Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended June 30, 2009Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission file number 0-19410



Sepracor Inc.(Exact name of registrant as specified in its charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

22-2536587(IRS Employer
Identification No.)84 Waterford Drive
Marlborough, Massachusetts(Address of principal executive offices)

01752(Zip Code)


Registrant's
telephone number, including area code: (508) 481-6700



Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files. Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No
ý

The number of shares outstanding of the registrant's class of Common Stock as of July 31, 2009 was 110,988,138 shares.



---





Table of Contents



SEPRACOR INC.  INDEX



Part IFinancial InformationItem 1.

Condensed Consolidated Interim Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008


3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (unaudited)


4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (unaudited)


5Notes to Condensed Consolidated Interim Financial Statements (unaudited)


6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


28Item 3.

Quantitative and Qualitative Disclosures About Market Risk


52Item 4.

Controls and Procedures


52Part IIOther InformationItem 1.

Legal Proceedings


54Item 1A.

Risk Factors


59Item 4.

Submission of Matters to a Vote of Security Holders


86Item 6.

Exhibits


86Signatures


87Exhibit Index


88


2

---





Table of Contents



PART 1FINANCIAL INFORMATION



Item I.    Financial Statements



SEPRACOR INC.        CONDENSED CONSOLIDATED BALANCE SHEETS        (In Thousands, Except Par Value Amounts)

June 30,
2009

December 31,
2008(Unaudited)AssetsCurrent assets:Cash and cash equivalents

$
367,234

$
629,255Short-term investments


135,898


62,376Accounts receivable, net


135,495


177,457Inventories


66,691


69,003Deferred tax asset


138,278


121,919Other current assets


28,612


32,417Total current assets


872,208


1,092,427Long-term investments


204,071


74,199Property and equipment, net


119,361


117,874Intangible assets, net


149,224


154,936Goodwill


21,046


19,898Deferred tax asset


277,731


342,200Other assets


4,209


5,790Total assets

$
1,647,850

$
1,807,324Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable

$
27,870

$
20,429Accrued expenses


137,944


138,852Current portion of long-term debt


186,088


367,101Product sales allowances and reserves


230,115


276,589Restructuring


9,036


Other current liabilities


38,113


37,903Total current liabilities


629,166


840,874Long-term debt


99,844


148,326Deferred tax liabilities


5,074


5,577Other liabilities


75,436


87,908Total liabilities


809,520


1,082,685Stockholders' equity:Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at June 30, 2009 and December 31, 2008





Common stock, $.10 par value, 240,000 shares authorized at June 30, 2009 and December 31, 2008; 115,227 and 113,357 shares issued, 110,966 and
109,096 shares outstanding, at June 30, 2009 and December 31, 2008, respectively


11,522


11,335Treasury stock, at cost (4,261 shares at June 30, 2009 and December 31, 2008)


(232,028
)

(232,028
)Additional paid-in capital


2,053,539


2,029,475Accumulated deficit


(984,410
)

(1,064,437
)Accumulated other comprehensive loss


(10,293
)

(19,706
)Total stockholders' equity


838,330


724,639Total liabilities and stockholders' equity

$
1,647,850

$
1,807,324


The accompanying notes are an integral part of the condensed consolidated interim financial statements.

3

---





Table of Contents



SEPRACOR INC.        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)        (In Thousands, Except Per Share Amounts)

Three Months Ended

Six Months EndedJune 30,
2009

June 30,
2008

June 30,
2009

June 30,
2008(as adjusted)



(as adjusted)Revenues:Product sales, net

$
289,264

$
269,946

$
596,118

$
575,490Royalties and license fees


36,980


24,199


60,298


39,434Total revenues


326,244


294,145


656,416


614,924Costs and expenses:Cost of product sold


28,447


26,666


60,150


54,253Cost of royalties earned


450


580


823


1,069Research and development


72,745


58,299


131,969


124,528Research and developmentin process upon acquisition





50,758





89,995Selling, marketing and distribution


122,008


179,288


242,599


334,619General and administrative


25,206


28,280


48,044


51,599Amortization of intangible assets


1,496


1,918


2,992


4,183Restructuring


2,555


(266
)

30,091


(566
)Total costs and expenses


252,907


345,523


516,668


659,680Income (loss) from operations


73,337


(51,378
)

139,748


(44,756
)Other income (expense):Interest income


2,123


5,545


4,004


13,714Gain on extinguishment of debt


3,016





2,526


Interest expense


(6,187
)

(8,776
)

(14,138
)

(15,472
)Equity in investee losses


(222
)

(272
)

(427
)

(475
)Other income (expense)


319


(9,354
)

514


(9,432
)Income (loss) before income taxes


72,386


(64,235
)

132,227


(56,421
)Provision for (benefit from) income taxes


27,536


(445,168
)

52,200


(444,472
)Net income

$
44,850

$
380,933

$
80,027

$
388,051Basic net income attributable to common shares and other participating securities

$
0.41

$
3.52

$
0.73

$
3.59Diluted net income attributable to common shares and other participating securities

$
0.39

$
3.28

$
0.70

$
3.34Shares used in computing basic and diluted net income attributable to common shares and other participating securities:Basic


109,493


108,325


109,365


108,082Diluted


113,828


116,247


114,137


116,013


The
accompanying notes are an integral part of the condensed consolidated interim financial statements.

4

---





Table of Contents



SEPRACOR INC.        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)        (In Thousands)

Six Months EndedJune 30,
2009

June 30,
2008(as adjusted)Cash flows from operating activities:Net income

$
80,027

$
388,051Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


17,691


15,944Research and developmentin process upon acquisition





89,995Interest accretion on license fee liabilities


6,202


2,066Impairment on investments


331


9,106Gain on extinguishment of debt


(2,526
)

Settlement of accreted interest on convertible debt


(42,948
)

Interest related to accretion of debt discount


7,846


13,303Equity in investee losses


427


475Stock compensation


19,664


19,509Deferred income taxes


47,504


(443,367
)Changes in operating assets and liabilities:Accounts receivable


42,076


(5,084
)Inventories


3,174


(13,661
)Other assets


3,529


(12,096
)Accounts payable


7,473


(167
)Accrued expenses


(432
)

(72,452
)Product sales allowances and reserves


(46,475
)

39,311Other liabilities


(8,814
)

(3,322
)Net cash provided by operating activities


134,749


27,611Cash flows from investing activities:Purchases of available-for-sale investments


(147,120
)

(38,589
)Sales of available-for-sale investments


13,804


59,992Maturities of available-for-sale investments


6,734


34,820Purchases of held-to-maturity investments


(159,558
)

(254,994
)Maturities of held-to-maturity investments


88,203


308,292Additions to property and equipment


(11,615
)

(21,268
)Payments for purchased intangibles





(151,000
)Business acquisitions, net of cash acquired





(49,812
)Net cash used in investing activities


(209,552
)

(112,559
)Cash flows from financing activities:Net proceeds from issuance of common stock


4,587


4,195Repayments of long-term debt and capital leases


(191,054
)

(593
)Net cash (used in) provided by financing activities


(186,467
)

3,602Effect of exchange rate changes on cash and cash equivalents


(751
)

(2,029
)Net decrease in cash and cash equivalents


(262,021
)

(83,375
)Cash and cash equivalents at beginning of period

$
629,255

$
598,929Cash and cash equivalents at end of period

$
367,234

$
515,554Supplemental schedule of cash flow information:Cash paid during the period for interest

$
42,992

$
104Cash paid during the period for income taxes

$
7,402

$
5,702Non cash activities:Fair value of intangible assets acquired under license and development agreement

$


$
148,122Liabilities assumed under license and development agreement

$


$
(97,310
)Cash paid upon execution of license and development agreement

$


$
50,812


The accompanying notes are an integral part of the condensed consolidated interim financial statements.

5

---





Table of Contents



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS        (UNAUDITED)

1. Basis of Presentation

The accompanying condensed consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with our audited financial statements.
Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The condensed consolidated interim financial statements, in the
opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended June 30, 2009 and
2008. Certain prior period amounts have been reclassified to conform to the current period presentation.

The
condensed consolidated interim financial statements include our accounts and all of our wholly-owned subsidiaries. We also have an investment in BioSphere Medical, Inc., or
BioSphere, which we record under the equity method and an investment in ACADIA Pharmaceuticals Inc., or ACADIA, which we account for as marketable equity securities.

