The following discussion contains certain forward-looking statements that reflect management's current views of future events and operations. This discussion should be read in conjunction with the following: (a) "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008, which are supplemented by the discussion which follows; (b) our audited consolidated financial statements and related notes which are included in our Annual Report on Form 10-K for the year ended December 31, 2008; and (c) our unaudited consolidated financial statements and related notes which are included in this report on Form 10-Q. Please see the sections entitled "Risk Factors" and "A Warning About Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

I.  OVERVIEW



Our Business

We are a vertically integrated pharmaceutical company that performs basic
research and develops, manufactures, markets and sells branded prescription
pharmaceutical products and animal health products. By "vertically integrated,"
we mean that we have the following capabilities:


            •   research and development        •   distribution
            •   manufacturing                   •   sales and marketing
            •   packaging                       •   business development
            •   quality control and assurance   •   regulatory management

Our branded prescription pharmaceuticals include neuroscience products (primarily pain medicines), hospital products, and legacy brands. The animal health business is focused on medicated feed additives ("MFAs") and water-soluble therapeutics primarily for poultry, cattle and swine.

Our corporate strategy is focused on specialty markets, particularly specialty-driven branded prescription pharmaceutical markets. We believe our target markets have significant potential and our organization is aligned accordingly. Our growth in specialty markets is achieved through organic growth and acquisitions.

Under our corporate strategy we work to achieve organic growth by maximizing the potential of our currently marketed products through sales and marketing and prudent product life-cycle management. By "product life-cycle management," we mean the extension of the economic life of a product, including seeking and gaining necessary related governmental approvals, by such means as:

• securing from the U.S. Food and Drug Administration, which we refer to as the "FDA," additional approved uses ("indications") for our products;

• developing and producing different strengths;

• producing different package sizes;

• developing new dosage forms; and

• developing new product formulations.

Our strategy also focuses on growth through the acquisition of novel branded prescription pharmaceutical products in various stages of development and the acquisition of prescription pharmaceutical technologies, particularly those products and technologies that we believe have significant market potential and complement the commercial footprint we have established in the neuroscience and hospital markets. Using our internal resources and a disciplined business development process, we strive to be a leader in developing and commercializing innovative, clinically-differentiated therapies and technologies in these target, specialty-driven markets. We may also seek company acquisitions that add products or products in development, technologies or sales and marketing capabilities to our existing platforms or that otherwise complement our operations. We also work to achieve organic growth by continuing to develop investigational drugs, as we have a commitment to research and development and advancing the products and technologies in our development pipeline.

We market our branded prescription pharmaceutical products primarily through a dedicated sales force to general/family practitioners, internal medicine physicians, neurologists, pain specialists, surgeons and hospitals across the United States and in Puerto Rico. Branded prescription pharmaceutical products are innovative products sold under a brand name that have, or previously had, some degree of market exclusivity. When we refer to "branded prescription pharmaceutical products," we mean branded prescription pharmaceutical products that are intended for humans.

Our animal health products are marketed through a staff of trained sales and technical service and marketing employees, many of whom are veterinarians and nutritionists. We have sales offices in the U.S., Europe, Canada, Mexico, South America and Asia. Elsewhere, our animal health products are sold primarily through the use of distributors and other third-party sales companies.

Recent Developments

Skelaxin®

On January 20, 2009, the U.S. District Court for the Eastern District of New York issued an Order ruling invalid United States Patent Nos. 6,407,128 and 6,683,102, two patents relating to Skelaxin®, our branded muscle relaxant. The Order was issued without the benefit of a hearing in response to defendant Eon Labs' motion for summary judgment in ongoing Paragraph IV litigation. Upon the entry of an appropriate judgment, we plan to appeal and vigorously defend our interests. Invalidation of these two patents would likely lead to generic versions of Skelaxin® entering the market sooner than previously anticipated and would likely cause our net sales of Skelaxin® to decline significantly.

Following the decision of the District Court, our senior management team conducted an extensive examination of our company and developed a restructuring initiative designed to partially offset the potential decline in Skelaxin® net sales in the event that a generic competitor enters the market. Pursuant to this initiative, we reduced our workforce by approximately 520 positions, including approximately 380 field sales positions. This reduction was substantially complete as of March 31, 2009.

