Summary of ENDO PHARMACEUTICALS HOLDINGS INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the principal factors affecting the results of operations, liquidity and capital resources, and critical accounting estimates at Endo. This discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto. Except for the historical information contained in this Report, this Report, including the following discussion, contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page 1 of this Report.

EXECUTIVE SUMMARY

About the Company

Endo Pharmaceuticals, which we refer to as "Endo", "we", "us" or the "Company", is a specialty pharmaceutical company with market leadership in pain management. We are engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain. Through a dedicated sales force of approximately 725 sales representatives in the United States and through a contracted field force of approximately 275 sales representatives and other sales management positions, we market our branded pharmaceutical products to high-prescribing physicians in pain management, neurology, surgery, anesthesiology, oncology and primary care. Our sales force also targets retail pharmacies and other healthcare professionals throughout the United States.

We have a portfolio of branded products that includes brand names such as Lidoderm ®, Opana® ER and Opana®, Percocet ®,, Frova®, and Voltaren ® Gel. Branded products comprised approximately 93% of our net sales in 2008, with 61% of our net sales coming from Lidoderm®. Our non-branded generic portfolio, which accounted for 7% of net sales in 2008, currently consists of products primarily focused in pain management. We focus on selective generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing.

We have recently acquired Indevus Pharmaceuticals, a specialty pharmaceutical company engaged in the acquisition, development and commercialization of products to treat conditions in urology and endocrinology. Indevus's approved products include Sanctura ® and Sanctura XRTM for overactive bladder ("OAB"), which is co-promoted with Allergan, Inc. ("Allergan"), Vantas® for advanced prostate cancer, Supprelin® LA for central precocious puberty ("CPP"), Delatestryl® for the treatment of hypogonadism and Valstar™ for bladder cancer. Indevus also has a core urology and endocrinology portfolio containing multiple compounds in development including Nebido® for hypogonadism, PRO 2000 for the prevention of infection by HIV and other sexually-transmitted pathogens, and the octreotide implant for acromegaly and carcinoid syndrome.

2008-A Year in Review

We believe that the Company's 2008 results reflect the Company's ability to operate in a competitive environment through execution of its business strategy. Significant items affecting the results of our 2008 operations include:

• The continued growth in net sales of our branded product portfolio;

• An in-depth review of research and development (R&D) activities, including an analysis of R&D priorities, focus and available resources for current and future projects as well as the commercial potential for each product;

• A focus on operations to assess our core competencies and cost infrastructure, resulting in improved effectiveness of our business operations and a reduction in certain operating expenses; and

• The balanced deployment of cash for investment in business development initiatives, strengthening of our capital structure and stock repurchases.

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Net sales for the year ended December 31, 2008 were $1.26 billion, a 16% increase over 2007, with net income in 2008 of $261.7 million, or $2.12 per diluted share, as compared to 2007 net income of $227.4 million or $1.69 per diluted share. The increase in sales was primarily due to the continued growth of Lidoderm®, Opana® ER and Opana®, and the launch of Voltaren® Gel in March of 2008. The increase in net income is primarily attributable to increased sales growth and favorability in research and development expense as upfront and milestone payment to partners decreased year-over-year.

Working capital as of December 31, 2008 improved to $797.2 million due to cash generated from operating activities of $356.6 million, offset by certain cash outlays for licensing and other investments totaling $105.0 million, treasury share repurchases totaling approximately $111.0 million and capital expenditures of $17.4 million. See "Working Capital" below.

Strategic Focus

Our business strategy is to maximize the future growth of the Company and to strengthen our position as a leading specialty pharmaceutical company by delivering innovative, commercially viable products and technologies to meet unmet medical needs in our existing therapeutic and complementary areas. Execution of our strategy will incorporate the following key elements:

• Developing new products through both an internal and a virtual research and development organization with greater scientific and clinical capabilities;

• Expanding the Company's product line by acquiring new products and technologies in existing therapeutic and complementary areas;

• Increasing revenues and earnings through sales and marketing programs for our innovative product offerings and effectively using the Company's resources; and

• Providing additional resources to support our generics business.

We believe that successful execution of our business strategy will enhance shareholder value.

