Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Company's financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.
Historically, we received revenues domestically from pharmaceutical products containing progesterone as an active ingredient, including progesterone vaginal gel 8% and progesterone vaginal gel 4% (collectively, the "Progesterone Products") that we either promoted through our own sales force and sold to wholesalers and specialty pharmacies or sold to licensees (see chart below). As of July 2, 2010, and the close of the Watson Transactions (as defined and described below), we supply Watson Pharmaceuticals, Inc. ("Watson") with Progesterone Products and Watson promotes and sells these products to wholesalers and specialty pharmacies in the United States. We also continue to supply Merck Serono with CRINONE 8% for resale outside the United States.
Products:

                      CRINONE® 8% progesterone vaginal gel formerly marketed and
                    - sold by the Company, and now sold to Watson for resale in
                      the U.S.

                    - CRINONE® 4% progesterone vaginal gel sold to Watson for
                      resale in the U.S.

   Progesterone     - CRINONE® 8% progesterone vaginal gel sold to Merck Serono
     Products         for resale outside the U.S.

                    - PROCHIEVE® 8% progesterone vaginal gel formerly sold by the
                      Company in the U.S.

                      PROCHIEVE® 4% progesterone vaginal gel sold to Ascend
                    - Therapeutics, Inc. for resale in the U.S. pursuant to an
                      agreement that terminated on July 23, 2010.

  Other Products    - STRIANT® testosterone buccal system marketed and sold by
                      the Company in the U.S. until April 2011

                    - STRIANT® licensed in April 2011 to Actient Pharmaceuticals,
                      LLC, for sale in the U.S.

                    - STRIANT® licensed to and sold by The Urology Company in the
                      U.K.

                    - STRIANT® licensed to Invaron Pharmaceuticals for sale in
                      Canada

Effective May 19, 2010, our license and supply agreement with Merck Serono S.A. ("Merck Serono") for the sale of CRINONE 8% outside the U.S. was renewed for an additional five year term.
On July 2, 2010, under a Purchase and Collaboration Agreement between the Company and Watson (the "Purchase Agreement"), we sold to Watson substantially all of our progesterone related assets and 11.2 million shares (the "Shares") of common stock of the Company ("Common Stock") for a $47 million upfront payment, the forgiveness of $15 million in debt plus royalties on certain Progesterone Products and potential milestone payments. These transactions are referred to collectively as the "Watson Transactions" and are described more broadly in Note 2 of the Notes to the Condensed Consolidated Financial Statements. The Watson Transactions allow for certain milestone payments that can be earned by the successful completion of clinical development milestones in the Company's Phase III study designed to evaluate the ability of progesterone vaginal gel 8% to reduce the risk of preterm birth in women with premature cervical shortening (the "PREGNANT study"), regulatory filings, receipt of regulatory approvals and product launches. Additionally, Watson agreed to fund the development of a next-generation vaginal Progesterone Product as part of a comprehensive life-cycle management strategy. On February 10, 2012, in connection with the second closing of the Watson Transactions, we transferred to Watson our New Drug Application ("NDA") relating to the use of the progesterone vaginal gel 8% to reduce the risk of preterm birth in women with a short cervical length as measured by transvaginal ultrasound at mid-pregnancy.
On April 20, 2011, we entered into an asset purchase agreement and license agreement with Actient Pharmaceuticals, LLC ("Actient") relating to the sale by us of certain assets and the licensing of certain intellectual property (related to the underlying progressive hydration technology for use in the treatment of hypogonadism and other indications related to low testosterone levels in men) relating to STRIANT in the United States. In connection with this transaction, we received a one-time payment of $3.1