Certain
prior period amounts have been adjusted to conform to the current period presentation, including changes resulting from the adoption of Financial Accounting Standards Board, or
FASB, Staff Position, or FSP, No. Accounting Principles Board, or APB, 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement), or FSP APB 14-1, and FSP Emerging Issues Task Force, or EITF, No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities,or FSP
EITF 03-6-1, in addition to the correction of certain immaterial prior period errors, as discussed further in Note 3 "Revised Financial Statements."

The
preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that
affect the following: (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the dates of the financial statements and
(iii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The
condensed consolidated statements of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These
condensed consolidated interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2008, which are contained in our Annual
Report on Form 10-K for the year ended December 31, 2008, as adjusted in our Form 8-K dated May 14, 2009, each filed with the Securities and
Exchange Commission, or SEC.

In
May 2009, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 165,Subsequent Event, or SFAS 165.
SFAS 165 requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This
statement is effective for financial statements issued for fiscal years and interim periods beginning after June 15, 2009. We have evaluated subsequent events through August 5, 2009, the
date these financial statements were issued.

2. Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, or SFAS 168. SFAS 168 will become the single source of authoritative nongovernmental GAAP, superseding existing FASB, American Institute of Certified
Public Accountants, EITF, and related accounting literature. This statement is effective for

6

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

2. Recent Accounting Pronouncements (Continued)

financial
statements issued for fiscal years and interim periods beginning after September 15, 2009. This will have an impact on our financial statements since all future references to
authoritative accounting literature will be references in accordance with SFAS 168.

3. Revised Financial Statements

Effective January 1, 2009, we adopted two pronouncements, FSP APB 14-1 and FSP EITF No. 03-6-1, which require us to
retrospectively adjust previously reported financial information. As such, certain prior period amounts have been adjusted in the
unaudited condensed consolidated interim financial statements to conform to the current period presentation. While retrospectively applying these two pronouncements, we also recorded certain
immaterial adjustments to our historic financial statements as a result of immaterial accounting errors detected during the first quarter of 2009.



Effective January 1, 2009, we adopted FSP APB 14-1, which applies to convertible debt instruments that may be
settled in cash (including partial cash settlement) upon conversion. FSP APB 14-1 is effective for our $500.0 million 0% convertible senior notes due 2024, or 0% notes due
2024, issued in September 2004, of which $382.5 million of par value remained outstanding at December 31, 2008. These notes are convertible into cash and into shares of our common stock
under a conversion formula that becomes applicable if and when our common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to our stock exceeding such price, the 0% notes
due 2024 are convertible into cash at the option of the holders in October 2009, 2014, 2019 and 2024, as well as under certain other circumstances. The 0% notes due 2024 are subject to the provisions
of FSP APB 14-1 since the notes can be settled in cash upon conversion.

FSP
APB 14-1 requires the issuer of convertible debt instruments with cash settlement features to account for the debt component separately from the equity component
(or conversion feature). In the case of our 0% notes due 2024, the debt component is valued at $372.5 million of the original $500.0 million par amount, and the equity component (or
conversion feature) is valued at $127.5 million of the original $500.0 million par amount as of the date of the issuance of the notes. The debt component was valued based on the present
value of its cash flows using a 5.9% discount rate, which represents our estimated borrowing rate at the date of the issuance of the notes for a similar debt instrument without the conversion feature.
The equity component, recorded as additional paid-in capital, represents the difference between the proceeds from the issuance of the 0% notes due 2024 and the fair value of the debt
component. As we had a full tax valuation allowance at the time of issuance of our 0% notes due 2024, the creation of a deferred tax liability of $47.1 million related to the recognition of the
debt discount as of the date of the issuance of our 0% notes due 2024 was offset by a corresponding decrease in the tax valuation allowance and, therefore, there was no initial tax impact to our
financial position or our results of operations.

The
debt component is accreted to par using the effective interest method and accretion is reported as a component of interest expense in our condensed consolidated statements of
operations. The interest expense attributed to the adoption of FSP APB 14-1 for the three and six months ended June 30, 2008 was $6.7 million and $13.3 million,
respectively. The equity component is not subsequently re-valued under FSP APB 14-1 as long as it continues to qualify for equity treatment. The issuance costs
associated with the liability component continues to be included in other assets on our

7

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. Revised Financial Statements (Continued)

condensed
consolidated balance sheets, whereas the issuance costs associated with the equity component are included in additional paid-in-capital and are not amortized.

Upon
retrospective application of FSP APB 14-1, the adoption resulted in a $113.3 million increase in the accumulated deficit at December 31, 2008,
comprised of non-cash interest expense of $104.1 million for the years 2004 through 2008, non-cash losses on debt extinguishment of $5.9 million related to the
partial extinguishment of our 0% notes due 2024 in 2008 and change in income tax provision of $6.4 million, offset by a reduction in deferred financing costs of approximately
$3.1 million. The impact to diluted earnings per share, or EPS, for the three and six months ended June 30, 2008 was a decrease of $0.13 and $0.19, respectively.

The
par amount of the outstanding 0% notes due 2024, the unamortized discount and the net carrying value at June 30, 2009 were $188.3 million, $2.8 million and
$185.5 million, respectively, and at December 31, 2008 were $382.5 million, $16.6 million and $365.9 million, respectively. The unamortized discount will continue to
be recognized until October 2009, which is when we expect the 0% notes due 2024 to be fully converted into cash by the noteholders. The table below presents the as adjusted and as previously reported
three and six months ended June 30, 2008 condensed statements of operations data materially affected by the adoption of FSP APB 14-1.



Effective January 1, 2009, we adopted FSP EITF 03-6-1. FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in
the earnings allocation in computing EPS under the two-class method as described in SFAS No. 128,Earnings per Share. Under the
guidance of FSP EITF 03-6-1, our unvested share-based payment awards that were granted prior to May 2009, which contain nonforfeitable rights to dividends, whether paid
or unpaid, are considered to be participating securities and are now included in the computation of EPS pursuant to the two class method. On May 14, 2009, our board of directors approved terms
of restricted stock
grants on a going-forward basis that do not provide nonforfeitable rights to dividends for our unvested share-based payment awards, thus FSP EITF 03-6-1 is not
applicable to any awards at this time. The condensed consolidated statements of operations presented herein have been prepared to reflect the adoption of FSP
EITF 03-6-1. The impact to reported diluted EPS for both the three and six months ended June 30, 2008 was a decrease of $0.01 per share.



During the first quarter of 2009, we detected two immaterial accounting errors related to our interest income calculation and our
accounting for manufacturing costs associated with our commercial products and product samples. The correction of the errors has been reflected retrospectively in the applicable periods in 2008, 2007,
2006 and 2005. An internal review of our interest income for the first quarter of 2009 detected an error in our interest income calculation for certain adjustable interest rate securities, which lead
us to reduce interest income by approximately $319,000 and $883,000 for the three and six months ended June 30, 2008, respectively.

During
the first quarter of 2009, we also detected an error in our calculation of accrued commercial product and product sample receipts. This error resulted in an overstatement of cost
of product sold for the three and six months ended June 30, 2008 by approximately $655,000 and

8

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. Revised Financial Statements (Continued)

$2.4 million,
respectively. The net impact of these items was an increase to income before income taxes of approximately $336,000 and $1.5 million for the three and six months ended
June 30, 2008, respectively. Diluted EPS was not impacted for the three months ended June 30, 2008 and there was an increase of $0.01 for the six months ended June 30, 2008.

