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Santarus 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Number: 000-50651
SANTARUS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   33-0734433
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
3721 Valley Centre Drive, Suite 400,
San Diego, CA

(Address of principal executive offices)
  92130
(Zip Code)
(858) 314-5700
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes       o No
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o       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 “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o    Accelerated filer þ    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). o Yes       þ No
     The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of April 30, 2009 was 57,849,588.
 
 

 


 

SANTARUS, INC.
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
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 EX-31.1
 EX-31.2
 EX-32
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Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Santarus, Inc.
Condensed Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
                 
    March 31,     December 31,  
    2009     2008  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 47,153     $ 49,886  
Short-term investments
    656       2,151  
Accounts receivable, net
    14,332       13,366  
Inventories, net
    4,801       5,230  
Prepaid expenses and other current assets
    4,030       3,826  
 
           
Total current assets
    70,972       74,459  
 
               
Long-term restricted cash
    1,400       1,400  
Long-term investments
    4,261       4,250  
Property and equipment, net
    975       988  
Intangible assets, net
    10,875       11,250  
Other assets
    81       137  
 
           
Total assets
  $ 88,564     $ 92,484  
 
           
 
               
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 49,038     $ 53,109  
Allowance for product returns
    10,918       10,251  
Current portion of deferred revenue
    4,647       7,365  
 
           
Total current liabilities
    64,603       70,725  
 
               
Deferred revenue, less current portion
    2,493       2,436  
Long-term debt
    10,000       10,000  
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at March 31, 2009 and December 31, 2008; no shares issued and outstanding at March 31, 2009 and December 31, 2008
           
Common stock, $0.0001 par value; 100,000,000 shares authorized at March 31, 2009 and December 31, 2008; 57,849,588 and 57,799,588 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively
    6       6  
Additional paid-in capital
    332,823       331,831  
Accumulated other comprehensive income
    2       2  
Accumulated deficit
    (321,363 )     (322,516 )
 
           
Total stockholders’ equity
    11,468       9,323  
 
           
Total liabilities and stockholders’ equity
  $ 88,564     $ 92,484  
 
           
See accompanying notes.

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Table of Contents

Santarus, Inc.
Condensed Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Revenues:
               
Product sales, net
  $ 27,555     $ 19,415  
Promotion revenue
    4,539       1,583  
License and royalty revenue
    2,716       3,468  
 
           
Total revenues
    34,810       24,466  
Costs and expenses:
               
Cost of product sales
    1,880       1,695  
License fees and royalties
    1,827       2,729  
Research and development
    3,111       1,706  
Selling, general and administrative
    26,718       26,516  
 
           
Total costs and expenses
    33,536       32,646  
 
           
Income (loss) from operations
    1,274       (8,180 )
Other income (expense):
               
Interest income
    92       561  
Interest expense
    (113 )      
 
           
Total other income (expense)
    (21 )     561  
 
           
Income (loss) before income taxes
    1,253       (7,619 )
Income tax expense
    100        
 
           
Net income (loss)
  $ 1,153     $ (7,619 )
 
           
 
               
Net income (loss) per share:
               
Basic
  $ 0.02     $ (0.15 )
 
           
Diluted
  $ 0.02     $ (0.15 )
 
           
 
               
Weighted average shares outstanding used to calculate net income (loss) per share:
               
Basic
    57,821,921       51,312,875  
Diluted
    58,229,931       51,312,875  
     See accompanying notes.

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Santarus, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Operating activities
               
Net income (loss)
  $ 1,153     $ (7,619 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
Depreciation and amortization
    538       161  
Unrealized gain on trading securities, net
    (11 )      
Stock-based compensation
    948       1,050  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (966 )     (1,996 )
Inventories, net
    429       713  
Prepaid expenses and other current assets
    (204 )     (148 )
Other assets
          4  
Accounts payable and accrued liabilities
    (4,071 )     3,076  
Allowance for product returns
    667       1,215  
Deferred revenue
    (2,661 )     (3,468 )
 
           
Net cash used in operating activities
    (4,178 )     (7,012 )
 
               
Investing activities
               
Purchase of short-term investments
    (2,054 )     (950 )
Maturities of short-term investments
    3,538       2,929  
Long-term restricted cash
          (400 )
Purchases of property and equipment
    (83 )     (534 )
 
           
Net cash provided by investing activities
    1,401       1,045  
 
               
Financing activities
               
Exercise of stock options
    44       1  
 
           
Net cash provided by financing activities
    44       1  
 
           
Decrease in cash and cash equivalents
    (2,733 )     (5,966 )
Cash and cash equivalents at beginning of the period
    49,886       58,382  
 
           
Cash and cash equivalents at end of the period
  $ 47,153     $ 52,416  
 
           
See accompanying notes.

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Santarus, Inc.
Notes to Condensed Financial Statements
(unaudited)
1. Organization and Business
     Santarus, Inc. (“Santarus” or the “Company”) is a specialty biopharmaceutical company focused on acquiring, developing and commercializing proprietary products that address the needs of patients treated by gastroenterologists or other targeted physicians. Santarus was incorporated on December 6, 1996 as a California corporation and did not commence significant business activities until late 1998. On July 9, 2002, the Company reincorporated in the State of Delaware.
2. Basis of Presentation
     The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles related to the preparation of interim financial statements and the rules and regulations of the U.S. Securities and Exchange Commission related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all information and disclosures required by GAAP for complete financial statements. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature.
     Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for any future periods. For further information, please see the financial statements and related disclosures included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. Revenue Recognition
     The Company follows Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and recognizes revenue when there is persuasive evidence that an arrangement exists, title has passed, the price is fixed or determinable, and collectibility is reasonably assured.
     Product Sales, Net. The Company received approval from the U.S. Food and Drug Administration (“FDA”) to market Zegerid® (omeprazole/sodium bicarbonate) Capsules in 2006 for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease (“GERD”), treatment and maintenance of healing of erosive esophagitis and treatment of duodenal and gastric ulcers. The Company received approval from the FDA to market Zegerid (omeprazole/sodium bicarbonate) Powder for Oral Suspension for these same indications in 2004. In addition, Zegerid Powder for Oral Suspension is approved for the reduction of risk of upper gastrointestinal bleeding in critically ill patients, and is currently the only proton pump inhibitor (“PPI”) product approved for this indication. The Company commercially launched Zegerid Capsules in early 2006 and launched Zegerid Powder for Oral Suspension 20 mg in late 2004 and the 40 mg dosage strength in early 2005.
     The Company sells its Zegerid products primarily to pharmaceutical wholesale distributors. The Company is obligated to accept from customers the return of products that are within six months of their expiration date or up to 12 months beyond their expiration date. The Company authorizes returns for damaged products and exchanges for expired products in accordance with its return goods policy and procedures, and has established allowances for such amounts at the time of sale.

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     The Company recognizes revenue from product sales in accordance with SAB No. 104 and Statement of Financial Accounting Standard (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists. Among its criteria for revenue recognition from sale transactions where a buyer has a right of return, SFAS No. 48 requires the amount of future returns to be reasonably estimable. The Company recognizes product sales net of estimated allowances for product returns, estimated rebates in connection with contracts relating to managed care, Medicaid, Medicare, and patient coupons, and estimated chargebacks from distributors, wholesaler fees and prompt payment and other discounts.
     The Company establishes allowances for estimated product returns, rebates and chargebacks based primarily on the following qualitative and quantitative factors:
    the number of and specific contractual terms of agreements with customers;
 
    estimated levels of inventory in the distribution channel;
 
    estimated remaining shelf life of products;
 
    analysis of prescription data gathered by a third-party prescription data provider;
 
    direct communication with customers;
 
    historical product returns, rebates and chargebacks;
 
    anticipated introduction of competitive products or generics;
 
    anticipated pricing strategy changes by the Company and/or its competitors; and
 
    the impact of state and federal regulations.
     In its analyses, the Company utilizes prescription data purchased from a third-party data provider to develop estimates of historical inventory channel pull-through. The Company utilizes a separate analysis which compares historical product shipments less returns to estimated historical prescriptions written. Based on that analysis, the Company develops an estimate of the quantity of product in the distribution channel which may be subject to various product return, rebate and chargeback exposures.
     The Company’s estimates of product returns, rebates and chargebacks require management’s most subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. If actual future payments for returns, rebates, chargebacks and other discounts exceed the estimates the Company made at the time of sale, its financial position, results of operations and cash flows would be negatively impacted.
     The Company’s allowance for product returns was $10.9 million as of March 31, 2009 and $10.3 million as of December 31, 2008. In order to provide a basis for estimating future product returns on sales to its customers at the time title transfers, the Company has been tracking its Zegerid products return history from the time of its first commercial product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into consideration product expiration dating and estimated inventory levels in the distribution channel. The Company recognizes product sales at the time title passes to its customers, and the Company provides for an estimate of future product returns at that time based upon its historical product returns trends, analysis of product expiration dating and inventory levels in the distribution channel, and the other factors discussed above. There may be a significant time lag between the date the Company determines the estimated allowance and when it receives the product return and issues credit to a customer. Due to this time lag, the Company records adjustments to its estimated allowance over several periods, which can result in a net increase or a net decrease in its operating results in those periods.
     The Company’s allowance for rebates, chargebacks and other discounts was $34.3 million as of March 31, 2009 and $29.3 million as of December 31, 2008. These allowances reflect an estimate of the Company’s liability for rebates due to managed care organizations under specific contracts, rebates due to various governmental organizations under Medicaid and Medicare contracts and regulations, chargebacks due to various organizations purchasing the Company’s products through federal contracts and/or group purchasing agreements, and other rebates and customer discounts due in connection with wholesaler fees and prompt payment and other discounts. The Company estimates its liability for rebates and chargebacks at each reporting period based on a combination of the qualitative and quantitative assumptions listed above. In each reporting period, the Company evaluates its outstanding contracts and applies the contractual discounts to the invoiced price of wholesaler shipments recognized. Although the total invoiced price of shipments to wholesalers for the reporting period and the contractual terms are known during the reporting period, the Company projects the ultimate disposition of the sale (e.g. future utilization rates of cash payors, managed care, Medicaid, Medicare or other contracted organizations). This estimate is based on historical trends adjusted for anticipated changes based on specific contractual terms of new agreements with customers, anticipated pricing strategy changes by the Company and/or its competitors and the other qualitative and quantitative factors described above. There may be a significant time lag between the date the

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Company determines the estimated allowance and when the Company makes the contractual payment or issues credit to a customer. Due to this time lag, the Company records adjustments to its estimated allowance over several periods, which can result in a net increase or a net decrease in its operating results in those periods. To date, actual results have not materially differed from the Company’s estimates.
     Promotion Revenue and License and Royalty Revenue. The Company recognizes promotion revenue and license and royalty revenue consistent with the provisions of SAB No. 104 and Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company analyzes each element of its promotion and licensing agreements to determine the appropriate revenue recognition. The Company recognizes revenue on upfront payments over the period of significant involvement under the related agreements unless the fee is in exchange for products delivered or services rendered that represent the culmination of a separate earnings process and no further performance obligation exists under the contract. The Company recognizes milestone payments upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement and (2) the fees are nonrefundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recognized as deferred revenue. Sales milestones, royalties and promotion fees are recognized as revenue when earned under the agreements.
4. Stock-Based Compensation
     For the three months ended March 31, 2009 and 2008, the Company recognized approximately $948,000 and $1.1 million of total stock-based compensation, respectively, in accordance with SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123(R)”). As of March 31, 2009, total unrecognized compensation cost related to stock options and employee stock purchase plan rights was approximately $8.3 million, and the weighted average period over which it was expected to be recognized was 2.4 years. In March 2009, the Company granted options to purchase an aggregate of 2,558,370 shares of its common stock in connection with annual option grants to all eligible employees. These stock options vest over a four-year period from the date of grant. In addition, in March 2009, the Company granted options to purchase an aggregate of 192,000 shares of its common stock to non-employee directors of the Company, which vest over a one-year period from the date of grant.
5. Comprehensive Income (Loss)
     Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income (loss), specifically unrealized gains and losses on securities available-for-sale. Comprehensive income (loss) consists of the following (in thousands):
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Net income (loss)
  $ 1,153     $ (7,619 )
Unrealized loss on investments
          (201 )
 
           
Comprehensive income (loss)
  $ 1,153     $ (7,820 )
 
           
6. Net Income (Loss) Per Share
     The Company calculates net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, preferred stock, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted income (loss) per share when their effect is dilutive. Potentially dilutive securities totaling 11.8 million shares and 10.8 million shares for the three months ended March 31, 2009 and 2008, respectively, were excluded from the calculation of diluted income (loss) per share because of their anti-dilutive effect.

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    Three Months Ended  
    March 31,  
    2009     2008  
Numerator:
               
Net income (loss) (in thousands) )
  $ 1,153     $ (7,619 )
 
               
Denominator:
               
Weighted average common shares outstanding
    57,821,921       51,316,152  
Weighted average unvested common shares subject to repurchase
          (3,277 )
 
           
Denominator for basic net income (loss) per share
    57,821,921       51,312,875  
 
           
 
               
Net effect of dilutive common stock equivalents
    408,010        
 
           
Denominator for diluted net income (loss) per share
    58,229,931       51,312,875  
 
           
 
               
Net income (loss) per share:
               
Basic
  $ 0.02     $ (0.15 )
 
           
Diluted
  $ 0.02     $ (0.15 )
 
           
7. Segment Reporting
     Management has determined that the Company operates in one business segment which is the acquisition, development and commercialization of pharmaceutical products.
8. Fair Value Measurements
     SFAS No. 157, Fair Value Measurements, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
     The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS No. 157 at March 31, 2009 are as follows (in thousands):
                                 
    Fair Value Measurements at Reporting Date Using  
    Quoted                    
    Prices in                    
    Active     Significant              
    Markets for     Other     Significant        
    Identical     Observable     Unobservable        
    Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
Money market funds
  $ 34,386     $     $     $ 34,386  
U.S. government sponsored enterprise securities
          14,823             14,823  
Municipal debt obligations - auction rate securities
                3,321       3,321  
Auction rate securities rights
                940       940  
 
                       
 
  $ 34,386     $ 14,823     $ 4,261     $ 53,470  
 
                       
     Level 3 assets held as of March 31, 2009 include municipal debt obligations with an auction rate reset mechanism issued by state municipalities. These auction rate securities (“ARS”) are AAA-rated debt instruments with long-term maturity dates ranging from 2034 to 2042 and interest rates that are reset at short-term intervals (every 28 days) through auctions. Due to conditions in the global credit markets, these securities, representing a par value of $4.3 million, had insufficient demand resulting in multiple failed auctions since early 2008. As a result, these affected securities are currently not liquid and the interest rates have been reset to predetermined higher rates. Due to the illiquid state of these investments, the Company has classified the balance of its ARS as long-term investments in the balance sheet as of March 31, 2009.

