Juniper Pharmaceuticals 10Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012



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 1-10352

COLUMBIA LABORATORIES, INC.

(Exact name of Registrant as specified in its charter)



Delaware		59-2758596
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

354 Eisenhower Parkway
Livingston, New Jersey		07039
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (973) 994-3999

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. Yes x No o

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). Yes x No o

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 “small reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o

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

Number of shares of Common Stock of Columbia Laboratories, Inc. issued and outstanding as of August 7, 2012: 87,507,333.

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

The following unaudited, condensed consolidated financial statements of Columbia Laboratories, Inc. (“Columbia” “we,” “us,” “our” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and therefore omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the six months ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related disclosures for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K (the “2011 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2012.

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	June 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents of which $1,713,371 in 2012 and $5,215,349 in 2011 is interest bearing	$	7,716,818		$	10,114,163
Short term investments	15,241,961			15,023,999
Accounts receivable, net of allowances for doubtful accounts of $100,000 in 2012 and 2011 (including amounts from related party: 2012 - $1,862,967; 2011 - $1,760,304)	4,483,910			4,695,410
Inventories	4,438,658			3,635,730
Prepaid expenses and other current assets	990,016			667,927
Total current assets	32,871,363			34,137,229
Property and equipment, net	2,205,822			1,481,071
Other assets	38,875			464,286
TOTAL ASSETS	$	35,116,060		$	36,082,586

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (including amounts due to related party: 2012 - $43,504; 2011 - $503,763)	$	2,182,460		$	3,526,171
Accrued expenses	2,465,245			3,016,596
Deferred revenue	31,250			93,750
Total current liabilities	4,678,955			6,636,517
Deferred revenue	39,889			46,416
Common stock warrant liability	1,703,779			8,168,846
TOTAL LIABILITIES	6,422,623			14,851,779
COMMITMENTS AND CONTINGENCIES
Contingently redeemable series C preferred stock, 600 shares issued and outstanding (liquidation preference of $600,000)	600,000			600,000
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value;1,000,000 shares authorized
Series B convertible preferred stock, 130 shares issued and outstanding (liquidation preference of $13,000)	1			1
Series E convertible preferred stock, 22,740 shares issued and outstanding (liquidation preference of $2,274,000)	227			227
Common stock $.01 par value; 150,000,000 authorized; 87,543,781 and 87,367,313 shares issued in 2012 and 2011, respectively	875,437			873,673
Capital in excess of par value	278,531,355			278,060,138
Less cost of 36,448 treasury shares	(125,381		)	(125,381		)
Accumulated deficit	(251,385,550		)	(258,282,753		)
Accumulated other comprehensive income	197,348			104,902
Shareholders' equity	28,093,437			20,630,807
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	35,116,060		$	36,082,586

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Six Months Ended June 30,						Three Months Ended June 30,
	2012			2011			2012			2011
REVENUES
Net product revenues (including amounts from related party:
six months 2012 - $2,163,183; 2011 - $938,340
three months 2012 - $1,922,782; 2011 - $511,560)	$	10,480,461		$	8,407,029		$	7,361,829		$	4,942,085
Royalties (including amounts from related party:
six months 2012 - $1,327,558; 2011 - $1,142,818
three months 2012 - $727,558; 2011 - $602,818)	1,514,588			1,287,532			834,211			686,719
Other revenues (including amounts from related party:
six months 2012 - $0; 2011 - $21,984,800
three months 2012 - $0; 2011 - $13,590,874 )	69,028			22,043,897			34,496			13,615,315
Total net revenues	12,064,077			31,738,458			8,230,536			19,244,119
COST OF PRODUCT REVENUES
Cost of product revenues (including amounts from related party:
six months 2012 - $1,966,333; 2011 - $817,488
three months 2012 - $1,747,809; 2011 - $429,355)	6,468,832			5,036,926			4,465,846			3,002,088
Gross profit	5,595,245			26,701,532			3,764,690			16,242,031
OPERATING EXPENSES:
Selling and distribution	—			87,669			—			29,827
General and administrative	4,474,681			4,856,804			1,923,356			2,500,326
Research and development (net of reimbursement from related party:
six months 2012 - $435,199; 2011 - $2,215,176
three months 2012 - $3,092; 2011 - $1,917,565)	712,750			1,853,550			159,072			507,949
Net gain on U.S. sale of STRIANT	—			(2,533,127		)	—			(2,533,127		)
Total operating expenses	5,187,431			4,264,896			2,082,428			504,975
Income from operations	407,814			22,436,636			1,682,262			15,737,056
OTHER INCOME (EXPENSE):
Interest income	122,745			4,527			63,624			3,002
Interest expense	—			(7,776		)	—			(3,888		)
Change in fair value of redeemable warrants	—			(2,721,205		)	—			—
Change in fair value of stock warrants	6,465,067			(2,260,183		)	205,700			2,797,928
Other, net	(95,747		)	(320,187		)	(8,776		)	(218,327		)
Total other income (expense)	6,492,065			(5,304,824		)	260,548			2,578,715
Income before taxes	6,899,879			17,131,812			1,942,810			18,315,771
Provision for income taxes	(2,676		)	(4,504		)	—			(1,576		)
NET INCOME	$	6,897,203		$	17,127,308		$	1,942,810		$	18,314,195
NET INCOME PER COMMON SHARE:
Basic	$	0.08		$	0.20		$	0.02		$	0.21
Diluted	$	0.00		$	0.19		$	0.02		$	0.16
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic	87,300,585			85,352,044			87,305,184			86,982,750
Diluted	87,300,585			89,534,165			87,344,009			95,851,956

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Six Months Ended June 30,					Three Months Ended June 30,
	2012			2011		2012			2011
NET INCOME	$	6,897,203		$	17,127,308	$	1,942,810		$	18,314,195
Other comprehensive income (loss):
Foreign currency translation	(3,442		)	5,230		(8,066		)	3,989
Unrealized gain (loss) on short term investments	95,888			—		(8,919		)	—
COMPREHENSIVE INCOME	$	6,989,649		$	17,132,538	$	1,925,825		$	18,318,184

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,897,203		$	17,127,308
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation and amortization	191,821			86,520
Gain on sale of STRIANT	—			(2,533,127		)
Change in value of redeemable warrants	—			2,721,205
Change in value of stock warrants	(6,465,067		)	2,260,183
Recognition of deferred income	—			(16,889,710		)
Provision for sales returns	(100,000		)	52,487
Writeoff of accounts receivable	—			7,616
Writeoff of inventories	758,638			—
Share-based compensation	487,981			504,383
Loss on disposal of fixed assets	6,225			3,780
Changes in assets and liabilities-
(Increase) decrease in:
Accounts receivable	211,500			(4,941,991		)
Inventories	(1,364,566		)	(483,645		)
Prepaid expenses and other current assets	(322,089		)	(292,118		)
Other assets	425,411			19,717
Decrease in:
Accounts payable	(1,343,711		)	(2,093,664		)
Other accrued expenses	(657,988		)	(918,025		)
Deferred revenue	(69,027		)	(154,187		)
Net cash used in operating activities	(1,343,669		)	(5,523,268		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(1,044,871		)	(625,344		)
Proceeds from sale of STRIANT	—			3,100,000
Net cash (used in) provided by investing activities	(1,044,871		)	2,474,656
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	—			2,641,951
Proceeds from exercise of warrants	—			653,299
Payments for purchase of treasury stock	—			(125,381		)
Dividends paid	(15,000		)	(15,000		)
Net cash (used in) provided by financing activities	(15,000		)	3,154,869



EFFECT OF EXCHANGE RATE CHANGES ON CASH	6,195			23,544
NET (DECREASE) INCREASE IN CASH	(2,397,345		)	129,801
CASH, BEGINNING OF PERIOD	10,114,163			21,630,979
CASH, END OF PERIOD	$	7,716,818		$	21,760,780

SUPPLEMENTAL INFORMATION
Taxes paid	$	37,156		$	109,476
NON-CASH FINANCING ACTIVITIES
Reclassification of redeemable warrant liability to capital in excess of par value	$	—		$	16,193,037
Retirement of warrant liability	$	—		$	561,398

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(1)	SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies followed for quarterly financial reporting are the same as those disclosed in Note (4) of the Notes to Consolidated Financial Statements included in the 2011 Annual Report.