During 2008, we completed a review of operations to assess our core competencies, cost infrastructure and growth opportunities. As a result of this review, we are pursuing several initiatives to improve the effectiveness of our business operations, reduce expenses and create additional long-term value for our customers and stockholders. In addition to implementing selective personnel reductions, we have decided to change our business structure and reduce our utilization of outside consultants to create a more effective operating model relative to our historical operating model.

The Company is working to implement this new strategy through the following initiatives:

Refocused sales and marketing programs:

We recently reorganized our commercial group and sales territories to increase the operating efficiency and effectiveness of the Company's sales teams. This reorganization is intended to make the Company's sales representatives more responsive to our customers and better able to allocate time to physicians who may require additional information about the Company's products, particularly Lidoderm®, Opana® ER and Opana ® , Voltaren® Gel and Frova®.

New research and development priorities:

Subsequent to the appointment of Dr. Ivan Gergel as executive vice president of research and development in 2008, the Company conducted an in-depth review of its research and development activities. The review included an analysis of the Company's R&D priorities, focus and available resources for current and future

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projects as well as the commercial potential for each product. As a result of this review, the Company decided to discontinue development of EN3267, Rapinyl ™, the sub-lingual, fast-dissolving tablet of fentanyl intended for treatment of breakthrough cancer pain, and EN3269, topical ketoprofen patch, being studied for the treatment of acute pain associated with soft-tissue injuries. In January 2009, the Company announced that by mutual agreement it concluded its research collaboration with Alexza Pharmaceuticals, Inc. to develop an inhaled fentanyl product for the treatment of breakthrough pain using Alexza's Staccato® inhalation technology. Further, in February 2009, the Company decided to discontinue all development activities related to EN3285, an oral rinse being studied for the prevention or delay of oral mucositis (OM) and EN3270 transdermal sufentanil patch for the treatment of moderate-to-severe chronic pain.

The Company also decided to expand its medicinal chemistry, project management and biostatistics competencies to help it conduct preclinical research and more efficiently manage the clinical development of new product candidates by contract research organizations.

Investment in new therapeutic areas:

We believe Endo's pain management products, strong revenue base and sales teams represent strategic assets that can be leveraged to expand the Company's pharmaceutical business beyond the treatment of pain. We are identifying complementary medical specialties where demographic, healthcare and reimbursement trends favor the consideration of new products to address unmet medical needs, such as certain pelvic diseases that are treated by urologists, endocrinologists and oncologists.

This strategy underlies our recent acquisition of Indevus Pharmaceuticals. Indevus currently markets products to treat overactive bladder, prostate cancer, hypogonadism and central precocious puberty and is pursuing regulatory approval of drugs to treat hypogonadism and acromegaly. The combined company will market products through three sales forces and have the capability to develop innovative new therapies using a novel drug delivery technology. We believe this acquisition will make Endo a stronger competitor, a more valuable healthcare supplier and a more successful company.

Endo intends to pursue other strategic acquisitions that support the growth of the Company's pain management business and its expansion into other therapeutic specialties, while continuing to make strategic decisions to support and grow our generics business.

Indevus Acquisition

On February 23, 2009, BTB Purchaser Inc. ("Purchaser"), a Delaware corporation and a wholly-owned subsidiary of Endo Pharmaceuticals Holdings Inc., a Delaware corporation ("Parent"), completed its initial tender offer (the "Offer") for all outstanding shares of common stock, par value $0.001 per share (the "Shares"), of Indevus Pharmaceuticals, Inc., a Delaware corporation ("Indevus"), at a price of $4.50 per Share, net to the seller in cash (less any required withholding taxes and without interest), plus contractual rights to receive up to an additional $3.00 per Share in contingent cash consideration payments (the "Offer Price"), pursuant to the terms of the Agreement and Plan of Merger, dated as of January 5, 2009, by and among Parent, Purchaser and Indevus (as amended, the "Merger Agreement"). Indevus was advised by the depositary for the Offer that, as of the expiration of the Offer, a total of approximately 61.4 million Shares were validly tendered and not withdrawn (including Shares delivered through notices of guaranteed delivery), representing approximately 77.972% of the Shares outstanding. On February 23, 2009, Parent announced that Purchaser had accepted for payment in accordance with the terms of the Offer all Shares that were validly tendered and not withdrawn prior to the expiration of the Offer. On that same day, Purchaser paid $276.1 million in aggregate initial cash consideration for the Shares tendered to the depositary and Parent entered into the Nebido Contingent Cash Consideration Agreement and the Octreotide Contingent Consideration Agreement (each as defined in the Merger Agreement), providing for the payment of up to an additional $3.00 per Share in contingent cash consideration payments, in accordance with the terms of the Offer. Additionally, the Purchaser placed $175 million in escrow until December 2009 to fund the potential Nebido Contingent Cash Agreement.