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     In October 2008, the Company received an offer of Auction Rate Securities Rights (“ARS Rights”) from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”), and in November 2008, the Company accepted the ARS Rights offer. The ARS Rights permit the Company to require UBS to purchase the Company’s ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If the Company does not exercise its ARS Rights, the ARS will continue to accrue interest as determined by the auction process, or if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised before July 2, 2012 they will expire and UBS will have no further obligation to buy the Company’s ARS. UBS has the discretion to purchase or sell the Company’s ARS at any time without prior notice so long as the Company receives a payment at par upon any sale or disposition. UBS has agreed to only exercise its discretion to purchase or sell the Company’s ARS for the purpose of restructurings, dispositions or other solutions that will provide the Company with par value for its ARS. As a condition to accepting the offer of ARS Rights, the Company released UBS from all claims except claims for consequential damages relating to its marketing and sales of ARS. The Company also agreed not to serve as a class representative or receive benefits under any class action settlement or investor fund.
     Typically the fair value of ARS approximates par value due to the frequent resets through the auction process. While the Company continues to earn interest on its ARS at the maximum contractual rates, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS and its ARS Rights as of March 31, 2009. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding period of the ARS and ARS Rights.
     In 2008, the Company elected to measure the ARS Rights under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment to FASB Statement No. 115. Reflecting management’s intent to exercise its ARS Rights during the period of June 30, 2010 through July 2, 2012, the Company transferred its ARS from investments available-for-sale to trading securities in 2008. Changes in the fair values of the Company’s ARS and ARS Rights are recognized as an increase or decrease in interest income. The ARS Rights will continue to be measured at fair value utilizing Level 3 inputs until the earlier of their maturity or exercise.
     The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of March 31, 2009 (in thousands):
         
    Three Months  
    Ended  
    March 31, 2009  
Long-term investments:
       
Beginning balance
  $ 4,250  
Net unrealized gain included in net income
    11  
 
     
Ending balance as of March 31, 2009
  $ 4,261  
 
     
9. Balance Sheet Details
     Inventories, net consist of the following (in thousands):
                 
       March 31,        December 31,  
    2009     2008  
Raw materials
  $ 1,372     $ 977  
Finished goods
    3,648       4,561  
 
           
 
    5,020       5,538  
Allowance for excess and obsolete inventory
    (219 )     (308 )
 
           
 
  $ 4,801     $ 5,230  
 
           
     Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and raw materials used in the manufacture of the Company’s Zegerid Capsules and Zegerid Powder for Oral Suspension products. Also included in inventories are product samples of Glumetza ® (metformin hydrochloride extended release tablets) which the Company

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purchases from Depomed, Inc. (“Depomed”) under its promotion agreement. The Company provides reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and on firm purchase commitments, compared to forecasts of future sales.
     Accounts payable and accrued liabilities consist of the following (in thousands):
                 
       March 31,        December 31,  
    2009     2008  
Accounts payable
  $ 4,481     $ 6,102  
Accrued compensation and benefits
    4,584       6,862  
Accrued rebates
    31,377       26,034  
Accrued license fees and royalties
    1,395       4,038  
Accrued research and development expenses
    666       4,126  
Other accrued liabilities
    6,535       5,947  
 
           
 
  $ 49,038     $ 53,109  
 
           
10. Long-Term Debt
     On July 11, 2008, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Comerica Bank (“Comerica”). The Amended Loan Agreement amends and restates the terms of the original Loan and Security Agreement entered into between the Company and Comerica in July 2006. In December 2008, the Company drew down $10.0 million under the Amended Loan Agreement. The credit facility under the Amended Loan Agreement consists of a revolving line of credit, pursuant to which the Company may request advances in an aggregate outstanding amount not to exceed $25.0 million. Under the Amended Loan Agreement, the revolving loan bears interest, as selected by the Company, at either the variable rate of interest, per annum, most recently announced by Comerica as its “prime rate” plus 0.50% or the LIBOR rate (as computed in the Amended and Restated LIBOR Addendum to the Amended Loan Agreement) plus 3.00%. The Company has selected the “prime rate” plus 0.50% interest rate option, which as of March 31, 2009 was 3.75%. Interest payments on advances made under the Amended Loan Agreement are due and payable in arrears on the first calendar day of each month during the term of the Amended Loan Agreement. Amounts borrowed under the Amended Loan Agreement may be repaid and re-borrowed at any time prior to July 11, 2011. There is a non-refundable unused commitment fee equal to 0.50% per annum on the difference between the amount of the revolving line and the average daily balance outstanding thereunder during the term of the Amended Loan Agreement, payable quarterly in arrears. The Amended Loan Agreement will remain in full force and effect for so long as any obligations remain outstanding or Comerica has any obligation to make credit extensions under the Amended Loan Agreement.
     Amounts borrowed under the Amended Loan Agreement are secured by substantially all of the Company’s personal property, excluding intellectual property. Under the Amended Loan Agreement, the Company is subject to certain affirmative and negative covenants, including limitations on the Company’s ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and make investments. In addition, under the Amended Loan Agreement the Company is required to maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances with either Comerica or another financial institution covered by a control agreement for the benefit of Comerica. The Company is also subject to specified financial covenants with respect to a minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements as defined in the Amended Loan Agreement. The Company has currently met all of its obligations under the Amended Loan Agreement.
11. Contingencies
     In September 2007, the Company filed a lawsuit in the United States District Court for the District of Delaware against Par Pharmaceutical, Inc. (“Par”) for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; and 6,699,885, each of which is listed in the Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”) for Zegerid Capsules. In December 2007, the Company filed a second lawsuit in the United States District Court for the District of Delaware against Par for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; 6,699,885; and 6,780,882, each of which is listed in the Orange Book for Zegerid Powder for Oral Suspension. The University of Missouri, licensor of the patents, is a co-plaintiff in the litigation, and both lawsuits have been consolidated for all purposes. The lawsuits are in response to

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Abbreviated New Drug Applications (“ANDAs”) filed by Par with the FDA regarding Par’s intent to market generic versions of the Company’s Zegerid Capsules and Zegerid Powder for Oral Suspension products prior to the July 2016 expiration of the asserted patents. Each complaint seeks a judgment that Par has infringed the asserted patents and that the effective date of approval of Par’s ANDA shall not be earlier than the expiration date of the asserted patents. Par has filed answers in each case, primarily asserting non-infringement, invalidity and/or unenforceability. Par has also filed counterclaims seeking a declaration in its favor on those issues. On July 15, 2008, the U.S. Patent and Trademark Office (“PTO”) issued U.S. Patent No. 7,399,772 (the “‘772 patent”), which is now listed in the Orange Book for both Zegerid Capsules and Zegerid Powder for Oral Suspension. In October 2008, the Company amended its complaint to add the ‘772 patent to the pending litigation with Par. A claim construction (“Markman”) hearing was held in November 2008. Following the Markman hearing, the court adopted all of the claim constructions the Company and the University of Missouri proposed. Trial is currently scheduled for July 2009.
     In addition, as part of this litigation, Par initially filed counterclaims seeking a declaration that U.S. Patent No. 5,840,737 (the “‘737 patent”) is not infringed, is invalid and/or is unenforceable. The Company moved to dismiss, or in the alternative, stay these claims due to a reissue proceeding involving the ‘737 patent currently pending before the PTO, and the Company and the University of Missouri also granted Par a covenant not to sue on the original ‘737 patent. In November 2008, Par dismissed its counterclaims relating to the ‘737 patent.
     The Company commenced each of the lawsuits within the applicable 45 day period required to automatically stay, or bar, the FDA from approving Par’s ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. If the litigation is still ongoing after 30 months, the termination of the stay could result in the introduction of one or more products generic to Zegerid Capsules and/or Zegerid Powder for Oral Suspension prior to resolution of the litigation.
     Although the Company intends to vigorously defend and enforce its patent rights, the Company is not able to predict the outcome of the litigation. Any adverse outcome in this litigation could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched before the expiration of the listed patents in July 2016, which could adversely affect the Company’s ability to successfully execute its business strategy to maximize the value of Zegerid Capsules and Zegerid Powder for Oral Suspension and would negatively impact the Company’s financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. An adverse outcome may also impact the patent protection for the products being commercialized pursuant to the Company’s strategic alliances with GlaxoSmithKline plc and Schering-Plough Healthcare Products, Inc. which in turn may impact the amount of, or the Company’s ability to receive, milestone payments and royalties under those agreements. In addition, even if the Company prevails, the litigation will be costly, time-consuming and distracting to management, which could have a material adverse effect on the Company’s business.
     In December 2007, the University of Missouri filed an Application for Reissue of the ‘737 patent with the PTO. It is not feasible to predict the impact that the reissue proceeding may have on the scope and validity of the ‘737 patent claims. If the claims of the ‘737 patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to the Company’s Zegerid family of products could be impaired, which could potentially harm the Company’s business and operating results.
12. Accounting Pronouncements
Adoption of Recent Accounting Pronouncements
     In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF Issue

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No. 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. The adoption of EITF Issue No. 07-1 did not have a material impact on the Company’s financial statements.
     In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and liabilities assumed in a business combination, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This statement is effective for the Company with respect to business combination transactions for which the acquisition date is after December 31, 2008. The adoption of SFAS No. 141(R) did not have a material impact on the Company’s financial statements.
     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (an amendment of Accounting Research Bulletin, or ARB, No. 51). SFAS No. 160 requires that noncontrolling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the income statement, that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This statement is effective for fiscal years beginning after December 31, 2008, and shall be applied prospectively. However, the presentation and disclosure requirements of SFAS No. 160 are required to be applied retrospectively for all periods presented. The retrospective presentation and disclosure requirements of this statement will be applied to any prior periods presented in financial statements for the fiscal year ending December 31, 2009, and later periods during which we have a consolidated subsidiary with a noncontrolling interest. As of March 31, 2009, the Company does not have any consolidated subsidiaries in which there is a noncontrolling interest.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors.” The interim condensed financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2008 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Overview
     We are a specialty biopharmaceutical company focused on acquiring, developing and commercializing proprietary products that address the needs of patients treated by gastroenterologists and other targeted physicians.
     Our commercial organization is currently promoting Zegerid® (omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension, which are proprietary formulations that combine omeprazole, which is a proton pump inhibitor, or PPI, and an antacid. We developed these products as the first immediate-release oral PPIs for the U.S. prescription market, and they have been approved by the U.S. Food and Drug Administration, or FDA, to treat or reduce the risk of a variety of upper gastrointestinal, or GI, diseases and disorders, including gastroesophageal reflux disease, or GERD. Our Zegerid products are based on patented technology and utilize antacids, which raise the gastric pH and thus protect the PPI, omeprazole, from acid degradation in the stomach, allowing the omeprazole to be quickly absorbed into the bloodstream. We commercially launched Zegerid Capsules in early 2006 and Zegerid Powder for Oral Suspension in late 2004 and early 2005.
     Our commercial organization also promotes Glumetza® (metformin hydrochloride extended release tablets) prescription products in the U.S., under the terms of an exclusive promotion agreement that we entered into with Depomed, Inc., or Depomed, in July 2008. Glumetza is a once-daily, extended-release formulation of metformin that incorporates patented drug delivery technology and is indicated as an adjunct to diet and exercise to improve glycemic control in adult patients with type 2 diabetes. The extended-release delivery system is designed to offer patients with diabetes an ability to reach their optimal dose of metformin with fewer GI side effects. We began our promotion of the Glumetza products in

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October 2008.
     We are developing two product candidates targeting lower GI conditions under the terms of a strategic collaboration that we entered into with Cosmo Technologies Limited, or Cosmo, in December 2008. The product candidates utilize Cosmo’s patented MMX ® technology, which is a proprietary multi-matrix system that is designed to result in the controlled release and homogeneous distribution of a drug substance throughout the length of the colon. The goal of the MMX technology is to improve efficacy while reducing side effects by minimizing systemic absorption. Budesonide MMX is an oral corticosteroid and is currently being investigated in two phase III clinical trials for the induction of remission of mild or moderate active ulcerative colitis. Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been investigated in a phase II clinical program for traveler’s diarrhea. Under the strategic collaboration, we were granted exclusive rights to develop and commercialize these product candidates in the U.S.
     In addition, in January 2009, we submitted a new drug application, or NDA, to the FDA, which NDA was accepted for filing in April 2009, for a new tablet formulation to add to our Zegerid family of prescription products. The new formulation is an immediate-release tablet that combines omeprazole with a mix of buffers.
     To further leverage our proprietary PPI technology and diversify our sources of revenue, we licensed exclusive rights to Schering-Plough Consumer Healthcare Products, Inc., or Schering-Plough, under our patented PPI technology to develop, manufacture and sell Zegerid brand over-the-counter, or OTC, products in the lower dosage strength of 20 mg of omeprazole in the U.S. and Canada. We have also entered into a license agreement and a distribution agreement granting exclusive rights to Glaxo Group Limited, an affiliate of GlaxoSmithKline, plc, or GSK, under our patented PPI technology to develop, manufacture and commercialize prescription and OTC products in up to 114 specified countries outside of the U.S., Europe, Australia, Japan and Canada (including markets within Africa, Asia, the Middle-East, and Central and South America), and to distribute and sell Zegerid brand prescription products in Puerto Rico and the U.S. Virgin Islands.
Critical Accounting Policies
     Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
     We follow Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, and recognize revenue when there is persuasive evidence that an arrangement exists, title has passed, the price is fixed or determinable, and collectibility is reasonably assured.
     Product Sales, Net. We sell our Zegerid products primarily to pharmaceutical wholesale distributors. We are obligated to accept from customers the return of products that are within six months of their expiration date or up to 12 months beyond their expiration date. We authorize returns for damaged products and exchanges for expired products in accordance with our return goods policy and procedures, and have established allowances for such amounts at the time of sale.
     We recognize revenue from product sales in accordance with SAB No. 104 and Statement of Financial Accounting Standards, or SFAS, No. 48, Revenue Recognition When Right of Return Exists. Among its criteria for revenue recognition from sale transactions where a buyer has a right of return, SFAS No. 48 requires the amount of future returns to be reasonably estimable. We recognize product sales net of estimated allowances for product returns, estimated rebates in connection with contracts relating to managed care, Medicaid, Medicare, and patient coupons, and estimated chargebacks from distributors, wholesaler fees and prompt payment and other discounts.
     We establish allowances for estimated product returns, rebates and chargebacks based primarily on the following qualitative and quantitative factors:

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    the number of and specific contractual terms of agreements with customers;
 
    estimated levels of inventory in the distribution channel;
 
    estimated remaining shelf life of products;
 
    analysis of prescription data gathered by a third-party prescription data provider;
 
    direct communication with customers;
 
    historical product returns, rebates and chargebacks;
 
    anticipated introduction of competitive products or generics;
 
    anticipated pricing strategy changes by us and/or our competitors; and
 
    the impact of state and federal regulations.
     In our analyses, we utilize prescription data purchased from a third-party data provider to develop estimates of historical inventory channel pull-through. We utilize a separate analysis which compares historical product shipments less returns to estimated historical prescriptions written. Based on that analysis, we develop an estimate of the quantity of product in the distribution channel which may be subject to various product return, rebate and chargeback exposures.
     Our estimates of product returns, rebates and chargebacks require our most subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. If actual future payments for returns, rebates, chargebacks and other discounts exceed the estimates we made at the time of sale, our financial position, results of operations and cash flows would be negatively impacted.
     Our allowance for product returns was $10.9 million as of March 31, 2009 and $10.3 million as of December 31, 2008. In order to provide a basis for estimating future product returns on sales to our customers at the time title transfers, we have been tracking our Zegerid products return history from the time of our first commercial product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into consideration product expiration dating and estimated inventory levels in the distribution channel. We recognize product sales at the time title passes to our customers, and we provide for an estimate of future product returns at that time based upon our historical product returns trends, our analysis of product expiration dating and estimated inventory levels in the distribution channel, and the other factors discussed above. There may be a significant time lag between the date we determine the estimated allowance and when we receive the product return and issue credit to a customer. Due to this time lag, we record adjustments to our estimated allowance over several periods, which can result in a net increase or a net decrease in our operating results in those periods.
     Our allowance for rebates, chargebacks and other discounts was $34.3 million as of March 31, 2009 and $29.3 million as of December 31, 2008. These allowances reflect an estimate of our liability for rebates due to managed care organizations under specific contracts, rebates due to various governmental organizations under Medicaid and Medicare contracts and regulations, chargebacks due to various organizations purchasing our products through federal contracts and/or group purchasing agreements, and other rebates and customer discounts due in connection with wholesaler fees and prompt payment and other discounts. We estimate our liability for rebates and chargebacks at each reporting period based on a combination of the qualitative and quantitative assumptions listed above. In each reporting period, we evaluate our outstanding contracts and apply the contractual discounts to the invoiced price of wholesaler shipments recognized. Although the total invoiced price of shipments to wholesalers for the reporting period and the contractual terms are known during the reporting period, we project the ultimate disposition of the sale (e.g. future utilization rates of cash payors, managed care, Medicaid, Medicare or other contracted organizations). This estimate is based on historical trends adjusted for anticipated changes based on specific contractual terms of new agreements with customers, anticipated pricing strategy changes by us and/or our competitors and the other qualitative and quantitative factors described above. There may be a significant time lag between the date we determine the estimated allowance and when we make the contractual payment or issue credit to a customer. Due to this time lag, we record adjustments to our estimated allowance over several periods, which can result in a net increase or a net decrease in our operating results in those periods. To date, actual results have not materially differed from our estimates.
     Promotion Revenue and License and Royalty Revenue. We recognize promotion revenue and license and royalty revenue consistent with the provisions of SAB No. 104 and Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We analyze each element of our promotion and licensing agreements to determine the appropriate revenue recognition. We recognize revenue on upfront payments over the period of significant involvement under the related agreements unless the fee is in exchange for products delivered or services rendered that represent the culmination of a separate earnings process and no further performance obligation exists under the contract.

