• Advancing the development of A0001 drug candidate. Through the planned Phase Ib and IIa trials, we are seeking to establish proof of concept with respect to both safety and efficacy.

• Monetizing the value of our proven drug delivery technologies and drug formulation expertise by executing additional deals. We are seeking to enter into at least two new collaborations in 2009. We believe that, with two agreements, this aspect of our business can operate on a breakeven basis, fund a portion of our overhead and provide us with a financial stake in products, should they advance in development and commercialization.

• Managing overhead and other costs to ensure that our infrastructure is sized appropriately to our priorities. In the three month period ended March 31, 2009, we continued to reduce expenses and closely managed our cash expenditures, including staff reductions implemented in January 2009.

In January 2009, we implemented staff reductions of approximately 18% of our workforce as part of our efforts to aggressively manage our overhead cost structure. The terms of the severance arrangements we entered into with terminated employees include severance pay and continuation of certain benefits including medical insurance over the respective severance periods. In connection with these severance arrangements, we recorded a severance charge in our statement of operations for the first quarter of 2009 of $550,000, of which $355,000 was unpaid as of March 31, 2009 but will be paid over the remainder of 2009. Of such severance charge, $464,000 and $86,000 were recorded as selling, general and administrative expense, and research and development expense, respectively. In addition, as a result of these terminations, in the first quarter of 2009, we recorded a non-cash credit of $885,000 under SFAS No. 123R associated with the forfeiture of stock options held by these former employees. Of such amount, $844,000 and $41,000 were recorded as credits to selling, general and administrative expense, and research and development expense, respectively.
Products
Opana ER. Opana ER is an oral extended release opioid analgesic, which we developed with Endo, using our proprietary TIMERx® technology. In June 2006, the FDA approved for marketing Opana ER, for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid treatment for an extended period of time. Under the terms of our collaboration with Endo, Endo launched Opana ER in the United States in July 2006 in 5 mg, 10 mg, 20 mg and 40 mg tablets, and in March 2008 in 7.5 mg, 15 mg and 30 mg tablets.
Under the terms of our collaboration with Endo, Endo pays us royalties based on U.S. net sales of Opana ER. No payments were due to us for the first $41 million of royalties otherwise payable to us beginning from the time of the product launch in July 2006, a period we refer to as the royalty holiday. In the third quarter of 2008, the royalty holiday ended and we began earning royalties from Endo on sales of Opana ER. Endo has the right under our agreement to recoup the $28 million in development costs that Endo funded on our behalf prior to the approval of Opana ER, through a temporary 50% reduction in royalties. For the three month period ended March 31, 2009, we recognized $4.4 million in royalties from Endo on sales of Opana ER. This royalty amount reflects this temporary reduction. As of March 31, 2009, $9.4 million of the $28 million has been recouped by Endo.
In March 2009, we and Endo entered into a Third Amendment to the Amended and Restated Strategic Alliance Agreement with respect to Opana ER, effective January 1, 2009. Under the terms of this amendment, Endo agreed to directly reimburse us for costs and expenses incurred by us in connection with patent applications and patent maintenance costs related to Opana ER. If any of such costs and expenses are not reimbursed to us by Endo, we may bill Endo for these costs and expenses through adjustments to the pricing of TIMERx material that we supply to Endo for use in Opana ER. In connection with the amendment, Endo reimbursed us for such costs and expenses incurred prior to December 31, 2008, which had been capitalized as patent assets in the amount of $206,000. Such payment was received in April 2009. We credited such reimbursement to our patent assets. Such costs incurred by us subsequent to December 31, 2008 were not significant and are expected to be reimbursed to us by Endo. In July 2008, we signed the Second Amendment with Endo, a similar agreement, related to patent enforcement litigation costs.
Opana ER is not approved for marketing outside the United States. We are currently seeking collaborators to develop and commercialize Opana ER in various territories outside the United States. Under the terms of our agreement with Endo, any fees, royalties, payments or other revenues received by the parties in connection with any collaborator outside the United States will be divided equally between Endo and us. A description of our agreement with Endo is included under the caption "Collaborative and Licensing Agreements" in "Part I. Item 1- Notes to Condensed Financial Statements".