The
following table sets forth the impact of the adoption of FSP APB 14-1 and FSP EITF 03-6-1 and the immaterial error adjustments to
our condensed consolidated statements of operations for the three and six months ended June 30, 2008:

Three Months Ended
June 30, 2008
(as previously
reported)

Adjustments

Three Months Ended
June 30, 2008
(as adjusted)(in thousands)Total costs and expenses

$
346,359

$
(836
)
$
345,523Loss from operations

$
(52,214
)
$
836

$
(51,378
)Interest income

$
5,865

$
(320
)
$
5,545Interest expense

$
(2,115
)
$
(6,661
)
$
(8,776
)Loss before income taxes

$
(58,090
)
$
(6,145
)
$
(64,235
)Benefit from income taxes

$
(453,170
)
$
8,002

$
(445,168
)Net income

$
395,080

$
(14,147
)
$
380,933Basic net income per common share

$
3.66

$
(0.14
)
$
3.52Diluted net income per common share

$
3.41

$
(0.13
)
$
3.28




Six Months Ended
June 30, 2008
(as previously
reported)

Adjustments

Six Months Ended
June 30, 2008
(as adjusted)(in thousands)Total costs and expenses

$
662,440

$
(2,760
)
$
659,680Loss from operations

$
(47,516
)
$
2,760

$
(44,756
)Interest income

$
14,598

$
(884
)
$
13,714Interest expense

$
(2,170
)
$
(13,302
)
$
(15,472
)Loss before income taxes

$
(44,995
)
$
(11,426
)
$
(56,421
)Benefit from income taxes

$
(452,267
)
$
7,795

$
(444,472
)Net income

$
407,272

$
(19,221
)
$
388,051Basic net income per common share

$
3.78

$
(0.19
)
$
3.59Diluted net income per common share

$
3.52

$
(0.18
)
$
3.34


4. Basic and Diluted Earnings Per Common Share

Basic EPS is computed based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares
outstanding during the period plus dilutive potential common shares outstanding during the period using the treasury stock method. Potential common shares are not included in the per share calculation
when the effect of their inclusion would be anti-dilutive.

Certain
unvested restricted shares granted prior to May 14, 2009 contain rights to receive nonforfeitable dividends, and thus, are participating securities requiring the
two-class method of

9

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4. Basic and Diluted Earnings Per Common Share (Continued)

computing
EPS as defined in FSP EITF 03-6-1. The calculation of EPS for common stock excludes the income attributable to these unvested restricted shares from the
numerator and excludes the dilutive impact of those shares from the denominator.

The
number of shares that were not included in the computation of diluted EPS because inclusion of such shares would be anti-dilutive was 9.2 million and
9.1 million shares for the three and six months ended June 30, 2009, respectively, and 9.3 million and 9.0 million shares for the three and six months ended June 30,
2008, respectively.

Our
0% notes due 2024 were not convertible into equity as of June 30, 2009 or 2008, or at any time during the six months ended June 30, 2009 or 2008. Shares of common stock
will be reserved under the conversion formula for issuance upon conversion if and when our common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to such occurrence, the
notes are only convertible into cash.

5. Inventories

Inventories consist of the following:

June 30,
2009

December 31,
2008(in thousands)Raw materials

$
28,462

$
28,306Finished goods


38,229


40,697Total

$
66,691

$
69,003


6. Goodwill and Intangible Assets

In order to establish a Canadian commercial presence, in June 2008, we acquired the outstanding capital stock of Oryx Pharmaceuticals, Inc., or Oryx, a specialty pharmaceutical
company that markets branded prescription pharmaceutical products to physician specialists and hospitals within Canada and is focused in the cardiovascular, central nervous system disorder, pain and
infectious disease therapeutic areas. We subsequently changed Oryx's name to Sepracor Pharmaceuticals, Inc., or SPI. The carrying value of goodwill, which resulted from the acquisition of SPI,
was $21.0 million and $19.9 million at
June 30, 2009 and December 31, 2008, respectively. The increase is due to currency translation adjustments of approximately $1.1 million.

10

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

6. Goodwill and Intangible Assets (Continued)

Our
intangible assets included in the condensed consolidated balance sheets are detailed as follows:

June 30, 2009

December 31, 2008Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amounts

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amounts(in thousands)SPI's intangible assets

$
29,249

$
(3,748
)
$
25,501

$
27,839

$
(2,094
)
$
25,745Intangible assetsArrow transactions


28,238


(2,196
)

26,042


28,238


(1,255
)

26,983Intangible assetsNycomed transactions


110,763


(13,388
)

97,375


110,763


(8,925
)

101,838Patents and other intangible assets


2,259


(1,953
)

306


2,259


(1,889
)

370Total intangible assets

$
170,509

$
(21,285
)
$
149,224

$
169,099

$
(14,163
)
$
154,936


SPI
intangible assets are being amortized over 3 to 13 years; Arrow International Limited, or Arrow, intangible assets are being amortized over 15 years;
Nycomed GmbH, or Nycomed, intangible assets are being amortized over 8 to 15 years; and patents are being amortized over 10 years.

The
gross carrying value of intangible assets increased by approximately $1.4 million for the six months ended June 30, 2009 due to the effects of foreign currency
translation.

7. Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

June 30,
2009

December 31,
2008(in thousands)0% Series B convertible senior subordinated notes due December 2010

$
99,844

$
148,0200% convertible senior subordinated notes due October 2024(1)


185,510


365,939Total

$
285,354

$
513,959






During
the second quarter of 2009, we repurchased and retired, at our option in privately negotiated transactions, an aggregate of $48.2 million par amount of our 0%
series B convertible senior subordinated notes due 2010, or 0% notes due 2010. We paid a total of $43.8 million in cash to repurchase these notes. In connection with these transactions,
we recorded a net gain on the

11

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Convertible Subordinated Debt (Continued)

extinguishment
of debt of approximately $4.0 million. At June 30, 2009 and December 31, 2008, $99.8 million and $148.0 million of our 0% notes due 2010 remained
outstanding, respectively.

Our
0% notes due 2024 are convertible into cash and into shares of our common stock under a conversion formula that becomes applicable if and when our common stock price exceeds $67.20
per share on the NASDAQ Global Select Market. Prior to our stock exceeding such price, the notes are convertible to cash at the option of the holders in October 2009, 2014, 2019 and 2024, as well as
under certain other circumstances.

During
the first quarter of 2009, we commenced and completed a cash tender offer to purchase up to all of our outstanding 0% notes due 2024 at a price of $970 for each $1,000 par amount
of notes tendered. An aggregate par amount of $143.4 million of our 0% notes due 2024 were validly tendered and accepted in the offer. We paid a total of $139.1 million in cash to
repurchase these tendered notes. During the second quarter of 2009, we repurchased and retired, at our option in privately negotiated transactions, an aggregate of $50.8 million par amount of
our 0% notes due 2024. We paid a total of $50.5 million in cash to repurchase these notes. In connection with both of these transactions, we recorded net losses on the debt extinguishments of
approximately $1.5 million. At June 30, 2009 and December 31, 2008, $185.5 million and $365.9 million of our 0% notes due 2024 remained outstanding, respectively.

In
April 2009, the FASB issued FSP SFAS, No. 107-1 and APB No. 28-1,Interim Disclosures about Fair Value of Financial
Instruments, or SFAS 107-1 and APB 28-1, respectively. This FSP amends SFAS Statement No. 107,Disclosures
about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This FSP also amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in all
interim financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009 and we adopted SFAS 107-1 and APB 28-1 for the
period ending June 30, 2009.

The
aggregate maturities of short- and long-term debt, excluding capital lease obligations, are $185.5 million in 2009 and $99.8 million in 2010. The estimated
fair value of our debt, which is estimated based on quoted market prices, was approximately $279.5 million and $468.8 million, compared to its carrying value of $285.4 million and
$514.0 million at June 30, 2009 and December 31, 2008, respectively.

12

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. Comprehensive Income

Total comprehensive income consists of net income, net foreign currency translation adjustments and net unrealized gain (loss) on available-for-sale securities.

Three Months Ended

Six Months EndedJune 30,
2009

June 30,
2008
(as adjusted)

June 30,
2009

June 30,
2008
(as adjusted)(in thousands)Comprehensive income:Net income

$
44,850

$
380,933

$
80,027

$
388,051Net foreign currency translation adjustment


4,892


448


3,320


(495
)Net unrealized gain (loss) on available-for-sale securities


4,717


(2,089
)

6,093


(9,536
)Total comprehensive income

$
54,459

$
379,292

$
89,440

$
378,020


9. Legal Proceedings

Litigation Related to Generic Competition

Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the duration or outcome of any
patent-related lawsuits. If we, third parties from whom we receive royalties, or third parties from whom we have licensed products or received other rights to commercialize products, are not
successful in enforcing our respective patents, the companies seeking to market generic versions of our marketed drugs and the drugs of our licensees will not be excluded, for the full term of the
respective patents, from marketing their generic versions of our marketed products or third-party products for which we have licensed rights to our patents. Introduction of generic equivalents of any
of our marketed products or third-party products for which we have licensed rights to our patents before the expiration of our or our collaborators' patents would have a material adverse effect on our
business, financial condition and results of operations.