(2)	WATSON TRANSACTIONS:

On July 2, 2010, the Company sold to Watson Pharmaceuticals, Inc. (“Watson”), (i) substantially all of its assets primarily relating to the research, development, regulatory approval, manufacture, distribution, marketing, sale and promotion of pharmaceutical products containing progesterone as an active ingredient, including progesterone vaginal gel 8% and progesterone vaginal gel 4% (collectively, the “Progesterone Products”), including certain intellectual property, promotional materials, contracts, product data and regulatory approvals and regulatory filings (the “Purchased Assets”), and (ii) 11,200,000 shares (the “Shares”) of the Company's common stock (“Common Stock”). The Company retained certain assets and rights relating to its progesterone business, including all rights necessary to perform its obligations under its agreement with Merck Serono S.A. (“Merck Serono”). These transactions are referred to collectively as the “Watson Transactions.”

Watson paid the Company $47 million in cash, forgave $15 million in debt, and assumed certain liabilities associated with the Purchased Assets. The Watson Transactions allow for certain milestone payments that can be earned by the successful completion of clinical development milestones in the Company's Phase III study designed to evaluate the ability of progesterone vaginal gel 8% to reduce the risk of preterm birth in women with premature cervical shortening (the “PREGNANT study”), regulatory filings, receipt of regulatory approvals and product launches. Watson makes royalty payments to the Company of 10 to 20 percent of annual net sales of certain Progesterone Products provided, however, that royalty rates would be reduced by 50% in a particular country if a generic entry by a third party occurs in such country and certain other circumstances are fulfilled. In addition, if Watson commercializes a product through a third party outside of the U.S., in lieu of royalties, the Company will be entitled to 20% of gross profits associated with such commercialization. If Watson or its affiliates effects a generic entry with respect to a Progesterone Product in a particular country in the circumstances permitted by the Purchase and Collaboration Agreement, dated as of March 3, 2010, between the Company and Watson (the “Purchase Agreement”), in lieu of royalties payable in respect of net sales for such generic product, the Company will be entitled to 20% of the gross profits associated with the commercialization of such generic product in such country. The Company and Watson are collaborating with respect to the development of Progesterone Products. In connection therewith, the parties established a Joint Development Committee to oversee and supervise all development activities. The Company was responsible for completing the PREGNANT study and is responsible for such other activities as determined by the Joint Development Committee. The Company was responsible for the costs of the preparation, filing and approval process of the new drug application (“NDA”) in the preterm birth indication with the Food and Drug Administration (“FDA”) up to a maximum of $7.0 million incurred after January 1, 2010. All subsequent development costs incurred in connection with the development collaboration were paid by Watson. From January 1, 2010 through June 30, 2012, the Company spent $10.6 million in costs related to the PREGNANT study and the related NDA, $3.6 million of which have been reimbursed by Watson, including $0.4 million in reimbursable costs which were recognized as a credit to research and development (“R&D”) expense in the first half of 2012. On February 10, 2012, the Company transferred to Watson NDA 22-139 (as defined below) pursuant to the second closing of the Watson Transactions.

The parties also entered into various ancillary agreements in connection with the Purchase Agreement, including an Investor's Rights Agreement (pursuant to which Watson designated a member of the Company's board of directors for the period set forth therein, Watson obtained certain registration rights pertaining to the Shares, and Watson agreed to certain transfer restrictions pertaining to the Shares) and a Supply Agreement (pursuant to which the Company will supply Progesterone Products to Watson for sale in the U.S. at a price equal to 110% of cost of goods sold), and a License Agreement relating to the grant of certain intellectual property licenses.

As part of the Purchase Agreement, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions, from July 2, 2010, (the date of the closing of the Watson Transactions) until the second anniversary of the date on which the Company and Watson terminate their relationship with respect to the joint development of Progesterone Products. The joint development collaboration is terminable by either party on or after July 2, 2015.

Upon the closing of the Watson Transactions on July 2, 2010, the Company allocated the $47 million initial proceeds plus the $15 million in forgiven debt plus accrued interest to the fair value of the Shares and the elimination of the remaining book value of the progesterone vaginal gel intangible assets in the amount of $16.2 million. The excess was recorded as deferred revenue and was amortized over the remaining R&D period for the PREGNANT study including the Company's submission to, and the FDA's filing of the related NDA. The Company recognized revenue from the amortization of these deferred revenues of $8,393,926 for the six months ended June 30, 2011. The Company completed the amortization of these deferred revenues as of June 2011.

In April 2011, the Company announced positive results from the PREGNANT study, a pivotal Phase III clinical trial of progesterone vaginal gel 8% conducted in collaboration with the National Institutes of Health (“NIH”) to reduce the risk of preterm birth in women with a short cervical length as measured by transvaginal ultrasound at mid-pregnancy. We filed an NDA (NDA 22-139), for this indication with the FDA in April 2011. The NDA was reviewed by the FDA's Advisory Committee for Reproductive Health Drugs (the "Committee") in January 2012. While Committee members generally agreed that progesterone vaginal gel 8% is safe, the Committee stated that more information is needed to support approval. On February 24, 2012, Watson received a Complete Response Letter (“CRL”) from the FDA indicating that the NDA review cycle is complete and the application is not ready for approval in its present form. The CRL stated that the effect of treatment with progesterone vaginal gel 8% in reducing the risk of preterm birth in women with a short uterine cervical length at ≤ 32 ⁶/₇ weeks gestation (p=0.022) did not meet the level of statistical significance generally expected to support the approval of the product in the U.S. market from a single trial. Watson continues to work with the FDA to determine if there is a viable path forward for this application.


(3)	STRIANT ASSET PURCHASE AGREEMENT:

On April 20, 2011, the Company entered into an asset purchase agreement (“Asset Purchase Agreement”) and a license agreement (“License Agreement”) with Actient Pharmaceuticals, LLC (“Actient”), Lake Forest, IL, relating to the sale of certain assets and the licensing of certain intellectual property related to STRIANT® (testosterone buccal system) (“STRIANT”) in the United States.

Under the Asset Purchase Agreement, the Company sold to Actient certain assets primarily related to STRIANT in the United States, its territories, and possessions (“Territory”), including, but not limited to the STRIANT NDA and other regulatory approvals in the Territory; the STRIANT trademark, trade dress and other promotional materials used primarily to promote, market and sell STRIANT in the Territory; on-hand STRIANT inventories as of the closing; and other ancillary assets and rights.

In consideration of the assets and rights acquired under the Asset Purchase Agreement, Actient made a one-time payment at closing to Columbia of $3.1 million. Columbia recognized a gain in the second quarter of 2011 of $2.5 million in connection with the sale of STRIANT, net of the transfer of inventory, fixed assets related to STRIANT, and the residual prepaid FDA fees.

Under the License Agreement, Columbia has granted to Actient an exclusive (even as to Columbia) irrevocable, perpetual and transferable license in the Territory to the intellectual property primarily related to STRIANT, including a license relating to Columbia's progressive hydration technology used in STRIANT, for use in the treatment of hypogonadism and other indications related to low testosterone levels in men.

In consideration of the rights granted under the License Agreement, Actient will pay Columbia a royalty on Actient's net sales of STRIANT in the Territory. No royalty is payable on net sales less than ten million dollars ($10,000,000) annually. A seven percent (7)% royalty is payable on sales between ten million dollars ($10,000,000) and twenty million dollars ($20,000,000) annually. A ten percent (10)% royalty is due on sales in excess of twenty million dollars ($20,000,000) annually. The royalty is reduced by fifty percent (50)% upon the expiration or other termination of the STRIANT patent and eliminated in the event of the launch of a generic product to STRIANT after the expiration or other termination of the STRIANT patent. No royalty is due after ten years from closing. No royalties have been earned to date.


(4)	REVENUE RECOGNITION AND SALES RETURNS RESERVES:

Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and sales of STRIANT through April, 2011), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (primarily the amortization of the deferred revenue and milestone payments from the Watson Transactions).

Net product revenues are recognized when shipped, except in the case of product shipments to Watson, which are recognized when received at Watson's warehouse. Royalty revenues, based on sales by licensees, are recorded as revenues as those sales are made by the licensees.

The Watson Transactions included allocated proceeds for licenses to the Progesterone Products and the continuation of development of the Progesterone Products through the filing of the related NDA with the FDA. The Company could not determine the fair value of the continuation of development of the Progesterone Products and concluded the license fee and continuation of development to be a single unit of account resulting in the deferral of allocated proceeds and recognition as revenue over the estimated development period. In June 2011, Columbia earned a $5 million milestone payment under the Purchase Agreement from Watson based on FDA's acceptance for filing of the NDA submission for the use of progesterone vaginal gel 8% to reduce the risk of preterm birth in women with premature cervical shortening.

