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 under "Risk Factors" in this report; (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" in this report 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. We also manufacture and market acute care medicines that are delivered using an auto-injector. Our Alpharma 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 ("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. ("Alpharma") 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

Embedatm

In August 2009, the U.S. Food and Drug Administration approved Embedatm (morphine sulfate and naltrexone hydrochloride) Extended Release Capsules, a long-acting Schedule II opioid analgesic for the management of moderate to severe pain when a continuous, around-the-clock opioid analgesic is needed for an extended period of time. Embedatm contains pellets of an extended-release oral formulation of morphine sulfate, an opioid receptor agonist, surrounding an inner core of naltrexone hydrochloride, an opioid receptor antagonist. Embedatm is the first FDA-approved long-acting opioid designed to reduce drug liking and euphoria when tampered with by crushing or chewing. However, the clinical significance of the degree of reduction in drug liking and euphoria reported in clinical studies has not yet been established. There is no evidence that the naltrexone in Embedatm reduces the abuse liability of Embedatm. Embedatm became commercially available in late September 2009.

On October 8, 2009, we received a warning letter from the FDA, Division of Drug Marketing, Advertising, and Communications ("DDMAC") regarding certain materials utilized in our recent commercial launch of Embedatm. The letter indicated these materials are false or misleading because they omit and minimize the risks associated with the use of Embedatm, fail to present the limitations to its approved indication, and present misleading claims. We have ceased the dissemination of these materials and have taken steps to conform other materials we currently utilize with Embedatm to the guidance set forth in the warning letter. On October 16, 2009, we responded to the warning letter, providing DDMAC with a list of materials that were discontinued and a comprehensive plan of action to appropriately disseminate corrective messages to those that received the original materials. We continue to cooperate fully with DDMAC in this matter. In addition, we will be meeting with members of the FDA staff to discuss the scope and meaning of certain provisions of the warning letter.

Remoxy®

In early July 2009, we met with the FDA to discuss the Complete Response Letter received by us in December 2008 regarding our 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. We believe the timing of the resubmission will be determined principally by the generation of six-month stability data. We are 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 approximately 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

On June 30, 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®. In early September 2009, we and Acura Pharmaceuticals, Inc. ("Acura") met with the FDA to discuss the Complete Response Letter. The FDA and the Companies agreed to take the NDA to an FDA advisory committee to consider the evidence to support the potential opioid abuse deterrent effects of Acurox® Tablets. While the FDA indicated that no new clinical trials are required at this time, we and Acura plan to initiate an additional clinical study in volunteers to further assess the abuse deterent features of Acurox®. The FDA has not yet set a meeting date for the Advisory Committee's review of the NDA. We expect the meeting to be convened in the first half of 2010.

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 Acura's patented Aversion® Technology, 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. On October 19, 2009, we received a Complete Response Letter from the FDA with respect to the NDA for Corvuetm. We are currently evaluating the FDA's Complete Response Letter. CorVuetm is a cardiac pharmacologic stress agent for use as an adjunct in SPECT (single-photon-emission computed tomographic) cardiac imaging intended for use in patients with or at risk for coronary artery disease who are unable to perform a cardiac exercise stress test.

Ketoprofen in Transfersome® Gel

In September 2007, Alpharma, acquired by us in December 2008, entered into an agreement with IDEA AG ("IDEA"), through which Alpharma obtained the exclusive U.S. license and distribution rights from IDEA to market ketoprofen in Transfersome® gel, a prescription topical NSAID (non-steroidal anti-inflammatory drug). Transfersome® gel is IDEA's proprietary technology platform for delivering drugs to targeted areas through the skin barrier.

Based upon a review of the progress of the licensed product's development and our view of its commercial potential, in August 2009, pursuant to provisions in the agreement, we provided written notice to IDEA of our intention to terminate the agreement. The agreement was terminated in October 2009.

Department of Justice Investigation

As previously disclosed, Alpharma, acquired by us in December 2008, received a subpoena from DOJ in February 2007 in connection with its investigation of alleged improper sales and marketing practices related to the sale of the pain medicine Kadian®. The Company divested Alpharma's Kadian® assets to Actavis LLC simultaneously with the closing of the acquisition of Alpharma.

In September 2009, we reached an agreement in principle with the U.S. Attorney's Office and DOJ which would, if completed, resolve this investigation. We recorded a reserve of $42.5 million in connection with this development in the third quarter of 2009 as an adjustment to the goodwill associated with the purchase of Alpharma. Final agreement is subject to the execution of a definitive settlement agreement approved by our Board of Directors and the DOJ.