million at closing and are entitled to certain royalties under the license agreement. In consideration of the rights granted under the license agreement, Actient will pay Columbia a royalty on Actient's net sales of STRIANT in the United States, its territories and possessions. No royalty is payable on net sales less than ten million dollars ($10,000,000) annually. A seven percent (7%) royalty is payable on sales between ten million dollars ($10,000,000) and twenty million dollars ($20,000,000) annually. A ten percent (10%) royalty is due on sales in excess of twenty million dollars ($20,000,000) annually. The royalty is reduced by fifty percent (50%) upon the expiration or other termination of the STRIANT patent and eliminated in the event of the launch of a generic product to STRIANT after the expiration or other termination of the STRIANT patent. No royalty is due after ten years from closing. This transaction is described in more detail in Note 3 to the Condensed Consolidated Financial Statements. Columbia's business now consists of its product manufacturing revenues, royalties and potential milestone payments, its collaboration with Watson on the development of next-generation Progesterone Products, and its novel bioadhesive drug delivery technologies and other products.
With the closing of the Watson Transactions, all Progesterone Products are marketed and sold in the U.S. by Watson. We manufacture and sell product to Watson at our cost plus 10%; these revenues are recorded within product revenues. In addition, we receive royalties equal to a minimum of 10% of annual net sales of these products for annual net sales up to $150 million, 15% for sales above $150 million but less than $250 million; and 20% for annual net sales of $250 million and over. Outside the U.S., we supply Merck Serono with CRINONE 8% for resale at the greater of 30% of net sales or direct manufacturing costs plus 20%. These revenues are recorded within product revenues. Future recurring revenues will be derived primarily from product sales to and royalty streams from our partners, Watson and Merck Serono. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Because products shipped to the Company's two major customers occur only in full batches, quarterly sales can vary widely and affect quarter to quarter comparisons and may not correlate to customers' in-market sales. Future, non-recurring milestone payments will be recognized when and if the milestones are achieved. Operating expenses attributable to product selling, marketing and distribution activities have been eliminated. Research and development ("R&D") expenses should remain low for the foreseeable future.
All of our products are manufactured in Europe by third parties on behalf of our foreign subsidiaries who sell the products to our worldwide licensees, and to the Company, in the case of the products supplied for resale in the United States. Because our European revenues reflect these sales and are reduced only by our product manufacturing costs, we have historically shown a profit from our foreign operations.
From July 2010 through June 2011, the Company recorded the amortization of the deferred revenue recognized as a result of the completion of the Watson Transactions, which amount totaled approximately $34 million. The Company historically charged our United States operations all selling and distribution expenses that supported our marketing, sales and distribution efforts. From the fourth quarter of 2010 until the sale of STRIANT to Actient in April 2011, only distribution costs related to STRIANT were included in selling and distribution costs. Going forward, there will be no such costs. R&D expenses are charged to our U.S. operations for product development, which principally supports new products. In addition, the majority of our general and administrative expenses represents the Company's management activities as a public company and are charged to our United States operations. The amortization of the repurchase of the U.S. rights to CRINONE was charged to our U.S. operations. Amortization on these rights ceased with the closing of the Watson Transactions. As a result, we have historically shown a loss from our U.S. operations that has been significantly greater than, and has offset, the profits from our foreign operations.
In connection with the Watson Transactions, until the second anniversary of the date on which the Company and Watson terminate their relationship with respect to the joint development of Progesterone Products, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions. The joint development collaboration can be terminated by either party five years after the closing of the Watson Transactions (i.e., July 2, 2015).
In December 2010, we announced positive top-line results from the PREGNANT study and in April 2011 the study was published in the peer-reviewed journal Ultrasound in Obstetrics & Gynecology in a manuscript entitled Vaginal progesterone reduces the rate of preterm birth in women with a sonographic short cervix: a multicenter, randomized, double-blind, placebo-controlled trial. (Hassan SS, Romero R, et al., Ultrasound Obstet Gynecol 2011;38:18-31). The published results indicate that the administration of progesterone vaginal gel 8% from mid-pregnancy until term in women with premature cervical shortening as confirmed by transvaginal ultrasound was associated with a statistically significant reduction in the rate of preterm birth at less than or equal to 32 6/7 weeks gestation, the primary endpoint of the study, compared to placebo gel. Use of progesterone vaginal gel 8% was associated with: a 44% reduction in the incidence of preterm birth before 33 weeks gestation (p=0.022) and a 39% reduction in preterm births before 35 weeks gestation (p=0.012). Improvement in infant outcome was also noted with progesterone vaginal gel 8%. The incidence and profile of adverse events in patients receiving progesterone vaginal gel 8% were comparable to placebo.
In April 2011, we filed a new drug application ("NDA") (NDA 22-139) for progesterone vaginal gel 8% for use in the