The Company is responsible for sales returns for products sold to domestic customers prior to both the Watson Transactions and the sale of STRIANT to Actient. Revenues from the sale of products to domestic customers were recorded at the time goods were shipped to customers. The Company believes that it has not made any shipments in excess of its customers' ordinary course of business inventory levels. Except for sales to licensees, our return policy allows product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Products sold to licensees are not returnable to us. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated

based on a percentage of sales, using such factors as historical sales information, distributor inventory levels and product prescription data, and were recorded as a reduction to sales in the same period as the related sales were recognized. The Company evaluates its remaining provision for returns on a quarterly basis based on the rate of returns processed and adjusts the provision if its analysis indicates that the provision needs to be adjusted. The Company is not responsible for returns for international sales. Sales adjustments for international sales are estimated to recognize changes in foreign exchange rates and government tenders that may fluctuate within a year.

An analysis of the reserve for sales returns follows:



	Six Months Ended June 30,
	2012			2011
Balance at beginning of year	$	1,429,598		$	2,663,648

Provision:
Related to current period sales	—			52,487
Related to prior period sales	(100,000		)	—
	(100,000		)	52,487
Returns:
Related to current period sales	—			—
Related to prior period sales	(109,787		)	(464,682		)
	(109,787		)	(464,682		)
Balance at end of quarter	$	1,219,811		$	2,251,453


(5)	INVENTORIES:

Inventories consisted of the following:



	June 30, 2012		December 31, 2011
Raw materials	$	993,442	$	1,244,119
Work in process	2,087,873		825,466
Finished goods	1,357,343		1,566,145
Total Inventories	$	4,438,658	$	3,635,730


(6)	NOTES PAYABLE:

On December 22, 2006, the Company raised approximately $40 million in gross proceeds to the Company from the offering and sale of convertible subordinated notes (the "Notes") to a group of institutional investors. The Notes accrued interest at a rate of 8% per annum and were subordinated to the Company's obligations under the Investment and Royalty Agreement dated, March 5, 2003 between the Company and PharmaBio Development, Inc. and had a stated maturity date of December 31, 2011. They were convertible into a total of approximately 7.6 million shares of Common Stock at a conversion price of $5.25. Investors also received warrants to purchase 2,285,714 shares of Common Stock at an exercise price of $5.50 per share. The warrants expired on December 22, 2011. The Company used the proceeds of this offering to acquire from Merck Serono the U.S. marketing rights to CRINONE for $33.0 million and Merck Serono’s existing inventory of that product. The balance of the proceeds was used to pay other costs related to the transaction and for general corporate purposes.

The Company recorded original issue discounts of $6.3 million to the Notes based upon the fair value of warrants granted. In addition, beneficial conversion features totaling $8.5 million were recorded as a discount to the Notes. These discounts were amortized at an imputed rate over the term of the Notes.

On March 3, 2010, the Company entered into Note Purchase and Amendment Agreements (the “Note Purchase Agreements”) with all of the holders (the “Holders”) of the Notes. Under the Note Purchase Agreements, the Company agreed to purchase, subject to the satisfaction of certain conditions, the approximately $40 million in aggregate principal amount of Notes held by the Holders. The aggregate purchase price for the Notes was $26 million in cash (plus accrued and unpaid interest through but excluding the date of the closing of the Note purchases), warrants to purchase 7,750,000 shares of Common Stock at an exercise price of $1.35 per share (the “Warrants”) and 7,407,407 shares of Common Stock. The closings of the transactions contemplated by the Note Purchase Agreements were subject to various conditions, including the consummation of the Watson Transactions. Pursuant to the Note Purchase Agreements, the Holders consented, effective on March 3, 2010, to an amendment to the Notes (the “Amendment”) that eliminated the right of any holder of the Notes to cause the Company to redeem the Notes by virtue of the Watson Transactions. The Amendment would have terminated if the Note purchase closings did not occur on or prior to August 31, 2010, and in certain other circumstances. On July 2, 2010, the closings under the Note Purchase Agreements occurred and the Notes were canceled.

The Notes contained an embedded derivative that allowed the Holders to redeem the Notes at face value in the event of the sale of substantially all of the assets of the Company. Prior to the signing of the Watson Transactions (See Note 2) on March 3, 2010, this feature was assigned a nominal value as the Company assessed the potential for such sale to be remote. The Watson Transactions resulted in the sale of substantially all of the assets of the Company and, therefore, the associated value of the embedded derivative was increased to the difference between the fair value of the consideration, as determined on March 31, 2010, to be paid at the closing of the Watson Transactions and the carrying value of the Notes. Accordingly, the Company recorded a non-cash charge of $5,848,150 on March 31, 2010.

The value of the embedded derivative fluctuated as long as the Notes remained outstanding, based on changes in the fair value of the consideration and the carrying value of the Notes. On June 30, 2010, the non-cash charge for the embedded derivative was $4,829,036. With the closing of the Watson Transactions on July 2, 2010, the value of the embedded derivative was reversed. The embedded derivative was classified as a Level 2 valuation as described in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10, “Fair Value Measurements and Disclosures.”

The Warrants issued under the Note Purchase Agreements on July 2, 2011 are exercisable, subject to the limitations set forth therein, during the period commencing 180 days after and ending on the five year anniversary of their issuance, unless earlier exercised or terminated as provided in such Warrants. The Warrants contained a feature requiring the Company to purchase the Warrants issued under the Note Purchase Agreements if the Company had issued shares of Common Stock (or equivalents) for a price less than $2.00 per share until 45 days after the Company's public announcement of the results of the PREGNANT study. This resulted in the Warrants being recorded as a liability. The Company determined the fair value using the Black-Scholes model. The Company recorded a liability at the closing of the Watson Transactions in the amount of $5,509,893 as of the close of business on July 1, 2010. The results of the PREGNANT study were announced in December 2010 and on January 20, 2011, when the contingent purchase rights on the Warrants expired, the value of the Warrants was determined under the Black-Scholes model to be $16,193,037 and reclassified to Capital in Excess of Par Value. These Warrants are no longer marked to market.


(7)	GEOGRAPHIC INFORMATION:

The Company and its subsidiaries are engaged in one line of business, the development, licensing, manufacturing and sale of pharmaceutical products. The Company conducts its international business through its Bermuda subsidiary which contracts with various manufacturers located in the United Kingdom, Switzerland and Italy, to make product for both its international and domestic operations. The Company’s international customers, Merck Serono and The Urology Company, sell its products into several countries.

As of July 2, 2010, with the completion of the Watson Transactions, Watson is responsible for the commercialization and sale of Progesterone Products domestically. The Company supplies Watson with finished products on a cost-plus-10% basis.

The following table shows selected information by geographic area:



	Net Revenues		Identifiable Assets
As of and for the six months ended June 30, 2012
United States	$	3,844,861	$	25,476,058
Switzerland	8,219,216		5,323,638
Other countries	—		4,316,364
Total	$	12,064,077	$	35,116,060
As of and for the six months ended June 30, 2011
United States	$	24,705,931	$	29,753,248
Switzerland	7,032,527		4,967,415
Other countries	—		926,572
Total	$	31,738,458	$	35,647,235


(8)	INCOME PER COMMON AND POTENTIAL COMMON SHARE:

The calculation of basic and diluted income per common and common equivalent share is as follows:



	Six Months Ended June 30,						Three Months Ended June 30,
	2012			2011			2012			2011
INCOME PER SHARE -Basic
NET INCOME	$	6,897,203		$	17,127,308		$	1,942,810		$	18,314,195
Less: Preferred stock dividends	(15,000		)	(15,000		)	(7,500		)	(7,500		)
NET INCOME APPLICABLE TO
COMMON STOCK	$	6,882,203		$	17,112,308		$	1,935,310		$	18,306,695

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: Basic:	87,300,585			85,352,044			87,305,184			86,982,750

NET INCOME PER COMMON SHARE: Basic	$	0.08		$	0.20		$	0.02		$	0.21

INCOME PER SHARE -Diluted
NET INCOME APPLICABLE TO
COMMON STOCK	$	6,882,203		$	17,112,308		$	1,935,310		$	18,306,695
Add: Preferred stock dividends	—			15,000			—			7,500
Less: Fair value of stock warrants for dilutive warrants	(6,465,067		)	—			(205,700		)	(2,797,949		)
NET INCOME APPLICABLE TO
DILUTIVE COMMON STOCK	$	417,136		$	17,127,308		$	1,729,610		$	15,516,246

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: Basic:	87,300,585			85,352,044			87,305,184			86,982,750
Effect of dilutive securities
Dilutive stock awards	—			1,777,414			38,825			1,649,489
Dilutive warrants	—			577,859			—			5,840,869
Dilutive preferred share conversions	—			1,826,848			—			1,378,848
	—			4,182,121			38,825			8,869,206
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - Diluted:	87,300,585			89,534,165			87,344,009			95,851,956

NET INCOME PER COMMON SHARE: Diluted	$	0.00		$	0.19		$	0.02		$	0.16

Basic income per share is computed by dividing the net income plus preferred dividends by the weighted-average number of shares of Common Stock outstanding during a period. The diluted earnings per share calculation gives effect to dilutive options, warrants, convertible notes, convertible preferred stock, and other potential dilutive Common Stock including selected restricted shares of Common Stock outstanding during the period. Diluted income per share is based on the treasury stock method and includes the effect from potential issuance of Common Stock, such as shares issuable pursuant to the exercise of stock options, assuming the exercise of all in-the-money stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive. The warrants related to the stock warrant liability were first evaluated on an "as if converted" basis; the change in the fair value of the stock warrants recognized in the three and six months ended was subtracted from earnings to calculate net income applicable to dilutive common stock. Then, the incremental shares for dilution were determined utilizing the treasury method. Since the average stock price for the quarter was below the exercise price of the warrants, the calculation under the treasury method resulted in repurchasing more shares than would have been exercised and therefore, the inclusion of these shares were deemed to be anti-dilutive and excluded from the dilutive share calculation.

