume, guarantee or be liable with respect to certain indebtedness; to grant liens; to pay dividends and make certain other restricted payments; and to make investments. In addition, under the loan agreement we are required to maintain a balance of cash with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances with either Comerica or another financial institution covered by a control agreement for the benefit of Comerica. We are also subject to specified financial covenants with respect to a minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements, as defined in the loan agreement.

If we default under the loan agreement because of a covenant breach or otherwise, all outstanding amounts could become immediately due and payable, which would negatively impact our liquidity and reduce the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes.

Our ability to use our net operating losses to offset taxes that would otherwise be due could be limited or lost entirely if we do not continue to generate taxable income in a timely manner or if we trigger an “ownership change” pursuant to Section 382 of the Internal Revenue Code which, if we continue to generate taxable income, could materially and adversely affect our business, financial condition, and results of operations.

As of December 31, 2009, we had Federal and state income tax net operating loss carryforwards, or NOLs, of approximately $161.1 million and $142.8 million, respectively. Our ability to use our NOLs to offset taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the NOLs, and we cannot predict with certainty whether we will be able to generate future taxable income. In addition, even if we generate taxable income, realization of our NOLs to offset taxes that would otherwise be due could be restricted by annual limitations on use of NOLs triggered by an “ownership change” under Section 382 of the Internal Revenue Code and similar state provisions. An “ownership change” may occur when there is a 50% or greater change in total ownership of our company by one or more 5% shareholders within a three-year period. The loss of some or all of our NOLs could materially and adversely affect our business, financial condition and results of operations. In addition, California and certain states have suspended use of NOLs for certain taxable years, and other states may consider similar measures. As a result, we may incur higher state income tax expense in the future. Depending on our future tax position, continued suspension of our ability to use NOLs in states in which we are subject to income tax could have an adverse impact on our operating results and financial condition.

Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.

Our results of operations could be materially negatively affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price may decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.

In addition, concern about the stability of markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers.

Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.

As of March 31, 2010, our short-term investments included AAA-rated auction rate securities, or ARS, issued by state municipalities. Our ARS are debt instruments with a long-term maturity and an interest rate that is reset in short-term intervals through auctions. The conditions in the global credit markets have prevented many investors from liquidating their holdings of ARS because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined higher rates. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.

Due to conditions in the global credit markets, our ARS, representing a par value of approximately $2.5 million, had insufficient demand resulting in multiple failed auctions since early 2008. As a result, these affected securities are currently not liquid.

In connection with the reporting of our financial condition and results of operations, we are required to make estimates and judgments which involve uncertainties, and any significant differences between our estimates and actual results could have an adverse impact on our financial position, results of operations and cash flows.

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. In particular, as part of our revenue recognition policy, our estimates of product returns, rebates and chargebacks require our most subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. Any significant differences between our actual results and our estimates under different assumptions or conditions could negatively impact our financial position, results of operations and cash flows.

Risks Related to the Securities Markets and Ownership of Our Common Stock

Our stock price has been and may continue to be volatile, and our stockholders may not be able to sell their shares at attractive prices.

The market prices for securities of specialty biopharmaceutical companies in general have been highly volatile and may continue to be highly volatile in the future. For example, during the year ended December 31, 2009, the trading prices for our common stock ranged from a high of $5.82 to a low of $1.05, and on April 30, 2010, the closing trading price for our common stock was $3.28. In addition, we have not paid cash dividends since our inception and do not intend to pay cash dividends in the foreseeable future. Furthermore, our loan agreement with Comerica prohibits us from paying dividends. Therefore, investors will have to rely on appreciation in our stock price and a liquid trading market in order to achieve a gain on their investment.

The trading price of our common stock may continue to fluctuate substantially as a result of one or more of the following factors:

•

the outcomes of the planned appeal relating to our Zegerid prescription products and the pending litigation concerning the Glumetza prescription products we promote;

•

announcements concerning our product development programs, results of our clinical studies or status of our regulatory submissions;

•

other announcements concerning our commercial progress and activities, including sales and revenue trends;

•

regulatory developments and related announcements in the U.S., including announcements by the FDA, and foreign countries;

•

developments, including announcements concerning progress, delays or terminations, pursuant to our strategic alliances with GSK, Schering-Plough and Norgine;

•

our entering into licenses, strategic partnerships and similar arrangements, or the termination of such arrangements;

•

other disputes or developments concerning proprietary rights, including patents and trade secrets, litigation matters, and our ability to patent or otherwise protect our products and technologies;

•

conditions or trends in the pharmaceutical and biotechnology industries, including the impact of healthcare reform;

•

fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;

•

changes in, or our failure to meet or exceed, investors’ and securities analysts’ expectations;

•

announcements of technological innovations or new commercial products by us or our competitors;

•

actual or anticipated fluctuations in our or our competitors’ quarterly or annual operating results;

•

announcements concerning borrowings under our loan agreement, takedowns under our existing universal shelf registration statement or other developments relating to the loan agreement, universal shelf registration statement or our other financing activities;

•

acquisition of products or businesses by us or our competitors;

•

announcements made by, or events affecting, our strategic partners, our contract sales force provider, our suppliers or other third parties that provide services to us;

•

litigation and government inquiries; or

•

economic and political factors, including wars, terrorism and political unrest.

