Summary of CPEX PHARMACEUTICALS, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with all financial and non-financial information appearing elsewhere in this report and with our combined financial statements and related notes included in our Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 17, 2008, referred to as the Form 10. Except for the historical information contained herein, the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein due to competitive factors and other risks discussed in the Form 10 under "Risk Factors".
Overview
We are an emerging specialty pharmaceutical company that employs 17 people at our principal executive offices in Exeter, New Hampshire. Our business is the research, development, licensing and commercialization of pharmaceutical products utilizing our validated drug delivery platform technology. We have U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Currently, we have research alliances with each of the University of New Hampshire and Dartmouth College to collaborate in the development of new intellectual property. Our platform drug delivery technology is our CPE-215®technology, which enhances permeation and absorption of pharmaceutical molecules across biological membranes such as the skin and nasal mucosa. Our first product is Testim®, a gel for testosterone replacement therapy, which is a formulation of CPE-215 with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc. who is currently marketing the product in the United States, Europe and other countries. Our second product, Nasulin™, currently in Phase II clinical trials, is an intranasal spray formulation of CPE-215 with insulin.
We believe, based upon our experience with Testim and Nasulin, that our CPE-215 technology is a broad platform technology that has the ability to significantly enhance the permeation of a wide range of therapeutic molecules. To expand the development and commercialization of products using our CPE-215 drug delivery technology, we are pursuing strategic alliances with partners including large pharmaceutical, specialty pharmaceutical and biotechnology companies. The alliance opportunities may include co-development of products, in-licensing of therapeutic molecules, out-licensing of delivery technology or partnering late-stage candidates for commercialization. Separation from Bentley
On June 12, 2008, the Board of Directors of Bentley Pharmaceuticals, Inc. approved the spin-off of its drug delivery business into CPEX Pharmaceuticals, Inc. Shares of CPEX were distributed to Bentley stockholders after the close of business on June 30, 2008 by means of a stock dividend, a transaction referred to as the Separation, which was taxable to Bentley and Bentley stockholders. Each Bentley stockholder of record on June 20, 2008 received one CPEX share for every ten shares of Bentley common stock. Bentley has no ownership interest in CPEX subsequent to the Separation.
We have incurred legal, tax and other strategic consulting costs specifically associated with the Separation. These costs, which are reported as separation costs within operating expenses in the Condensed Consolidated and Combined Statements of Operations, totaled $423,000 for the three months ended September 30, 2007, and $2.5 million and $577,000 for the nine months ended September 30, 2008 and 2007, respectively. No additional separation costs have been incurred by CPEX subsequent to its spin-off from Bentley in June 2008.
RESULTS OF OPERATIONS:
The following is a discussion of the results of our operations for the three and nine months ended September 30, 2008 and 2007. Included in the financial disclosures for the three and nine months ended

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September 30, 2007 and nine months ended September 30, 2008 are direct costs associated with our business and certain allocated costs from Bentley related to executive compensation, public company costs and other administrative costs. As these costs only represent an allocation of the costs incurred by Bentley before the Separation, they are not necessarily indicative of the costs that would have been incurred if we were an independent public company in the periods presented.
For the three months ended September 30, 2008 and 2007:

                                      Three Months Ended
                                         September 30,            Increase (Decrease)
    (unaudited, in thousands)          2008          2007            $              %
    Royalties and other revenue     $    3,945     $  3,069     $       876           29 %


    Operating expenses:
    General and administrative           2,574        1,523           1,051           69 %
    Research and development             2,249        2,444            (195 )         (8 )%
    Separation costs                         -          423            (423 )       (100 )%
    Depreciation and amortization          171          160              11            7 %


    Total operating expenses:            4,994        4,550             444           10 %


    Loss from operations                (1,049 )     (1,481 )           432           29 %

    Other, net                              43          148            (105 )        (71 )%


    Net loss                        $   (1,006 )   $ (1,333 )   $       327           25 %