Shares to be issued upon the exercise of the outstanding options and warrants or the conversion of the Notes, convertible preferred stock and selected restricted shares of Common Stock excluded from the income per share calculation amounted to 17,021,453 and 13,333,244 for the six months ended June 30, 2012, and 2011, respectively but were not included in the computation of diluted earnings per share because the awards were anti-dilutive. Shares to be issued upon the exercise of the outstanding options and warrants, convertible preferred stock and selected restricted shares of Common Stock excluded from the income per share calculation amounted

to16,968,748 and 4,339,789 for the three months ended June 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the awards were anti-dilutive.


(9)	LEGAL PROCEEDINGS:

Claims and lawsuits are filed against the Company from time to time. Although the results of pending claims are always uncertain, the Company believes that it has adequate reserves or adequate insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance coverage in the event of any unfavorable outcome resulting from these actions.

Between February 1, 2012 and February 6, 2012, two putative securities class action complaints were filed against the Company and certain of its officers and directors in the United States District Court for the District of New Jersey. These actions were filed under the captions Wright v. Columbia Laboratories, Inc., et al., and Shu v. Columbia Laboratories, Inc., et al. Both actions have been consolidated into a single proceeding entitled In re Columbia Laboratories, Inc., Securities Litigation, have added Watson Pharmaceuticals, Inc., and certain of its officers as defendants, and assert claims under sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act on behalf of an alleged class of purchasers of the Common Stock during the period from December 6, 2010 through January 20, 2012. The complaint alleges that the Company and certain of its officers and a director omitted to state material facts that they were under a duty to disclose, and made materially false and misleading statements that related to the results of the Company's PREGNANT study and the likelihood of approval by the FDA of an NDA to market progesterone vaginal gel 8% for the prevention of preterm birth in women with premature cervical shortening. According to the complaint, these alleged omissions and misleading statements had the effect of artificially inflating the market price of the Common Stock. The plaintiffs seek unspecified damages on behalf of the putative class and an award of costs and expenses, including attorney's fees. The Company believes that this action is without merit, and intends to defend it vigorously. At this time it is not possible to determine the likely outcome of, or estimate the liability related to, this action and the Company has not made any provision for losses in connection with it.


(10)	STOCK-BASED COMPENSATION:

The Company’s net income for the six months ended June 30, 2012 and June 30, 2011 included $0.5 million and $0.5 million, respectively, of stock based compensation expense. Stock based compensation for the six months ended June 30, 2012 included $48,187 related to the extension of the expiration periods of certain stock options due to the reduction in force.



	Six Months Ended June 30,
Stock Based Compensation	2012		2011
Cost of revenues	$	10,039	$	6,618
General and administrative	416,692		454,855
Research and development	61,250		42,910
Total	$	487,981	$	504,383

During the six months ended June 30, 2012, the Company granted 835,000 options to employees. During the six months ended June 30, 2012, 593,625 options expired unexercised.


(11)	FAIR VALUE OF FINANCIAL INSTRUMENTS:

Effective January 1, 2008, the Company adopted FASB ASC 820-10-25, (“Fair Value Measurement and Disclosures." This standard establishes a framework for measuring fair value and expands disclosure about fair value measurements. The Company did not elect fair value accounting for any assets and liabilities allowed by FASB ASC 825, “Financial Instruments.”

FASB ASC 820-10 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820-10 describes the following three levels of inputs that may be used:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The fair value of the short term investments are determined based on quoted market prices on the balance sheet date and

are classified as a level 1 investment.

The estimated fair value of the Common Stock warrant liability resulting from the October 2009 registered direct offering of 10,900,000 shares of Common Stock and warrants to purchase 5,450,000 shares of Common Stock is shown in the table below and is determined by using the Black-Scholes option pricing model based on the Company's stock price at the measurement date, exercise price of the warrant, risk-free rate and historical volatility, and are classified as a Level 2 measurement. During the six months ended June 30, 2012, the Company recorded income as shown in the table below to adjust the value of the stock warrant liability to market as a result of the change in the stock price from December 31, 2011.



	June 30, 2012		December 31, 2011		Income (Expense) to adjust to market value

Common Stock Warrant Liability	$	1,703,779	$	8,168,846	$	6,465,067

	June 30, 2011		December 31, 2010		Income (Expense) to adjust to market value

Common Stock Warrant Liability	$	10,985,691	$	8,725,508	$	(2,260,183	)

The estimated fair value of the Company's contingent obligation to purchase the Warrants issued under the Note Purchase Agreements, if the Company issued shares of Common Stock (or equivalents) for a price less than $2.00 per share until 45 days (January 20, 2011) after the Company's public announcement of the results of the PREGNANT study, was determined under the Black-Scholes model and recorded as a liability at the closing of the Watson Transactions in the amount of $5,509,893 as of the close of business on July 1, 2010. It was adjusted, as of December 31, 2010, to $13,471,832. The results of the PREGNANT study were announced in December 2010, and on January 20, 2011, when the contingent purchase rights on the Warrants expired, As shown in the table below, the Company recorded expense to adjust the value of the redeemable warrants to market on January 20, 2011 determined under the Black-Scholes option pricing model as a result of the change in the stock price from December 31, 2011 and reclassified to Capital in Excess of Par Value. These Warrants will no longer be marked to market.

The fair value of accounts receivable and accounts payable approximate their carrying amount.


(12)	RELATED PARTY TRANSACTIONS

The table below presents the transactions between the Company and Watson.



	Six Months Ended June 30,				Three Months Ended June 30,
	2012		2011		2012		2011
REVENUES
Net product revenues	$	2,163,183	$	938,340	$	1,922,782	$	511,560
Royalties	1,327,558		1,142,818		727,558		602,818
Amortization of deferred revenue	—		16,984,800		—		8,590,874
Milestone payment	—		5,000,000		—		5,000,000
Total net revenues	$	3,490,741	$	24,065,958	$	2,650,340	$	14,705,252

COST OF PRODUCT REVENUES
Cost of product revenues	1,966,333		817,488		1,747,809		429,355
Gross profit	$	1,524,408	$	23,248,470	$	902,531	$	14,275,897


Accounts receivable	$	1,862,967	$	6,540,972

Accounts payable	$	43,504	$	503,763

The Company has exceeded the cap of $7.0 million by $3.6 million for R&D spending on the PREGNANT study and related Preterm Birth NDA pursuant to the Watson Transactions and has recorded this amount as a reduction of R&D expenses. Watson has paid the Company for $3.6 million of these excess amounts. In the six months of 2012, Watson was invoiced and paid to the Company $0.4 million for reimbursable R&D expenses. There are no further expenses to be reimbursed by Watson.


(13)	RECENT ACCOUNTING PRONOUNCEMENTS:

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs, (ASU 2011-04), which amends ASC 820. This update clarifies the existing guidance and amends the wording used to describe many of the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with prospective application required. This update did not have a material effect on our consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income (ASU 2011-05). This update requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retrospective applications required. This update did not have a material effect on our consolidated financial statements.

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

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.

Historically, we received revenues domestically from pharmaceutical products containing progesterone as an active ingredient, including progesterone vaginal gel 8% and progesterone vaginal gel 4% (collectively, the “Progesterone Products”) that we either promoted through our own sales force and sold to wholesalers and specialty pharmacies or sold to licensees (see chart below). As of July 2, 2010, and the close of the Watson Transactions (as defined and described below), we supply Watson Pharmaceuticals, Inc. (“Watson”) with Progesterone Products and Watson promotes and sells these products to wholesalers and specialty pharmacies in the United States. We also continue to supply Merck Serono with CRINONE 8% for resale outside the United States.



