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.

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

Recent Developments

Skelaxin®

In January 2009, the U.S. District Court for the Eastern District of New York issued an Order ruling invalid two patents relating to Skelaxin®, our branded muscle relaxant. In June 2009, the Court entered judgment against us. We have appealed the judgment and plan to 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. For additional information regarding Skelaxin® litigation, please see Note 10, "Commitments and Contingencies," in Part 1, Item 1, "Financial Statements."

Remoxy®

In early July 2009, we met with the US Food and Drug Administration ("FDA") to discuss the Complete Response Letter, received by us in December 2008, regarding the New Drug Application ("NDA") for Remoxy®. The outcome of this meeting provided us with a clearer path forward to resubmit the Remoxy® NDA and to address all FDA comments in the Complete Response Letter. The Company believes the timing of the resubmission will be determined principally by the generation of six-month stability data. The Company is not required by the FDA to conduct clinical trials in order to provide additional safety or efficacy data in patients with moderate to severe chronic pain. As part of the resubmission plan, and in order to strengthen the NDA, we will conduct a likeability study and a pharmacokinetic trial in volunteers. We anticipate the resubmission of the NDA could occur by the middle of 2010.

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

In early July 2009, the FDA issued a Complete Response Letter regarding the NDA for Acurox® Tablets. The Complete Response Letter raises issues regarding the potential abuse deterrent benefits of Acurox®. We are currently evaluating the FDA's Complete Response Letter, and at this stage believe we can respond to the issues raised without conducting any additional studies. We plan to meet with the FDA late in the third quarter of 2009 following submission of our response.

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 result 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.

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 regarding CorVuetm was held on July 28, 2009. As a result of the advisory committee meeting, we plan to supplement the original NDA for CorVuetm with additional information. The Prescription Drug User Fee Act ("PDUFA") date for the original CorVuetm NDA is October 18, 2009.

II.  RESULTS OF OPERATIONS



Three and Six Months Ended June 30, 2009 and 2008

The following table summarizes total revenues and cost of revenues by operating
segment, excluding intercompany transactions:


                                                   For the Three Months            For the Six Months
                                                      Ended June 30,                 Ended June 30,
                                                   2009            2008           2009           2008
                                                      (In thousands)                 (In thousands)

Total Revenues
Branded prescription pharmaceuticals            $   275,110      $ 315,715      $ 552,814      $ 685,087
Animal Health                                        82,824              -        162,659              -
Meridian Auto-Injector                               72,091         55,260        128,698         98,172
Royalties                                            14,709         23,678         29,467         42,801
Contract manufacturing                                  250            103            459            416
Other                                                     4          2,095            (52 )        2,408

Total revenues                                  $   444,988      $ 396,851      $ 874,045      $ 828,884

Cost of Revenues, exclusive of depreciation,
amortization and impairments
Branded prescription pharmaceuticals            $    70,891      $  78,709      $ 136,818      $ 151,078
Animal Health                                        56,484              -        117,102              -
Meridian Auto-Injector                               26,805         20,507         49,315         37,114
Royalties                                             1,809          2,886          3,625          5,204
Contract manufacturing                                   81             76            121            238
Other                                                    23              7             51             12

Total cost of revenues                          $   156,093      $ 102,185      $ 307,032      $ 193,646

The following table summarizes our deductions from gross sales:

For the Three Months For the Six Months Ended June 30, Ended June 30, 2009 2008 2009 2008

Gross Sales $ 522,833 $ 474,958 $ 1,029,877 $ 1,024,377 Commercial Rebates 14,386 15,332 29,845 57,008 Medicare Part D Rebates 3,099 5,433 5,638 21,630 Medicaid Rebates 11,400 9,042 23,023 21,306 Chargebacks 26,704 25,574 54,880 45,786 Returns 5,345 3,975 8,228 8,425 Trade Discounts/Other 16,911 18,751 34,218 41,338

Gross sales increased in the second quarter of 2009 compared to the second quarter of 2008 and in the first six months of 2009 compared to the first six months of 2008, primarily due to additional sales from the acquisition of Alpharma at the end of December 2008 and an increase in sales of the Meridian Auto-Injector segment. Gross sales of several key branded prescription pharmaceuticals products decreased due to market competition as discussed below.

Based on inventory data provided to us by our customers, we believe that wholesale inventory levels of our key products, Skelaxin®, Thrombin-JMI®, Flector® Patch, Avinza®, and Levoxyl®, are at or below normalized levels as of June 30, 2009. We estimate that wholesale and retail inventories of our products as of June 30, 2009 represent gross sales of approximately $115.0 million to $125.0 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

 Current provision related to sales made in current period      31,219        36,297
 Current provision related to sales made in prior periods       (2,334 )      (6,490 )
 Alpharma acquisition                                              885             -
 Rebates paid                                                  (35,474 )     (55,692 )

Balance at June 30, net of prepaid amounts $ 49,336 $ 25,893

Rebates include commercial, 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 significantly decreased in the first and second quarters of 2008 and 2009. The decrease in utilization of Altace® by rebate-eligible customers has, in turn, 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.