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On February 23, 2009, Parent also announced that Purchaser had commenced a subsequent offering period for all remaining untendered Shares. Indevus was advised by the depositary for the Offer that, as of the expiration of the subsequent offering period, an additional 2,238,757 Shares were validly tendered and not withdrawn, which together with the 61,358,944 Shares previously tendered represents approximately 80% of the Shares outstanding.

The offering period has been extended until March 13, 2009 in accordance with the terms of the Merger Agreement and the applicable rules and regulations of the Securities and Exchange Commission. The same Offer Price per Share offered in the initial offering period of the Offer will be paid during the subsequent offering period. Purchaser will immediately accept for payment all Shares validly tendered during this subsequent offering period, and payment will be made promptly after acceptance, in accordance with the terms of the Offer. Procedures for tendering Shares during the subsequent offering period are the same as during the initial offering period with two exceptions: (1) Shares cannot be delivered by the guaranteed delivery procedure, and (2) pursuant to Rule 14d-7(a)(2) promulgated under the Securities Exchange Act of 1934, as amended, Shares tendered during the subsequent offering period may not be withdrawn. Indevus supports the Purchaser's decision to pursue the subsequent offering period.

The $286.2 million in initial cash consideration paid and payable to holders of Shares tendered during the initial and subsequent offer period has been, and any cash payable to holders of Shares tendered during the additional subsequent offering period and for Shares to be converted into the right to receive the Offer Price upon the merger of Purchaser with and into Indevus pursuant to the Merger Agreement, whereby Indevus will become a wholly owned subsidiary of Parent (the "Merger"), has been and will be provided by cash on hand at Parent and its subsidiaries.

Indevus currently markets products to treat overactive bladder, prostate cancer, hypogonadism and central precocious puberty and is pursuing regulatory approval of additional drugs to treat hypogonadism and acromegaly. Indevus's approved products include Sanctura® and Sanctura XR TM for overactive bladder, Vantas® for advanced prostate cancer, Supprelin ® LA for central precocious puberty, Delatestryl® for the treatment of hypogonadism and Valstar™ for bladder cancer. The core urology and endocrinology portfolio of Indevus also contains multiple compounds in development in addition to its approved products. Indevus's most advanced compounds are Nebido® for hypogonadism, Pro 2000 for the prevention of infection by HIV and other sexually-transmitted diseases, the octreotide implant for acromegaly and cardinoid syndrome, and pagoclone for the treatment of stuttering.

Business Environment

The Company conducts its business within the pharmaceutical industry, which is highly competitive and subject to numerous government regulations. Many competitive factors may significantly affect the Company's sales of its products, including product efficacy, safety, price and cost-effectiveness, marketing effectiveness, product labeling, quality control and quality assurance at our third-party manufacturing operations, and research and development of new products. To successfully compete for business in the health care industry, the Company must demonstrate that its products offer medical benefits as well as cost advantages. Currently, most of the Company's products compete with other products already on the market in the same therapeutic category, in addition to potential competition of new products that competitors may introduce in the future. The Company manufactures branded products, which are priced higher than generic products. Generic competition is one of the Company's leading challenges.