Products:

Progesterone Products	-	CRINONE® 8% progesterone vaginal gel formerly marketed and sold by the Company, and now sold to Watson for resale in the U.S.

	-	CRINONE® 4% progesterone vaginal gel sold to Watson for resale in the U.S.

	-	CRINONE® 8% progesterone vaginal gel sold to Merck Serono for resale outside the U.S.

	-	PROCHIEVE® 8% progesterone vaginal gel formerly sold by the Company in the U.S.

	-	PROCHIEVE® 4% progesterone vaginal gel sold to Ascend Therapeutics, Inc. for resale in the U.S. pursuant to an agreement that terminated on July 23, 2010.

Other Products	-	STRIANT® testosterone buccal system marketed and sold by the Company in the U.S. until April 2011

	-	STRIANT® licensed in April 2011 to Actient Pharmaceuticals, LLC, for sale in the U.S.

	-	STRIANT® licensed to and sold by The Urology Company in the U.K.

	-	STRIANT® licensed to Invaron Pharmaceuticals for sale in Canada

Effective May 19, 2010, our license and supply agreement with Merck Serono S.A. (“Merck Serono”) for the sale of CRINONE 8% outside the U.S. was renewed for an additional five year term.

On July 2, 2010, under a Purchase and Collaboration Agreement between the Company and Watson (the “Purchase Agreement”), we sold to Watson substantially all of our progesterone related assets and 11.2 million shares (the "Shares") of common stock of the Company (“Common Stock”) for a $47 million upfront payment, the forgiveness of $15 million in debt plus royalties on certain Progesterone Products and potential milestone payments. These transactions are referred to collectively as the “Watson Transactions” and are described more broadly in Note 2 of the Notes to the Condensed Consolidated Financial Statements. The Watson Transactions allow for certain milestone payments that can be earned by the successful completion of clinical development milestones in the Company's Phase III study designed to evaluate the ability of progesterone vaginal gel 8% to reduce the risk of preterm birth in women with premature cervical shortening (the “PREGNANT study”), regulatory filings, receipt of regulatory approvals and product launches. Additionally, Watson agreed to fund the development of a next-generation vaginal Progesterone Product as part of a comprehensive life-cycle management strategy. On February 10, 2012, in connection with the second closing of the Watson Transactions, we transferred to Watson our New Drug Application (“NDA”) relating to the use of the progesterone vaginal gel 8% to reduce the risk of preterm birth in women with a short cervical length as measured by transvaginal ultrasound at mid-pregnancy.

On April 20, 2011, we entered into an asset purchase agreement and license agreement with Actient Pharmaceuticals, LLC (“Actient”) relating to the sale by us of certain assets and the licensing of certain intellectual property (related to the underlying progressive hydration technology for use in the treatment of hypogonadism and other indications related to low testosterone levels in men) relating to STRIANT in the United States. In connection with this transaction, we received a one-time payment of $3.1

million at closing and are entitled to certain royalties under the license agreement. In consideration of the rights granted under the license agreement, Actient will pay Columbia a royalty on Actient's net sales of STRIANT in the United States, its territories and possessions. No royalty is payable on net sales less than ten million dollars ($10,000,000) annually. A seven percent (7%) royalty is payable on sales between ten million dollars ($10,000,000) and twenty million dollars ($20,000,000) annually. A ten percent (10%) royalty is due on sales in excess of twenty million dollars ($20,000,000) annually. The royalty is reduced by fifty percent (50%) upon the expiration or other termination of the STRIANT patent and eliminated in the event of the launch of a generic product to STRIANT after the expiration or other termination of the STRIANT patent. No royalty is due after ten years from closing. This transaction is described in more detail in Note 3 to the Condensed Consolidated Financial Statements. Columbia's business now consists of its product manufacturing revenues, royalties and potential milestone payments, its collaboration with Watson on the development of next-generation Progesterone Products, and its novel bioadhesive drug delivery technologies and other products.

With the closing of the Watson Transactions, all Progesterone Products are marketed and sold in the U.S. by Watson. We manufacture and sell product to Watson at our cost plus 10%; these revenues are recorded within product revenues. In addition, we receive royalties equal to a minimum of 10% of annual net sales of these products for annual net sales up to $150 million, 15% for sales above $150 million but less than $250 million; and 20% for annual net sales of $250 million and over. Outside the U.S., we supply Merck Serono with CRINONE 8% for resale at the greater of 30% of net sales or direct manufacturing costs plus 20%. These revenues are recorded within product revenues.

Future recurring revenues will be derived primarily from product sales to and royalty streams from our partners, Watson and Merck Serono. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Because products shipped to the Company's two major customers occur only in full batches, quarterly sales can vary widely and affect quarter to quarter comparisons and may not correlate to customers' in-market sales. Future, non-recurring milestone payments will be recognized when and if the milestones are achieved. Operating expenses attributable to product selling, marketing and distribution activities have been eliminated. Research and development (“R&D”) expenses should remain low for the foreseeable future.

On March 1, 2012, the Company announced a 42% workforce reduction from 24 employees at December 31, 2011, to 14 employees. The Company recorded a severance charge of approximately $0.5 million in the first quarter of 2012, and expects to realize annual savings of over $1.5 million from reductions in salaries, bonuses and benefits. The reduction impacts R&D and general administrative positions. Columbia's remaining staff continues to focus on the future course of Columbia's business, executing its public reporting obligations, management of its supply chain, and its role on the Joint Development Committee with Watson for progesterone vaginal gel 8% for use in the reduction of risk of preterm birth in women with premature cervical shortening.

All of our products are manufactured in Europe by third parties on behalf of our foreign subsidiaries who sell the products to our worldwide licensees, and to the Company, in the case of the products supplied for resale in the United States. Because our European revenues reflect these sales and are reduced only by our product manufacturing costs, we have historically shown a profit from our foreign operations.

From July 2010 through June 2011, the Company recorded the amortization of the deferred revenue recognized as a result of the completion of the Watson Transactions, which amount totaled approximately $34 million. The Company historically charged our United States operations all selling and distribution expenses that supported our marketing, sales and distribution efforts. From the fourth quarter of 2010 until the sale of STRIANT to Actient in April 2011, only distribution costs related to STRIANT were included in selling and distribution costs. Going forward, there will be no such costs. R&D expenses are charged to our U.S. operations for product development, which principally supports new products. In addition, the majority of our general and administrative expenses represents the Company's management activities as a public company and are charged to our United States operations. The amortization of the repurchase of the U.S. rights to CRINONE was charged to our U.S. operations. Amortization on these rights ceased with the closing of the Watson Transactions. As a result, we have historically shown a loss from our U.S. operations that has been significantly greater than, and has offset, the profits from our foreign operations.

In connection with the Watson Transactions, until the second anniversary of the date on which the Company and Watson terminate their relationship with respect to the joint development of Progesterone Products, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions. The joint development collaboration can be terminated by either party five years after the closing of the Watson Transactions (i.e., July 2, 2015).

In December 2010, we announced positive top-line results from the PREGNANT study and in April 2011 the study was published in the peer-reviewed journal Ultrasound in Obstetrics & Gynecology in a manuscript entitled Vaginal progesterone reduces the rate of preterm birth in women with a sonographic short cervix: a multicenter, randomized, double-blind, placebo-controlled trial. (Hassan SS, Romero R, et al., Ultrasound Obstet Gynecol 2011;38:18-31). The published results indicate that the administration of progesterone vaginal gel 8% from mid-pregnancy until term in women with premature cervical shortening

as confirmed by transvaginal ultrasound was associated with a statistically significant reduction in the rate of preterm birth at less than or equal to 32 ⁶/₇ weeks gestation, the primary endpoint of the study, compared to placebo gel. Use of progesterone vaginal gel 8% was associated with: a 44% reduction in the incidence of preterm birth before 33 weeks gestation (p=0.022) and a 39% reduction in preterm births before 35 weeks gestation (p=0.012). Improvement in infant outcome was also noted with progesterone vaginal gel 8%. The incidence and profile of adverse events in patients receiving progesterone vaginal gel 8% were comparable to placebo.

In April 2011, we filed a new drug application (“NDA”) (NDA 22-139) for progesterone vaginal gel 8% for use in the reduction of risk of preterm birth in women with a singleton gestation and a short uterine cervical length in the mid-trimester of pregnancy. The NDA was reviewed by the FDA's Advisory Committee for Reproductive Health Drugs (the "Committee") in January 2012. While Committee members generally agreed that progesterone vaginal gel 8% is safe, the Committee stated that more information is needed to support approval. On February 10, 2012, we transferred to Watson our pending NDA for the preterm birth indication pursuant to the second closing of the Watson Transactions. On February 24, 2012, Watson announced that it had received a Complete Response Letter (“CRL”) from the FDA indicating that the NDA review cycle was complete and the application is not ready for approval in its present form. The CRL stated that the effect of treatment with progesterone vaginal gel 8% in reducing the risk of preterm birth in women with a short uterine cervical length at ≤ 32 6/7 weeks gestation (p=0.022) did not meet the level of statistical significance generally expected to support the approval of the product in the U.S. market from a single trial. Watson continues to work with the FDA to determine if there is a viable path forward for this application.