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We recognize milestone payments upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement and (2) the fees are nonrefundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recognized as deferred revenue. Sales milestones, royalties and promotion fees are recognized as revenue when earned under the agreements.
Inventories and Related Reserves
     Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and raw materials used in the manufacture of our Zegerid Capsules and Zegerid Powder for Oral Suspension products. Also included in inventories are product samples of the Glumetza products which we purchase from Depomed under our promotion agreement. We provide reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and on firm purchase commitments compared to forecasts of future sales.
Stock-Based Compensation
     Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123(R), using the modified prospective transition method. Under this transition method, compensation cost recognized for the three months ended March 31, 2009 and 2008 included (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.
     We estimate the fair value of stock options and employee stock purchase plan rights granted using the Black-Scholes valuation model. This estimate is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the expected volatility of our stock price, the expected term of the stock option, the risk-free interest rate and expected dividends. As the length of time our shares have been publicly traded is generally shorter than the expected life of the option, we consider the expected volatility of similar entities as well as our historical volatility since our initial public offering in April 2004 in determining our volatility factor. In evaluating similar entities, we consider factors such as industry, stage of development, size and financial leverage. In determining the expected life of the options, we use the “short-cut” method described in SAB No. 110. Under this method, the expected life is presumed to be the mid-point between the vesting date and the end of the contractual term. We will continue to use the “short-cut” method until we have sufficient historical exercise data to estimate the expected life of the options.
     For options granted prior to January 1, 2006, we amortized the fair value on an accelerated basis. For options granted after January 1, 2006, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service period of the awards, which is generally the vesting period ranging from one to four years. Pre-vesting forfeitures were estimated to be approximately 0% for the three months ended March 31, 2009 and 2008 as the majority of options granted contain monthly vesting terms. In 2008, certain stock options were granted to employees at or above the vice president level that vest upon the attainment of specific financial performance targets. The measurement date of stock options containing performance-based vesting is the date the stock option grant is authorized and the specific performance goals are communicated. Compensation expense is recognized based on the probability that the performance criteria will be met. The recognition of compensation expense associated with performance-based vesting requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. The continued assessment of probability may result in additional expense recognition or expense reversal depending on the level of achievement of the performance goals. We have not recorded any compensation expense related to performance-based awards for the three months ended March 31, 2009.
     The following table includes stock-based compensation recognized in accordance with SFAS No. 123(R) in our condensed statements of operations (in thousands):

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    Three Months Ended  
    March 31,  
    2009     2008  
Cost of product sales
  $ 19     $ 27  
Research and development
    118       109  
Selling, general and administrative
    811       914  
 
           
Total
  $ 948     $ 1,050  
 
           
     As of March 31, 2009, total unrecognized compensation cost related to stock options was approximately $8.3 million, and the weighted average period over which it was expected to be recognized was 2.4 years.
     The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited financial statements and notes thereto included in our annual report on Form 10-K, which contain accounting policies and other disclosures required by GAAP.
Results of Operations
Comparison of Three Months Ended March 31, 2009 and 2008
     Product Sales, Net. Product sales, net were $27.6 million for the three months ended March 31, 2009 and $19.4 million for the three months ended March 31, 2008 and consisted of sales of Zegerid Capsules and Zegerid Powder for Oral Suspension. The $8.2 million increase in product sales, net was primarily attributable to an increase in the sales volume of Zegerid Capsules as well as increased average selling prices. For the three months ended March 31, 2009 as compared to the three months ended March 31, 2008, the amount of rebates, chargebacks and other discounts has grown primarily as a result of increased sales of our Zegerid products and increased utilization under contracts with various managed care organizations and governmental organizations relating to Medicaid and Medicare.
     Promotion Revenue. Promotion revenue was $4.5 million for the three months ended March 31, 2009 and $1.6 million for the three months ended March 31, 2008. For the three months ended March 31, 2009, promotion revenue was comprised primarily of fees earned under our promotion agreement with Depomed related to our promotion of the Glumetza products. For the three months ended March 31, 2008, promotion revenue was comprised of co-promotion fees earned under our agreements with Victory Pharma, Inc., or Victory, pursuant to which we co-promoted Naprelan® (naproxen sodium) Controlled Release Tablets and with C.B. Fleet Company, Incorporated, or Fleet, pursuant to which we co-promoted the Fleet ® Phospho-soda® EZ-Prep Bowel Cleansing System. In July 2008, we and Victory mutually agreed to terminate our co-promotion agreement previously entered into in June 2007. We ceased all promotional efforts under the agreement as of September 30, 2008. We entered into our co-promotion agreement with Fleet in August 2007, which was subsequently amended in May 2008. Effective as of October 1, 2008, our co-promotion agreement with Fleet expired in accordance with its terms.
     License and Royalty Revenue. License and royalty revenue was $2.7 million for the three months ended March 31, 2009 and $3.5 million for the three months ended March 31, 2008. Significant components of our license and royalty revenue are described below:
    In November 2006, we received a nonrefundable $15.0 million upfront license fee in connection with our license agreement with Schering-Plough. The $15.0 million upfront payment is being amortized to revenue on a straight-line basis over a 37-month period through the end of 2009, which represents the estimated period during which we have significant responsibilities under the agreement.
 
    In December 2007, we received a nonrefundable $11.5 million upfront payment in connection with our license and distribution agreements with GSK. To support GSK’s initial launch costs, we agreed to waive the first $2.5 million of aggregate royalties payable under the agreements. Of the total $11.5 million upfront payment, the $2.5 million in waived royalty obligations was recorded as deferred revenue and is being recognized as revenue as the royalties are earned. The remaining $9.0 million was also recorded as deferred revenue and is being amortized to revenue on a straight-line basis over an 18-month period, which represents the estimated period we are obligated to supply Zegerid products to GSK for sale in Puerto Rico and the U.S. Virgin Islands under the distribution agreement.

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    In October 2004, we received a nonrefundable $15.0 million upfront payment in connection with our non-exclusive agreement with Otsuka America Pharmaceutical Inc., or Otsuka America, under which Otsuka America had been co-promoting Zegerid Capsules and Zegerid Powder for Oral Suspension. The $15.0 million upfront payment was being amortized to revenue on a straight-line basis over the 63-month contractual term through the end of 2009. On May 28, 2008, we agreed to terminate the co-promotion agreement effective as of June 30, 2008 and amortized the remaining balance of the $15.0 million up-front payment.
     Cost of Product Sales. Cost of product sales was $1.9 million for the three months ended March 31, 2009 and $1.7 million for the three months ended March 31, 2008, or approximately 7% and 9% of net product sales, respectively. Cost of product sales consists primarily of raw materials, third-party manufacturing costs, freight and indirect personnel and other overhead costs associated with the sales of our Zegerid products. Cost of product sales also includes reserves for excess, dated or obsolete commercial inventories based on an analysis of inventory on hand and on firm purchase commitments compared to forecasts of future sales. The decrease in our cost of product sales as a percentage of net product sales was primarily attributable to increased average selling prices. Additionally, the decrease in our cost of product sales as a percentage of net product sales was attributable to certain fixed costs being applied to increased sales volumes.
     License Fees and Royalties. License fees and royalties were $1.8 million for the three months ended March 31, 2009 and $2.7 million for the three months ended March 31, 2008. For both periods, license fees and royalties included royalties due to the University of Missouri based upon our net product sales as well as products sold by GSK under our license and distribution agreements. For the three months ended March 31, 2009, license fees and royalties also included license fee amortization from the $12.0 million upfront fee paid to Depomed under our promotion agreement entered into in July 2008. The $12.0 million upfront fee has been capitalized and is being amortized to license fee expense over the estimated useful life of the asset on a straight-line basis through mid-2016. For the three months ended March 31, 2008, license fees and royalties also included royalties due to Otsuka America under our co-promotion agreement based upon our net product sales. Following the termination of our co-promotion agreement effective as of June 30, 2008, we are no longer obligated to pay royalties to Otsuka America.
     Research and Development. Research and development expenses were $3.1 million for the three months ended March 31, 2009 and $1.7 million for the three months ended March 31, 2008. The $1.4 million increase in our research and development expenses was primarily attributable to our strategic collaboration with Cosmo entered into in December 2008. We are responsible for one-half of the total out-of-pocket costs associated with the two ongoing multi-center budesonide MMX phase III clinical trials and for all of the out-of-pocket costs for the planned rifamycin SV MMX phase III U.S. registration trial. In addition to the costs associated with our strategic collaboration with Cosmo, the increase in our research and development expenses was attributable to payment of the user fee associated with the submission of our 505(b)(2) NDA to the FDA for a new tablet formulation we intend to add to our Zegerid family of branded prescription pharmaceutical products.
     Research and development expenses have historically consisted primarily of costs associated with clinical trials of our products under development as well as clinical studies designed to further differentiate our Zegerid products from those of our competitors, development of and preparation for commercial manufacturing of our products, compensation and other expenses related to research and development personnel and facilities expenses. In connection with our strategic collaboration with Cosmo entered into in December 2008, we are developing two product candidates targeting lower GI conditions. Budesonide MMX is an oral corticosteroid and is currently being investigated in two multi-center phase III clinical trials for the induction of remission of mild or moderate active ulcerative colitis. Assuming successful and timely completion of the clinical program, we plan to submit an NDA for budesonide MMX to the FDA in 2011. Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been investigated in a phase II clinical program for traveler’s diarrhea. Assuming successful and timely completion of certain non-clinical and pharmacokinetic clinical activities, we would then expect to file an investigational new drug application with the FDA and initiate the planned phase III U.S. registration trial in traveler’s diarrhea in the first half of 2010. We are unable to estimate with any certainty the research and development costs that we may incur in the future. We have also committed, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, to evaluate the product in pediatric populations, including pharmacokinetic/pharmacodynamic, or PK/PD, and safety studies. In the future, we may conduct additional clinical trials to further differentiate our Zegerid family of products, as well as conduct research and development related to any future products that we may in-license or otherwise acquire. Although we are currently focused primarily on advancing our Zegerid family of products and development of the budesonide MMX and rifamycin SV MMX product candidates, we anticipate that we will make determinations as to which development projects to pursue and how much funding to direct to each project on an ongoing basis in response to the scientific, clinical and commercial merits of each project.

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     Selling, General and Administrative. Selling, general and administrative expenses were $26.7 million for the three months ended March 31, 2009 and $26.5 million for the three months ended March 31, 2008. The $202,000 increase in our selling, general and administrative expenses was primarily attributable to an increase in legal fees primarily due to the patent infringement litigation against Par Pharmaceutical, Inc., or Par, costs associated with the advertising and promotion of the Glumetza products and increased compensation and health insurance costs. These increases in our selling, general and administrative expenses were offset in part by a decrease in costs associated with advertising and promotional activities related to our Zegerid products.
     Interest Income. Interest income was $92,000 for the three months ended March 31, 2009 and $561,000 for the three months ended March 31, 2008. The $469,000 decrease in interest income was primarily attributable to a lower rate of return on our cash, cash equivalents and short-term investments and lower average cash balances.
     Interest Expense. Interest expense was $113,000 for the three months ended March 31, 2009 and was comprised of interest due in connection with our revolving credit facility with Comerica Bank, or Comerica.
     Income Tax Expense. Income tax expense was $100,000 for the three months ended March 31, 2009, and there was no income tax expense for the three months ended March 31, 2008. We generated pre-tax income for the three months ended March 31, 2009 as compared to a pre-tax loss for the three months ended March 31, 2008.
Liquidity and Capital Resources
     As of March 31, 2009, cash, cash equivalents and short-term investments were $47.8 million, compared to $52.0 million as of December 31, 2008, a decrease of $4.2 million. This net decrease resulted primarily from decreases in accounts payable and accrued liabilities related to payment of our $2.5 million one-time sales milestone to the University of Missouri, as well as payments of $3.9 million in research and development expenses reimbursable to Cosmo and annual corporate bonuses accrued in 2008.
     Net cash used in operating activities was $4.2 million for the three months ended March 31, 2009 and $7.0 million for the three months ended March 31, 2008. The primary use of cash resulted from our net income (loss) for these periods, adjusted for non-cash expenses, including $948,000 for the three months ended March 31, 2009 and $1.1 million for the three months ended March 31, 2008 in stock-based compensation and changes in operating assets and liabilities. Significant working capital uses of cash for the three months ended March 31, 2009 included decreases in accounts payable and accrued liabilities and decreases in deferred revenue. Significant working capital uses of cash for the three months ended March 31, 2008 included decreases in deferred revenue and increases in accounts receivable, offset in part by an increase in the allowance for product returns and increases in accounts payable and accrued liabilities primarily driven by an increase in accrued rebates.
     Net cash provided by investing activities was $1.4 million for the three months ended March 31, 2009 and $1.0 million for the three months ended March 31, 2008. These activities consisted of purchases and maturities of short-term investments and purchases of property and equipment. Additionally, net cash provided by investing activities in the three months ended March 31, 2008 was offset in part by an increase in long-term restricted cash in conjunction with a letter of credit agreement required by our facilities sublease agreement related to the relocation of our primary office facility.
     Net cash provided by financing activities was $44,000 for the three months ended March 31, 2009 and $1,000 for the three months ended March 31, 2008 consisting of proceeds from the exercise of stock options.
     While we support the commercialization of our Zegerid products, promote Glumetza under our promotion agreement with Depomed, develop and manufacture our Zegerid products and our budesonide MMX and rifamycin SV MMX product candidates under our strategic collaboration with Cosmo and pursue new product opportunities, we anticipate significant cash requirements for personnel costs for our own organization, as well as in connection with our contract sales agreement with inVentiv, advertising and promotional activities, clinical trial costs, capital expenditures, and investment in additional office space, internal systems and infrastructure.