Royalties and other revenues increased 29% from $3.1 million for the three months ended September 30, 2007 to $3.9 million for the three months ended September 30, 2008, primarily from increased royalties earned on sales of Testim. Testim's market share increased to 22% as of September 30, 2008 compared to 21% at September 30, 2007. We recently received a notice from Upsher-Smith Laboratories advising of the filing by Upsher-Smith Laboratories of an Abbreviated New Drug Application (ANDA) containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for testosterone gel. This notice states that Upsher-Smith Laboratories does not believe that their product infringes our patent which covers Testim. We are currently reviewing the details of this and intend to pursue all available legal and regulatory options in defense of Testim, including enforcement of intellectual property rights and approved labeling. See the Liquidity Risk section on page 20 for further discussion.
Total operating expenses increased 10% to $5.0 million for the three months ended September 30, 2008 from $4.6 million for the three months ended September 30, 2007, primarily due to a $1.2 million non-cash charge resulting from the modification of equity awards associated with the spin-off from Bentley. This increase was partially offset by reduced research and development expenses of approximately $195,000 due to the timing of our preclinical and clinical activities. In addition, operating expenses for the three months ended September 30, 2007 include $423,000 in separation costs. We have not incurred any separation costs subsequent to the spin-off. Although cost estimates and timing of our trials are subject to change, we expect research and development expenses for 2008 to range between $9.0 million and $11.0 million.
Our net loss decreased to $1.0 million for the three months ended September 30, 2008 from $1.3 million for the three months ended September 30, 2007. The decreased net loss primarily resulted from the increase in Testim royalty revenue that exceeded the increase in operating expenses.

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For the nine months ended September 30, 2008 and 2007:

                                       Nine Months Ended
                                         September 30,            Increase (Decrease)
     (unaudited, in thousands)         2008          2007            $              %
     Royalties and other revenue     $  11,343     $  7,887     $     3,456           44 %


     Operating expenses:
     General and administrative          5,023        3,875           1,148           30 %
     Research and development            6,778        7,268            (490 )         (7 )%
     Separation costs                    2,502          577           1,925          334 %
     Depreciation and amortization         514          578             (64 )        (11 )%


     Total operating expenses:          14,817       12,298           2,519           20 %


     Loss from operations               (3,474 )     (4,411 )           937           21 %

     Other, net                            266          369            (103 )        (28 )%


     Net loss                        $  (3,208 )   $ (4,042 )   $       834           21 %

Royalties and other revenues increased 44% to $11.3 million in the nine months ended September 30, 2008 from $7.9 million in the nine months ended September 30, 2007, primarily from increased royalties earned on sales of Testim. Testim's market share increased to 22% as of September 30, 2008 compared to 21% at September 30, 2007. As mentioned above, we recently received a notice from Upsher-Smith Laboratories advising of the filing by Upsher-Smith Laboratories of an Abbreviated New Drug Application (ANDA) containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for testosterone gel. This notice states that Upsher-Smith Laboratories does not believe that their product infringes our patent which covers Testim. We are currently reviewing the details of this notice and intend to pursue all available legal and regulatory options in defense of Testim, including enforcement of intellectual property rights and approved labeling. See the Liquidity Risk section on page 20 for further discussion.
Total operating expenses increased 20% to $14.8 million for the nine months ended September 30, 2008 from $12.3 million for the nine months ended September 30, 2007. The increase in operating expenses was primarily due to a $1.9 million increase in costs related to the Separation and to the $1.2 million non-cash charge related to equity awards mentioned above. These costs were partially offset by reduced research and development expenses of approximately $490,000 which was due to the timing of our preclinical and clinical activities.
Our net loss decreased to $3.2 million for the nine months ended September 30, 2008 from $4.0 million for the nine months ended September 30, 2007. The decrease primarily resulted from the increase in Testim royalties that was partially offset by the increase in separation costs.

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