In the pharmaceutical industry, the majority of an innovative product's commercial value is usually realized during the period that the product has market exclusivity. When a product loses exclusivity, it is no longer protected by a patent and is subject to new competing products in the form of generic brands. Upon exclusivity loss, the Company can lose a major portion of that product's sales in a short period of time. Intellectual property rights have increasingly come under attack in the current healthcare environment. Generic drug firms have filed

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Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of certain of the Company's key pharmaceutical products, prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in ANDA filings, the generic firms will then introduce generic versions of the product at issue, resulting in the potential for substantial market share and revenue losses for that product. For a complete description of legal proceedings, see Note 15 of the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

The health care industry is subject to various government-imposed regulations authorizing prices or price controls that have and will continue to have an impact on the Company's sales. The U.S. Congress and some state legislatures have considered a number of proposals and have enacted laws that could result in major changes in the current health care system, either nationally or at the state level. Driven in part by budget concerns, Medicaid access and reimbursement restrictions have been implemented in some states and proposed in many others. In addition, the Medicare Prescription Drug Improvement and Modernization Act provides outpatient prescription drug coverage to senior citizens in the U.S. This legislation has had a modest favorable impact on the Company as a result of an increase in the number of seniors with drug coverage. At the same time, there continues to be a potential negative impact on the U.S. pharmaceutical business that could result from pricing pressures or controls.

The growth of Managed Care Organizations (MCOs) in the U.S. has increased competition in the healthcare industry. MCOs seek to reduce healthcare expenditures for participants by making volume purchases and entering into long-term contracts to negotiate discounts with various pharmaceutical providers. Because of the market potential created by the large pool of participants, marketing prescription drugs to MCOs has become an important part of the Company's strategy. Companies compete for inclusion in MCO formularies and the Company generally has been successful in having its major products included. The Company believes that developments in the managed care industry, including continued consolidation, have had and will continue to have a generally downward pressure on prices.

Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn may impact the Company's business.

Pharmaceutical production processes are complex, highly regulated and vary widely from product to product. We contract with various third party manufacturers and suppliers to provide us with raw materials used in our products and finished goods. Our most significant agreements are with Novartis Consumer Health, Inc., Teikoku Seiyaku Co., Ltd., Mallinckrodt Inc., Almac Pharma Services and Sharp Corporation. Shifting or adding manufacturing capacity can be a lengthy process that could require significant expenditures and regulatory approvals. If for any reason we are unable to obtain sufficient quantities of any of the finished goods or raw materials or components required for our products, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The Company has maintained a competitive position in the market and strives to uphold this position, which is dependent on its success in discovering and developing innovative, cost-effective products that serve unmet medical need.

Pipeline Developments

Significant activities related to our product pipeline are as follows:

As part of our continuing strategic review of projects and programs, in February 2009, we decided to discontinue development activities related to EN3285, our oral rinse for the treatment of oral mucositis obtained through our acquisition of RxKinetix in October 2006 and EN3270 transdermal sufentanil patch for the treatment

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of moderate-to-severe chronic pain. EN3270 was licensed from Durect Corporation in March 2005. We will return to Durect all development rights to its transdermal sufentanil patch.

In February 2009, we entered into a discovery collaboration agreement with Aurigene Discovery Technologies Limited (referred to as the Aurigene Agreement). The Aurigene Agreement is a three-year collaboration to discover novel drug candidates to treat cancer. Endo has agreed to provide discovery research funding of approximately $3.0 million over the first three years of the Aurigene Agreement. Endo will be responsible for all clinical development and commercialization of drug candidates that advance into human testing. We also may be required to make additional clinical, regulatory and approval milestones of up to $29.8 million and commercial milestone payments of up to an additional $32.5 million based on cumulative net sales of products commercialized under the Aurigene Agreement. The Aurigene Agreement includes an initial three-year discovery research program, which may be terminated by Endo at our sole discretion upon 60 days' prior written notice without penalty. The Aurigene Agreement will expire in its entirety if Endo does not select any development product candidates by the end of the discovery research program or upon satisfaction and/or expiration of Endo's obligations to make the milestone payments. Subsequent to the initial discovery research program, Endo may terminate the Aurigene Agreement at our sole discretion upon 30 days' prior written notice without penalty.