In September 2005, we received notification that the United States Food and Drug Administration, or FDA, had received an abbreviated
new drug applications, or ANDA, from Breath Limited, or Breath, seeking approval of generic versions of our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX® (levalbuterol HCl)
Inhalation Solution. Breath's submission includes a Paragraph IV certification alleging that our patents listed in the FDA publication entitledApproved Drug Products
With Therapeutic Equivalence Evaluations, commonly referred to as the "Orange Book", for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not
infringed by the generic versions for which Breath sought approval. In October 2005, we filed a civil action against Breath for patent infringement in the United States District Court for the District
of Massachusetts, No. 1:06-CV-10043.

In
April 2008, we entered into a settlement and license agreement with Breath to resolve this litigation. The agreement permits Breath to sell its generic versions of these XOPENEX
Inhalation Solution products in the United States under the terms of an exclusive 180-day license commencing on August 20, 2012 and a non-exclusive license thereafter.
Upon launch, Breath will pay us a double-digit

13

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

9. Legal Proceedings (Continued)

royalty
on gross profits generated from the sales of generic versions of these XOPENEX Inhalation Solution products. Under the agreement, Breath agreed not to sell any of the products covered by our
patents that are the subject of the license before the date on which the license commences. On May 1, 2008, the parties submitted to the court an agreed order of dismissal without prejudice,
which the court approved. The litigation is now concluded.

In
connection with the settlement and license agreement with Breath, in April 2008 we also entered into a supply agreement with Breath whereby, effective August 20, 2012, we may
exclusively supply levalbuterol products (1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL)to Breath, under our New Drug Application, or NDA, for a period
of 180 days, which we refer to as the Initial Term, and on a non-exclusive basis for two and one-half years thereafter. In addition to the royalties described above,
Breath will pay us on a cost plus margin basis for supply of these levalbuterol products. The supply agreement contains provisions regarding termination for cause and convenience, including either
party's right to terminate the agreement at any time after the Initial Term upon nine months written notice. Both the exclusive license under the settlement and license agreement and the exclusive
supply obligations under the supply agreement could become effective prior to August 20, 2012 if a third-party launches a generic version of those dosages of XOPENEX Inhalation Solution or if
the parties otherwise mutually agree.



In January 2006, we received notification that the FDA had received an ANDA from Dey, L.P., seeking approval of generic versions
of our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3 mL XOPENEX Inhalation Solution. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the
Orange Book for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable, or not infringed by the generic versions for which Dey, L.P. has sought approval. In February
2006, we filed a civil action against Dey, L.P. for patent infringement, and the case is pending in the United States District Court for the District of Delaware, C.A.
No. 06-113.

In
August 2006, we received notification that the FDA had received an ANDA from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL XOPENEX Inhalation Solution
concentrate. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate
are invalid, unenforceable, or not
infringed by the generic version for which Dey, L.P. has sought approval. In September 2006, we filed a civil action against Dey, L.P. for patent infringement in the United States
District Court for the District of Delaware, C.A. No. 06-604. In September 2006, both civil actions we filed against Dey, L.P. were consolidated into a single suit.

The
court held a Markman hearing in July 2008 to address the parties' disputed issues of patent claim interpretation and issued its written decision and ruling on these matters in
December 2008. A pretrial conference is scheduled for September 2009, and trial is currently scheduled to begin within 120 days of the pretrial conference.

In
June 2008, Dey, L.P. filed a Complaint against us in the United States District Court for the District of Delaware, C.A. No. 08-372. The Complaint is a
declaratory judgment action in which Dey, L.P. seeks a declaration of non-infringement and invalidity of United States Patent 6,451,289 owned by us. Dey, L.P. had previously
sent us notice that its ANDA contained a Paragraph IV certification alleging that patent 6,451,289 is invalid, unenforceable or not infringed, and we did not

14

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

9. Legal Proceedings (Continued)

commence
litigation in response. We filed a Motion to Dismiss for lack of subject matter jurisdiction in response to the Complaint. In January 2009, the court entered an order denying our Motion to
Dismiss and issued a corresponding opinion shortly thereafter. In February 2009, we filed a Motion for Certification of the court's order denying our Motion to Dismiss and to stay the proceedings
pending resolution of appeal, which was denied by the court in April 2009. In May 2009, we filed our Answer to the Complaint, and in response Dey, L.P. filed a Motion for Judgment on the
pleadings of non-infringement, which is currently pending before the Court.



In May 2007, we received notification that the FDA had received an ANDA from Barr Laboratories, Inc., or Barr, seeking approval
of generic versions of our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Barr's submission includes a Paragraph IV certification alleging that our patents listed in
the Orange Book for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the generic versions for which Barr has sought approval. In July 2007, we filed a
civil action against Barr for patent infringement.

In
March 2009, we entered into a settlement and license agreement with Teva Pharmaceuticals USA, Inc., or Teva, and Barr, a wholly owned subsidiary of Teva, to resolve this
litigation with Barr and to grant a license to Barr and Teva. The settlement and license agreement permits Barr and Teva to launch generic versions of these XOPENEX Inhalation Solution dosages under
terms of a
non-exclusive license commencing on February 17, 2013. The agreement also contains provisions whereby the effective date of Barr's and Teva's license can be earlier under certain
circumstances. Upon launch, Teva and Barr will pay us a royalty on their respective profit margins generated from the sales of generic versions of these XOPENEX Inhalation Solution dosages. On
March 11, 2009, the parties submitted to the court an agreed Consent Final Judgment and Dismissal, which the court approved.



The filing of an action for patent infringement under the Hatch-Waxman Act results in an automatic 30-month stay of the
FDA's authority to grant final marketing approval to those companies that filed an ANDA containing a Paragraph IV certification against one or more of our XOPENEX Inhalation Solution patents.
However, if an ANDA submission that includes a Paragraph IV certification is filed against a patent for a drug that has been granted five-year new chemical entity data exclusivity,
and that ANDA is filed between years four and five of the date the data exclusivity was awarded, such as in the case of the recently filed ANDAs with Paragraph IV certifications regarding
LUNESTA® (eszopiclone), the statutory stay will run for 7.5 years from the NDA approval date. The first filer of an ANDA with a Paragraph IV certification is potentially
entitled to a 180-day period of semi-exclusivity during which the FDA cannot approve subsequently filed ANDAs. The 180-day semi-exclusivity period would
begin to run only upon first commercial marketing by the first filer. There are, however, also certain events that could cause the first filer to forfeit the 180-day
semi-exclusivity period, which we refer to as a forfeiture event.

15

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

9. Legal Proceedings (Continued)

For
our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3 mL dosages of XOPENEX Inhalation Solution, we believe that Breath is the sole first filer and potentially entitled to 180 days of
semi-exclusivity against subsequent ANDA filers for those three dosages. On April 9, 2008, the FDA granted final approval to Breath's ANDA for all three dosages. However, if a
forfeiture event occurs and the FDA determines that Breath has forfeited the 180-day semi-exclusivity period for one or more of those three dosages, other ANDA filers could
be granted final approval by the FDA and could subsequently commence an "at risk" launch. For those three dosages, the 30-month stay against Dey, L.P. expired on July 9,
2008. In addition, a forfeiture could also accelerate the effective date of Barr's and Teva's license.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey, L.P. is the sole first filer and potentially entitled to 180 days of
semi-exclusivity for that concentration. The 30-month stay against Dey, L.P.'s ANDA for that concentration expired on February 14, 2009. Dey, L.P. received
final approval to sell 1.25 mg/0.5 mL levalbuterol from the FDA on March 20, 2009 and could commence an "at risk" launch of this product at any time.

Although
we could seek recovery of any damages sustained in connection with any activities conducted by a party that infringes a valid and enforceable claim in our patents, whether we
are ultimately entitled to such damages would be determined by a court of law. If any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution products prior
to the resolution of ongoing legal proceedings or in violation of any settlement agreement, or there is a court determination that the products these companies wish to market do not infringe our
patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our business, financial condition and results of operations. In addition, our previously issued
guidance regarding our projected financial results may no longer be accurate, and we would have to revise such guidance.

In
May 2008 and March 2009, we provided to the Federal Trade Commission and Department of Justice Antitrust Division the notifications of the settlement with Breath and Barr,
respectively, as required under Section 1112(a) of the Medicare Prescription Drug Improvement Act of 2003, or MMA. The settlements with these parties as well as the other agreements with Breath
and its affiliates, including the supply agreement, the agreement for the acquisition of Oryx and license agreements with Arrow may be reviewed by antitrust enforcement agencies, such as the Federal
Trade Commission and Department of Justice Antitrust Division. There can be no assurances that governmental authorities will not seek to challenge the settlement with Breath or Barr/Teva or that a
competitor, customer or other third-party will not initiate a private action under antitrust or other laws challenging either or both of these settlements. We may not prevail in any such challenges or
litigation and, in any event, may incur significant costs in the event of an investigation or in defending any action under antitrust laws.