IMPAX Laboratories, Inc., or IMPAX, Actavis South Atlantic LLC, or Actavis, and Sandoz, Inc., or Sandoz, have each filed abbreviated new drug applications, or ANDA's, that, together with their respective amendments, cover all seven strengths of Opana ER. Barr Laboratories, Inc., or Barr, has also filed an ANDA that covers the Opana ER 5 mg, 10 mg, 20 mg and 40 mg strengths. These ANDA filings each contained paragraph IV certifications under 21 U.S.C.
Section 355(j). We and Endo have filed patent infringement lawsuits against each of IMPAX , Actavis, Sandoz and Barr in connection with their respective ANDA's.
We intend to pursue all available legal and regulatory avenues to defend Opana ER. We believe that we are entitled to a 30-month stay under the Hatch Waxman Act against IMPAX's ANDA, Actavis' ANDA, Sandoz's ANDA and Barr's ANDA. IMPAX has announced that it is seeking to reinstate an earlier filing date of its ANDA covering Opana ER 5mg, 10 mg, 20 mg and 40 mg. If this occurs, or if we and Endo are unsuccessful in these legal proceedings, Opana ER could be subject to generic competition earlier than the end of the 30-month stay.
On February 20, 2009, we and Endo settled all of the Actavis litigation. Both sides agreed to dismiss their respective claims and counterclaims with prejudice. Under the terms of the settlement, Actavis agreed not to challenge the validity or enforceability of our four Orange Book-listed patents. We and Endo agreed to grant Actavis a license under US Patent No. 5,958,456 and a covenant not to sue for its generic formulation of Opana ER under our four Orange Book-listed patents. The license and covenant not to sue will take effect on July 15, 2011, and earlier under certain circumstances.
The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.
A description of the legal proceedings related to Opana ER and the settlement with Actavis are included in "Part II. Item 1 - Legal Proceedings." A0001. A0001 is a coenzyme Q analog that we are developing under our collaboration and licensing agreement with Edison. Coenzyme Q is a molecule intrinsic to mitochondria and its production of energy in the body. We are developing A0001 for the treatment of inherited mitochondrial respiratory chain diseases. We believe that impairment of mitochondrial function is a significant factor in a number of inherited mitochondrial respiratory chain diseases. As such, we believe that enhancing mitochondrial function may provide substantial clinical benefit to patients suffering from mitochondrial respiratory chain disease. A0001 has shown strong biological activity in cell assays developed by Edison to test the ability of the class to rescue cells from death caused by inherited mitochondrial diseases.
In May 2008, we submitted an Investigational New Drug application, or IND, for A0001 for the treatment of symptoms associated with inherited mitochondrial respiratory chain diseases. In July 2008, we initiated a Phase Ia placebo-controlled, single ascending dose trial designed to evaluate the safety and tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data. A0001 was well tolerated by all subjects across all dose groups and there were no drug-related serious adverse events. In February 2009, we initiated a Phase Ib multiple ascending dose clinical study in healthy subjects. The study is a single-blind, placebo-controlled, multiple ascending dose clinical trial in healthy subjects, designed to assess the safety, tolerability, and pharmacokinetics of A0001 following repeat dosing in healthy male and female subjects. We plan to enroll a total of approximately 30 healthy subjects in the trial. We expect that results from this study will be available in the second quarter of 2009. If A0001 demonstrates an acceptable safety profile and tolerability in this Phase Ib study, we plan to commence a Phase IIa trial in patients with inherited mitochondrial respiratory chain diseases in the second half of 2009. We are currently working on the study design for the Phase IIa program. In parallel with the Phase Ib trial, we have initiated long-term animal toxicology studies to support the clinical program.
Under the terms of the Edison agreement, we have exclusive, worldwide rights to develop and commercialize A0001 and up to one additional compound of Edison's, which we may exercise our option to select, for all indications, subject to the terms and conditions in the agreement. Edison has not yet presented us with a compound for selection under the agreement.