Remoxy®

In late March 2009, we exercised rights under our Collaboration Agreement with Pain Therapeutics, Inc. and assumed sole control and responsibility for the development of Remoxy®. This includes all communications with the FDA regarding Remoxy® and ownership of the Remoxy® New Drug Application ("NDA").

The Remoxy® NDA was submitted to the FDA in June 2008. In December 2008, Pain Therapeutics received a Complete Response Letter from the FDA with respect to the NDA for Remoxy®, requiring additional non-clinical information to support approval. As a result of assuming sole control and responsibility for the development of Remoxy®, we have set a new date to meet with the FDA in the first half of July of this year to discuss our response to the Complete Response Letter. Following this meeting, we expect to have a better understanding of the additional steps and the time required to obtain approval.

Remoxy® is a unique long-acting formulation of oral oxycodone with a proposed indication for the management of moderate to severe pain when a continuous, around-the-clock, opioid analgesic is needed for an extended period of time. This formulation uses the Oradurtm platform technology which provides a unique physical barrier that is designed to provide controlled pain relief and resist certain common methods used to extract the opioid more rapidly than intended as can occur with products currently on the market. Common methods used to cause a rapid extraction of an opioid include crushing, chewing and dissolution in alcohol. These methods are typically used to cause failure of the controlled release dosage form, resulting in "dose dumping" of oxycodone, or the immediate release of the active drug.

Acurox® Tablets

An NDA for Acurox® (oxycodone HCl/niacin) Tablets was submitted to the FDA in December 2008. The Acurox® NDA was accepted and granted priority review by the FDA, with a Prescription Drug User Fee Act (PDUFA) date of June 30, 2009.

Acurox® Tablets, a patented, orally administered, immediate release tablet containing oxycodone HCl as its sole active analgesic ingredient, has a proposed indication for the relief of moderate to severe pain. Acurox® uses the patented Aversion® Technology of Acura Pharmaceuticals, Inc. (Acura), which is designed to deter misuse and abuse by intentional swallowing of excess quantities of tablets, intravenous injection of dissolved tablets and nasal snorting of crushed tablets. Attempts to extract oxycodone from an Acurox® Tablet by dissolving it in liquid results in the formation of a viscous gel which is intended to sequester the opioid and deter I.V. injection. Crushing an Acurox® Tablet for the purposes of nasal snorting releases an ingredient that is intended to cause nasal irritation and thereby discourage this method of misuse and abuse. Swallowing excessive numbers of Acurox® Tablets releases niacin in quantities that are intended to cause unpleasant and undesirable side effects that may potentially deter this method of misuse and abuse.

Class-Wide Risk Evaluation and Mitigation Strategy

On February 6, 2009, the FDA sent a letter to manufacturers of previously approved, currently marketed long-acting opioid drug products, including us as the sponsor of Avinza®, indicating that this class of drugs will be required to have a risk evaluation and mitigation strategy (REMS). The FDA has determined that a REMS is required to ensure that the benefits outweigh the risks of:
1) use of certain opioid products in non-opioid tolerant individuals; 2) abuse; and 3) overdose, both accidental and intentional. The agency announced its intention to consult all relevant stakeholders, including manufacturers, pharmacies, healthcare practitioners, patient groups and others in developing this class-wide REMS for long-acting opioids.

On March 3, 2009, the FDA convened a meeting of the companies that market the affected opioid drugs and requested those companies to work together to develop a class-wide REMS. Accordingly, these companies have begun that process and are diligently working towards a common goal. The FDA has also announced a public meeting scheduled for May 27 and 28, 2009, to allow affected sponsors and other interested persons to provide input on the development of a class-wide REMS.