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     We currently rely on Norwich Pharmaceuticals, Inc. as our manufacturer of Zegerid Capsules and Patheon, Inc. as our manufacturer of Zegerid Powder for Oral Suspension. We also purchase commercial quantities of omeprazole, an active ingredient in our Zegerid products, from Union Quimico Farmaceutica, S.A. At March 31, 2009, we had finished goods and raw materials inventory purchase commitments of approximately $3.4 million.
     The following summarizes our long-term contractual obligations as of March 31, 2009, excluding potential sales-based royalty obligations and milestone payments under our agreements with the University of Missouri, Depomed and Cosmo which are described below:
                                         
    Payments Due by Period  
            Less than                    
            One Year                    
            (Remainder     One to     Four to        
    Total     of 2009)     Three Years     Five Years     Thereafter  
Contractual Obligations   (in thousands)  
Operating leases
  $ 5,587     $ 1,543     $ 3,964     $ 80     $  
Other long-term contractual obligations
    170             170              
 
                             
Total
  $ 5,757     $ 1,543     $ 4,134     $ 80     $  
 
                             
     Under our exclusive worldwide license agreement with the University of Missouri entered into in January 2001, we are required to make milestone payments to the University of Missouri upon initial commercial sale in specified territories outside the U.S., which may total up to $3.5 million in the aggregate. We are also required to make milestone payments based on first-time achievement of significant sales thresholds, up to a maximum of $83.8 million, which includes sales by us, GSK and Schering-Plough. We are also obligated to pay royalties on net sales of our products and any products commercialized by GSK under our license and distribution agreements and Schering-Plough under our OTC license agreement.
     Under our promotion agreement with Depomed entered into in July 2008, we may be required to pay Depomed one-time sales milestones totaling up to $16.0 million in aggregate. Under the promotion agreement, we are required to meet certain minimum promotion obligations during the term of the agreement. We began promoting the Glumetza products in October 2008. For a period of one year from the date we began promoting the Glumetza products, we are required to deliver a minimum number of sales calls to potential Glumetza prescribers. Following the end of that one-year period, for a period of three years, we are required to make specified minimum sales force expenditures. In addition, during the term of the agreement, we are required to make certain minimum marketing, advertising, medical affairs and other commercial support expenditures.
     Under our license agreement, stock issuance agreement and registration rights agreement with Cosmo entered into in December 2008, Cosmo is entitled to receive up to a total of $9.0 million in clinical and regulatory milestones for the initial indications for the licensed products, up to $6.0 million in clinical and regulatory milestones for a second indication for rifamycin SV MMX and up to $57.5 million in commercial milestones. The milestones may be paid in cash or through issuance of additional shares of our common stock, at Cosmo’s option, subject to certain limitations. We will pay tiered royalties to Cosmo ranging from 12% to 14% on net sales of any licensed products we sell. We will be responsible for one-half of the total out-of-pocket costs associated with the two ongoing budesonide MMX multi-center phase III clinical trials and for all of the out-of-pocket costs for the planned rifamycin SV MMX phase III U.S. registration trial.
     The amount and timing of cash requirements will depend on market acceptance of Zegerid Capsules and Zegerid Powder for Oral Suspension, the Glumetza products and any other products that we may market in the future, the success of our strategic alliances, the resources we devote to researching, developing, formulating, manufacturing, commercializing and supporting our products, and our ability to enter into third-party collaborations.
     Any adverse outcome in the litigation against Par could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched before the expiration of the listed patents in July 2016, which could adversely affect our ability to successfully execute our business strategy to maximize the value of Zegerid Capsules and Zegerid Powder for Oral Suspension and would negatively impact our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. An adverse outcome may also impact the patent protection for the products being commercialized pursuant to our strategic alliances with GSK and Schering-Plough, which in turn may impact the amount of, or our ability to receive, milestone payments and royalties under those agreements.

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Although we intend to vigorously defend and enforce our patent rights, we are not able to predict the outcome of the litigation. In addition, even if we prevail, the litigation will be costly, time-consuming and distracting to management, which could have a material adverse effect on our business.
     We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our current operations for at least the next 12 months; however, our projected revenue may decrease or our expenses may increase and that would lead to our cash resources being consumed earlier than we expect. Although we do not believe that we will need to raise additional funds to finance our current operations over the next 12 months, we may pursue raising additional funds in connection with licensing or acquisition of new products. Sources of additional funds may include funds generated through strategic collaborations or licensing agreements, or through equity, debt and/or royalty financing.
     In November 2008, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, which was declared effective in December 2008. The universal shelf registration statement replaced our previous universal shelf registration statement that expired in December 2008. The universal shelf registration statement may permit us, from time to time, to offer and sell up to an additional approximately $75.0 million of equity or debt securities. However, there can be no assurance that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include the progress of our commercial and development activities, investor perception of our prospects and the general condition of the financial markets, among others.
     In July 2006, we entered into our loan agreement with Comerica, which was subsequently amended in July 2008, pursuant to which we may request advances in an aggregate outstanding amount not to exceed $25.0 million. In December 2008, we drew down $10.0 million under the loan agreement. The revolving loan bears interest at a variable rate of interest, per annum, most recently announced by Comerica as its “prime rate” plus 0.50%, which as of March 31, 2009 was 3.75%. Interest payments on advances made under the loan agreement are due and payable in arrears on the first calendar day of each month during the term of the loan agreement. Amounts borrowed under the loan agreement may be repaid and re-borrowed at any time prior to July 11, 2011. There is a non-refundable unused commitment fee equal to 0.50% per annum on the difference between the amount of the revolving line and the average daily balance outstanding thereunder during the term of the loan agreement, payable quarterly in arrears. The loan agreement will remain in full force and effect for so long as any obligations remain outstanding or Comerica has any obligation to make credit extensions under the loan agreement.
     Amounts borrowed under the loan agreement are secured by substantially all of our personal property, excluding intellectual property. Under the loan agreement, we are subject to certain affirmative and negative covenants, including limitations on our ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and make investments. In addition, under the loan agreement, we are required to maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances with either Comerica or another financial institution covered by a control agreement for the benefit of Comerica. We are also subject to specified financial covenants with respect to a minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements. We have currently met all of our obligations under the loan agreement.
     We cannot be certain that our existing cash and marketable securities resources will be adequate to sustain our current operations. To the extent we require additional funding, we cannot be certain that such funding will be available to us on acceptable terms, or at all. For example, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our products or proprietary technologies, or grant licenses on terms that are not favorable to us. To the extent that we raise additional capital by issuing equity or convertible securities, our stockholders’ ownership will be diluted. Any debt financing we enter into may involve covenants that restrict our operations. If adequate funds are not available on terms acceptable to us at that time, our ability to continue our current operations or pursue new product opportunities would be significantly limited.
     In addition, our results of operations could be materially affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an

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economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operations could be adversely affected by those factors in many negative ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.
     As of March 31, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Accounting Pronouncements
Adoption of Recent Accounting Pronouncements
     In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. The adoption of EITF Issue No. 07-1 did not have a material impact on our financial statements.
     In December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and liabilities assumed in a business combination, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This statement is effective for us with respect to business combination transactions for which the acquisition date is after December 31, 2008. The adoption of SFAS No. 141(R) did not have a material impact on our financial statements.
     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (an amendment of Accounting Research Bulletin, or ARB, No. 51). SFAS No. 160 requires that noncontrolling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the income statement, that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This statement is effective for fiscal years beginning after December 31, 2008, and shall be applied prospectively. However, the presentation and disclosure requirements of SFAS No. 160 are required to be applied retrospectively for all periods presented. The retrospective presentation and disclosure requirements of this statement will be applied to any prior periods presented in financial statements for the fiscal year ending December 31, 2009, and later periods during which we have a consolidated subsidiary with a noncontrolling interest. As of March 31, 2009, we do not have any consolidated subsidiaries in which there is a noncontrolling interest.

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Caution on Forward-Looking Statements
     Any statements in this report and the information incorporated herein by reference about our expectations, beliefs, plans, objectives, assumptions or future events or performance that are not historical facts are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” or “would.” Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation: our ability to increase market demand for, and sales of, our Zegerid® and Glumetza® products; the scope and validity of patent protection for our products, including the outcome and duration of our patent infringement lawsuit against Par Pharmaceutical, Inc., and our ability to commercialize products without infringing the patent rights of others; whether we are successful in generating revenue under our strategic alliances, including our over-the-counter, or OTC, license agreement with Schering-Plough Healthcare Products, Inc., or Schering-Plough, and our license and distribution agreements with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc; Schering-Plough’s ability to address issues in the U.S. Food and Drug Administration’s, or FDA’s, complete response letter for its Zegerid brand OTC product and whether the FDA ultimately approves Schering-Plough’s new drug application, or NDA, in a timely manner or at all; our ability to successfully develop (including successful completion of the ongoing and planned phase III clinical trials) and obtain regulatory approval for our budesonide MMX® and rifamycin SV MMX product candidates in a timely manner or at all; whether the FDA completes its review and approves the NDA for the new tablet formulation of our Zegerid products in a timely manner or at all; adverse side effects or inadequate therapeutic efficacy of our products or products we promote that could result in product recalls, market withdrawals or product liability claims; competition from other pharmaceutical or biotechnology companies and evolving market dynamics, including the impact of currently available generic prescription and OTC proton pump inhibitor, or PPI, products and the introduction of additional generic or branded PPI products; our ability to further diversify our sources of revenue and product portfolio; other difficulties or delays relating to the development, testing, manufacturing and marketing of, and obtaining and maintaining regulatory approvals for, our and our strategic partners’ products; fluctuations in quarterly and annual results; our ability to obtain additional financing as needed to support our operations or future product acquisitions; the impact of the recent turmoil in the financial markets; and other risks detailed below under Part II — Item 1A — Risk Factors.
     Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     Under the terms of our loan agreement with Comerica Bank, or Comerica, the interest rate applicable to any amounts borrowed by us under the credit facility will be, at our election, indexed to either Comerica’s prime rate or the LIBOR rate. If we elect Comerica’s prime rate for all or any portion of our borrowings, the interest rate will be variable, which would expose us to the risk of increased interest expense if interest rates rise. If we elect the LIBOR rate for all or any portion of our borrowings, such LIBOR rate will remain fixed only for a specified, limited period of time after the date of our election, after which we will be required to repay the borrowed amount, or elect a new interest rate indexed to either Comerica’s prime rate or the LIBOR rate. The new rate may be higher than the earlier interest rate applicable under the loan agreement. As of March 31, 2009, the balance outstanding under the credit facility was $10.0 million, and we had elected the “prime rate” plus 0.50% interest rate option, which was 3.75% as of March 31, 2009. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. A hypothetical 1% increase or decrease in the interest rate under the loan agreement would not materially affect our interest expense at our current level of borrowing.
     In addition to market risk related to our loan agreement with Comerica, we are exposed to market risk primarily in the area of changes in U.S. interest rates and conditions in the credit markets, particularly because the majority of our investments are in short-term marketable securities. We do not have any material foreign currency or other derivative financial instruments. Our short-term investment securities have consisted of corporate debt securities and government agency securities which are classified as available-for-sale and therefore reported on the balance sheet at estimated market value. As of March 31, 2009, our long-term investments included AAA-rated auction rate securities, or ARS, issued by state municipalities. Our ARS are debt instruments with a long-term maturity and an interest rate that is reset in short-term intervals through auctions. The conditions in the global credit markets have prevented many investors from liquidating their holdings of ARS because the amount of securities submitted for sale has exceeded the amount of purchase orders for

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such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined higher rates. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.
     Due to conditions in the global credit markets, our ARS, representing a par value of approximately $4.3 million, had insufficient demand resulting in multiple failed auctions since early 2008. As a result, these affected securities are currently not liquid and the interest rates have been reset to predetermined higher rates.
     In October 2008, we received an offer of Auction Rate Securities Rights, or ARS Rights, from our investment provider, UBS Financial Services, Inc., a subsidiary of UBS AG, or UBS. In November 2008, we accepted the ARS Rights offer. The ARS Rights permit us to require UBS to purchase our ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If we do not exercise our ARS Rights, the ARS will continue to accrue interest as determined by the auction process or, if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised before July 2, 2012 they will expire and UBS will have no further obligation to buy our ARS. UBS has the discretion to purchase or sell our ARS at any time without prior notice so long as we receive a payment at par upon any sale or disposition. UBS will only exercise its discretion to purchase or sell our ARS for the purpose of restructurings, dispositions or other solutions that will provide us with par value for our ARS. As a condition to accepting the offer of ARS Rights, we released UBS from all claims except claims for consequential damages relating to its marketing and sales of ARS. We also agreed not to serve as a class representative or receive benefits under any class action settlement or investor fund.
     In the event we need to access the funds that are in an illiquid state, we will not be able to do so without the likely loss of principal, until a future auction for these investments is successful or they are redeemed by the issuer or they mature. If we are unable to sell these securities in the market or they are not redeemed, then we may be required to hold them to maturity. We do not believe we have a need to access these funds for operational purposes for the foreseeable future. We will continue to monitor and evaluate these investments on an ongoing basis for impairment. Based on our ability to access our cash, cash equivalents and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate that the potential illiquidity of these investments will affect our ability to execute our current business plan.
     Our results of operations could be materially affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operations could be adversely affected by those factors in many negative ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.
Item 4. Controls and Procedures
     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
     As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

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

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     In September 2007, we filed a lawsuit in the United States District Court for the District of Delaware against Par Pharmaceutical, Inc., or Par, for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; and 6,699,885, each of which is listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book, for Zegerid Capsules. In December 2007, we filed a second lawsuit in the United States District Court for the District of Delaware against Par for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; 6,699,885; and 6,780,882, each of which is listed in the Orange Book for Zegerid Powder for Oral Suspension. The University of Missouri, licensor of the patents, is a co-plaintiff in the litigation, and both lawsuits have been consolidated for all purposes. The lawsuits are in response to abbreviated new drug applications, or ANDAs, filed by Par with the U.S. Food and Drug Administration, or FDA, regarding Par’s intent to market generic versions of our Zegerid Capsules and Zegerid Powder for Oral Suspension products prior to the July 2016 expiration of the asserted patents. Each complaint seeks a judgment that Par has infringed the asserted patents and that the effective date of approval of Par’s ANDA shall not be earlier than the expiration date of the asserted patents. Par has filed answers in each case, primarily asserting non-infringement, invalidity and/or unenforceability. Par has also filed counterclaims seeking a declaration in its favor on those issues. On July 15, 2008, the U.S. Patent and Trademark Office, or PTO, issued U.S. Patent No. 7,399,772, or the ‘772 patent, which is now listed in the Orange Book for both Zegerid Capsules and Zegerid Powder for Oral Suspension. In October 2008, we amended our complaint to add the ‘772 patent to the pending litigation with Par. A claim construction, or “Markman,” hearing was held in November 2008. Following the Markman hearing, the court adopted all of the claim constructions we and the University of Missouri proposed. Trial is currently scheduled for July 2009.
     In addition, as part of this litigation, Par initially filed counterclaims seeking a declaration that U.S. Patent No. 5,840,737, or the ‘737 patent, is not infringed, is invalid and/or is unenforceable. We moved to dismiss, or in the alternative, stay these claims due to a reissue proceeding involving the ‘737 patent currently pending before the PTO, and we and the University of Missouri also granted Par a covenant not to sue on the original ‘737 patent. In November 2008, Par dismissed its counterclaims relating to the ‘737 patent.
     We commenced each of the lawsuits against Par within the applicable 45 day period required to automatically stay, or bar, the FDA from approving Par’s ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. If the litigation is still ongoing after 30 months, the termination of the stay could result in the introduction of one or more products generic to Zegerid Capsules and/or Zegerid Powder for Oral Suspension prior to resolution of the litigation.
     Although we intend to vigorously defend and enforce our patent rights, we are not able to predict the outcome of the litigation. Any adverse outcome in this litigation could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched before the expiration of the listed patents in July 2016, which could adversely affect our ability to successfully execute our business strategy to maximize the value of Zegerid Capsules and Zegerid Powder for Oral Suspension and would negatively impact our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. An adverse outcome may also impact the patent protection for the products being commercialized pursuant to our strategic alliances with Glaxo Group Limited, an affiliate of GlaxoSmithKline, plc, and Schering-Plough Consumer Healthcare Products, Inc., which in turn may impact the amount of, or our ability to receive, milestone payments and royalties under those agreements. In addition, even if we prevail, the litigation will be costly, time-consuming and distracting to management, which could have a material adverse effect on our business.
     In December 2007, the University of Missouri filed an Application for Reissue of the ‘737 patent with the PTO. The ‘737 patent is one of six issued patents listed in the Orange Book for Zegerid Powder for Oral Suspension. The ‘737 patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not feasible to predict the impact that the reissue proceeding may have on the scope and validity of the ‘737 patent claims. If the claims of the ‘737 patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to our Zegerid family of products could be impaired, which could potentially harm our business and operating results.
     Santaris Pharma A/S has filed a Request for Revocation against our European Union, or EU, registration for the mark Santarus® on the basis of non-use. This Request for Revocation was filed in response to our filing of an opposition against the EU application for the mark Santaris Pharma. These proceedings are pending and any adverse decision may negatively impact our right to use our Santarus® mark in the EU.