II.  RESULTS OF OPERATIONS



Three and Nine Months Ended September 30, 2009 and 2008

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


                                                   Three Months                     Nine Months
                                                Ended September 30,             Ended September 30,
                                                2009           2008            2009             2008
                                                  (In thousands)                   (In thousands)

Total Revenues
Branded prescription pharmaceuticals         $  283,414      $ 301,879      $   836,228      $   986,966
Animal Health                                    95,843              -          258,502                -
Meridian Auto-Injector                           71,841         67,515          200,539          165,687
Royalties                                        11,932         18,456           41,399           61,257
Contract manufacturing                              368            658              827            1,074
Other                                               (49 )          (63 )           (101 )          2,345

Total revenues                               $  463,349      $ 388,445      $ 1,337,394      $ 1,217,329

Cost of Revenues, exclusive of
depreciation, amortization and impairments
Branded prescription pharmaceuticals         $   79,351      $  74,178      $   216,169      $   225,256
Animal Health                                    53,372              -          170,474                -
Meridian Auto-Injector                           28,505         24,705           77,820           61,819
Royalties                                         1,480          2,281            5,105            7,485
Contract manufacturing                              139            299              260              537
Other                                               (50 )            2                1               14

Total cost of revenues                       $  162,797      $ 101,465      $   469,829      $   295,111

The following table summarizes our deductions from gross sales:

                                      Three Months                   Nine Months
                                  Ended September 30,            Ended September 30,
                                   2009          2008           2009            2008
                                                    (In thousands)

      Gross Sales               $  548,854     $ 458,171     $ 1,578,731     $ 1,482,548
      Commercial Rebates            18,484        15,390          48,329          72,398
      Medicare Part D Rebates        3,243         3,830           8,881          25,460
      Medicaid Rebates               8,113         8,045          31,136          29,351
      Chargebacks                   28,155        21,283          83,035          67,069
      Returns                        5,926         2,927          14,154          11,352
      Trade discounts/other         21,584        18,251          55,802          59,589

      Net sales                 $  463,349     $ 388,445     $ 1,337,394     $ 1,217,329

Gross sales increased in the third quarter of 2009 compared to the third quarter of 2008 and in the first nine months of 2009 compared to the first nine months of 2008, primarily due to additional sales from the acquisition of Alpharma at the end of December 2008 and an increase in sales in 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 normal levels as of

September 30, 2009. We estimate that wholesale and retail inventories of our products as of September 30, 2009 represent gross sales of approximately $120 million to $130 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

 Current provision related to sales made in current period   $  30,200     $  27,225
 Current provision related to sales made in prior periods         (360 )          40
 Alpharma acquisition                                              886             -
 Rebates paid                                                  (41,124 )     (34,028 )

 Balance at September 30, net of prepaid amounts             $  38,938     $  19,130

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 each quarter 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

                Current provision                $  5,926     $  2,927
                Actual returns                     (7,743 )     (5,832 )

                Ending balance at September 30   $ 29,174     $ 27,400

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

               Current provision                $  28,155     $  21,283
               Actual chargebacks                 (28,041 )     (22,918 )

               Ending balance at September 30   $   9,757     $   8,905

Branded Prescription Pharmaceuticals Segment


                                                Three Months                  Change                     Nine Months                    Change
                                            Ended September 30,            2009 vs. 2008             Ended September 30,            2009 vs. 2008
                                             2009          2008            $            %             2009          2008            $             %
                                               (In thousands)                                           (In thousands)

Branded Prescription Pharmaceutical
Revenue:
Skelaxin®                                 $  102,080     $ 109,990     $  (7,910 )      (7.2 )%    $  304,857     $ 333,095     $  (28,238 )      (8.5 )%
Thrombin-JMI®                                 43,409        66,813       (23,404 )     (35.0 )        139,310       197,585        (58,275 )     (29.5 )
Flector® Patch                                40,397             -        40,397           -           95,794             -         95,794           -
Avinza®                                       30,774        35,928        (5,154 )     (14.3 )         98,646       102,941         (4,295 )      (4.2 )
Levoxyl®                                      16,995        17,608          (613 )      (3.5 )         51,847        53,462         (1,615 )      (3.0 )
Altace®                                       10,119        29,950       (19,831 )     (66.2 )         27,989       154,485       (126,496 )     (81.9 )
Embedatm                                      11,230             -        11,230           -           11,230             -         11,230           -
Other                                         28,410        41,590       (13,180 )     (31.7 )        106,555       145,398        (38,843 )     (26.7 )

Total revenue                             $  283,414     $ 301,879     $ (18,465 )      (6.1 )%    $  836,228     $ 986,966     $ (150,738 )     (15.3 )%

Cost of revenues, exclusive of
depreciation, amortization and
impairments                               $   79,351     $  74,178     $   5,173         7.0 %     $  216,169     $ 225,256     $   (9,087 )      (4.0 )%

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 court's 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 third quarter and first nine months of 2009 from the third quarter and first nine 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 22.0% and 18.5% in the third quarter and first nine months of 2009, respectively, from the third quarter and first nine months of 2008, according to IMS America, Ltd. ("IMS") monthly prescription data. We expect net sales of Skelaxin® will continue to decrease during 2009 as a result of the decrease in promotional efforts. We anticipate additional decreases in net sales if generic competition enters the market.

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 Skelaxin® litigation and 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 our Thrombin-JMI® product decreased in the third quarter and first nine months of 2009 compared to the third quarter and first nine 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 our Thrombin-JMI® product 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 27.8% and . . .