A description of the Edison agreement is included under the caption "Collaborative and Licensing Agreements" in "Part I. Item 1. - Notes to Condensed Financial Statements".
Nifedipine XL. Under a collaboration agreement with Mylan Pharmaceuticals Inc., or Mylan, we developed Nifedipine XL, a generic version of Procardia XL based on our TIMERx technology that was approved by the FDA in December 1999. In March 2000, Mylan signed a supply and distribution agreement with Pfizer Inc., or Pfizer, to market Pfizer's generic versions of all three strengths (30 mg, 60 mg, and 90 mg) of Procardia XL. In connection with that agreement, Mylan decided not to market Nifedipine XL, and as a result, Mylan entered into a letter agreement with us and agreed to pay us a royalty on all future net sales of the 30 mg strength of Pfizer's generic Procardia XL. The term of the letter agreement continues until such time as Mylan permanently ceases to market Pfizer's generic version of Procardia XL 30 mg. Net Loss and Profitability
We have incurred net losses since 1994 including net losses of $26.7 million, $34.5 million and $31.3 million during 2008, 2007 and 2006, respectively. For the three month period ended March 31, 2009, our net loss was $962,000. As of March 31, 2009, our accumulated deficit was approximately $235 million. We currently generate revenues primarily from royalties received from Endo on Endo's net sales of Opana ER and from Mylan on Mylan's net sales of Pfizer's generic version of Procardia XL 30 mg, revenues from our drug delivery technology collaborations and, to a lesser extent, from bulk sales of TIMERx to Endo for use in Opana ER. We anticipate that, based upon our current operating plan, which contemplates a significant reduction in our operating expenses as compared with 2008 levels, and includes expected royalties from third parties, we will achieve quarterly profitability in the fourth quarter of 2009. If we do not receive royalties from Endo for Opana ER in such amounts as forecasted and provided to us by Endo, or if we are unable to significantly reduce our operating expenses, we may not be able to achieve quarterly profitability in the fourth quarter of 2009. However, even if we are able to achieve profitability on a quarterly basis, we may not be able to maintain it, or we may not be able to achieve profitability on an annual basis. Our future profitability will depend on numerous factors, including:
• the commercial success of Opana ER, and the amount of royalties from Endo's sales of Opana ER, which may be adversely affected by any potential generic competition;

• our ability to successfully defend our intellectual property protecting our products;

• our ability to access funding support for our development programs from third party collaborators;

• the level of our investment in research and development activities, including the timing and costs of conducting clinical trials of our products;

• the level of our general and administrative expenses;

• the successful development and commercialization of product candidates in our portfolio and products being developed for collaborations; and

• royalties from Mylan's sales of Pfizer's generic version of Procardia XL 30 mg.

Our results of operations may fluctuate from quarter to quarter depending on the amount and timing of royalties on Endo's sales of Opana ER, Mylan's sales of Pfizer's generic version of Procardia XL 30 mg, the volume and timing of shipments of formulated bulk TIMERx material, including to Endo, the variations in payments under our collaborative agreements, and the amount and timing of our investment in research and development activities. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and

expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the nature of the estimate or assumption is material due to the level of subjectivity and judgment involved, or the susceptibility of such matter to change, and if the impact of the estimate or assumption on our financial condition or performance may be material. We evaluate these estimates and judgments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Areas where significant judgments are made include, but are not limited to: revenue recognition, research and development expenses, deferred taxes-valuation allowance, impairment of long-lived assets and share-based compensation. For a more detailed explanation of the judgments we make in these areas, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.
Recent Accounting Pronouncements
A detailed description of recent accounting pronouncements is included under the caption "Recent Accounting Pronouncements" in "Part I. Item 1. - Notes to Condensed Financial Statements".
Results of Operations for the Three Month Periods Ended March 31, 2009 and 2008

Revenues

                                                        Three months                             Three months
                                                            ended             Percentage             ended
                                                          March 31,            increase            March 31,
                                                            2009              (decrease)             2008
                                                                  (In thousands, except percentages)
Royalties                                               $       4,722               1,019 %      $         422
Product sales                                                     180                 (21 )                228
Collaborative licensing and development revenue                   368                 313                   89

Total revenues                                          $       5,270                 613 %      $         739