On March 13, 2012, we announced that we engaged Cowen and Company, LLC, as the Company's independent financial advisor to assist the Company with its stated goal to evaluate possible strategic transactions. There can be no assurances as to whether any particular strategic transaction will be recommended by our board of directors. The Company does not intend to disclose developments with respect to the progress of its evaluation of any strategic alternatives until such time as our Board of Directors has approved a transaction or otherwise deems disclosure appropriate.

On March 6, 2012, we received a letter from the Nasdaq Stock Market indicating that for 30 consecutive business days the Common Stock did not maintain a minimum closing bid price of $1.00 (“Minimum Bid Price Requirement”) per share as required by Nasdaq Listing Rule 5450(a)(1).

The notification of noncompliance had no immediate effect on the listing or trading of our Common Stock on the Nasdaq Global Market. Under the Nasdaq Listing Rules, if during the 180 calendar days following the date of the notification, or prior to September 4, 2012, the closing bid price of our Common Stock is at or above $1.00 for a minimum of 10 consecutive business days, the Company will regain compliance with the Minimum Bid Price Requirement and the Common Stock will continue to be eligible for listing on the NASDAQ Global Market.

If the Company does not achieve compliance with the Minimum Bid Price Requirement by September 4, 2012, Nasdaq will provide written notification to the Company that the Common Stock is subject to delisting. The Company may, at that time, appeal the Nasdaq determination to a Nasdaq Hearing Panel. Such an appeal, if granted, would stay delisting until a Panel ruling. Alternatively, if at that time the Company is in compliance with all initial listing standards for the Nasdaq Capital Market other than the Minimum Bid Price Requirement, the Company could apply to transfer the listing of its Common Stock to the Nasdaq Capital Market and thereby receive an additional grace period to gain compliance with the Minimum Bid Price Requirement.

The Company is monitoring the closing bid price of its Common Stock and may, if appropriate, consider implementing available options to regain compliance with the Minimum Bid Price Requirement under the Nasdaq Listing Rules.

Results of Operations - Six Months Ended June 30, 2012 versus Six Months Ended June 30, 2011



				Percentage Inc./(Dec.) from prior year
	June 30, 2012			Percentage Inc./(Dec.) from prior year		June 30, 2011
Net product revenues	$	10,480,461		25	%	$	8,407,029
Royalties	1,514,588			18	%	1,287,532
Other revenues	69,028			(100	)%	22,043,897
Total net revenues	$	12,064,077		(62	)%	$	31,738,458

Cost of product revenues	$	6,468,832				$	5,036,926

Total gross profit	$	5,595,245				$	26,701,532

Total gross profit
as a % of total net revenues	46		%			84		%
Total product gross profit
as a % of net product revenues	38		%			40		%

Total net revenues in the six months ended June 30, 2012 were $12.1 million as compared to $31.7 million in the six months ended June 30, 2011. Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and, in 2011, sales of STRIANT), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (in 2011, primarily amortization of the deferred revenue and milestone payments from the Watson Transactions).

Total net product revenues were $10.5 million in the six months ended June 30, 2012 as compared to $8.4 million in the six months ended June 30, 2011. This increase reflects higher revenues over last year for both Watson and Merck Serono. In the case of Merck Serono, the higher revenues are primarily related to shipments to countries with higher market prices with a single digit increase in volume. Higher revenues for Watson reflect a 64% increase in volumes coupled with higher pricing related to the cost of the repackaging of batches previously meant for the anticipated launch of the preterm birth indication. The increases are slightly offset by the absence of STRIANT net product revenues as a result of the April 2011 sale to Actient.

Royalty revenues were $1.5 million in the six months ended June 30, 2012 as compared with $1.3 million in the six months ended June 30, 2011 as a result of royalty revenues from Watson on Progesterone Products sold by Watson.

Other revenues in the six months ended June 30, 2012 were $0.1 million as compared to $22.0 million in the six months ended June 30, 2011, due primarily to the amortization of $22.0 million in deferred revenue recognized from the sale of assets to Watson recorded in 2011 and the $5.0 million milestone payment made pursuant to the Purchase Agreement for the acceptance for filing of the preterm birth NDA by the FDA. The Company amortized $34.0 million in deferred gains over four quarters from July 2, 2010 through June 30, 2011, representing the estimated remaining development period for progesterone vaginal gel 8% in the preterm birth indication.

Gross profit decreased $21.1 million from $26.7 million in the six months ended June 30, 2011 to $5.6 million for the six months ended June 30, 2012 primarily as a result of the recognition of the amortization of the deferred revenue resulting from the Watson Transactions in the six months ended June 30, 2011. Gross margin as a percentage of total net revenues was lower at 46% for the six months ended June 30, 2012 compared with 84% in the same period in 2011, primarily related to the absence of the amortization as discussed above. The gross margin as a percentage of net product revenues in the six months ended June 30, 2012 was 38% compared with 40% in the same period in 2011. The lower profit margin in 2012 as compared with 2011 is a result of a reserve for inventory in the amount of $0.8 million which did not meet specifications in 2012.

There were no selling and distribution expenses in the six months ended June 30, 2012, as compared to $0.1 million in the six months ended June 30, 2011, reflecting the sale of STRIANT in April 2011.

General and administrative expenses were $4.5 million in the six months ended June 30, 2012, as compared to $4.9 million in the six months ended June 30, 2011. General and administrative expenses include payroll, employee benefits, equity

compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees. The decrease in expenses from 2011 was primarily attributable to lower professional fees for accounting and legal offset by $0.3 million in severance costs related to the workforce reduction announced in March 2012.

Research and development expenses were $0.7 million in the six months ended June 30, 2012, as compared to $1.9 million in the six months ended June 30, 2011. Research and development expenses typically include costs for product development, clinical development and regulatory fees, which is a combination of internal and third-party costs. Expenses in the first half of 2012 are lower than the same period in 2011 due to the residual expenses that were our responsibility up to the $7.0 million cap for research and development spending on the PREGNANT study in 2011. We incurred the full $7.0 million for research and development spending on the PREGNANT study and related NDA submission for which we were responsible under the Watson Transactions with expenses in excess of that amount being the responsibility of Watson. Also contributing to the first half of 2012 expense was the recognition of $0.2 million in severance costs related to the workforce reduction announced in March 2012, offset by $0.4 million in reimbursable costs that were credited to research and development expense during the six months ended June 30, 2012.

There were no other expenses in the six months ended June 30, 2012, as compared to the six months ended June 30, 2011 in which the Company recognized a one-time gain of $2.5 million on the U.S. sale of STRIANT to Actient.

Other income/expense amounted to income of $6.5 million for the six months ended June 30, 2012, compared to expense of $5.3 million over the same period in 2011, consisting primarily of the recognition of the $6.5 million change in fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from December 31, 2011. Other income/expense for the six months ended June 30, 2011 amounted to $5.3 million, consisting primarily of expenses related to the recognition of the change in fair value of the warrants issued in conjunction with the July 2010 convertible note retirement ($2.7 million) and the October 2009 stock issuance ($2.3 million) resulting from the increase in stock price from December 31, 2010.

As a result, the net income for the six months ended June 30, 2012 was $6.9 million, or $0.08 per basic and $0.00 per diluted share, as compared to net income for the six months ended June 30, 2011 of $17.1 million, or $0.20 per basic and $0.19 per diluted share.

Results of Operations - Three Months Ended June 30, 2012 versus Three Months Ended June 30, 2011



				Percentage Inc./(Dec.) from prior year
	June 30, 2012			Percentage Inc./(Dec.) from prior year		June 30, 2011
Net product revenues	$	7,361,829		49	%	$	4,942,085
Royalties	834,211			21	%	686,719
Other revenues	34,496			(100	)%	13,615,315
Total net revenues	$	8,230,536		(57	)%	$	19,244,119

Cost of product revenues	$	4,465,846				$	3,002,088

Total gross profit	$	3,764,690				$	16,242,031

Total gross profit
as a % of total net revenues	46		%			84		%
Total product gross profit
as a % of net product revenues	39		%			39		%

Total net revenues in the three months ended June 30, 2012 were $8.2 million as compared to $19.2 million in the three months ended June 30, 2011. Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and, in 2011, sales of STRIANT), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (in 2011, primarily amortization of the deferred revenue and milestone payments from the Watson Transactions).