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Item 1A. Risk Factors
     Certain factors may have a material adverse effect on our business, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors in its entirety, in addition to other information contained in this report as well as our other public filings with the Securities and Exchange Commission, or SEC.
     In the near-term, the success of our business will depend on many factors, including:
    whether we are able to increase market demand for, and sales of, our currently marketed prescription products — Zegerid® (omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension and Glumetza® (metformin hydrochloride extended release tablets);
 
    whether we are able to maintain patent protection for our products, including whether we are successful in our litigation against Par Pharmaceutical, Inc., or Par, for infringement of patents covering Zegerid Capsules and Zegerid Powder for Oral Suspension;
 
    whether we are successful in generating revenue under our strategic alliances, including our over-the-counter, or OTC, license agreement with Schering-Plough Healthcare Products, Inc., or Schering-Plough, and our license and distribution agreements with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, or GSK; and
 
    whether we are successful in progressing the development and commercialization of our development products, including the budesonide MMX® and rifamycin SV MMX product candidates and the new tablet formulation of our Zegerid prescription products, in a timely manner.
     Each of these factors, as well as other factors that may impact our business, are described in more detail in the following discussion. Although the factors highlighted above are among the most significant, any of the following factors could materially adversely affect our business or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time, and you should consider all of the factors described when evaluating our business.
Risks Related to Our Business and Industry
We depend on the commercial success of the Zegerid and Glumetza prescription products, and we cannot be certain that we will be able to continue to increase sales of these products.
     We anticipate that in the near term our ability to generate revenues will depend in large part on the commercial success of our currently marketed Zegerid and Glumetza prescription products, which in turn, will depend on several factors, including our ability to:
    successfully increase market demand for, and sales of, these products through the promotional efforts of our own sales force, the contract sales representatives under our agreement with inVentiv Commercial Services, LLC, or inVentiv, and any other promotional arrangements that we may later establish;
 
    successfully maintain patent protection for these products, including whether we are successful in the lawsuits we filed against Par for infringement of patents covering our Zegerid Capsules and Zegerid Powder for Oral Suspension products;
 
    obtain greater acceptance of the products by physicians and patients and obtain and maintain distribution at the retail level;
 
    maintain adequate levels of reimbursement coverage for our products from third-party payors, particularly in light of the availability of other branded and generic competitive products;

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    establish and maintain agreements with wholesalers and distributors on commercially reasonable terms; and
 
    maintain commercial manufacturing arrangements with third-party manufacturers as necessary to meet commercial demand for the products.
     In addition, the occurrence of adverse side effects or inadequate therapeutic efficacy of the Zegerid or Glumetza products, and any resulting product liability claims or product recalls, could impact our ability to increase sales of these products.
     We cannot be certain that our continued marketing of the Zegerid and Glumetza products will result in increased demand for, and sales of, those products. If we fail to successfully commercialize our prescription products, we may be unable to generate sufficient revenues to grow our business and attain and sustain profitability, and our business, financial condition and results of operations will be materially adversely affected.
We may not generate adequate revenues under our promotion agreement for Glumetza products to justify our level of promotional effort and expense under the agreement.
     In July 2008, we entered into a promotion agreement with Depomed, Inc., or Depomed, pursuant to which we agreed to promote Depomed’s Glumetza prescription products in the U.S. Under the terms of the promotion agreement, Depomed pays us a fee ranging from 75% to 80% of the gross margin earned from all net sales of Glumetza products in the U.S., with gross margin defined as net sales less cost of goods including product-related fees paid by Depomed to Biovail Laboratories International SRL. We paid Depomed a $12.0 million upfront fee, and based on the achievement of specified levels of annual Glumetza net product sales, we may be required to pay Depomed one-time sales milestones, totaling up to $16.0 million in aggregate. We are also responsible for all costs associated with our sales force and for all other sales and marketing-related expenses associated with our promotion of Glumetza products. We began promotion of Glumetza products in October 2008.
     Our ability to generate adequate revenues under the promotion agreement to justify the resources and the level of promotional effort we will have to expend is subject to a number of risks and uncertainties, including those described in the previous risk factor relating to our ability to increase sales of the Glumetza products, as well as the potential for termination of the promotion arrangement and Depomed’s ability to maintain commercial supply and patent protection for the Glumetza products. In addition, the promotion of the Glumetza products could detract from our sales representatives’ efforts to promote our Zegerid products and have an adverse impact on Zegerid sales. If our promotion efforts are not successful, our ability to generate sufficient revenues to grow our business and attain and sustain profitability may be adversely affected.
Our ability to generate revenues also depends on the success of our strategic alliances with GSK and Schering-Plough, many aspects of which are out of our control.
     Our ability to generate revenues in the longer term will also depend on whether our strategic alliances with GSK and Schering-Plough lead to the successful commercialization of additional omeprazole products using our patented proton pump inhibitor, or PPI, technology, and we cannot be certain that we will receive any additional milestone payments or sales-based royalties from these alliances. In November 2007, we entered into a license agreement and a distribution agreement granting exclusive rights to GSK under our patented PPI technology to develop, manufacture and commercialize prescription and OTC products in up to 114 specified countries within Africa, Asia, the Middle-East, and Central and South America, and to distribute and sell Zegerid brand prescription products in Puerto Rico and the U.S. Virgin Islands. In October 2006, we entered into an OTC license agreement with Schering-Plough, pursuant to which we granted exclusive rights under our patented PPI technology to develop, manufacture, market and sell omeprazole products for the OTC market in the U.S. and Canada.
     Under these agreements, we depend on the efforts of GSK and Schering-Plough, and we have limited control over their commercialization efforts. For example, GSK and Schering-Plough may not commercialize products as fast as we would like or as fast as the market may expect and may not generate the level of sales that we would like. GSK is currently distributing and selling our Zegerid prescription products in Puerto Rico and the U.S. Virgin Islands and is working to prepare the filings necessary to obtain marketing approval authorization in various countries covered by the license agreement, and we cannot be certain that GSK will be successful in those efforts. In January 2009, Schering-Plough

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received a complete response letter from the U.S. Food and Drug Administration, or FDA, which outlined questions that the FDA identified during its review of Schering-Plough’s new drug application, or NDA, for its first product under the license agreement. We are in regular communications with Schering-Plough, who continues to work closely with the FDA to define the nature and content of the response to the FDA. We believe that the response will be based on further analysis of existing data. We cannot be certain that Schering-Plough will ultimately receive FDA approval for a licensed product in a timely manner or at all. In addition, Citizen Petitions raising certain concerns, including concerns related to the potential approval and labeling of Schering-Plough’s proposed Zegerid brand OTC product, were recently submitted to the FDA by The Proctor & Gamble Company. The Citizen Petitions are currently being reviewed by the FDA and we cannot be certain about the impact, if any, that the Citizen Petitions will have on Schering-Plough’s development efforts.
     Any failures by GSK or Schering-Plough could have a negative impact on physician and patient impressions of our prescription products in the U.S. Even if GSK’s and Schering-Plough’s efforts are successful, we will only receive specified milestone payments and royalties on net sales and may not enjoy the same financial rewards as we would have had we developed and launched the products ourselves. Furthermore, the availability of products developed by Schering-Plough using our patented PPI technology for the U.S. OTC market could decrease demand or negatively impact reimbursement coverage for our prescription products in the U.S.
     We are also subject to risks associated with termination of our agreements with GSK and Schering-Plough. The GSK license and distribution agreements may be terminated by either party in the event of the other party’s uncured material breach or bankruptcy or insolvency. In addition, GSK may terminate the license and distribution agreements on six months prior written notice to us at any time. The Schering-Plough license agreement may be terminated by either party if the other party is in material breach of its material obligations, subject to certain limitations. In addition, Schering-Plough may terminate the agreement in its entirety on 180 days prior written notice to us at any time.
     If GSK and Schering-Plough fail to successfully commercialize products using our patented PPI technology or are significantly delayed in doing so, we may be unable to generate sufficient revenues to grow our business and attain and sustain profitability, and our business, financial condition and results of operations will be materially adversely affected.
     In addition, Schering-Plough recently announced a definitive merger agreement under which Schering-Plough will combine with Merck & Co., Inc., or Merck. The transaction has been approved by the boards of directors of Schering-Plough and Merck. The transaction is still subject to approval by Schering-Plough and Merck shareholders and the satisfaction of customary closing conditions and regulatory approvals. Schering-Plough and Merck have announced that they expect to complete the transaction in the fourth quarter of 2009. We cannot be certain that the transaction will ultimately be completed and we cannot predict the effect, if any, the merger will have on our strategic alliance with Schering-Plough.
Our budesonide MMX and rifamycin SV MMX product candidates will require significant development activities and ultimately may not be approved by the FDA, and any failure or delays associated with these activities or the FDA’s approval of such products would increase our costs and time to market.
     We are currently developing our budesonide MMX and rifamycin SV MMX product candidates under a strategic collaboration with Cosmo Technologies Limited, or Cosmo, and in connection with those development programs we face substantial risks of failure that are inherent in developing pharmaceutical products. The pharmaceutical industry is subject to stringent regulation by many different agencies at the federal, state and international levels. For example, our product candidates must satisfy rigorous standards of safety and efficacy before the FDA will approve them for commercial use.
     Product development is generally a long, expensive and uncertain process. Successful development of product formulations depends on many factors, including our ability to select key components, establish a stable formulation (for both development and commercial use), develop a product that demonstrates our intended safety and efficacy profile, and transfer from development stage to commercial-scale operations. Any delays we encounter during our product development activities would in turn adversely affect our ability to commercialize the product under development.
     Once we have manufactured formulations of our product candidates that we believe will be suitable for clinical testing, we then must complete our clinical testing, and failure can occur at any stage of testing. These clinical tests must comply with FDA and other applicable regulations. We may encounter delays based on our inability to timely enroll enough patients to complete our clinical trials. We may suffer significant setbacks in advanced clinical trials, even after showing

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promising results in earlier trials. The results of later clinical trials may not replicate the results of prior clinical trials. Based on results at any stage of clinical trials, we may decide to discontinue development of a product candidate. We or the FDA may suspend clinical trials at any time if the patients participating in the trials are exposed to unacceptable health risks or if the FDA finds deficiencies in our applications to conduct the clinical trials or in the conduct of our trials. Moreover, not all product candidates in clinical trials will receive timely, or any, regulatory approval.
     Even if clinical trials are completed as planned, their results may not support our assumptions or our product claims. The clinical trial process may fail to demonstrate that our products are safe for humans or effective for their intended uses. Our product development costs will increase and our product revenues will be delayed if we experience delays in testing or regulatory approvals or if we need to perform more or larger clinical trials than planned. In addition, such failures could cause us to abandon a product entirely. If we fail to take any current or future product from the development stage to market, we will have incurred significant expenses without the possibility of generating revenues, and our business will be adversely affected.
     With regard to budesonide MMX, Cosmo is conducting two multicenter phase III clinical trials to evaluate the product candidate for the induction of remission in patients with mild or moderate active ulcerative colitis in North America and Europe, both of which are intended to support U.S. regulatory approval. We are responsible for overseeing the phase III U.S. registration trial. Assuming timely enrollment, we currently anticipate that we will have preliminary results from the phase III clinical program, excluding the safety extension trial, during the first half of 2010. Assuming successful and timely completion of the phase III clinical program and safety extension trial, we plan to submit an NDA for budesonide MMX to the FDA in 2011.
     With regard to rifamycin SV MMX, Cosmo is currently conducting various pre-IND activities, including a multiple-dose PK clinical study and a single dose food effect clinical study in healthy volunteers, as well as a genotoxicity study in an appropriate animal species and a reproductive toxicity study. Assuming successful and timely completion of those activities, we would then expect to file an IND and initiate the planned phase III U.S. registration trial in traveler’s diarrhea in the first half of 2010. It is anticipated that a European phase III clinical trial in the same indication will be conducted by Cosmo’s European partner Dr. Falk Pharma. Both of the phase III trials are intended to support U.S. regulatory approval.
     We cannot be certain that the ongoing and planned clinical and development programs will proceed in a timely manner. We also cannot be certain that the budesonide MMX and rifamycin SV MMX product candidates will achieve the desired safety and efficacy profile in one or more of the ongoing or future clinical trials or that the other development activities will be completed in a successful and timely manner. For example, the phase II clinical trial for the budesonide MMX product candidate was pilot in nature and involved a different design than the currently ongoing phase III clinical trials. As a result, there may be a higher degree of uncertainty regarding the potential outcome of the phase III clinical trials. Moreover, it is anticipated that U.S. regulatory approval for each of the product candidates will be supported in part by clinical trials being conducted by Cosmo or its European partners, in addition to the clinical trials that we will oversee or conduct. As a result, certain of the clinical activities for these product candidates are not within our direct control.
     Any failures or delays in the product development or clinical programs relating to our product candidates could adversely affect our ability to commercialize one or more of our development products and the timing for commercial availability, which in turn could adversely affect our business.
Our pending NDA for the tablet formulation of our Zegerid prescription products may not be approved by the FDA in a timely manner, or at all, which would adversely impact our ability to commercialize this product.
     In January 2009, we submitted a 505(b)(2) NDA for a new tablet formulation of our Zegerid prescription products, which NDA was accepted for filing by the FDA in April 2009. Pursuant to Prescription Drug User Fee Act, or PDUFA, guidelines, we expect the FDA will complete its review or otherwise respond to the NDA by December 4, 2009. As part of its review, the FDA may request additional information from us, including data from additional clinical trials. Ultimately, the FDA may not approve the tablet product in a timely manner or at all. Any failure to obtain FDA approval or delay associated with the FDA’s review process would adversely impact our ability to commercialize this product, which in turn could adversely impact our business, financial condition and results of operations.