In March 2009, we filed a lawsuit in the U.S. District Court for the District of New Jersey alleging infringement of our U.S. Patent
Numbers 6,319,926; 6,444,673; 6,864,257; and 7,381,724, against each of Teva, Teva Pharmaceuticals Industries, Ltd., Cobalt Laboratories Inc., Cobalt Pharmaceuticals, Inc.,
Dr. Reddy's Laboratories Ltd., Dr. Reddy's Laboratories, Inc., Orchid Healthcare, a division of Orchid Chemicals & Pharmaceuticals Ltd., Orchid
Chemicals & Pharmaceuticals, Ltd., Glenmark Generics, Inc., USA, Glemnark Generics, Ltd., Glenmark Pharmaceuticals, Ltd., Roxane

16

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

9. Legal Proceedings (Continued)

Laboratories, Inc.,
Lupin Ltd., Lupin Pharmaceuticals, Inc., Wockhardt Limited, Wockhardt USA, Inc., Sun Pharma Global Inc., Sun Pharmaceutical
Industries Inc., Sun Pharmaceutical Industries Ltd., Orgenus Pharma Inc., Mylan Inc., or Mylan, and Alphapharm Pty. Ltd., or Alphapharm. In April 2009, we also filed
a lawsuit in the United States District Court for the Southern District of New York alleging infringement of these patents against Mylan and Alphapharm, which was subsequently dismissed pursuant to
agreement by the parties.

Beginning
in February 2009, we received notices from each of these parties indicating that each had filed an ANDA with the FDA for generic versions of eszopiclone tablets (1 mg, 2 mg and
3 mg). Each submission includes a Paragraph IV certification alleging that one or more of our patents listed in the Orange Book for LUNESTA is invalid, unenforceable or not infringed by their
respective proposed generic products. We may receive additional notices that other ANDAs with Paragraph IV certifications have been filed by different generic pharmaceutical companies. Due to
the commencement of this litigation, ANDA approval will be stayed until approximately June 15, 2012 (or potentially six months thereafter if we successfully obtain a pediatric exclusivity
extension) or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier. Should we successfully enforce our patents, ANDA approval should not occur until
expiration of the applicable patents, one of which may be extended by our outstanding patent term extension application.



Certain of Schering-Plough Corporation, or Schering-Plough's, CLARINEX® (desloratadine) products for which we receive sales
royalties are currently the subject of patent infringement litigation. Since June 2007, the FDA has received ANDAs relating to various dosage forms of CLARINEX from eleven different generic
pharmaceutical companies. These ANDA submissions include Paragraph IV certifications alleging that our patents, which Schering-Plough (as exclusive licensee of such patents) listed in the
Orange Book for these products, are invalid, unenforceable and/or not infringed by the submitter's proposed product. Starting in July 2007, we and
the University of Massachusetts, co-owners of certain patents listed in the Orange Book, filed civil actions against these parties for patent infringement in the United States District
Court for the District of New Jersey. In April 2008, the trial judge consolidated these cases for all purposes including discovery and trial. The court has not set a trial date. We believe that all of
these ANDAs are subject to a statutory stay of approval until at least December 21, 2009 based on previous litigation commenced by Schering-Plough against these parties in separate civil
actions involving another patent.

In
March 2008, we entered into a consent agreement with Glenmark Pharmaceuticals, Inc., or Glenmark, one of the eleven generic pharmaceutical companies that filed a
Paragraph IV certification against our patents, whereby Glenmark agreed not to pursue its case and to not market CLARINEX 5 mg tablets until the expiration of our patents listed by
Schering-Plough in the Orange Book or until these patents are found invalid or unenforceable.

As
a result of separate formal settlement agreements that Schering-Plough has entered into with several ANDA filers involved in litigation with Schering-Plough, or Schering-Plough
Settlement Agreements, we and the University of Massachusetts submitted, and the court approved, stipulations of dismissal without prejudice against eight of the ANDA filers that we sued. The
Schering-Plough Settlement Agreements entered to date permit generic entry of CLARINEX-D® -12 Hour, CLARINEX-D® -24 Hour and
CLARINEX® REDITABS® on January 1, 2012 and CLARINEX 5 mg

17

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

9. Legal Proceedings (Continued)

tablet
on July 1, 2012. Upon generic entry of each product by a party to a Schering-Plough Settlement Agreement, our right to receive royalties on sales of such product will be significantly
reduced.



Beginning in February 2008, we and UCB S.A. received notices from Synthon Pharmaceuticals, Inc., or Synthon, Sun
Pharmaceutical Industries Limited of Andheri (East), or Sun, Sandoz Inc., or Sandoz, and Pliva Hrvatska D.O.O. and Barr, or Pliva/Barr, that each has filed an ANDA seeking approval to market
generic versions of XYZAL® (levocetirizine) 5 mg tablets, and that each ANDA contained a Paragraph IV certification alleging that United States Patent 5,698,558, owned by us and
exclusively licensed to UCB S.A., is invalid, unenforceable or not infringed. Beginning in April 2008, UCB S.A. filed in its name and on our behalf civil actions for patent infringement
in the United States District Court for the Eastern District of North Carolina against Synthon, Sun, Sandoz, Pliva/Barr. We believe that all of these ANDAs are subject to a 30-month
statutory stay of approval, resulting from the filing of lawsuits for patent infringement, the earliest of which, against Synthon, is scheduled to expire on or about August 29, 2010. In August
2008, the trial judge consolidated these cases for all purposes including discovery and trial. The court has not set a trial date.

Barr,
as agent for Pliva, and Sun amended their ANDAs to change their Paragraph IV certifications to Paragraph III certifications, thereby withdrawing the challenges to our
patent. As a result, in April and May 2009, respectively, the parties submitted agreed stipulations of dismissal without prejudice, which the court approved. Thus, the actions against Pliva/Barr and
Sun are complete.

BROVANA Patent Infringement Claim

In April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York, C.A.
No. 1:07-cv-2353, by Dey, L.P. and Dey, Inc., collectively referred to as Dey, alleging that the manufacture and sale of BROVANA® (arformoterol
tartrate) Inhalation Solution infringes or will induce infringement of a single United States patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and
Counterclaims to this Complaint seeking to invalidate the originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent. In March
2008, United States Patent 7,348,362, or the '362 patent, entitled "Bronchodilation b-agonist compositions and Methods" issued, and Dey, L.P. is the assignee of the patent. In
August 2008, the court granted our Motion to Amend our Answer and Counterclaims to seek declaratory judgment that the '362 patent is invalid and unenforceable and to add Mylan, Dey, L.P.'s
parent corporation, as a party. Between December 2008 and January 2009, U.S. patents 7,462,645; 7,465,756; and 7,473,710 all entitled "Bronchodilation b-agonist compositions and Methods"
issued. These three patents claim priority to the same parent patent application that issued as the '362 patent. In January 2009, Dey filed a motion to add these three patents to the case, which we
did not oppose and was granted by the court. In March 2009, Dey filed a Supplemental Complaint to add these three patents to the case, and in April 2009 we filed and an Answer and Counterclaims to
this Supplemental Complaint. In July 2009, in response to our filings ofex partereexamination requests, the United States Patent and Trademark Office
issued orders granting the reexamination requests for certain claims of Dey, L.P.s U.S. Patents 6,814,953 and 6,667,344.

18

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

9. Legal Proceedings (Continued)

Under
the current trial scheduling order, the trial will begin no earlier than February 26, 2010. It is too early to make a reasonable assessment as to the likely outcome or
impact of this litigation. We are unable to reasonably estimate any possible range of loss or liability related to this lawsuit due to its uncertain resolution.