In February 2009, we entered into a development, license and supply agreement with Grünenthal GMBH, referred to as Grünenthal, granting us the exclusive right in North America to develop and market Grünethal's investigational drug, axomadol (referred to as the Grünenthal Agreement). Currently in Phase II trials, axomadol is a patented new chemical entity being developed for the treatment of moderate to moderately-severe chronic pain and diabetic peripheral neuropthic pain. Under the terms of the Grünenthal Agreement, Endo will pay Grünenthal approximately 22.4 million euros up-front, and possibly additional clinical, regulatory and approval milestones of up to an additional 21.7 million euros and possibly development and commercial milestone payments of up to an additional $68 million. In addition, Grünenthal will receive payments from Endo based on a percentage of Endo's annual net sales of the product in the United States and Canada. The Grünenthal Agreement will expire in its entirety on the date of (i) the 15th anniversary of the first commercial sale of the product; or
(ii) the expiration of the last issued patent claiming or covering the product, or (iii) the expiration of exclusivity granted by the FDA for the product, whichever occurs later. Among other standard and customary termination rights granted under the Grünenthal Agreement, we may terminate the Grünenthal Agreement at our sole discretion at any time upon 90 days' written prior notice to Grünenthal and payment of certain penalties.

On January 29, 2009, the Company announced that by mutual agreement it concluded its research collaboration with Alexza Pharmaceuticals, Inc. to develop an inhaled fentanyl product for the treatment of breakthrough pain using Alexza's Staccato® inhalation technology. The product, Staccato®fentanyl (AZ-003/EN-3284), has completed Phase I clinical testing and will be returned to Alexza. In 2007, Endo licensed exclusive rights to develop and commercialize AZ-003 in North America.

In December 2008, we entered into a license agreement and a sponsored research agreement with Harvard University (referred to as the Harvard Agreement). Under the terms of the Harvard Agreement, we obtained the exclusive worldwide rights to a new combination pain-drug-delivery technique that targets pain-sensing neurons without affecting motor neurons. Endo will be responsible for development and commercialization of any drug candidates discovered under the Harvard Agreement. Under the terms of the Harvard Agreement, we made an upfront payment of $2.0 million and may pay up to an additional $16.5 million in clinical, regulatory and approval milestones. In addition, we agreed to provide research funding with respect to these products of approximately $2.0 million over the three-year life of the sponsored research agreement. Harvard will also receive payments from Endo based on a percentage of Endo's annual net sales of licensed products commercialized under the Harvard Agreement. Endo may terminate the Harvard Agreement upon 60 days' prior written notice without penalty.

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During the second quarter of 2008, the Company completed an in-depth review of its research and development (R&D) activities. The review included an analysis of the Company's R&D priorities, focus and available resources for current and future projects as well as the commercial potential for each product. As a result of this review, the Company decided to discontinue development of Rapinyl™, the sub-lingual, fast-dissolving tablet of fentanyl intended for treatment of breakthrough cancer pain, and topical ketoprofen patch being studied for the treatment of acute pain associated with soft-tissue injuries.

In April 2008, we notified the U.S. Food and Drug Administration (FDA) of the withdrawal of the supplemental new drug application (sNDA) without prejudice to refiling as afforded under 21 CFR 314.65 for Frova® (frovatriptan succinate) 2.5 mg tablets. This sNDA was for the additional indication of Frova® for the short-term (six days per month) prevention of menstrual migraine. Frova ® is already approved and marketed for the acute treatment of migraine with or without aura in adults where a clear diagnosis of migraine has been established.

In April 2008, upon written notice to DURECT, we terminated the DURECT CHRONOGESICTM License Agreement. Under the current terms of this license agreement, we were not responsible for any development costs for CHRONOGESIC prior to May 1, 2008 so long as written notification of termination of the agreement is provided to DURECT by April 30, 2008. This return of CHRONOGESIC rights has no effect on DURECT and Endo's collaboration with respect to the sufentanil transdermal patch (TRANSDUR™-Sufentanil) licensed by Endo from DURECT for the U.S. and Canada. There was no fee due to DURECT as a result of terminating the DURECT CHRONOGESICTM License Agreement.

Branded Business Activity

In May 2008, we entered into a services agreement with Ventiv Commercial Services, LLC (Ventiv), (referred to as the Ventiv Agreement) pursuant to which Ventiv will provide certain sales and marketing services, namely the promotion of Voltaren® Gel and other Endo products. The Ventiv Agreement will expire on June 30, 2010 unless earlier terminated in accordance with its terms. In January 2009, we agreed to certain changes to the Ventiv Agreement allowing for . . .