Embedatm

An NDA for Embedatm was submitted to the FDA in June 2008. Utilizing proprietary technology, Embedatm, which contains long-acting morphine pellets, each with a sequestered core of naltrexone, an opioid antagonist, has a proposed indication for the management of moderate to severe pain when a continuous, around-the-clock opioid analgesic is needed for an extended period of time. The formulation is designed to work such that if taken as directed, the morphine would relieve pain while the sequestered naltrexone would pass through the body with no intended clinical effect. If Embedatm capsules were crushed or chewed, however, the naltrexone would be released, mitigating the euphoric effect that might otherwise be caused by the morphine under these circumstances. We acquired Embedatm on December 29, 2008 as part of our acquisition of Alpharma. In December 2008, the FDA informed us that it is continuing its review of the NDA. We have received feedback from the FDA regarding a REMS for Embedatm and are in discussions with the FDA in what we view as the final step towards approval. However, the specific timing of approval and commercial introduction is uncertain.

CorVuetm (binodenoson) for Injection

In December 2008, we submitted an NDA for CorVuetm to the FDA. CorVuetm is a cardiac pharmacologic stress SPECT (single-photon-emission computed tomographic) imaging agent with a proposed indication for use in patients with, or who are at risk for, coronary artery disease who are unable to perform a cardiac exercise stress test. In the NDA, we are requesting FDA approval of CorVuetm as an adjunct to non-invasive myocardial perfusion imaging tests to detect perfusion abnormalities in patients with known or suspected coronary artery disease. An FDA advisory committee meeting is scheduled for CorVuetm on July 28, 2009 and the PDUFA date is October 18, 2009.

In December 2008, we initiated a Phase II clinical trial program evaluating the efficacy and safety of T-62, our investigational oral drug formulation for the treatment of neuropathic pain. During the second quarter, we stopped dosing patients prior to completion of the trial due to the transient elevation of liver enzymes in some trial participants. We are continuing to monitor trial participants and assess the data obtained from the clinical trial.

Generic Competition

In April 2009, a third party entered the market with a generic substitute for Cytomel®, a tablet indicated in the medical treatment of hypothyroidism. As a result of the entry of generic competition, we expect net sales of Cytomel® to decline in the future. Net sales of Cytomel® were $13.9 million in the first quarter of 2009 and were $51.1 million in the full year of 2008.

II.  RESULTS OF OPERATIONS



Three Months Ended March 31, 2009 and 2008

The following table summarizes total revenues and cost of revenues by operating
segment:


                                                                     For the Three Months
                                                                       Ended March 31,
                                                                     2009            2008
                                                                        (In thousands)

Total Revenues
Branded prescription pharmaceuticals                              $   277,704      $ 369,372
Animal Health                                                          79,835              -
Meridian Auto-Injector                                                 56,607         42,912
Royalties                                                              14,758         19,123
Contract manufacturing                                                    209            313
Other                                                                     (56 )          313

Total revenues                                                    $   429,057      $ 432,033

Cost of Revenues, exclusive of depreciation, amortization and
impairments
Branded prescription pharmaceuticals                              $    65,927      $  72,369
Animal Health                                                          60,618              -
Meridian Auto-Injector                                                 22,510         16,607
Royalties                                                               1,816          2,318
Contract manufacturing                                                     40            162
Other                                                                      28              5

Total cost of revenues                                            $   150,939      $  91,461

The following table summarizes our deductions from gross sales:

For the Three Months Ended March 31, 2009 2008

Gross Sales $ 507,044 $ 549,419 Commercial Rebates 15,459 41,676 Medicare Part D Rebates 2,539 16,197 Medicaid Rebates 11,623 12,264 Chargebacks 28,176 20,212 Returns 2,883 4,450 Trade Discounts/Other 17,307 22,587

Gross sales decreased in 2009 compared to 2008 primarily due to market competition with several key products in the branded prescription pharmaceuticals segment discussed below, partially offset by additional sales due to the acquisition of Alpharma at the end of December 2008, and an increase in sales of the Meridian Auto-Injector segment.

Based on inventory data provided to us by our customers, we believe that wholesale inventory levels of our key products, Skelaxin®, Thrombin-JMI®, Avinza® and Flector® Patch are at or below normalized levels as of March 31, 2009. We estimate that wholesale and retail inventories of our products as of March 31, 2009 represent gross sales of approximately $130.0 million to $140.0 million.