reduction of risk of preterm birth in women with a singleton gestation and a short uterine cervical length in the mid-trimester of pregnancy. The NDA was reviewed by the FDA's Advisory Committee for Reproductive Health Drugs (the "Committee") in January 2012. While Committee members generally agreed that progesterone vaginal gel 8% is safe, the Committee stated that more information is needed to support approval. On February 10, 2012, we transferred to Watson our pending NDA for the preterm birth indication pursuant to the second closing of the Watson Transactions. On February 24, 2012, Watson announced that it had received a Complete Response Letter ("CRL") from the FDA indicating that the NDA review cycle was complete and the application is not ready for approval in its present form. The CRL stated that the effect of treatment with progesterone vaginal gel 8% in reducing the risk of preterm birth in women with a short uterine cervical length at ? 32 6/7 weeks gestation (p=0.022) did not meet the level of statistical significance generally expected to support the approval of the product in the U.S. market from a single trial. In October 2012, the American College of Obstetricians and Gynecologists issued Practice Bulletin 130, in which vaginal progesterone is recommended as a management option to reduce the risk of preterm birth in asymptomatic women with a singleton gestation without a prior preterm birth with an incidentally identified short cervical length ?20mm before or at 24 weeks of gestation.
On October 26, 2012, it was confirmed that the FDA has denied Watson's Formal Dispute Resolution Request (FDRR) related to its New Drug Application (NDA 22-139) for Prochieve for the prevention of preterm birth in women with a short cervical length. Watson filed its FDRR in August of 2012. Workforce Reduction
On March 1, 2012, the Company announced a 42% workforce reduction from 24 employees at December 31, 2011, to 14 employees. The Company recorded a severance charge of approximately $0.5 million in the first quarter of 2012, and expects to realize annual savings of over $1.5 million from reductions in salaries, bonuses and benefits. The reduction impacts R&D and general administrative positions. Columbia's remaining staff focuses its efforts on supporting its customers through existing product supply agreements, assuring compliance with all financial reporting requirements and evaluating strategic options for the Company.
Business Development Activities
On March 13, 2012, we announced that we engaged Cowen and Company, LLC, as the Company's independent financial advisor to assist the Company with its stated goal to evaluate possible strategic transactions. There can be no assurances as to whether any particular strategic transaction will be recommended by our board of directors. The Company does not intend to disclose developments with respect to the progress of its evaluation of any strategic alternatives until such time as our Board of Directors has approved a transaction or otherwise deems disclosure appropriate.
Nasdaq Listing
On September 6, 2012, we received a letter from the Nasdaq Stock Market indicating that the Company had regained compliance with the minimum bid price requirement for continued listing on the NASDAQ Global Market as set forth in Listing Rule 5450(a)(1) (the "Rule"). The notice stated that the closing bid price of the Company's Common Stock had been at $1.00 per share or greater for the previous ten consecutive business days.
On October 24, 2012, we again received a letter from the Nasdaq Stock Market indicating that the Company no longer meets the minimum bid price requirement for continued listing on the Nasdaq Global Market as set forth in the Rule. The notice stated that the bid price of the Company's Common Stock closed below the required minimum $1.00 per share for the previous 30 consecutive business days. The Nasdaq notice has no immediate effect on the listing of the Company's Common Stock.
In accordance with Nasdaq rules, the Company has 180 calendar days to regain compliance with the Rule. If at any time before April 23, 2013, the bid price of Columbia's Common Stock closes at $1.00 per share or higher for a minimum of 10 consecutive business days, Nasdaq will notify the Company that it has regained compliance with the Rule.
In the event the Company does not regain compliance with the Rule prior to April 23, 2013, Nasdaq will notify the Company that its securities are subject to delisting. However, the Company may be eligible for additional time. To qualify, the Company may apply to transfer the listing of its Common Stock to the Nasdaq Capital Market if it satisfies all criteria for initial listing on the Nasdaq Capital Market, other than compliance with the minimum bid price requirement. If such application to the Nasdaq Capital Market is approved, then the Company may be eligible for an additional grace period.
The Company is considering actions that it may take in response to this notification in order to regain compliance with the continued listing requirements.