Other Legal Proceedings

We have been named as the defendant in two separate lawsuits filed in the United States District Court for the Middle District of
Florida (Sharp, et al., filed July 17, 2008) and the United States District Court for the District of Arizona (Greeves, et al., served September 9, 2008) claiming that our pharmaceutical
sales representatives should have been categorized as "non-exempt" rather than "exempt" employees under the Fair Labor Standards Act, or FLSA. Both lawsuits claim that we owe damages,
overtime wages, interest, costs and attorneys' fees for periods preceding the filing of the respective actions. Other companies in the pharmaceutical industry face substantially similar lawsuits. We
filed an Answer to the Complaint in each of the Sharp and Greeves litigation on October 10, 2008 and October 15, 2008, respectively. On March 4, 2009, we filed before The Judicial
Panel for Multidistrict Litigation a motion seeking to consolidate both actions into one lawsuit. On June 23, 2009, the Judicial Panel approved Sepracor's motion for consolidation and
transferred the Florida proceeding to Arizona. In addition, on March 27, 2009, we filed a Defendant's Memorandum Regarding Collective Action Issues under the FLSA in the Arizona court in
opposition to the plaintiffs' motion for class certification in the Greeves litigation. To date, the court has not ruled on the merits of this motion, but has instructed the plaintiffs to refile the
motion as part of the Multidistrict Litigation docket in the U.S. District Court (District of Arizona). Discovery in each case is proceeding and no trial dates have been set. Based upon the facts as
presently known, we do not believe that it is likely that either collective action will result in liability that would be material to our financial position.

From
time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a material adverse effect on our
business, financial condition or results of operations.

10. Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and for differences between the financial statement
amounts of assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is established if, based on management's review of both positive and negative evidence, it is more likely than not that all or a portion of the deferred tax asset will not be
realized. Based upon our operating results over recent years and through June 30, 2009 and an assessment of our expected future results of operations, we have determined that it is more likely
than not that we will realize a portion of our deferred tax assets.

We
have a valuation allowance recorded against United States net deferred tax assets of $182.8 million, which consists of $145.1 million for stock-based compensation
deductions and $6.9 million of stock-based compensation research and development credits that will be credited to additional paid-in-capital when realized;
$1.9 million for certain state operating loss carryforwards, $9.0 million for capital losses, and $19.9 million of research and development credits that will likely

19

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Income Taxes (Continued)

expire
without being utilized. Additionally, there is a non-U.S. valuation allowance of $1.1 million for non-U.S. operating losses and tax credit carryforwards that will
likely expire without being utilized.

Our
income tax provision for the three and six months ended June 30, 2009 varies from the United States statutory tax rate principally as a result of the provision for state
income taxes, the benefit related to research tax credits and stock-based compensation. Our income tax provision for the three and six months ended June 30, 2008 consisted primarily of Federal
and state alternative minimum taxes, state income taxes and foreign income tax and the release of the valuation allowance. The net tax benefit as of June 30, 2008 was due to the release of a
valuation allowance recorded against net deferred tax assets in the amount of $443.4 million in the second quarter of 2008.

We
account for uncertain tax positions in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes,or FIN 48, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return
and also provides guidance on various related matters such as derecognition, interest, penalties and disclosure. At June 30, 2009, unrecognized tax benefits included approximately
$10.6 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deduction, $900,000 of tax positions related to
the shorter deductibility period, and approximately $13.2 million of tax positions related to certain tax credits which have not been utilized as of June 30, 2009. We recognize accrued
interest and penalties related to unrecognized tax benefits as a component of tax expense. For the three and six months ended June 30, 2009, the amount of accrued interest related to
unrecognized tax benefits was not significant and no amount has been accrued for penalties.

We
file tax returns in the United States Federal jurisdiction and in various state, local and foreign jurisdictions. We are no longer subject to Internal Revenue Service, or IRS,
examination for years prior
to 2005, although carryforward attributes that were generated prior to 2005 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. We receive
inquiries from various states during the year, some of which include an audit of state returns previously filed. With limited exceptions, we are no longer subject to state or local examinations for
years prior to 2005; however, carryforward attributes that were generated prior to 2005 may still be adjusted upon examination by state or local tax authorities if they either have been or will be
used in a future period.

Our
foreign income tax returns are not currently under examination. With limited exceptions, we are no longer subject to foreign income tax examinations for years prior to 2004, although
carryforward attributes that were generated prior to these respective periods may still be adjusted upon examination if they either have been or will be used in a future period.

11. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value,
establishes a framework and gives guidance regarding the methods used for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Fair value is based upon quoted market prices, where
available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. SFAS 157 establishes a three-level

20

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

valuation
hierarchy for disclosure of fair value measurements. The three levels of the hierarchy are defined as follows:

Level 1Inputs
to the valuation methodology are quoted market prices for identical assets or liabilities in active markets. The types of assets measured at fair value
using Level 1 inputs include our publicly traded equity investments with quoted market prices and money market funds. We also
include commercial paper, government agency securities, corporate bonds and municipal securities that are actively traded.

Level 2Inputs
include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from, or
corroborated by, observable market data by correlation or other means (market corroborated inputs). The types of assets measured at fair value using Level 2 inputs include our publicly traded
debt securities and asset-backed securities with quoted market prices, which are in markets that are considered less active.

Level 3Inputs
to the valuation methodology are unobservable inputs based on management's best estimate of inputs market participants would use in pricing the asset or
liability at the measurement date, including assumptions about risk. The types of assets measured at fair value using Level 3 inputs include auction-rate securities where the
auctions have failed.

In
April 2009, the FASB issued FSP SFAS No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP 157-4. This FSP provides additional guidance on estimating fair value when the
volume and level of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on
circumstances that may indicate that a transaction is not orderly. This FSP is effective for interim periods ending after June 15, 2009. We adopted FSP 157-4 for the period ending
June 30, 2009.

21

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

In
accordance with the fair value hierarchy described above, the following tables show the fair value of our available-for-sale investments measured at fair value
on a recurring basis as of June 30, 2009:

Quoted Prices
in Active
Markets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Carrying
Value at
June 30, 2009Level 1

Level 2

Level 3

Total(in thousands)Money market funds

$
365,990

$


$


$
365,990Asset-backed securities





544





544Equity securities


6,551








6,551Commercial paper


19,879








19,879Government agency securities


25,134








25,134Corporate bonds


79,815








79,815Municipal securities


5,002








5,002Auction-rate securities








71,333


71,333Total

$
502,371

$
544

$
71,333

$
574,248


In
accordance with the fair value hierarchy described above, the following table shows the fair value of our available-for-sale investments measured at fair value
on a recurring basis as of December 31, 2008:

Quoted Prices
in Active
Markets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Carrying
Value at
December 31,
2008Level 1

Level 2

Level 3

Total(In Thousands)Money market funds

$
595,750

$


$


$
595,750Asset-backed securities





681





681Equity securities


4,539








4,539Auction-rate securities








70,912


70,912Total

$
600,289

$
681

$
70,912

$
671,882


Auction-rate
securities are long-term variable rate bonds tied to short-term interest rates. After the initial issuance of the securities, the
interest rate on the securities is reset periodically, at intervals established at the time of issuance (primarily every 28 days), based on market demand for a reset period.
Auction-rate securities are bought and sold in the marketplace through a competitive bidding process often referred to as an auction. If there is insufficient interest in the securities at
the time of an auction, the auction may not be completed and the rates may be reset to predetermined "penalty" or "maximum" rates. These rates are determined by each auction-rate
securities' prospectus and may be below market rates or even zero.

Substantially
all of our auction-rate investments, approximately $71.3 million at June 30, 2009, are backed by pools of student loans guaranteed by the Federal
Family Education Loan Program. Auctions

22

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

for
these securities began failing in the first quarter of 2008 and continued to fail throughout the first half of 2009. Consequently, the investments are not currently liquid, and we will not be able
to access these funds until a future auction of these investments is successful, a buyer is found outside of the auction process, the security is resecuritized, or is called, the underlying securities
have matured, or the arbitration proceedings related to these securities is resolved in our favor. At the time of our initial investment and through the date of this report, a substantial majority of
our auction-rate securities remain AAA rated by one or more rating agencies. We intend to hold these investments until the lack of liquidity in these markets is resolved. As a result, we
continue to classify the entire balance of our auction-rate securities as non-current available-for-sale investments at fair value on our condensed
consolidated balance sheets.

The
fair values of these auction-rate securities are estimated utilizing a trinomial discounted cash flow valuation model as of June 30, 2009. This analysis considers,
among other items, the maximum interest rate, the probability of passing, failing or default at each auction, the severity of default and the discount rate. These securities were also compared, when
possible, to other observable market data or inputs with similar characteristics to the securities that we held, including credit default swaps spreads on securities with similar credit, implied
volatility rates on exchange traded options and spreads on corporate credit. The analysis assumes that a successful auction would occur, at par, at some point in time for each security.

