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 consolidated and combined financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission on March 25, 2009, referred to as the 2008 Form 10-K. 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-K under Item 1A,"Risk Factors".
Overview
We are an emerging specialty pharmaceutical company in the business of 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. Our platform drug delivery technology enhances permeation and absorption of pharmaceutical molecules across the skin, nasal mucosa and eye through formulation development with proprietary molecules such as CPE-215. Our first product is Testim®, a gel for testosterone replacement therapy, which is a formulation of our technology 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, Nasulintm, currently in Phase 2 clinical trials, is an intranasal spray formulation of insulin with our permeation enhancement technology. In addition, Serenity Pharmaceuticals, Inc, our development and commercialization partner, has completed a Phase 2a clinical study of an undisclosed intranasal urology drug, delivered using our technology.
We believe, based upon our experience with Testim and Nasulin, that our 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 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, which we refer to as the Separation. Each Bentley stockholder of record on June 20, 2008 received one CPEX share for every ten shares of Bentley common stock it owned. Bentley retained 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 $937,000 for the three months ended March 31, 2008. No separation costs have been incurred by CPEX subsequent to the Separation.
Nasulin Clinical Program
Ongoing Clinical Trials
We are currently conducting a Phase 2a clinical trial of Nasulin, our intranasal insulin candidate, in the United States in patients with Type 2 diabetes. This study will randomize 90 patients who are currently being treated with basal, or long-acting, insulin and oral anti-diabetes agents. As of May 6, 2009 we have randomized 14 patients in the study, which is designed to assess the efficacy and safety of Nasulin versus a placebo over a 6-week treatment period and is being conducted at multiple centers in the U.S with the addition of planned international sites. We expect to complete this trial early next year under our current operating plan.
We recently stopped enrollment in a Phase 1 study being conducted in the U.S. This was a randomized, single-site open-label study comparing the time action profiles of Nasulin versus insulin Lispro, both in combination with insulin glargine in patients with Type 1 diabetes mellitus. This study was intended to enroll up to 24 patients and as of April 22, 2008, had enrolled 8 patients. Enrollment in this clinical trial had been slow and intermittent. As a result of the slow enrollment the Company completed an interim

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analysis and determined that it would not be feasible to continue enrolling in the trial. The Company believes the slow enrollment was due to the stringent inclusion criteria of the trial and was not product related. Final analysis on the completed subjects is ongoing.
Planned Clinical Trials
We expect to initiate a single-site Phase 1 study during the second quarter of 2009. This study will be in healthy volunteers to determine the pharmacokinetic parameters of various formulation strengths of Nasulin. This study is expected to enroll up to 24 patients and to be completed during the third quarter of 2009.
Following the completion of the ongoing Phase 2a study described above, we expect to initiate a Phase 2b study to assess the safety and efficacy of Nasulin in patients with Type 2 diabetes. In this trial, which will randomize 220 patients, we will measure the patients' change in HbA1c, or average glucose control over the previous three to four months, after initiating Nasulin into their treatment regiment. This trial is expected to be completed in mid-2011. Upon completion of this trial we expect to request an end of Phase 2 meeting with the U.S. Food and Drug Administration, which we expect to be held in late-2011.
RESULTS OF OPERATIONS:
The following is a discussion of the results of our operations for the three months ended March 31, 2009 and 2008. Included in the financial disclosures for the three months ended March 31, 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 during the three months ended March 31, 2008.
For the three months ended March 31, 2009 and 2008:

Three Months Ended March 31, Increase (Decrease) (unaudited, in thousands) 2009 2008 $ % Royalties and other revenue $ 4,011 $ 3,450 $ 561 16 % Operating expenses: General and administrative 1,771 1,105 666 60 % Research and development 2,599 1,896 703 37 % Separation costs - 937 (937 ) (100 )% Depreciation and amortization 166 172 (6 ) 3 % Total operating expenses: 4,536 4,110 426 10 % Loss from operations (525 ) (660 ) 135 20 % Other, net 57 146 (89 ) (61 )% Net loss $ (468 ) $ (514 ) $ 46 9 %

Royalties and other revenues increased 16% to $4.0 million for the three months ended March 31, 2009 from $3.5 million for the three months ended March 31, 2008, primarily due to increased royalties earned on sales of Testim. This growth is due to continued increases in prescriptions for Testim and to its increased market share of the testosterone replacement gel market. Royalty income is subject to several risks, including potential competition from generic products. See Liquidity and Capital Resources - Liquidity Risk for further discussion.
General and administrative expenses increased 60% to $1.8 million for the three months ended March 31, 2009 from $1.1 million for the three months ended March 31, 2008, primarily due a $341,000 increase in legal costs, increased non-cash share based compensation expense of $164,000 and a $123,000 increase in consulting and professional services compared to the same period of the prior year. The legal costs relate to our patent infringement suit against Upsher-Smith Laboratories described in Commitments, contingencies and concentrations in the accompanying Notes to the Unaudited Condensed Consolidated and Combined Financial Statements.
Research and development expenses increased 37% to $2.6 million for the three months ended March 31, 2009, from $1.9 million for the three months ended March 31, 2008 primarily due to increased clinical trial expenses related to the ongoing Nasulin clinical trials. Although cost estimates and timing of our trials are subject to change and fluctuation from quarter to quarter, we expect research and development expenses for 2009 to range between $15.0 million and $18.0 million.

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Operating expenses for the three months ended March 31, 2008 include $937,000 in separation costs. We have not incurred any separation costs subsequent to our spin-off from Bentley in June 2008.