Results of Operations - Nine Months Ended September 30, 2012 versus Nine Months

Ended September 30, 2011
                                                          Percentage
                                                          Inc./(Dec.)
                                                             from
                                  September 30, 2012      prior year       September 30, 2011
Net product revenues             $       16,101,350          28  %        $       12,536,141
Royalties                                 2,532,197          22  %                 2,070,226
Other revenues                              103,568        (100 )%                22,078,785
Total net revenues               $       18,737,115         (49 )%        $       36,685,152

Cost of product revenues         $        9,655,624                       $        8,161,210

Total gross profit               $        9,081,491                       $       28,523,942

Total gross profit
as a % of total net revenues                     48 %                                     78 %
Total product gross profit
as a % of net product revenues                   40 %                                     35 %

Total net revenues in the nine months ended September 30, 2012 were $18.7 million as compared to $36.7 million in the nine months ended September 30, 2011. Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and, in 2011, sales of STRIANT), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (in 2011, primarily amortization of the deferred revenue and milestone payments from the Watson Transactions).
Total net product revenues were $16.1 million in the nine months ended September 30, 2012 as compared to $12.5 million in the nine months ended September 30, 2011. This increase reflects higher revenues over last year for both Watson and Merck Serono. In the case of Merck Serono, the higher revenues are primarily related to shipments to countries with higher net selling prices with a small single digit decrease in volume. Higher revenues for Watson reflect a 45% increase in volume coupled with higher pricing related to the cost of repackaging batches previously meant for the anticipated launch of the preterm birth indication. In addition, a favorable adjustment of $0.2 million was made to net product revenues, reflecting the reversal of a reserve for sales returns. These increases are slightly offset by the absence of STRIANT net product revenues as a result of the April 2011 sale to Actient.
Royalty revenues were $2.5 million in the nine months ended September 30, 2012 as compared with $2.1 million in the nine months ended September 30, 2011 as a result of royalties on higher revenues from Watson on Progesterone Products sold by Watson.
Other revenues in the nine months ended September 30, 2012 were $0.1 million as compared to $22.1 million in the nine months ended September 30, 2011, due primarily to the amortization of $22.1 million in deferred revenue recognized from the sale of assets to Watson recorded in 2011 and the $5.0 million milestone payment made pursuant to the Purchase Agreement for the acceptance for filing of the preterm birth NDA by the FDA. The Company amortized $34.0 million in deferred gains over four quarters from July 2, 2010 through June 30, 2011, representing the estimated remaining development period for progesterone vaginal gel 8% in the preterm birth indication.
Gross profit decreased $19.4 million from $28.5 million in the nine months ended September 30, 2011 to $9.1 million for the nine months ended September 30, 2012, primarily as a result of the recognition of the amortization of the deferred revenue resulting from the Watson Transactions in the nine months ended September 30, 2011. Gross profit as a percentage of total net revenues was lower at 48% for the nine months ended September 30, 2012 compared with 78% in the same period in 2011, primarily related to the absence of the amortization as discussed above. Gross profit as a percentage of net product revenues in the nine months ended September 30, 2012 was 40% compared with 35% in the same period in 2011. The higher profit margin in 2012 as compared with 2011 was a result of a favorable product mix offset, in part, by a reserve for inventory which did not meet specifications in 2012 in the amount of $0.9 million. There were no selling and distribution expenses in the nine months ended September 30, 2012, as compared to $0.1