In
the second quarter of 2009, we adopted the provisions of FSP SFAS No. 115-2,Recognition and Presentation of
Other-Than-Temporary Impairments, or FSP 115-2, and assessed the unrealized losses in our portfolio under this guidance, primarily related
to our auction-rate securities. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on
available-for-sale securities that are determined to be other-than-temporary but not related to credit loss, are recorded, net of tax, in accumulated
other comprehensive income.

For
available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely
than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security's decline in fair
value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss.

Regardless
of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the
security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security. Other-than-temporary
impairments related to credit losses are recorded within earnings as an impairment loss.

For
equity securities, when assessing whether a decline in fair value below our cost basis is other-than-temporary, we consider the fair value of our equity
securities compared to their carrying amount, the historical volatility of the price of each security and any market and company-specific factors related to each security. We then consider our intent
and ability to hold the equity security for a period of time sufficient to recover our carrying value. Where we have determined that we lack the intent and ability to hold an equity security to its
expected recovery, the security's decline in fair value is deemed to be other-than-temporary and is recorded within earnings as an impairment loss.

23

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

Prior
to our adoption of FSP 115-2, we recognized impairments under the previously effective guidance contained within SFAS No. 115,Accounting
for Certain Investments in Debt and Equity Securities,or SFAS 115. In accordance with SFAS 115, other-than-temporary impairment losses related
to equity securities were recognized through earnings during the three and six months ended June 30, 2008 of $9.1 million relating to our investment in ACADIA. We did not recognize any
other-than-temporary impairment charges through earnings for the three and six months ended June 30, 2009 relating to our investment in ACADIA.

During
the three and six months ended June 30, 2009, we recognized other-than-temporary impairment losses related to our auction-rate
securities through earnings of $331,000. Decreases to other-than-temporary impairment losses related to the auction-rate securities were recognized in other
comprehensive income were $2.1 million and $3.5 million for the three and six months ended June 30, 2009, respectively. The total unrealized losses in the auction-rate
securities at June 30, 2009 approximated $5.3 million.

All
of our assets measured at fair value on a recurring basis using significant Level 3 inputs as of June 30, 2009 and June 30, 2008 were auction-rate
securities. The following tables summarize the change in balances for the six month periods ended June 30, 2009 and 2008:

Level 3
Auction-Rate
Securities(in thousands)Balance at January 1, 2009

$
70,912Unrealized gain included in other comprehensive income


1,416Net settlements


(1,225
)Balance at March 31, 2009


71,103Unrealized gain included in other comprehensive income


2,061Credit loss recognized in earnings


(331
)Net settlements


(1,500
)Balance at June 30, 2009

$
71,333




Level 3
Auction-Rate
Securities(in thousands)Balance at January 1, 2008

$
99,900Unrealized loss included in other comprehensive income


(3,509
)Net settlements


(16,150
)Balance at March 31, 2008


80,241Unrealized loss included in other comprehensive income


(447
)Net settlements


(1,600
)Balance at June 30, 2008

$
78,194


Effective
January 1, 2009, we implemented SFAS 157 for our nonfinancial assets and liabilities that are subject to remeasurement at fair value on a
non-recurring basis. These assets include those

24

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

associated
with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one
or more is determined to be impaired. The adoption of SFAS 157 for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact
our financial position or results of operations; however the remeasurements under SFAS 157 could have an impact in future periods. In addition, we may have additional disclosure requirements in
the event we complete an acquisition or incur impairment of our assets in future periods.

As
of June 30, 2009, we have not made any fair value elections with respect to any of our eligible assets and liabilities as permitted under the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115.

12. Restructuring

In the first quarter of 2009, we recorded $27.5 million of restructuring charges. These charges consisted of approximately $21.8 million relating to employee termination
benefits and approximately $5.7 million relating to other charges, including contract sales organization termination fees, lease termination fees associated with equipment and automobiles, and
future lease and lease-related obligations relating to office vacancies.

During
the second quarter of 2009, we vacated a leased facility and implemented a nominal reduction in workforce. As a result, we recorded a net restructuring charge of
$2.6 million. This net charge consisted of approximately $860,000 relating to employee termination benefits and approximately $2.3 million in charges related to future lease and
lease-related obligations resulting from a vacancy and expected continued vacancy of a leased facility, offset by a reversal of approximately $600,000 relating to the first quarter charges.

The
following table sets forth a summary of the restructuring accrual activity for the three and six months ended June 30, 2009:

Employee Related
Items and Benefits

Other Costs

Total(in thousands)Restructuring accrual at January 1, 2009

$


$


$
Charges


21,818


5,719


27,537Utilization


(4,921
)

(2,781
)

(7,702
)Restructuring accrual at March 31, 2009


16,897


2,938


19,835Reversal of first quarter charges


(372
)

(213
)

(585
)Charges


856


2,283


3,139Utilization


(11,065
)

(2,288
)

(13,353
)Restructuring accrual at June 30, 2009

$
6,316

$
2,720

$
9,036


The
employee related items and benefits primarily relate to severance and benefit costs for the employees that were terminated. Other costs consist of excess leased computer equipment,
excess leased facilities and termination fees related to a contract sales organization as a result of our corporate restructuring. The restructuring reserve is recorded as other current liabilities on
our condensed consolidated balance sheets.

25

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Business Segment Reporting

We report and operate in two segments distinguished by strategic business units that offer different products: (i) Sepracor Inc., which consists of Sepracor and our
subsidiaries other than SPI and currently engages in the discovery, research and development and commercialization of pharmaceutical products and (ii) SPI, which currently engages in the
licensing and commercialization of pharmaceutical products in Canada. The accounting policies of both segments are the same as those described in the summary of significant accounting policies, which
are contained in our Annual Report on Form 10-K and filed with the SEC.

The
tables below represent segment information for the periods identified and provides a reconciliation of segment information to total consolidated information. For the Sepracor and SPI
segments, segment income (loss) from operations represents segment gross profit less direct research and development expenses, research and developmentin process upon acquisition, or
IPR&D, expenses, direct selling, general and administrative expenses and amortization of intangible assets. There are no inter-segment revenues; and we do not report capital expenditures by segment as
such information is not used by our chief operating decision-maker.

Three Months Ended

Six Months EndedJune 30, 2009

June 30, 2008(1)

June 30, 2009

June 30, 2008(1)(in thousands)Revenue:Sepracor

$
320,976

$
292,497

$
647,016

$
613,276SPI


5,268


1,648


9,400


1,648Total revenues

$
326,244

$
294,145

$
656,416

$
614,924Income (loss) from operations:Sepracor

$
73,209

$
(51,100
)
$
140,057

$
(44,478
)SPI


128


(278
)

(309
)

(278
)Income (loss) from operations

$
73,337

$
(51,378
)
$
139,748

$
(44,756
)Depreciation and amortization:Sepracor

$
7,932

$
8,630

$
15,964

$
15,942SPI


892


2


1,727


2Total depreciation and amortization

$
8,824

$
8,632

$
17,691

$
15,944


---

June 30, 2009

December 31, 2008(in thousands)Total assets:Sepracor

$
1,591,366

$
1,751,397SPI


56,484


55,927Total assets

$
1,647,850

$
1,807,324


All
of our revenues were received from unaffiliated customers located in the United States and Canada.

26

---



Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

14. GSK License Agreement Termination

On April 29, 2009, we entered into a mutual termination agreement, or Termination Agreement, with GSK Group Limited, or GSK, an affiliate of GlaxoSmithKline, pursuant to which the
parties mutually agreed to terminate the development, license and commercialization agreement dated September 11, 2007, or GSK License Agreement. In accordance with the Termination Agreement,
all rights granted by us to GSK ceased as of April 29, 2009, with the exception of certain provisions that customarily survive termination. In addition, the parties confirmed that each party is
current in its payments due to the other and that no further payments, milestones or other consideration are due to either party under the terms of the GSK License Agreement. As a result of the
termination of the GSK License Agreement, we recognized the remaining $16.9 million in deferred revenue as license fees in the second quarter of 2009.

27

---





Table of Contents



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning
our business, operations and financial condition, including statements with respect to the safety, efficacy and potential benefits of our products and products under development, expectations with
respect to the timing and success of the development and commercialization of our products and product candidates and acquisitions of technologies, product candidates, approved products and/or
businesses, the timing and success of the submission, acceptance and approval of regulatory filings, the scope of patent protection with respect to
our products and product candidates and information with respect to the other plans and strategies for our business and the business of our subsidiaries. All statements other than statements of
historical facts included in this report regarding our strategy, future operations, timetables for product testing, development, regulatory approvals and commercialization, acquisitions, financial
position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "will,"
"estimate," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking
statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including
those discussed under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report.