Our calculation for Medicaid, Medicare and commercial rebate reserves are based on estimates of utilization by rebate-eligible customers, estimates of the level of inventory of our products in the distribution channel that remain potentially subject to those rebates and the terms of our rebate obligations. During the first quarter of 2008, we estimated the effect that the initial generic substitute would have on Altace® utilization by rebate-eligible customers. Actual Altace® rebates for the first quarter were lower than originally anticipated, resulting in a change in estimate during the second quarter of 2008. This change in estimate resulted in a decrease in rebate expense of approximately $5.0 million and a corresponding increase in Altace® net sales in the second quarter of 2008 and is included in the "current provision related to sales made in prior periods" in the table above. As a result of this increase in net sales, the co-promotion expense related to net sales of Altace® in the second quarter of 2008 increased by approximately $1.0 million. Accordingly, the net effect of the change in estimate on second quarter 2008 operating income was an increase of approximately $4.0 million fully offsetting the effect of the estimate in the first quarter of 2008.

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

                  Current provision               5,345        3,975
                  Actual returns                 (6,062 )     (6,845 )

                  Ending balance at June 30    $ 30,991     $ 30,305

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

                 Current provision               26,704        25,574
                 Actual chargebacks             (27,958 )     (25,286 )

                 Ending balance at June 30    $   9,643     $  10,540

Branded Prescription Pharmaceuticals Segment


                                For the Three Months                 Change                  For the Six Months                 Change
                                   Ended June 30,                2009 vs. 2008                 Ended June 30,                2009 vs. 2008
                                2009            2008             $             %            2009           2008             $              %
                                   (In thousands)                                              (In thousands)

Branded Prescription
Pharmaceutical revenue:
Skelaxin®                    $   102,178      $ 107,221      $  (5,043 )       (4.7 )%    $ 202,777      $ 223,105      $  (20,328 )       (9.1 )%
Thrombin-JMI®                     48,562         63,621        (15,059 )      (23.7 )        95,901        130,772         (34,871 )      (26.7 )
Flector® Patch                    38,621              -         38,621        100.0          55,397              -          55,397        100.0
Avinza®                           28,892         34,990         (6,098 )      (17.4 )        67,872         67,013             859          1.3
Levoxyl®                          15,280         20,196         (4,916 )      (24.3 )        34,852         35,854          (1,002 )       (2.8 )
Altace®                            8,059         44,447        (36,388 )      (81.9 )        17,870        124,258        (106,388 )      (85.6 )
Other                             33,518         45,240        (11,722 )      (25.9 )        78,145        104,085         (25,940 )      (24.9 )

Total revenue                $   275,110      $ 315,715      $ (40,605 )      (12.9 )%    $ 552,814      $ 685,087      $ (132,273 )      (19.3 )%

Cost of revenues,
exclusive of depreciation,
amortization and
impairments                  $    70,891      $  78,709      $  (7,818 )       (9.9 )%    $ 136,818      $ 151,078      $  (14,260 )       (9.4 )%

Sales of Key Products

Skelaxin®

In January 2009, the U.S. District Court for the Eastern District of New York issued an Order ruling invalid two patents related to Skelaxin®. In June 2009, the Court entered judgment against King. We have appealed the judgment and plan 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.

Net sales of Skelaxin® decreased in the second quarter and first six months of 2009 from the second quarter and first six months of 2008 primarily due to a decrease in prescriptions, partially offset by a price increase taken in the fourth quarter of 2008 and the second quarter of 2009. Due to a decrease in promotional efforts, total prescriptions for Skelaxin® decreased approximately 18.2% and 16.8% in the second quarter and first six months of 2009, respectively, from the second quarter and first six months of 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.

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."

Thrombin-JMI®

Net sales of Thrombin-JMI® decreased in the second quarter and first six months of 2009 compared to the second quarter and first six months of 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 43.9% and 81.7% in the second quarter and first six months of 2009, respectively, compared to the second quarter and first six months 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. Flector® Patch net sales 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® decreased in the second quarter of 2009 compared to the second quarter 2008 primarily due to a decrease in wholesale inventory levels in the second quarter of 2009 and a decrease in prescriptions, partially offset by a price increase taken in the first quarter of 2009. Net sales of Avinza® in the first six months of 2009 were consistent with the first six months of 2008. Total prescriptions for Avinza® decreased approximately 7.9% and 4.4% in the second quarter and first six months of 2009, respectively, compared to the second quarter and first six months 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 are in the process of finalizing other corrective actions to be taken and 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® decreased in the second quarter of 2009 compared to the second quarter of 2008 primarily due to a decrease in prescriptions, partially offset by price increases taken in the fourth quarter of 2008. Net sales of Levoxyl® decreased in the first six months of 2009 compared to the first six months of 2008 primarily due to decreases in prescriptions, partially offset by a decrease in wholesale inventory levels in 2008 and price increases taken in the fourth quarter of 2008. Total prescriptions for Levoxyl® decreased approximately 12.0% and 13.9% in the second quarter and first six months of 2009, respectively, compared to the second quarter and first six months 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 the second quarter and first six months of 2009 from the second quarter and first six months of 2008 due to competitors entering the market in December 2007 and June 2008 with generic substitutes for Altace®. Total prescriptions for Altace® decreased approximately 82.7%

and 86.8% in the second quarter and first six months of 2009, respectively, from the second quarter and first six months of 2008 according to IMS monthly . . .