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The markets in which we compete are intensely competitive and many of our competitors have significantly more resources and experience, which may limit our commercial opportunity.
     The pharmaceutical industry is intensely competitive, particularly in the gastrointestinal, or GI, and diabetes fields in which our currently marketed products compete and our development products may compete, and there are many other currently marketed products that are well-established and successful, as well as development programs underway. In addition, many of our competitors are large, well-established companies in the pharmaceutical field. Given our relatively small size and the nature of the GI and diabetes markets, we may not be able to compete effectively.
     In addition, many of our competitors, either alone or together with their collaborative partners, may have significantly greater experience in:
    developing prescription and OTC drugs;
 
    undertaking preclinical testing and human clinical trials;
 
    formulating and manufacturing drugs;
 
    obtaining FDA and other regulatory approvals of drugs; and
 
    launching, marketing, distributing and selling drugs.
     As a result, they may have a greater ability to undertake more extensive research and development, manufacturing, marketing and other programs. Many of these companies may succeed in developing products earlier than we do, completing the regulatory process and showing safety and efficacy of products more rapidly than we do or developing products that are more effective than our products. Additionally, many of our competitors have greater resources to conduct clinical studies differentiating their products, as compared to our limited resources. Further, the products they develop may be based on new and different technology and may exhibit benefits relative to our products.
     Many of these companies with which we compete also have significantly greater financial and other resources than we do. Larger pharmaceutical companies typically have significantly larger field sales force organizations and invest significant amounts in advertising and marketing their products, including through the purchase of television advertisements and the use of other direct-to-consumer methods. As a result, these larger companies are able to reach a greater number of physicians and consumers and reach them more frequently than we can with our smaller sales organization.
     If we are unable to compete successfully, our business, financial condition and results of operations will be materially adversely affected.
Our currently marketed products compete with many other drug products, which could put downward pressure on pricing and market share and limit our ability to generate revenues.
     Our Zegerid prescription products compete with many other products, including:
    branded PPI prescription products (such as Nexium®, Prevacid®, Aciphex®, Protonix® and Kapidex);
 
    generic PPI prescription products (such as delayed-release omeprazole and delayed-release pantoprazole);
 
    OTC PPI products (such as Prilosec OTC® and store-brand versions); and
 
    other prescription and/or OTC acid-reducing agents (such as histamine-2 receptor antagonists and antacids).
     In addition, various companies are developing new products that may compete with our Zegerid prescription and OTC products in the future, including new PPIs, motility agents, reversible acid inhibitors, cytoprotective compounds and products that act on the lower esophageal sphincter, or LES. For example, Novartis AG has announced that it is developing an OTC version of Takeda’s Prevacid prescription PPI product.

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     Similarly, the Glumetza prescription products compete with many other products, including:
    other branded immediate-release and extended-release metformin products (such as Fortamet®, Glucophage® and Glucophage XR®);
 
    generic immediate-release and extended-release metformin products; and
 
    other prescription diabetes treatments.
     We or our strategic partners may also face competition for our products from lower priced products from foreign countries that have placed price controls on pharmaceutical products. Proposed federal legislative changes may expand consumers’ ability to import lower priced versions of our products and competing products from Canada and other developed countries. Further, several states and local governments have implemented importation schemes for their citizens, and, in the absence of federal action to curtail such activities, we expect other states and local governments to launch importation efforts. The importation of foreign products that compete with our own products could negatively impact our business and prospects.
     The existence of numerous competitive products may put downward pressure on pricing and market share, which in turn may adversely affect our business, financial condition and results of operations.
If we are unable to maintain adequate levels of reimbursement for our products on reasonable pricing terms, their commercial success may be severely hindered.
     Our ability to sell our products may depend in large part on the extent to which reimbursement for the costs of our products is available from private health insurers, managed care organizations, government entities and others. Third-party payors are increasingly attempting to contain their costs. We cannot predict actions third-party payors may take, or whether they will limit the coverage and level of reimbursement for our products or refuse to provide any coverage at all. Reduced or partial reimbursement coverage could make our products less attractive to patients, suppliers and prescribing physicians and may not be adequate for us to maintain price levels sufficient to realize an appropriate return on our investment in our products or compete on price.
     In many cases, insurers and other healthcare payment organizations encourage the use of less expensive alternative generic brands and OTC products through their prescription benefits coverage and reimbursement policies. For example, in the case of our Zegerid prescription products, the availability of generic prescription and OTC PPI products has created, and will continue to create, a competitive reimbursement environment. Insurers and other healthcare payment organizations frequently make the generic or OTC alternatives more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic or OTC product to the patient is less than the net cost of a prescription branded product. Aggressive pricing policies by our generic or OTC product competitors and the prescription benefit policies of insurers could have a negative effect on our product revenues and profitability. In addition, even though we are eligible to receive sales-based royalties on OTC products under our OTC Zegerid license agreement with Schering-Plough, those potential revenues could be offset by the impact of lost sales of our prescription products to the extent the OTC products are preferred by customers over our current prescription products.
     The competition among pharmaceutical companies to have their products approved for reimbursement also results in downward pricing pressure in the industry and in the markets where our products compete. In some cases, we aggressively discount our products in order to obtain reimbursement coverage, and we may not be successful in any efforts we take to mitigate the effect of a decline in average selling prices for our products. Declines in our average selling prices also reduce our gross margins.
     If we fail to successfully secure and maintain reimbursement coverage for our products on favorable terms, we will have difficulty sustaining market acceptance of our products and our business will be materially adversely affected.
Our reliance on third-party clinical investigators and clinical research organizations may result in delays in completing, or a failure to complete, clinical trials or we may be unable to use the clinical data gathered if they fail to comply with regulatory requirements or perform under our agreements with them.

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     As an integral component of our clinical development programs, we engage clinical investigators and clinical research organizations, or CROs, to enroll patients and conduct and manage our clinical studies. As a result, many key aspects of this process have been and will be out of our direct control. If the CROs and other third parties that we rely on for patient enrollment and other portions of our clinical trials fail to perform the clinical trials in a timely and satisfactory manner and in compliance with applicable U.S. and foreign regulations, we could face significant delays in completing our clinical trials or we may be unable to rely in the future on the clinical data generated. If these clinical investigators and CROs do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, we may be required to repeat one or more of our clinical trials and we may be unable to obtain or maintain regulatory approval for or successfully commercialize our products.
We depend on a limited number of wholesaler customers for retail distribution of our Zegerid products, and if we lose any of our significant wholesaler customers, our business could be harmed.
     Our wholesaler customers for our Zegerid products include some of the nation’s leading wholesale pharmaceutical distributors, such as Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, and major drug chains. Sales to Cardinal, McKesson and AmerisourceBergen accounted for approximately 30%, 27% and 16%, respectively, of our annual revenues during 2008 and 32%, 27% and 16%, respectively, of our revenues for the three months ended March 31, 2009. The loss of any of these wholesaler customers’ accounts or a material reduction in their purchases could harm our business, financial condition or results of operations. In addition, we may face pricing pressure from our wholesaler customers.
We do not currently have any manufacturing facilities and instead rely on third-party manufacturers.
     We rely on third-party manufacturers to provide us with an adequate and reliable supply of our products on a timely basis, and we do not currently have any of our own manufacturing or distribution facilities. Our manufacturers must comply with U.S. regulations, including the FDA’s current good manufacturing practices, applicable to the manufacturing processes related to pharmaceutical products, and their facilities must be inspected and approved by the FDA and other regulatory agencies on an ongoing basis as part of their business. In addition, because several of our key manufacturers are located outside of the U.S., they must also comply with applicable foreign laws and regulations.
     We have limited control over our third-party manufacturers, including with respect to regulatory compliance and quality assurance matters. Any delay or interruption of supply related to a third-party manufacturer’s failure to comply with regulatory or other requirements would limit our ability to make sales of our products. Any manufacturing defect or error discovered after products have been produced and distributed could result in even more significant consequences, including costly recall procedures, re-stocking costs, damage to our reputation and potential for product liability claims. With respect to any future products under development, if the FDA finds significant issues with any of our manufacturers during the pre-approval inspection process, the approval of those products could be delayed while the manufacturer addresses the FDA’s concerns, or we may be required to identify and obtain the FDA’s approval of a new supplier. This could result in significant delays before manufacturing of our products can begin, which in turn would delay commercialization of our products. In addition, the importation of pharmaceutical products into the U.S. is subject to regulation by the FDA, and the FDA can refuse to allow an imported product into the U.S. if it is not satisfied that the product complies with applicable laws or regulations.
     For our Zegerid prescription products, we rely on Norwich Pharmaceuticals, Inc., located in New York, as the current sole third-party manufacturer of Zegerid Capsules. In addition, we rely on a single third-party manufacturer located outside of the U.S., Patheon Inc., for the supply of Zegerid Powder for Oral Suspension, and we are obligated under our supply agreement to purchase a significant portion of our requirements of this product from Patheon. We also currently rely on a single third-party supplier located outside of the U.S., Union Quimico Farmaceutica, S.A., or Uquifa, for the supply of omeprazole, which is an active pharmaceutical ingredient in each of our current Zegerid products. We are obligated under our supply agreement with Uquifa to purchase all of our requirements of omeprazole from this supplier.
     For the Glumetza products, we rely on Depomed to oversee product manufacturing and supply. Similarly, for our budesonide MMX and rifamycin SV MMX product candidates, we rely on Cosmo to manufacture and supply all of our drug product requirements.

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     Any significant problem that our sole source manufacturers or suppliers experience could result in a delay or interruption in the supply to us until the manufacturer or supplier cures the problem or until we locate an alternative source of supply. In addition, because our sole source manufacturers and suppliers provide services to a number of other pharmaceutical companies, they may experience capacity constraints or choose to prioritize one or more of their other customers over us. In addition, to the extent GSK or Schering-Plough utilizes our suppliers for our Zegerid prescription products, capacity at those suppliers may become further constrained.
     Although alternative sources of supply exist, the number of third-party manufacturers with the manufacturing and regulatory expertise and facilities necessary to manufacture the finished forms of our pharmaceutical products or the key ingredients in our products is limited, and it would take a significant amount of time to arrange for alternative manufacturers. Any new supplier of products or key ingredients would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing such products or ingredients. The FDA may require us to conduct additional clinical trials, collect stability data and provide additional information concerning any new supplier before we could distribute products from that supplier. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new supplier to bear significant additional costs which may be passed on to us.
Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions, and any failure to comply with those obligations could subject us to penalties and sanctions, which in turn could have a material adverse effect on our business and financial condition.
     As a condition of reimbursement by various federal and state healthcare programs, we must calculate and report certain pricing information to federal and state healthcare agencies. The regulations regarding reporting and payment obligations with respect to Medicaid reimbursement and rebates and other governmental programs are complex. Our calculations and methodologies are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in material changes. In addition, because our processes for these calculations and the judgments involved in making these calculations involve subjective decisions and complex methodologies, these calculations are subject to the risk of errors. Any failure to comply with the government reporting and payment obligations could result in civil and/or criminal sanctions.
Regulatory approval for our currently marketed products is limited by the FDA to those specific indications and conditions for which clinical safety and efficacy have been demonstrated.
     Any regulatory approval is limited to those specific diseases and indications for which our products are deemed to be safe and effective by the FDA. In addition to the FDA approval required for new formulations, any new indication for an approved product also requires FDA approval. If we are not able to obtain FDA approval for any desired future indications for our products, our ability to effectively market and sell our products may be reduced and our business may be adversely affected.
     While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved by the FDA. These “off-label” uses are common across medical specialties and may constitute an appropriate treatment for many patients in varied circumstances. Regulatory authorities in the U.S. generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion and advertising may cause the FDA to delay its approval or refuse to approve a product, the suspension or withdrawal of an approved product from the market, recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution, any of which could harm our business.

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We are subject to ongoing regulatory review of our currently marketed products.
     Following receipt of regulatory approval, any products that we market continue to be subject to extensive regulation. These regulations impact many aspects of our operations, including the manufacture, labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion and record keeping related to the products. The FDA also frequently requires post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. For example, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, we committed to commence clinical studies to evaluate the product in pediatric populations in 2005. We have not yet commenced any of the studies and, prior to doing so, will need to finalize study designs, including receiving FDA input on one of the proposed study designs, engage clinical research organizations and undertake other related activities. In addition, the subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, disgorgement of money, operating restrictions and criminal prosecution.
     In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.
     Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.
     Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.
     In addition, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning record keeping and control procedures. Any failure to comply with the regulations may result in significant criminal and civil penalties as well as damage to our credibility in the marketplace.
We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital.
     There have been a number of legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products, changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products, proposals concerning reimportation of pharmaceutical products and proposals concerning safety matters. For example, in an attempt to protect against counterfeit

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drugs, the federal government and numerous states have enacted pedigree legislation. In particular, California has enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level through the distribution system. California’s electronic pedigree requirement is scheduled to take effect in January 2011. Compliance with California and future federal or state electronic pedigree requirements will likely require an increase in our operational expenses and will likely be administratively burdensome. It is also possible that other proposals will be adopted, particularly in light of the 2008 presidential and congressional elections and the agenda of the new administration. For example, the new presidential administration has proposed a budget that would include significant amounts to finance the reform of the U.S. healthcare system with an objective of ultimately reducing healthcare costs by, among other things, limiting the level of reimbursement for pharmaceuticals. The enactment of any cost containment measures could result in decreased net revenues from our pharmaceutical products and decrease potential returns from our research and development efforts. It has also been reported that the new presidential administration may be seeking to curb practices that extend the term of patent protection for pharmaceuticals, which may include applications for new indications or product enhancements. As a result of these and other new proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations.
We face a risk of product liability claims and may not be able to obtain adequate insurance.
     Our business exposes us to potential liability risks that may arise from the clinical testing, manufacture and sale of our products and product candidates. These risks exist even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Any product liability claim or series of claims brought against us could significantly harm our business by, among other things, reducing demand for our products, injuring our reputation and creating significant adverse media attention and costly litigation. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Any judgment against us that is in excess of our insurance policy limits would have to be paid from our cash reserves, which would reduce our capital resources. Although we have product and clinical trials liability insurance with a coverage limit of $15.0 million, this coverage may prove to be inadequate. Furthermore, we cannot be certain that our current insurance coverage will continue to be available for our commercial or clinical trial activities on reasonable terms, if at all. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets, including our intellectual property.
We rely on third parties to perform many necessary services for our commercial products, including services related to the distribution, storage and transportation of our products.
     We have retained third-party service providers to perform a variety of functions related to the sale and distribution of our products, key aspects of which are out of our direct control. For example, we rely on one third-party service provider to provide key services related to warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivable management and call center management, and, as a result, most of our inventory is stored at a single warehouse maintained by the service provider. We place substantial reliance on this provider as well as other third-party providers that perform services for us, including entrusting our inventories of products to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical or natural damage at their facilities, our ability to deliver product to meet commercial demand would be significantly impaired. In addition, we utilize third parties to perform various other services for us relating to sample accountability and regulatory monitoring, including adverse event reporting, safety database management and other product maintenance services. If the quality or accuracy of the data maintained by these service providers is insufficient, our ability to continue to market our products could be jeopardized or we could be subject to regulatory sanctions. We do not currently have the internal capacity to perform these important commercial functions, and we may not be able to maintain commercial arrangements for these services on reasonable terms.
If we are unable to attract and retain key personnel, our business will suffer.
     We are a small company and, as of March 31, 2009, had 345 employees. Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical, manufacturing, product development, business development and sales and marketing personnel. We, as well as inVentiv, our contract sales provider, may not be able to recruit and retain qualified personnel in the future, due to competition for personnel among pharmaceutical businesses, and the failure to do so could have a significant negative impact on our future product revenues and business results.