Total net product revenues were $7.4 million in the three months ended June 30, 2012 as compared to $4.9 million in the

three months ended June 30, 2011. This increase reflects higher revenues over last year for both Watson and Merck Serono. In the case of Merck Serono, the 25% higher revenues are primarily related to shipments to countries with higher market prices. A nearly three-fold increase in product revenues from Watson reflects a 45% increase in volumes coupled with higher pricing related to the cost of the repackaging of batches previously meant for the anticipated launch of the preterm birth indication.

Royalty revenues were $0.8 million in the three months ended June 30, 2012 as compared with $0.7 million in the three months ended June 30, 2011 as a result of higher royalty revenues from Watson on Progesterone Products sold by Watson.

There were no other revenues in the three months ended June 30, 2012 as compared to $13.6 million in the three months ended June 30, 2011, due to the amortization of $8.6 million in deferred revenue recognized from the sale of assets to Watson recorded in 2011 and the $5 million milestone payment received from Watson under the Purchase Agreement for the acceptance for filing of the preterm birth NDA by the FDA. The Company amortized $34.0 million in deferred gains over four quarters from July 2, 2010 through June 30, 2011, representing the estimated remaining development period for progesterone vaginal gel 8% in the preterm birth indication.

Gross profit decreased $12.5 million from $16.2 million in the three months ended June 30, 2011 to $3.8 million for the three months ended June 30, 2012, primarily as a result of the recognition of the amortization of the deferred revenue and the milestone payment under the Purchase Agreement resulting from the Watson Transactions in the three months ended June 30, 2011. Gross margin as a percentage of total net revenues was lower at 46% for the three months ended June 30, 2012 compared with 84% in the same period in 2011, primarily related to the absence of the amortization as discussed above. The gross profit percentage on net product revenues in the three months ended June 30, 2012 remained the same at 39% compared with the same period in 2011. While the gross profit percentage did not change from the previous year, higher margins as a result of a favorable pricing mix for Merck Serono in the second quarter of 2012 were offset by a reserve for inventory in the amount of $0.3 million which did not meet specifications.

There were no selling and distribution expenses in the three months ended June 30, 2012 or June 30, 2011.

General and administrative expenses were $1.9 million in the three months ended June 30, 2012, as compared to $2.5 million in the three months ended June 30, 2011. General and administrative expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees. The decrease in expenses from 2011 was primarily attributable to lower professional fees for accounting and legal and lower personnel costs related to the workforce reduction announced in March 2012. Research and development expenses were $0.2 million in the three months ended June 30, 2012, as compared to $0.5 million in the three months ended June 30, 2011.

Research and development expenses include costs for product development, clinical development and regulatory fees, which is a combination of internal and third-party costs. Expenses in the second quarter of 2012 were lower than in the second quarter of 2011 due to lower personnel costs related to the workforce reduction announced in March 2012 and lower project expenses.

There were no other expenses in the three months ended June 30, 2012, as compared to the three months ended June 30, 2011 in which the Company recognized a one-time gain of $2.5 million on the U.S. sale of STRIANT to Actient.

Other income/expense amounted to income of $0.3 million for the three months ended June 30, 2012, compared to income of $2.6 million for the same period in 2011, consisting primarily of the recognition of the $0.2 million change in fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from March 31, 2012. Other income/expense for the three months ended June 30, 2011 amounted to $2.6 million, consisting primarily of $2.8 million in income related to the recognition of change in fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from March 31, 2011.

As a result, the net income for the three months ended June 30, 2012 was $1.9 million, or $0.02 per basic and diluted share, as compared to net income for the three months ended June 30, 2011 of $18.3 million, or $0.21 per basic and $0.16 per diluted share.

Liquidity and Capital Resources

Cash and cash equivalents were $7.7 million and $10.1 million at June 30, 2012 and December 31, 2011, respectively. In addition, short term investments were $15.2 million and $15.0 million at June 30, 2012 and December 31, 2011, respectively. The Company believes its cash, cash equivalents and short term investments of $23.0 million will sustain its operations for the foreseeable future.

Cash provided by (used in) operating, investing and financing activities is summarized as follows:



	Six Months Ended June 30,
	2012			2011
Cash flows:
Operating activities:
Net income	$	6,897,203		$	17,127,308
Non-cash charges	(5,120,402		)	(13,786,663		)
Net cash income	1,776,801			3,340,645
Change in working capital	(3,120,470		)	(8,863,913		)
Operating activities	(1,343,669		)	(5,523,268		)

Investing activities
Purchase of property and equipment	(1,044,871		)	(625,344		)
Proceeds from sale of STRIANT	—			3,100,000
Investing activities	(1,044,871		)	2,474,656

Financing activities
Proceeds from exercise of stock options	—			2,641,951
Proceeds from exercise of warrants	—			653,299
All other financing activities	(15,000		)	(140,381		)
Financing activities	(15,000		)	3,154,869
Effect of exchange rate changes on cash	6,195			23,544
NET (DECREASE) INCREASE IN CASH	$	(2,397,345	)	$	129,801

Operating Activities:

Net cash used in operating activities for the six months ended June 30, 2012 was $1.3 million and resulted primarily from $1.8 million in net operating income after applying non-cash charges and increases in working capital of $3.1 million. The net income of $6.9 million in the first six months of 2012 included non-cash items for depreciation, amortization, change in valuation of redeemable warrants and stock warrants, recognition of deferred revenue, stock-based compensation, write-off of inventories, provision for sales returns, and loss on disposal of fixed assets, which totaled $5.1 million, resulting in a net cash income of $1.8 million. Accounts receivable decreased by $0.2 million from December 31, 2011. Inventories grew by $1.4 million during the period to meet customer orders and prepare for the potential launch of progesterone vaginal gel 8% for the prevention of preterm birth in women with premature cervical shortening. Portions of the potential launch inventories are now being re-worked to support CRINONE sales. Accounts payable decreased by $1.3 million. Other accrued expenses decreased by $0.7 million, mainly related to the payment of bonuses in the first quarter of 2012.

Net cash used in operating activities for the six months ended June 30, 2011 was $5.5 million and resulted primarily from $3.3 million in net operating income after applying non-cash charges and increases in working capital of $8.9 million. The net income of $17.1 million in the first six months of 2011 included non-cash items for depreciation, amortization, change in valuation of redeemable warrants and stock warrants, recognition of deferred revenue, gain on the sale of STRIANT, stock-based compensation, write-down of inventories, provision for sales returns, and loss on disposal of fixed assets, which totaled $13.8 million, resulting in a net cash income of $3.3 million. Accounts receivable increased by $4.9 million from December 31, 2010, primarily related to the accrual for the $5.0 million milestone payment from Watson under the Purchase Agreement. Inventories grew by $0.5 million during the period to meet customer orders. Accounts payable decreased by $2.1 million due primarily to the $1.8 million payment for the Bio-Mimetics settlement coupled with payments related to completion of the PREGNANT

Study. Other accrued expenses decreased by $0.9 million, mainly related to the payment of bonuses in the first quarter of 2011.

Investing activities:

Net cash used in investing activities was $1.0 million in the six months ended June 30, 2012 and net cash provided by investing activities was $2.5 million in the six months ended June 30, 2011. During the first half of 2012, investing activities included investments of $1.0 million to complete the increased manufacturing capacity primarily to ensure the Company's ability to meet Watson's forecasts for the anticipated launch of progesterone vaginal gel 8% and facility improvements to ensure compliant manufacturing operations. Net cash used in investing activities in the six months ended June 30, 2011 included proceeds from the sale of STRIANT of $3.1 million and investments of $0.6 million to increase the manufacturing capacity and facility improvements mentioned above.

Financing Activities:

In the six months ended June 30, 2012, there was no net cash provided by financing activities. Net cash provided by financing activities in the six months ended June 30, 2011 was $3.2 million, consisting of $2.6 million of proceeds from the exercise of employee stock options and $0.7 million of proceeds from the exercise of warrants offset by the related purchase of treasury stock of $0.1 million. As of June 30, 2012, the Company had outstanding exercisable options and warrants that, if exercised, would result in approximately $27.3 million of additional capital and would cause the number of shares outstanding to increase; however, the cashless exercise feature of certain warrants may result in no cash to the Company. Options and warrants outstanding at June 30, 2012 were 5,053,340 and 9,893,455, respectively; however, there can be no assurance that any such options or warrants will be exercised. As of June 30, 2011, 1,685,014 employee stock options were exercised and 4,206,545 warrants were exercised. The aggregate intrinsic value of exercisable options and warrants was $0.0 million and $0.0 million at each period ended June 30, 2012 and June 30, 2011, respectively.