The following tables provide the activity and ending balances for our significant deductions from gross sales.

Accrual for Rebates, including Administrative Fees (in thousands):

                                                               2009          2008

 Balance at January 1, net of prepaid amounts                $  58,129     $  65,301
 Current provision related to sales made in current period      28,512        67,155
 Current provision related to sales made in prior periods        1,109         2,982
 Alpharma acquisition                                            1,772             -
 Rebates paid                                                  (34,482 )     (83,660 )

Balance at March 31, net of prepaid amounts $ 55,040 $ 51,778

Rebates include commercial rebates and Medicaid and Medicare rebates.

A competitor entered the market with a generic substitute for Altace® during December 2007 and additional competitors entered the market in June 2008. As a result of this competition, sales of Altace® and utilization of Altace® by rebate-eligible customers decreased in each quarter of 2008 and the first quarter of 2009. We expect sales of Altace® to continue to decline significantly in the future. The significant decrease in utilization of Altace® by rebate-eligible customers has significantly decreased the "current provision related to sales made in the current period" and "rebates paid" in the table above. For a discussion regarding Altace® net sales, please see "Altace®" within the "Sales of Key Products" section below.

Accrual for Returns (in thousands):


                                                 2009         2008

                  Balance at January 1         $ 33,471     $ 32,860
                  Current provision               2,883        4,450
                  Actual returns                 (4,646 )     (4,135 )

                  Ending balance at March 31   $ 31,708     $ 33,175

Accrual for Chargebacks (in thousands):


                                                2009          2008

                 Balance at January 1         $   9,965     $  11,120
                 Current provision               28,176        20,212
                 Actual chargebacks             (27,244 )     (21,080 )

                 Ending balance at March 31   $  10,897     $  10,252

Branded Prescription Pharmaceuticals Segment


                                                       For the Three Months                 Change
                                                         Ended March 31,                2009 vs. 2008
                                                       2009            2008             $             %
                                                                        (In thousands)

Branded prescription pharmaceuticals revenue:
Skelaxin®                                           $   100,599      $ 115,884      $ (15,285 )      (13.2 )%
Flector® Patch                                           16,776              -         16,776            -
Thrombin-JMI®                                            47,339         67,151        (19,812 )      (29.5 )
Avinza®                                                  38,980         32,023          6,957         21.7
Levoxyl®                                                 19,572         15,658          3,914         25.0
Altace®                                                   9,811         79,811        (70,000 )      (87.7 )
Other                                                    44,627         58,845        (14,218 )      (24.2 )

Total revenue                                       $   277,704      $ 369,372      $ (91,668 )      (24.8 )%

Cost of revenues, exclusive of depreciation,
amortization and impairments                        $    65,927      $  72,369      $  (6,442 )       (8.9 )%

Sales of Key Products

Skelaxin®

On January 20, 2009 the U.S. District Court for the Eastern District of New York, in the case of King Pharmaceuticals, Inc., et al. v. Eon Labs, Inc., Case No. 04-cv-5540 (DGT), issued an Order ruling invalid United States Patent Nos. 6,407,128 and 6,683,102, two patents related to Skelaxin®. The Order was issued without the benefit of a hearing in response to defendant Eon Labs' motion for summary judgment. We plan to appeal, upon the entry of an appropriate judgment, and intend to vigorously defend our interests. The entry of the Order may lead to generic versions of Skelaxin® entering the market sooner than previously anticipated, which would likely cause net sales of Skelaxin® to decline significantly. Also, in January 2008, we entered into an agreement with CorePharma, LLC ("CorePharma") granting CorePharma a license to launch an authorized generic version of Skelaxin® in December 2012, or earlier under certain conditions.

For a discussion regarding the risk of potential generic competition for Skelaxin®, please see Note 10, "Commitments and Contingencies," in Part I, Item 1, "Financial Statements."