Royalties increased in the three month period ended March 31, 2009, as compared to the three month period ended March 31, 2008, reflecting that we did not begin to recognize royalties from Endo on its net sales of Opana ER until the third quarter of 2008, following completion of the royalty holiday. For the three month period ended March 31, 2009, we recognized $4.4 million in royalties from Endo. Partially offsetting these increased revenues were decreased royalties from Mylan as a result of a decrease in Mylan's net sales of Pfizer's generic version of Procardia XL 30 mg.
Our product sales in the three month periods ended March 31, 2009 and 2008 consisted of sales of formulated TIMERx material to Endo for use in Opana ER. Under our agreement with Endo, the selling price of formulated TIMERx material is determined periodically based on our approximate costs, which may include patent enforcement litigation costs and patent application and maintenance costs related to Opana ER, if not otherwise reimbursed to us by Endo. Product sales decreased in the 2009 three month period in comparison with the 2008 three month period due to a lower selling price of TIMERx material to Endo in the 2009 three month period, which resulted following the Second Amendment and the Third Amendment to our agreement with Endo. In connection with the Second Amendment to our agreement that we entered into with Endo in July 2008, the selling price of TIMERx material to Endo was reduced for the second half of 2008 to exclude the reimbursement of patent enforcement litigation costs we incurred related to Opana ER, which Endo agreed to separately reimburse us for. In addition, in connection with the Third Amendment to our agreement that we entered into with Endo in March 2009 as discussed above, the selling price of TIMERx material to Endo was further reduced effective January 1, 2009 and for the remainder of 2009, to exclude the reimbursement of patent application and maintenance costs we incurred related to Opana ER, which Endo agreed to separately reimburse us for. Partially offsetting the decreased revenue resulting from the lower selling prices was an increase in the volume of TIMERx material sold to Endo in the 2009 three month period as compared with the 2008 three month period. We believe the level of product sales for each of the remaining quarters of 2009 will generally be lower than the level of product sales for the three month period ended March 31, 2009.
Revenue from collaborative licensing and development consists of reimbursements of our expenses under our drug delivery technology collaborations and the recognition of revenue relating to upfront payments from these

collaborations. The increase in revenue for the three month period ended March 31, 2009, as compared to the three month period ended March 31, 2008 was due to revenues earned on the increased level of development activity associated with the three collaboration agreements in place during the 2009 three month period as compared to one such agreement in place during the 2008 three month period.

Cost of Revenues

                                                               Three months           Percentage           Three months
                                                                  ended                increase               ended
                                                              March 31, 2009          (decrease)          March 31, 2008
                                                                          (In thousands, except percentages)
Cost of royalties                                            $            113                 438 %      $             21
Cost of product sales                                                     181                 135                      77
Cost of collaborative licensing and development revenue                   360                 407                      71

Total cost of revenues                                       $            654                 287 %      $            169

Cost of royalties consists of the amortization of deferred royalty termination costs associated with royalty termination agreements, and the amortization of certain patent costs associated with our TIMERx technology. The cost of royalties increased for the three month period ended March 31, 2009 as compared to the three month period ended March 31, 2008 primarily as a result of increased amortization of the deferred royalty termination costs as a result of increased royalty revenues recognized in the 2009 three month period.
Cost of product sales consists of the costs related to sales of formulated TIMERx material, primarily to Endo. Cost of product sales increased for the three month period ended March 31, 2009 as compared to the three month period ended March 31, 2008 primarily as a result of an increase in the volume of TIMERx material sold to Endo in the 2009 three month period for use in Opana ER.
Cost of collaborative licensing and development revenue consists of our expenses under our drug delivery technology collaborations, which are generally reimbursed by our collaborators, and includes allocations of internal research and development, or R&D, costs, including compensation and overhead costs associated with formulation activities under these collaborations, as well as contract and other outside service fees. These costs increased for the three month period ended March 31, 2009 as compared to the three month period ended March 31, 2008 due to the increased level of development activity under our three collaboration agreements in place during the 2009 three month period as compared to one such agreement in place during the 2008 three month period.

Selling, General and Administrative Expenses

                                                          Three months           Percentage            Three months
                                                             ended                increase                ended
                                                         March 31, 2009          (decrease)           March 31, 2008
                                                                     (In thousands, except percentages)
Selling, general and administrative expenses            $          2,321                 (46 )%      $          4,324

Selling, general and administrative, or SG&A, expenses for the three month period ended March 31, 2009 decreased as compared to the three month period ended March 31, 2008 primarily due to lower share-based compensation expense, largely due to a credit of $844,000 recorded in the 2009 three month period, which resulted from the forfeiture of stock options held by former employees in connection with our January 2009 staff reductions discussed above. The decrease also reflects the inclusion in SG&A expense in the 2008 three month period of the impairment charge we recorded in the amount of $1.0 million to establish a reserve against the collectability of the loan that we made to Edison in February 2008 under the Edison agreement. These decreases were partially offset by the severance charge we recorded in the 2009 three month period, as discussed above, and additional costs associated with the proxy contest in which we are involved.
As a result of the staff reductions implemented in January 2009, as discussed . . .