Significant expenditures anticipated by the Company in the near future are concentrated on relatively fixed general and administrative expenses and related staff costs. The Company has made investments to increase manufacturing capacity and facility improvements to ensure compliant manufacturing operations, but does not expect to incur material capital expenditures in the future.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

The Company's contractual obligations, commercial commitments and off-balance sheet arrangements disclosures in the 2011 Annual Report have not materially changed since that report was filed.

Recent Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-05 Presentation of Comprehensive Income (ASU 2011-05). This update requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retrospective applications required. This update did not have a material effect on our consolidated financial statements.

Critical Accounting Policies and Estimates

The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 4 of the consolidated financial statements included in Item 15 of the 2011 Annual Report , beginning on page F-13. Note that the preparation of this Quarterly Report on Form 10-Q requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition. The Company’s revenue recognition is significant because revenue is a key component of our results of operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and royalties. Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and sales of STRIANT through April 2011), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (primarily the amortization of the deferred revenue and milestone payments from the Watson Transactions). Net product

revenues are recognized when shipped to Merck Serono, but in the case of product shipments to Watson, they are recognized when received at Watson's warehouse. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Royalty revenues, based on sales by licensees, are recorded as revenues as those sales are made by the licensees.

Sales Returns. The Company is responsible for sales returns for products sold to domestic customers prior to both the Watson Transactions and the sale of STRIANT to Actient. Revenues from the sale of products to domestic customers were recorded at the time goods were shipped to customers. The Company believes that it has not made any shipments in excess of its customers' ordinary course of business inventory levels. Except for sales to licensees, our return policy allows product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Products sold to licensees are not returnable to us. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated based on a percentage of sales, using such factors as historical sales information, distributor inventory levels and product prescription data, and were recorded as a reduction to sales in the same period as the related sales were recognized. The Company evaluates its remaining provision for returns on a quarterly basis based on returns processed rate and adjusts the provision if its analysis indicates that the potential for product non-salability exists. The Company is not responsible for returns for international sales. Sales adjustments for international sales are estimated to recognize changes in foreign exchange rates and government tenders that may fluctuate within a year.

Stock-Based Compensation – Employee Stock-Based Awards. The Company recognizes compensation expense [ASC 718, “Share Based Payment”, formerly SFAS 123(R)], for all stock-based awards made to employees and directors including employee stock options based on estimated fair values.

ASC 718, “Share Based Payment”, requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's Consolidated Statements of Operations. Employee stock-based compensation expenses for the years ended December 31, 2011, 2010 and 2009, were $814,520, $2,800,256 and $1,749,228, respectively, which consisted primarily of stock-based compensation expense related to employee stock options.

During the first six months of 2012, there were 835,000 options granted.



	Six Months Ended June 30,
	2012		2011
Risk free interest rate	0.82	%	2.12	%
Expected term	4.75		4.75
Dividend yield	—		—
Expected volatility	105.72	%	92.7	%

Short Term Investments- Investments consist of U.S. Treasury and agency securities. The Company's investments are classified as available-for-sale and are recorded at fair value, based upon quoted market prices. Unrealized temporary adjustments to fair value are included on the balance sheet in a separate component of stockholders' equity as unrealized gains and losses and reported as a component of accumulated other comprehensive income. No gains or losses on investments are realized until shares are sold or a decline in fair value is determined to be other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Fair Value of Financial Instruments- Effective January 1, 2008, we adopted FASB ASC 820-10-25, "Fair Value Measurement and Disclosures." This standard establishes a framework for measuring fair value and expands disclosure about fair value measurements. We did not elect fair value accounting for any assets and liabilities allowed by FASB ASC 825, "Financial Instruments."

FASB ASC 820-10 defines fair value as the amount that would be receive for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820-10 describes the following three levels of inputs that may be used:

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

The fair value of the short term investments are determined based on quoted market prices on the balance sheet date and are classified as a level 1 investment. The estimated fair value of the Common Stock warrant liability resulting from the October 2009 registered direct offering of 10,900,000 shares of Common Stock and warrants to purchase 5,450,000 shares of Common Stock is shown in the table below and is determined by using the Black-Scholes option pricing model based on the Company's stock price at the measurement date, exercise price of the warrant, risk-free rate and historical volatility, and are classified as a Level 2 measurement. During the six months ended June 30, 2012, the Company recorded income of $6,465,067 to adjust the value of the stock warrant liability to market.



	June 30, 2012	December 31, 2011	Income (Expense) to adjust to market value

Common Stock Warrant Liability	$1,703,779	$8,168,846	$6,465,067

	June 30, 2011	December 31, 2010	Income (Expense) to adjust to market value

Common Stock Warrant Liability	$10,985,691	$8,725,508	$(2,260,183)

The estimated fair value of the Company's contingent obligation to purchase the Warrants issued under the Note Purchase Agreements, if the Company issued shares of Common Stock (or equivalents) for a price less than $2.00 per share until 45 days (January 20, 2011) after the Company's public announcement of the results of the PREGNANT study, was determined under the Black-Scholes model and recorded as a liability at the closing of the Watson Transactions in the amount of $5,509,893 as of the close of business on July 1, 2010. It was adjusted, as of December 31, 2010, to $13,471,832. The results of the PREGNANT study were announced in December 2010, and on January 20, 2011, when the contingent purchase rights on the Warrants expired, The Company recorded expense to adjust the value of the redeemable warrants to market on January 20, 2011 determined under the Black-Scholes option pricing model as a result of the change in the stock price from December 31, 2011 and reclassified to Capital in Excess of Par Value. These Warrants will no longer be marked to market.

The fair value of accounts receivable and accounts payable approximate their carrying amount.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements, which statements are indicated by the words “may,” “will,” “plans,” “believes,” “expects,” “intends,” “anticipates,” “potential,” “should,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made.

Factors that might cause future results to differ include, but are not limited to, the following: the successful marketing of CRINONE by Watson in the United States; the successful marketing of CRINONE 8% by Merck Serono outside the United States; Watson's and Merck Serono's continued desire to develop progesterone vaginal gel 8% for the preterm birth indication in the U.S. and rest of the world, respectively; Columbia's ability to timely regain compliance with the Nasdaq minimum closing bid price rule; Watson's success in obtaining timely approval, if any, of an NDA by the FDA for progesterone vaginal gel 8% for the preterm birth indication; Merck Serono's success in obtaining timely marketing approvals, if any, of progesterone vaginal gel 8% for the preterm birth indication in countries outside the U.S.; the timing and level of success of a future product launch for the preterm birth indication, if any; successful development of a next-generation vaginal progesterone product; difficulties or delays in manufacturing; the availability and pricing of third-party source products and materials; successful compliance with FDA and other governmental regulations applicable to manufacturing facilities, products and/or businesses; changes in the laws and regulations, including Medicaid; the ability to obtain and enforce patents and other intellectual property rights; ; the timely and

successful negotiation of partnerships or other transactions; the impact of competitive products and pricing; the evaluation of potential strategic transactions; the strength of the U.S. dollar relative to international currencies, particularly the euro; competitive economic and regulatory factors in the pharmaceutical and healthcare industry; general economic conditions; and other risks and uncertainties that may be detailed, from time-to-time, in Columbia’s reports filed with the SEC. All forward-looking statements contained herein are neither promises nor guarantees. Columbia does not undertake any responsibility to revise or update any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not believe that it has material exposure to market rate risk. The Company may, however, require additional financing to fund future obligations and no assurance can be given that the terms of future sources of financing will not expose the Company to material market risk.

Expenditures, primarily related to manufacturing for the six months ended June 30, 2012 were approximately $0.6 million less than they would have been if the average 2011 exchange rates had been in effect in 2012.

Item 4. Controls And Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC 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 timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation at June 30, 2012, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q 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

Claims and lawsuits are filed against the Company and its subsidiaries from time to time. Although the results of pending claims are always uncertain, the Company believes that it has adequate reserves or insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance coverage in the event of any unfavorable outcome resulting from these actions.

Item 1A. Risk Factors

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in the 2011 Annual Report.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


(a)	Exhibits



10.1	Agreement, dated July 24, 2012, of the Company and Scientelle LLC for an exclusive transferable worldwide license for certain of the Company's patents and know how (1)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company.*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company.*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101	XBRL instance documents



*	Filed herewith.
**	Furnished herewith.
(1)	Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed July 26, 2012

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.

COLUMBIA LABORATORIES, INC.

/s/ Lawrence A. Gyenes

Lawrence A. Gyenes

Senior Vice President,

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer) DATE: August 7, 2012

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