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     Our success depends on a number of key senior management personnel, particularly Gerald T. Proehl, our President and Chief Executive Officer. Although we have employment agreements with our executive officers, these agreements are terminable at will at any time with or without notice and, therefore, we cannot be certain that we will be able to retain their services. In addition, although we have a “key person” insurance policy on Mr. Proehl, we do not have “key person” insurance policies on any of our other employees that would compensate us for the loss of their services. If we lose the services of one or more of these individuals, replacement could be difficult and may take an extended period of time and could impede significantly the achievement of our business objectives.
Risks Related to Our Intellectual Property
The protection of our intellectual property rights is critical to our success and any failure on our part to adequately maintain such rights would materially affect our business.
     We regard the protection of patents, trademarks and other proprietary rights that we own or license as critical to our success and competitive position. Laws and contractual restrictions, however, may not be sufficient to prevent unauthorized use or misappropriation of our technology or deter others from independently developing products that are substantially equivalent or superior to our products.
     Patents
     Our commercial success will depend in part on the patent rights we have licensed or will license and on patent protection for our own inventions related to the products that we market and intend to market. Our success also depends on maintaining these patent rights against third-party challenges to their validity, scope or enforceability. Our patent position is subject to uncertainties similar to other biotechnology and pharmaceutical companies. For example, the U.S. Patent and Trademark Office, or PTO, or the courts may deny, narrow or invalidate patent claims, particularly those that concern biotechnology and pharmaceutical inventions.
     We may not be successful in securing or maintaining proprietary or patent protection for our products, and protection that we have and do secure may be challenged and possibly lost. Our competitors may develop products similar to ours using methods and technologies that are beyond the scope of our intellectual property rights. Other drug companies may challenge the scope, validity and enforceability of our patent claims and may be able to develop generic versions of our products if we are unable to maintain our proprietary rights. For example, although we believe that we have valid patent protection in the U.S. for our Zegerid products until at least 2016, depending on the outcome of our patent infringement suits against Par, described below, a generic version of Zegerid could be launched prior to the expiration of our patents. It is also possible that other generic drug makers will attempt to introduce generic versions of our Zegerid products, or that the Glumetza products will face similar challenges, prior to the expiration of the applicable patents. We also may not be able to protect our intellectual property rights against third-party infringement, which may be difficult to detect.
     Zegerid Products and Related PPI Technology
     We have entered into an exclusive, worldwide license agreement with the University of Missouri for patents and pending patent applications relating to specific formulations of PPIs with antacids and other buffering agents and methods of using these formulations. Currently, there are six issued U.S. patents that provide coverage for our Zegerid products (U.S. Patent Nos. 5,840,737; 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772), all of which are subject to the University of Missouri license agreement. There are also several pending U.S. patent applications relating to our Zegerid products and technology, some of which are subject to the University of Missouri license agreement and some of which we own. The issued patents generally cover pharmaceutical compositions combining PPIs with buffering agents, such as antacids, and methods of treating GI disorders by administering solid or liquid forms of such compositions, and each of the patents expires in July 2016. In addition to the U.S. patent coverage, several international patents have been issued, including in Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Mexico, Monaco, Netherlands, New Zealand, Portugal, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey and the United Kingdom, and several international patent applications are pending, some of which are subject to the University of Missouri license agreement and some of which we own. The issued claims in these international patents vary between the different countries and include claims covering pharmaceutical

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compositions combining PPIs with buffering agents and the use of these compositions in the manufacture of drug products for the treatment of GI disorders.
     We consult with the University of Missouri in its pursuit of the patent applications that we have licensed, but the University of Missouri remains primarily responsible for prosecution of the applications. We cannot control the amount or timing of resources that the University of Missouri devotes on our behalf. It may not assign as great a priority to prosecution of patent applications relating to technology we license as we would if we were undertaking such prosecution ourselves. As a result of this lack of control and general uncertainties in the patent prosecution process, we cannot be sure that any additional patents will ever be issued. Issued patents generally require the payment of maintenance or similar fees to continue their validity. We rely on the University of Missouri to do this, subject to our obligation to provide reimbursement, and the University’s failure to do so could result in the forfeiture of patents not maintained. In addition, the initial U.S. patent from the University of Missouri does not have corresponding international or foreign counterpart applications and there can be no assurance that we will be able to obtain foreign patent rights to protect each of our products in all foreign countries of interest.
     In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent No. 5,840,737, or the ‘737 patent, with the PTO. The ‘737 patent is one of six issued patents listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book, for Zegerid Powder for Oral Suspension. The ‘737 patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not feasible to predict the impact that the reissue proceeding may have on the scope and validity of the ‘737 patent claims. If the claims of the ‘737 patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to our Zegerid family of products could be impaired, which could potentially harm our business and operating results.
     Glumetza Extended Release Tablets
     We have exclusive rights to promote the Glumetza products in the U.S. under our promotion agreement with Depomed. Currently, there are 4 issued U.S. patents that provide coverage for the Glumetza 500 mg dose product (U.S. Patent Nos. 6,340,475 (expires in September 2016); 6,635,280 (expires in September 2016); 6,488,962 (expires in June 2020); and 6,723,340 (expires in October 2021)). There is one issued U.S. patent that provides coverage for the Glumetza 1000 mg dose product (U.S. Patent No. 6,488,962 (expires in June 2020)). The issued patents generally cover various aspects of the delivery technology utilized in each of the Glumetza products. In addition, there is one pending U.S. patent application that covers the Glumetza 1000 mg dose product.
     We consult with Depomed concerning the patent rights relating to the Glumetza products, but Depomed remains primarily responsible for prosecution of the applications. We cannot control the amount or timing of resources that Depomed devotes to these activities. It may not assign as great a priority to prosecution of patent applications as we would if we were undertaking such prosecution ourselves. As a result of this lack of control and general uncertainties in the patent prosecution process, we cannot be sure that any additional patents will ever be issued. Issued patents generally require the payment of maintenance or similar fees to continue their validity. We rely on Depomed to do this, and Depomed’s failure to do so could result in the forfeiture of patents not maintained.
     Budesonide MMX and Rifamycin SV MMX
     We have exclusive rights to develop and commercialize the budesonide MMX and rifamycin SV MMX product candidates in the U.S. under our strategic collaboration with Cosmo. Currently, there are two issued U.S. patents that provide coverage for the budesonide MMX product candidate (U.S. Patent Nos. 7,431,943 and 7,410,651), as well as one pending U.S. patent application. The issued patents cover the MMX technology generally and the MMX technology with budesonide, and each of these patents expires in June 2020. There is one issued U.S. patent that provides coverage for the rifamycin SV MMX product candidate (U.S. Patent No. 7,431,943), which expires in June 2020, and two pending U.S. patent applications. The issued patent covers the MMX technology generally.
     We consult with Cosmo concerning the patent rights relating to the budesonide MMX and rifamycin SV MMX product candidates, but Cosmo remains primarily responsible for prosecution of the applications. We cannot control the amount or timing of resources that Cosmo devotes to these activities. It may not assign as great a priority to prosecution of patent applications as we would if we were undertaking such prosecution ourselves. As a result of this lack of control and general uncertainties in the patent prosecution process, we cannot be sure that any additional patents will ever be issued.

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Issued patents generally require the payment of maintenance or similar fees to continue their validity. We rely on Cosmo to do this, and Cosmo’s failure to do so could result in the forfeiture of patents not maintained.
     Trade Secrets and Proprietary Know-how
     We also rely upon unpatented proprietary know-how and continuing technological innovation in developing our products. Although we require our employees, consultants, advisors and current and prospective business partners to enter into confidentiality agreements prohibiting them from disclosing or taking our proprietary information and technology, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how. Further, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. Others may independently develop similar or equivalent trade secrets or know-how. If our confidential, proprietary information is divulged to third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfully penetrate our target markets could be severely compromised.
     Trademarks
     Our trademarks are important to our success and competitive position. We have received U.S. and European Union, or EU, trademark registration for our corporate name, Santarus®. We also have received trademark registration in the U.S., EU, Canada and Japan for our brand name, Zegerid®, and have applied for trademark registration for various other names and logos. Any objections we receive from the PTO, foreign trademark authorities or third parties relating to our registered trademarks and pending applications could require us to incur significant expense in defending the objections or establishing alternative names. There is no guarantee we will be able to secure any of our pending trademark applications with the PTO or comparable foreign authorities.
     If we do not adequately protect our rights in our various trademarks from infringement, any goodwill that has been developed in those marks would be lost or impaired. We could also be forced to cease using any of our trademarks that are found to infringe upon or otherwise violate the trademark or service mark rights of another company, and, as a result, we could lose all the goodwill which has been developed in those marks and could be liable for damages caused by any such infringement or violation.
The duration and any potential negative outcome in the ongoing patent litigation with Par could adversely affect our financial condition and results of operations as it could result in the introduction of generic products prior to the expiration of the patents for Zegerid Capsules and Zegerid Powder for Oral Suspension, as well as in significant legal expenses and diversion of management time.
     In September 2007, we filed a lawsuit in the United States District Court for the District of Delaware against Par for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; and 6,699,885, each of which is listed in the Orange Book for Zegerid Capsules. In December 2007, we filed a second lawsuit in the United States District Court for the District of Delaware against Par for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; 6,699,885; and 6,780,882, each of which is listed in the Orange Book for Zegerid Powder for Oral Suspension. The University of Missouri, licensor of the patents, is a co-plaintiff in the litigation, and both lawsuits have been consolidated for all purposes. The lawsuits are in response to abbreviated new drug applications, or ANDAs, filed by Par with the FDA regarding Par’s intent to market generic versions of our Zegerid Capsules and Zegerid Powder for Oral Suspension products prior to the July 2016 expiration of the asserted patents. Each complaint seeks a judgment that Par has infringed the asserted patents and that the effective date of approval of Par’s ANDA shall not be earlier than the expiration date of the asserted patents. Par has filed answers in each case, primarily asserting non-infringement, invalidity and/or unenforceability. Par has also filed counterclaims seeking a declaration in its favor on those issues. On July 15, 2008, the PTO issued U.S. Patent No. 7,399,772, or the ‘772 patent, which is now listed in the Orange Book for both Zegerid Capsules and Zegerid Powder for Oral Suspension. In October 2008, we amended our complaint to add the ‘772 patent to the pending litigation with Par. A claim construction, or “Markman,” hearing was held in November 2008. Following the Markman hearing, the court adopted all of the claim constructions we and the University of Missouri proposed. Trial is currently scheduled for July 2009.
     In addition, as part of this litigation, Par initially filed counterclaims seeking a declaration that the ‘737 patent is not infringed, is invalid and/or is unenforceable. We moved to dismiss, or in the alternative, stay these claims due to a reissue proceeding involving the ‘737 patent currently pending before the PTO, and we and the University of Missouri also granted Par a covenant not to sue on the original ‘737 patent. In November 2008, Par dismissed its counterclaims relating to the ‘737 patent.

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     We commenced each of the lawsuits against Par within the applicable 45 day period required to automatically stay, or bar, the FDA from approving Par’s ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. If the litigation is still ongoing after 30 months, the termination of the stay could result in the introduction of one or more products generic to Zegerid Capsules and/or Zegerid Powder for Oral Suspension prior to resolution of the litigation.
     Although we intend to vigorously defend and enforce our patent rights, we are not able to predict the outcome of the litigation. Any adverse outcome in this litigation could result in one or more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched before the expiration of the listed patents in July 2016, which could adversely affect our ability to successfully execute our business strategy to maximize the value of Zegerid Capsules and Zegerid Powder for Oral Suspension and would negatively impact our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows. An adverse outcome may also impact the patent protection for the products being commercialized pursuant to our strategic alliances with GSK and Schering-Plough, which in turn may impact the amount of, or our ability to receive, milestone payments and royalties under those agreements. In addition, even if we prevail, the litigation will be costly, time-consuming and distracting to management, which could have a material adverse effect on our business.
Third parties may choose to file patent infringement claims against us, which litigation would be costly, time-consuming and distracting to management and could be materially adverse to our business.
     The products we currently market, and those we may market in the future, may infringe patent and other rights of third parties. In addition, our competitors, many of which have substantially greater resources than us and have made significant investments in competing technologies or products, may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use and sell products either in the U.S. or international markets. Intellectual property litigation in the pharmaceutical industry is common, and we expect this to continue.
     If we or our third-party manufacturers or suppliers are unsuccessful in any challenge to our rights to manufacture, market and sell our products, we may be required to license the disputed rights, if the holder of those rights is willing, or to cease manufacturing and marketing the challenged products, or, if possible, to modify our products to avoid infringing upon those rights. If we or our third-party manufacturers or suppliers are unsuccessful in defending our rights, we could be liable for royalties on past sales or more significant damages, and we could be required to obtain and pay for licenses if we are to continue to manufacture and sell our products. These licenses may not be available and, if available, could require us to pay substantial upfront fees and future royalty payments. Any patent owner may seek preliminary injunctive relief in connection with an infringement claim, as well as a permanent injunction, and, if successful in the claim, may be entitled to lost profits from infringing sales, attorneys’ fees and interest and other amounts. Any damages could be increased if there is a finding of willful infringement. Even if we and our third-party manufacturers and suppliers are successful in defending an infringement claim, the expense, time delay and burden on management of litigation could have a material adverse effect on our business.
     For example, in January 2009, we submitted a 505(b)(2) NDA for our new tablet formulation as part of our Zegerid family of prescription products, which NDA referenced certain preclinical and clinical studies conducted for Prilosec® (delayed-release omeprazole capsules). The NDA was accepted for filing by the FDA in April 2009, and shortly thereafter we provided notice and a paragraph iv certification to AstraZeneca, the holder of the Prilosec NDA, and related affiliated patent holders that the tablet product does not infringe the unexpired patents listed in the Orange Book for Prilosec or that those patents are invalid. We provided similar notices in connection with each of our NDAs for Zegerid Capsules and Zegerid Powder for Oral Suspension, and AstraZeneca did not file any lawsuits against us within the required 45-day period. Although we believe we continue to have meritorious non-infringement and/or invalidity positions with regard to the listed patents, we cannot be certain as to whether or not AstraZeneca will elect to file a lawsuit against us with regard to the NDA for the new tablet product. The outcome of any such litigation would be uncertain and defending such litigation would be expensive, time-consuming and distracting to management.

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Our Zegerid products depend on technology licensed from the University of Missouri and any loss of our license rights would harm our business and seriously affect our ability to market our products.
     Our Zegerid products are based on patented technology and technology for which patent applications are pending that we have exclusively licensed from the University of Missouri. A loss or adverse modification of our technology license from the University of Missouri would materially harm our ability to develop and commercialize our current Zegerid products and other products based on that licensed technology that we may attempt to develop or commercialize in the future. The University of Missouri may claim that new patents or new patent applications that result from new research performed by the University of Missouri are not part of the licensed technology.
     The licenses from the University of Missouri expire in each country when the last patent for licensed technology expires in that country and the last patent application for licensed technology in that country is abandoned. In addition, our rights under the University of Missouri license are subject to early termination under specified circumstances, including our material and uncured breach of the license agreement or our bankruptcy or insolvency. Further, we are required to use commercially reasonable efforts to develop and sell products based on the technology we licensed from the University of Missouri to meet market demand. If we fail to meet these obligations in specified countries, after giving us an opportunity to cure the failure, the University of Missouri can terminate our license or render it nonexclusive with respect to those countries. To date, we believe we have met all of our obligations under the University of Missouri agreement. However, in the event that the University of Missouri is able to terminate the license agreement for one of the reasons specified in the license agreement, we would lose our rights to develop, market and sell our current Zegerid products and we would not be able to develop, market and sell future products based on those licensed technologies.
Risks Related to Our Financial Results and Need for Financing
We have incurred significant operating losses since our inception, and we may incur additional operating losses and may not attain and sustain profitability.
     The extent of our future operating losses and our ability to attain and sustain profitability are highly uncertain. We have been engaged in developing and commercializing drugs and have generated significant operating losses since our inception in December 1996. Our commercial activities and continued product development and clinical activities will require significant expenditures. For the three months ended March 31, 2009, we recognized $34.8 million in total revenues, and, as of March 31, 2009, we had an accumulated deficit of $321.4 million. We may incur additional operating losses and capital expenditures as we support the continued marketing of the Zegerid and Glumetza products and any other products we commercialize, and continue our product development and clinical research programs.
To the extent we need to raise additional funds in connection with the licensing or acquisition of new products or to continue our operations, we may be unable to raise capital when needed.
     We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our current operations for at least the next 12 months; however, our projected revenue may decrease or our expenses may increase and that would lead to our cash resources being consumed earlier than we expect. Although we do not believe that we will need to raise additional funds to finance our current operations over the next 12 months, we may pursue raising additional funds in connection with licensing or acquisition of new products. Sources of additional funds may include funds generated through strategic collaborations or licensing agreements, or through equity, debt and/or royalty financing.
     In November 2008, we filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective in December 2008. The universal shelf registration statement replaced our previous universal shelf registration statement that expired in December 2008. The universal shelf registration statement may permit us, from time to time, to offer and sell up to approximately $75.0 million of equity or debt securities. However, there can be no assurance that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include the progress of our commercial and development activities, investor perception of our prospects and the general condition of the financial markets, among others.
     In July 2006, we entered into a loan agreement with Comerica Bank, or Comerica, which we subsequently amended in July 2008, pursuant to which we may request advances in an aggregate outstanding amount not to exceed $25.0 million.