million in the nine months ended September 30, 2011, reflecting the sale of STRIANT in April 2011.
General and administrative expenses were $6.4 million in the nine months ended September 30, 2012, as compared to $6.8 million in the nine months ended September 30, 2011. General and administrative expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees. The decrease in expenses from 2011 was primarily attributable to $1.0 million in lower professional fees for accounting, insurance and patent services offset by a total of $0.6 million in severance costs related to the workforce reduction announced in March 2012, business development, and legal costs related to the securities litigation. Research and development expenses were $0.9 million in the nine months ended September 30, 2012, as compared to $2.4 million in the nine months ended September 30, 2011. Research and development expenses typically include costs for product development, clinical development and regulatory fees, which is a combination of internal and third-party costs. Expenses in the nine months ended September 30, 2012 are lower than the same period in 2011 due to the residual expenses that were our responsibility up to the $7.0 million cap for research and development spending on the PREGNANT study in 2011. We incurred the full $7.0 million for research and development spending on the PREGNANT study and related NDA submission for which we were responsible under the Watson Transactions with expenses in excess of that amount being the responsibility of Watson. Also contributing to expenses in the nine months ended September 30, 2012 was the recognition of $0.2 million in severance costs related to the workforce reduction announced in March 2012, offset by $0.4 million in reimbursable costs that were credited to research and development expense during the nine months ended September 30, 2012.
There were no other expenses in the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011 in which the Company recognized a one-time gain of $2.5 million on the U.S. sale of STRIANT to Actient.
Other income/expense amounted to income of $5.4 million for the nine months ended September 30, 2012, consisting primarily of the recognition of the $5.4 million change in fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from December 31, 2011. Other income/expense for the nine months ended September 30, 2011 amounted to $0.3 million, consisting primarily of expenses related to the recognition of the change in fair value of the warrants issued in conjunction with the July 2010 convertible note retirement ($2.7 million) and the October 2009 stock issuance ($2.8 million) resulting from the increase in stock price from December 31, 2010.
As a result, the net income for the nine months ended September 30, 2012 was $7.3 million, or $0.08 per basic and $0.02 per diluted share, as compared to net income for the nine months ended September 30, 2011 of $21.5 million, or $0.25 per basic and $0.20 per diluted share.

Results of Operations - Three Months Ended September 30, 2012 versus Three

Months Ended September 30, 2011
                                                     Percentage
                                                     Inc./(Dec.)
                                  September 30,         from         September 30,
                                       2012          prior year           2011
Net product revenues             $    5,620,889        36  %        $    4,129,112
Royalties                             1,017,609        30  %               782,694
Other revenues                           34,540        (1 )%                34,888
Total net revenues               $    6,673,038        35  %        $    4,946,694

Cost of product revenues         $    3,186,792                     $    3,124,284

Total gross profit               $    3,486,246                     $    1,822,410

Total gross profit
as a % of total net revenues                 52 %                               37 %
Total product gross profit
as a % of net product revenues               43 %                               24 %

Total net revenues in the three months ended September 30, 2012 were $6.7 million as compared to $4.9 million in the three months ended September 30, 2011. Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and, in 2011, sales of STRIANT), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues.
Total net product revenues were $5.6 million in the three months ended September 30, 2012 as compared to $4.1 million in the three months ended September 30, 2011. This increase reflects higher revenues over last year for both Watson and Merck Serono. In the case of Merck Serono, the higher revenues are primarily related to shipments to countries with higher net selling prices and an upward adjustment to previously estimated in-market pricing offset by a 15% decrease in volume due to the timing of shipments. A 46% increase in products sold to Watson reflects a 26% increase in volume coupled with higher pricing related to the cost of repackaging batches previously meant for the anticipated launch of the preterm birth indication. In addition, a favorable adjustment of $0.1 million was made to net product revenues, reflecting the reversal of a reserve for sales returns.
Royalty revenues were $1.0 million in the three months ended September 30, 2012 as compared with $0.8 million in the three months ended September 30, 2011 as a result of royalties on higher revenues from Watson on Progesterone Products sold by Watson.
There was no change in other revenues in the three months ended September 30, 2012 as compared with the three months ended September 30, 2011.
Gross profit increased $1.7 million from $1.8 million in the three months ended September 30, 2011 to $3.5 million for the three months ended September 30, 2012, primarily as a result of the increase in net product revenues and royalty revenues, together with a favorable gross profit from the product mix of net product revenues. Gross profit as a percentage of total net revenues was 52% for the three months ended September 30, 2012 compared with 37% in the same period in 2011. Gross profit as a percentage of net product revenues in the three months ended September 30, 2012 was 43% compared with 24% for the same period in 2011. The higher profit margin in the third quarter of 2012 was a result of favorable product mix.
There were no selling and distribution expenses in the three months ended September 30, 2012 or September 30, 2011.
General and administrative expenses were $1.9 million in each of the three month periods ended September 30, 2012 and September 30, 2011. General and administrative expenses include payroll, employee benefits, equity compensation . . .