Our stock price could decline and our stockholders may suffer dilution in connection with future issuances of equity or debt securities.

Although we do not believe that we will need to raise additional funds to finance our current operations over the next 12 months, we may pursue raising additional funds in connection with licensing or acquisition of new products. Sources of additional funds may include funds generated through equity and/or debt financing, or through strategic collaborations or licensing agreements. To the extent we conduct substantial future offerings of equity or debt securities, such offerings could cause our stock price to decline. For example, we may issue securities under our existing universal shelf registration statement or we may pursue alternative financing arrangements.

The exercise of outstanding options and warrants and future equity issuances, including future public offerings or future private placements of equity securities and any additional shares issued in connection with acquisitions, will also result in dilution to investors. The market price of our common stock could fall as a result of resales of any of these shares of common stock due to an increased number of shares available for sale in the market.

Future sales of our common stock by our stockholders may depress our stock price.

A concentrated number of stockholders hold significant blocks of our outstanding common stock. Sales by our current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. In addition, certain of our executive officers have from time to time established programmed selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of common stock, and other employees and affiliates, including our directors and executive officers, may choose to establish similar plans in the future. If any of our stockholders cause securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.

We may become involved in securities or other class action litigation that could divert management’s attention and harm our business.

The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical and biotechnology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. In addition, over the last few years, several class action lawsuits have been filed against pharmaceutical companies alleging that the companies’ sales representatives have been misclassified as exempt employees under the Federal Fair Labor Standards Act and applicable state laws and there have not yet been final decisions at the appellate level. We cannot be certain as to how the lawsuits will ultimately be resolved. Although we have not been the subject of these types of lawsuits, we may be

targeted in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.

Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could adversely affect our stock price and prevent attempts by our stockholders to replace or remove our current management.

Our certificate of incorporation and bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.

These provisions include:

•

dividing our board of directors into three classes serving staggered three-year terms;

•

prohibiting our stockholders from calling a special meeting of stockholders;

•

permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval;

•

prohibiting our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and

•

requiring advance notice for raising business matters or nominating directors at stockholders’ meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

In addition, in November 2004, we adopted a stockholder rights plan, which was subsequently amended in April 2006 and December 2008. Although the rights plan will not prevent a takeover, it is intended to encourage anyone seeking to acquire our company to negotiate with our board prior to attempting a takeover by potentially significantly diluting an acquirer’s ownership interest in our outstanding capital stock. The existence of the rights plan may also discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Not applicable.

Issuer Purchases of Equity Securities

Not applicable.


Item 3.		Defaults Upon Senior Securities

Not applicable.


Item 4.		Reserved


Item 5.		Other Information

Not applicable.


Item 6.		Exhibits


Exhibit
Number		Description
3.1(1)		Amended and Restated Certificate of Incorporation

3.2(2)		Amended and Restated Bylaws

3.3(3)		Certificate of Designations for Series A Junior Participating Preferred Stock

4.1(3)		Form of Common Stock Certificate

4.2(4)		Amended and Restated Investors’ Rights Agreement, dated April 30, 2003, among us and the parties named therein

4.3(4)		Amendment No. 1 to Amended and Restated Investors’ Rights Agreement, dated May 19, 2003, among us and the parties named therein

4.4(4)*		Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between us and The Curators of the University of Missouri

4.5(4)		Form of Common Stock Purchase Warrant

4.6(3)		Rights Agreement, dated as of November 12, 2004, between us and American Stock Transfer & Trust Company, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Santarus, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C

4.7(5)		First Amendment to Rights Agreement, dated as of April 19, 2006, between us and American Stock Transfer & Trust Company

4.8(6)		Second Amendment to Rights Agreement, dated December 10, 2008, between us and American Stock Transfer & Trust Company

4.9(7)		Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to Kingsbridge Capital Limited

4.10(7)		Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge Capital Limited

4.11(8)		Registration Rights Agreement, dated December 10, 2008, between us and Cosmo Technologies Limited

4.12(8)		Amendment No. 1 to Registration Rights Agreement, dated April 23, 2009, between us and Cosmo Technologies Limited

31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32†		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to the Quarterly Report on Form 10-Q of Santarus, Inc. for the quarter ended March 31, 2004, filed with the Securities and Exchange Commission on May 13, 2004.


(2)		Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on December 5, 2008.

(3)		Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on November 17, 2004.

(4)		Incorporated by reference to the Registration Statement on Form S-1 of Santarus, Inc. (Registration No. 333-111515), filed with the Securities and Exchange Commission on December 23, 2003, as amended.

(5)		Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on April 21, 2006.

(6)		Incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2008.

(7)		Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on February 3, 2006.

(8)		Incorporated by reference to the Registration Statement on Form S-3 of Santarus, Inc. (Registration No. 333-156806), filed with the Securities and Exchange Commission on January 20, 2009, as amended.

*		Santarus, Inc. has been granted confidential treatment with respect to certain portions of this exhibit (indicated by asterisks), which portions have been omitted and filed separately with the Securities and Exchange Commission.

†		These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Santarus, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Dated: May 6, 2010	/s/ Debra P. Crawford
	Debra P. Crawford,
	Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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Litigous
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Santarus (SNTS) Inactive 10-Q2010 Q1 Quarterly report

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