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Amounts borrowed under the loan agreement may be repaid and re-borrowed at any time prior to July 11, 2011. In December 2008, we borrowed $10.0 million under the loan agreement. Our ability to borrow additional amounts under the loan agreement depends upon a number of conditions and restrictions, and we cannot be certain that we will satisfy all borrowing conditions at a time when we desire to borrow such amounts under the loan agreement. For example, we have made comprehensive representations and warranties to Comerica as our lender, and all of these representations and warranties generally must be true and correct at the time of any proposed borrowing. Furthermore, we are subject to a number of affirmative and negative covenants, each of which must be satisfied at the time of any proposed borrowing. If we have not satisfied these various conditions, or an event of default otherwise has occurred, we may be unable to borrow additional amounts under the loan agreement, and may be required to repay any amounts previously borrowed. In addition, given the current financial market conditions, our continued ability to borrow under the loan agreement may be dependent on the financial solvency of banks in general, including Comerica.
     We cannot be certain that our existing cash and marketable securities resources will be adequate to sustain our current operations. To the extent we require additional funding, we cannot be certain that such funding will be available to us on acceptable terms, or at all. If adequate funds are not available on terms acceptable to us at that time, our ability to continue our current operations or pursue new product opportunities would be significantly limited.
Our quarterly financial results are likely to fluctuate significantly due to uncertainties about future sales levels for our currently marketed products and future costs associated with our development products.
     Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because the commercial success of, and demand for currently marketed products, as well as the success and costs of our development programs are uncertain and therefore our future prospects are uncertain. The level of our revenues, if any, and results of operations at any given time will be based primarily on the following factors:
    commercial success of the Zegerid and Glumetza prescription products;
 
    the outcome of, or other developments related to, our patent infringement suit against Par involving Zegerid Capsules and Zegerid Powder for Oral Suspension;
 
    progress under the strategic alliances with GSK and Schering-Plough, including Schering-Plough’s ability to obtain regulatory approval for a licensed OTC product;
 
    our ability to obtain regulatory approval for any future products we develop, including the new tablet formulation of our Zegerid prescription products, for which an NDA was accepted for filing by the FDA in April 2009;
 
    results of clinical trials and other development programs, including the ongoing and planned clinical trials for the budesonide MMX and rifamycin SV MMX product candidates, and our ability to establish safety and efficacy for our development products;
 
    interruption in the manufacturing or distribution of our products;
 
    timing of new product offerings, acquisitions, licenses or other significant events by us, GSK, Schering-Plough or our competitors;
 
    legislative changes affecting the products we may offer or those of our competitors; and
 
    the effect of competing technological and market developments.
     It will continue to be difficult for us to forecast demand for our products with any degree of certainty. In addition, we expect to incur significant operating expenses as we continue to support the marketing of the Zegerid and Glumetza products and continue our product development and clinical research programs. Accordingly, we may experience significant, unanticipated quarterly losses. Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.

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Our current and any future indebtedness under our loan agreement with Comerica could adversely affect our financial health.
     Under our loan agreement with Comerica, we may incur a significant amount of indebtedness. Such indebtedness could have important consequences. For example, it could:
    impair our ability to obtain additional financing in the future for working capital needs, capital expenditures and general corporate purposes;
 
    increase our vulnerability to general adverse economic and industry conditions;
 
    make it more difficult for us to satisfy other debt obligations we may incur in the future;
 
    require us to dedicate a substantial portion of our cash flows from operations to the payment of principal and interest on our indebtedness, thereby reducing the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes;
 
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
    place us at a disadvantage compared to our competitors that have less indebtedness; and
 
    expose us to higher interest expense in the event of increases in interest rates because our indebtedness under the loan agreement with Comerica bears interest at a variable rate.
     For a description of the loan agreement, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.
Covenants in our loan agreement with Comerica may limit our ability to operate our business.
     Under our loan agreement with Comerica, we are subject to specified affirmative and negative covenants, including limitations on our ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and make investments. In addition, under the loan agreement we are required to maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances with either Comerica or another financial institution covered by a control agreement for the benefit of Comerica. We are also subject to specified financial covenants with respect to a minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements, as defined in the loan agreement.
     If we default under the loan agreement because of a covenant breach or otherwise, all outstanding amounts could become immediately due and payable, which would negatively impact our liquidity and reduce the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes.
Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.
     Our results of operations could be materially negatively affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.

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     In addition, concern about the stability of markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers.
Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.
     As of March 31, 2009, our long-term investments included AAA-rated auction rate securities, or ARS, issued by state municipalities. Our ARS are debt instruments with a long-term maturity and an interest rate that is reset in short-term intervals through auctions. The conditions in the global credit markets have prevented many investors from liquidating their holdings of ARS because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined higher rates. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.
     Due to conditions in the global credit markets, our ARS, representing a par value of approximately $4.3 million, had insufficient demand resulting in multiple failed auctions since early 2008. As a result, these affected securities are currently not liquid and the interest rates have been reset to predetermined higher rates.
     In October 2008, we received an offer of Auction Rate Securities Rights, or ARS Rights, from our investment provider, UBS Financial Services, Inc., a subsidiary of UBS AG, or UBS. In November 2008, we accepted the ARS Rights offer. The ARS Rights permit us to require UBS to purchase our ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If we do not exercise our ARS Rights, the ARS will continue to accrue interest as determined by the auction process or, if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised before July 2, 2012 they will expire and UBS will have no further obligation to buy our ARS. UBS has the discretion to purchase or sell our ARS at any time without prior notice so long as we receive a payment at par upon any sale or disposition. UBS has agreed to only exercise its discretion to purchase or sell our ARS for the purpose of restructurings, dispositions or other solutions that will provide us with par value for our ARS. As a condition to accepting the offer of ARS Rights, we released UBS from all claims except claims for consequential damages relating to its marketing and sales of ARS. We also agreed not to serve as a class representative or receive benefits under any class action settlement or investor fund.
     In the event we need to access the funds that are in an illiquid state, we will not be able to do so without the likely loss of principal, until a future auction for these investments is successful or they are redeemed by the issuer or they mature. If we are unable to sell these securities in the market or they are not redeemed, then we may be required to hold them to maturity.
In connection with the reporting of our financial condition and results of operations, we are required to make estimates and judgments which involve uncertainties, and any significant differences between our estimates and actual results could have an adverse impact on our financial position, results of operations and cash flows.
     Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. In particular, as part of our revenue recognition policy, our estimates of product returns, rebates and chargebacks require our most subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. Any significant differences between our actual results and our estimates under different assumptions or conditions could negatively impact our financial position, results of operations and cash flows.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price has been and may continue to be volatile, and our stockholders may not be able to sell their shares at attractive prices.
     The market prices for securities of specialty biopharmaceutical companies in general have been highly volatile and may continue to be highly volatile in the future. For example, during the year ended December 31, 2008, the trading prices for

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our common stock ranged from a high of $3.24 to a low of $1.23, and on March 31, 2009, the closing trading price for our common stock was $1.61. In addition, we have not paid cash dividends since our inception and do not intend to pay cash dividends in the foreseeable future. Furthermore, our loan agreement with Comerica prohibits us from paying dividends. Therefore, investors will have to rely on appreciation in our stock price and a liquid trading market in order to achieve a gain on their investment.
     The trading price of our common stock may continue to fluctuate substantially as a result of one or more of the following factors:
    announcements concerning our commercial progress and activities, including sales trends, or concerning our product development programs, results of our clinical trials or status of our regulatory submissions;
 
    developments in our pending patent infringement suit against Par involving Zegerid Capsules and Zegerid Powder for Oral Suspension;
 
    regulatory developments and related announcements in the U.S., including announcements by the FDA, and foreign countries;
 
    other disputes or developments concerning proprietary rights, including patents and trade secrets, litigation matters, and our ability to patent or otherwise protect our products and technologies;
 
    developments, including progress or delays, pursuant to our strategic alliances with GSK and Schering-Plough;
 
    conditions or trends in the pharmaceutical and biotechnology industries;
 
    fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;
 
    changes in, or our failure to meet or exceed, investors’ and securities analysts’ expectations;
 
    announcements of technological innovations or new commercial products by us or our competitors;
 
    actual or anticipated fluctuations in our or our competitors’ quarterly or annual operating results;
 
    announcements concerning borrowings under our loan agreement, takedowns under our existing universal shelf registration statement or other developments relating to the loan agreement, universal shelf registration statement or our other financing activities;
 
    our entering into licenses, strategic partnerships and similar arrangements, or the termination of such arrangements;
 
    acquisition of products or businesses by us or our competitors;
 
    announcements made by, or events affecting, our strategic partners, our contract sales force provider, our suppliers or other third parties that provide services to us;
 
    litigation and government inquiries; or
 
    economic and political factors, including wars, terrorism and political unrest.
Our stock price could decline and our stockholders may suffer dilution in connection with future issuances of equity or debt securities.
     We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our current operations for at least the next 12 months; however, our projected revenue may decrease or our expenses may increase and that would lead to our cash resources being consumed earlier than we expect. Although we do not believe that we will need

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to raise additional funds to finance our current operations over the next 12 months, we may pursue raising additional funds in connection with licensing or acquisition of new products. Sources of additional funds may include funds generated through strategic collaborations or licensing agreements, or through equity, debt and/or royalty financing. To the extent we conduct substantial future offerings of equity or debt securities, such offerings could cause our stock price to decline. For example, we may issue securities under our existing universal shelf registration statement or we may pursue alternative financing arrangements.
     The exercise of outstanding options and warrants and future equity issuances, including future public offerings or future private placements of equity securities and any additional shares issued in connection with acquisitions, will also result in dilution to investors. The market price of our common stock could fall as a result of resales of any of these shares of common stock due to an increased number of shares available for sale in the market.
Future sales of our common stock by our stockholders may depress our stock price.
     A concentrated number of stockholders hold significant blocks of our outstanding common stock. Sales by our current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. For example, sales by Cosmo of any shares that we have issued or may issue to it in connection with our strategic collaboration (following expiration of the applicable lock-up period), or the expectation that sales may occur, could significantly reduce the market price of our common stock. In addition, the holders of a substantial number of shares of common stock may have rights, subject to certain conditions, to require us to file registration statements to permit the resale of their shares in the public market or to include their shares in registration statements that we may file for ourselves or other stockholders. Moreover, certain of our executive officers have from time to time established programmed selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of common stock, and other employees and affiliates, including our directors and executive officers, may choose to establish similar plans in the future. If any of our stockholders cause securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.
We may become involved in securities or other class action litigation that could divert management’s attention and harm our business.
     The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical and biotechnology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. In addition, over the last few years, several class action lawsuits have been filed against pharmaceutical companies alleging that the companies’ sales representatives have been misclassified as exempt employees under the Federal Fair Labor Standards Act and applicable state laws. Summary judgment has been granted in favor of the pharmaceutical companies in several of the cases, however, they remain subject to appeal. We cannot be certain as to how the lawsuits will ultimately be resolved. Although we have not been the subject of these types of lawsuits, we may be targeted in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could adversely affect our stock price and prevent attempts by our stockholders to replace or remove our current management.
     Our certificate of incorporation and bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.
     These provisions include:
    dividing our board of directors into three classes serving staggered three-year terms;
 
    prohibiting our stockholders from calling a special meeting of stockholders;

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    permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval;
 
    prohibiting our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and
 
    requiring advance notice for raising business matters or nominating directors at stockholders’ meetings.
     We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.
     In addition, in November 2004, we adopted a stockholder rights plan, which was subsequently amended in April 2006 and December 2008. Although the rights plan will not prevent a takeover, it is intended to encourage anyone seeking to acquire our company to negotiate with our board prior to attempting a takeover by potentially significantly diluting an acquirer’s ownership interest in our outstanding capital stock. The existence of the rights plan may also discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
     Not applicable.
Issuer Purchases of Equity Securities
     Not applicable.
Item 3. Defaults Upon Senior Securities
     Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
     Not applicable.
Item 5. Other Information
     Not applicable.
Item 6. Exhibits
     
Exhibit    
Number   Description
 
   
3.1(1)
  Amended and Restated Certificate of Incorporation
 
   
3.2(2)
  Amended and Restated Bylaws
 
   
3.3(3)
  Certificate of Designations for Series A Junior Participating Preferred Stock
 
   
4.1(3)
  Form of Common Stock Certificate
 
   
4.2(4)
  Amended and Restated Investors’ Rights Agreement, dated April 30, 2003, among us and the parties named therein

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Exhibit    
Number   Description
 
   
4.3(4)
  Amendment No. 1 to Amended and Restated Investors’ Rights Agreement, dated May 19, 2003, among us and the parties named therein
 
   
4.4(4)*
  Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between us and The Curators of the University of Missouri
 
   
4.5(4)
  Form of Common Stock Purchase Warrant
 
   
4.6(3)
  Rights Agreement, dated as of November 12, 2004, between us and American Stock Transfer & Trust Company, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Santarus, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C
 
   
4.7(5)
  First Amendment to Rights Agreement, dated as of April 19, 2006, between us and American Stock Transfer & Trust Company
 
   
4.8(6)
  Second Amendment to Rights Agreement, dated December 10, 2008, between us and American Stock Transfer & Trust Company
 
   
4.9(7)
  Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to Kingsbridge Capital Limited
 
   
4.10(7)
  Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge Capital Limited
 
   
4.11(8)
  Registration Rights Agreement, dated December 10, 2008, between us and Cosmo Technologies Limited
 
   
4.12(8)
  Amendment No. 1 to Registration Rights Agreement, dated April 23, 2009, between us and Cosmo Technologies Limited
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
 
   
32†
  Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(1)   Incorporated by reference to the Quarterly Report on Form 10-Q of Santarus, Inc. for the quarter ended March 31, 2004, filed with the Securities and Exchange Commission on May 13, 2004.
 
(2)   Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on December 5, 2008.
 
(3)   Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on November 17, 2004.
 
(4)   Incorporated by reference to the Registration Statement on Form S-1 of Santarus, Inc. (Registration No. 333-111515), filed with the Securities and Exchange Commission on December 23, 2003, as amended.
 
(5)   Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on April 21, 2006.
 
(6)   Incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2008.

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(7)   Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on February 3, 2006.
 
(8)   Incorporated by reference to the Registration Statement on Form S-3 of Santarus, Inc. (Registration No. 333-156806), filed with the Securities and Exchange Commission on January 20, 2009, as amended.
 
*   Santarus, Inc. has been granted confidential treatment with respect to certain portions of this exhibit (indicated by asterisks), which portions have been omitted and filed separately with the Securities and Exchange Commission.
 
  These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Santarus, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 6, 2009
         
     
  /s/ Debra P. Crawford    
  Debra P. Crawford,   
  Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 
 
 

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