Net sales of Skelaxin® decreased in 2009 from 2008 primarily due to a decrease in prescriptions, an increase in wholesale inventory levels in 2008, partially offset by a price increase taken in the fourth quarter of 2008. Due to a decrease in promotional efforts, total prescriptions for Skelaxin® decreased approximately 15.4% in 2009 from 2008 according to IMS America, Ltd. ("IMS") monthly prescription data. As a result of the decrease in promotional efforts we expect net sales of Skelaxin® will continue to decrease during 2009. If generic competition enters the market we would anticipate additional decreases in net sales.

Thrombin-JMI®

Net sales of Thrombin-JMI® decreased in 2009 compared to 2008 primarily due to additional price concessions and the market entry of two competing products which caused a decrease in gross sales. The first competing product entered the market in the fourth quarter of 2007 and another entered the market in the first quarter of 2008. Net sales of Thrombin-JMI® may continue to decrease as a result of competition.

Flector® Patch

Flector® Patch was part of the acquisition of Alpharma at the end of December 2008. Total prescriptions for Flector® Patch increased approximately 158.0% in the first quarter of 2009 compared to the first quarter of 2008 according to IMS monthly prescription data. At the time of acquisition, the wholesale inventory level of Flector® Patch exceeded our normal levels. During the first quarter of 2009, we reduced these inventories to a level consistent with our other promoted products. As a result, net sales of Flector® Patch were lower than prescription demand in the first quarter of 2009. We anticipate that Flector® Patch net sales should more closely reflect prescription demand beginning in the second quarter of 2009. Alpharma began selling the Flector® Patch in January 2008.

Avinza®

Net sales of Avinza® increased in 2009 compared to 2008 primarily due to an increase in wholesale inventory levels in the first quarter of 2009 and a price increase taken in the fourth quarter of 2008. Total prescriptions for Avinza® decreased approximately 0.7% in the first quarter of 2009 compared to the first quarter of 2008 according to IMS monthly prescription data.

On March 24, 2008, we received a warning letter from the United States Food and Drug Administration, Division of Drug Marketing, Advertising, and Communications ("DDMAC") regarding promotional material for Avinza® that was created and submitted to the DDMAC by Ligand Pharmaceuticals (the company from whom we acquired Avinza® in late February 2007). The letter expressed concern with the balance of the described risks and benefits associated with the use of the product and the justification for certain statements made in the promotional material. We discontinued the use of promotional materials created by Ligand prior to receiving the letter and have communicated this to DDMAC. In addition, DDMAC requested support for certain statements included in Avinza® promotional materials which were then in use. We promptly responded to this request and asked for a meeting with DDMAC to discuss this matter.

Our request resulted in a teleconference with DDMAC representatives on January 6, 2009. After this call, we immediately ceased the dissemination of promotional materials for Avinza® that included any statements with which DDMAC took issue in its March 24, 2008 letter. Further, we directed our sales representatives to discontinue the use of such materials and ceased all advertising containing the statements discussed in that letter. We continue to cooperate fully with DDMAC in this matter.

For a discussion regarding the risk of potential generic competition for Avinza®, please see Note 10, "Commitments and Contingencies," in Part I, Item 1, "Financial Statements."

Levoxyl®

Net sales of Levoxyl® increased in 2009 compared to 2008 primarily due to increases in wholesale inventory levels in 2009 and price increases taken in the fourth quarter of 2008, partially offset by a decrease in prescriptions. Total prescriptions for Levoxyl® decreased approximately 22.3% in the first quarter of 2009

compared to the first quarter of 2008 according to IMS monthly prescription data. We anticipate net sales for this product will decline in 2009 due to decreasing prescriptions.

Altace®

Net sales of Altace® decreased significantly in 2009 from 2008 due to a competitor entering the market in December 2007 and additional competitors entering the market in June 2008 with generic substitutes for Altace®. As a result of the entry of generic competition, we expect net sales of Altace® to continue to decline significantly in the future. Total prescriptions for Altace® decreased approximately 89.0% in 2009 from 2008 according to IMS monthly prescription data.

For a discussion regarding the generic competition for Altace®, please see Note 10, "Commitments and Contingencies" in Part I, Item 1, "Financial Statements."

Other

The branded prescription pharmaceutical products included in other branded prescription pharmaceutical products are not promoted through our sales force and prescriptions for many of our products included in this category are . . .