You
should read these forward-looking statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our
future financial condition, or state other "forward-looking" information. You should be aware that the occurrence of any of the events described under "Risk Factors" and elsewhere in this report could
substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline.

We
cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this Quarterly Report on Form 10-Q
represent our expectations as of the date of this Quarterly Report on Form 10-Q and should not be relied upon as representing our expectations as of any other date. Subsequent
events and developments will cause our expectations to change. However, while we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so, even if our
expectations change.

Executive Overview

We are a research-based pharmaceutical company focused on discovering, developing and commercializing differentiated products that
address large and growing markets and unmet medical needs and are prescribed principally by primary care physicians and certain specialists. Our drug research and development program, together with
our corporate development and licensing activities, have yielded a portfolio of products and product candidates intended to treat a broad range of indications. We are currently concentrating our
product development efforts in two therapeutic areas: respiratory diseases and central nervous system, or CNS, disorders.

Our
currently marketed products in the United States are:



28

---



Table of Contents



In
January 2008, we obtained from Nycomed GmbH, or Nycomed, the exclusive United States distribution rights to OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol. We
commercially introduced OMNARIS Nasal Spray in April 2008. In September 2008, we commercially introduced ALVESCO HFA Inhalation Aerosol through a staged launch that was initially targeted primarily to
specialists, and in early 2009 we expanded our sales and marketing efforts to include a broader group of physicians. We expect 2009 revenues for this product, if any, to take place in the latter part
of the year as we reduce launch phase inventory.

Our
sales force markets our products in the United States to primary care physicians, allergists, pulmonologists, pediatricians, hospitals, psychiatrists and sleep specialists, as
appropriate. We expect to commercialize any additional products that we may successfully develop or acquire through our own or a contract sales force, co-promotion agreements and/or
out-licensing partnerships.

In
January 2009, we announced a corporate restructuring and workforce reduction plan pursuant to which we reduced our workforce by approximately 20%. As of the end of the second quarter
of 2009, we had substantially completed this restructuring and workforce reduction. In addition, during the first quarter of 2009, we eliminated approximately 410 sales representative positions from a
contract sales organization. These representatives marketed OMNARIS Nasal Spray, ALVESCO HFA Inhalation Aerosol and our XOPENEX products from September 2008 through January 2009. In total, our sales
positions were reduced to approximately 1,325 (although the actual number of sales positions varies from time to time due to attrition in the ordinary course of business).

In
the first quarter of 2009, we recorded $27.5 million of restructuring charges. These charges consisted of approximately $21.8 million relating to employee termination
benefits and approximately $5.7 million relating to other charges, including contract sales organization termination fees, lease termination fees associated with equipment and automobiles, and
future lease and lease-related obligations related to office vacancies. During the second quarter of 2009, we vacated a leased facility and implemented a nominal reduction in workforce. As a result,
we recorded a net restructuring charge of $2.6 million. This net charge consisted of approximately $860,000 relating to employee termination benefits and approximately $2.3 million in
charges relating to future lease and lease-related obligations resulting from an office vacancy and expected continued vacancy of a leased facility, offset by a reversal of approximately $600,000
relating to the first quarter charges.

29

---



Table of Contents

While
we have substantially completed the implementation of our restructuring and workforce reduction plan, we may incur additional charges as we complete the implementation of this
plan. We do not currently believe any additional charges will be material. However, our estimates are based on a number of assumptions and actual results may differ materially and additional charges
not currently expected may be incurred in connection with, or as a result of, these activities.

In
order to establish a Canadian commercial presence, in June 2008, we acquired the outstanding capital stock of Oryx Pharmaceuticals, Inc., or Oryx, a specialty pharmaceutical
company that markets branded prescription pharmaceutical products to physician specialists and hospitals within Canada and is focused in the cardiovascular, CNS disorder, pain and infectious disease
therapeutic areas. We subsequently changed Oryx's name to Sepracor Pharmaceuticals, Inc., or SPI. Following this acquisition, in accordance with Financial Accounting Standards Board, or FASB,
Statement of Financial Accounting Standards, or SFAS, No. 131,Disclosures about Segments of an Enterprise and Related Information,we began
operating in two segments distinguished by strategic business units that offer different products: (1) Sepracor Inc., which consists of Sepracor and our subsidiaries other than SPI and
currently engages in the discovery, research and development and commercialization of pharmaceutical products, and (2) SPI, which currently engages in the licensing and commercialization of
pharmaceutical products in Canada. However, since there are no differences among our operating segments that are material to an understanding of our business as a whole, we present the financial
information of these two segments on a consolidated basis.

Factors
that will be critical for us in achieving near-term success include our ability to:



We
believe that success in each of these areas should allow us to continue to be profitable in the near term and provide us the ability to repay our par amount of outstanding convertible
debt of

30

---



Table of Contents

$288.1 million.
If not converted, repurchased at the noteholders' or our option, or otherwise refinanced earlier, the par amount of this debt becomes due as follows:

Par Amount of Convertible Debt

Maturity Date$99,844,000


2010
(1)$188,255,000


2024
(2)


---

Our
long-term success depends in part on our ability to continue to sell our commercialized products, build upon our current business, successfully develop or acquire and
commercialize new products and successfully complete our corporate restructuring plan. Our long-term success also depends in part on our ability to maintain patent protection for our
products, including successful enforcement of our patents, particularly for XOPENEX Inhalation Solution and LUNESTA for which a number of ANDAs have been submitted to the FDA. In addition, the Obama
Administration has announced that health care reform, including regulation of pharmaceutical companies and their products, is a priority. The impact of such reform and affect on our
long-term success cannot be predicted at this time.

We
expect that sales of LUNESTA and XOPENEX Inhalation Solution will represent the majority of our total revenues in 2009. We do not have long-term sales contracts with our
customers, and we rely on purchase orders for sales of our products. Reductions, delays or cancellations of orders for our marketed products could adversely affect our operating results. If sales of
our marketed products do not meet our expectations, we may not have sufficient revenues to achieve our business plan and our business will not be successful.

Significant 2009 Developments

Research and Development/Regulatory



31

---



Table of Contents





32

---



Table of Contents



Litigation



33

---



Table of Contents



Other Developments



Revised Financial Statements

As a result of our adoption of FASB Staff Position, or FSP, No. Accounting Principles Board, or APB, 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP
APB 14-1, and its impact on our 0% notes due 2024, interest expense and general and administrative amounts prior to January 1, 2009 have been adjusted to conform to the current
period presentation. In addition, during the first quarter of 2009 we detected two immaterial accounting errors. The first related to our interest income calculation and the second related to our
accounting for manufacturing costs associated with our commercial products and product samples. For purposes of the three and six month periods ended June 30, 2009 and 2008 comparisons below,
we have adjusted our first and second quarter 2008 interest income, cost of revenue, interest expense and general and administrative amounts to reflect the adjusted amounts. See Note 3 "Revised
Financial Statements" to the condensed consolidated interim financial statements for further discussions related to the adoption of FSP APB 14-1 and the correction of certain
immaterial prior period errors.

Three Month Periods ended June 30, 2009 and 2008

Revenues

Product Sales Revenue

Product sales were $289.2 million and $269.9 million for the three months ended June 30, 2009 and 2008,
respectively, an increase of approximately 7%.

Sales
of LUNESTA were $151.3 million and $148.1 million for the three months ended June 30, 2009 and 2008, respectively, an increase of approximately 2%. The
increase is primarily the result of a net selling price increase of approximately 13%. The net selling price increase consisted of a gross selling price increase of approximately 8% and a decrease in
product sales allowances primarily attributed to reduced government rebates and contractual discounts. Partially offsetting the increase in the net selling price was an approximately 10% decrease in
the number of units sold, which we believe is primarily the result of competition from generic products in the insomnia market, and a decline in

34

---



Table of Contents

the
overall growth rate of the market for branded insomnia products. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX Inhalation Solution were $89.9 million and $85.4 million for the three months ended June 30, 2009 and 2008, respectively, an increase of
approximately 5%. The increase was primarily the result of a net selling price increase of approximately 50%. The net selling price increase consisted of a gross selling price increase of
approximately 18% and a decrease in product sales allowances primarily related to lower sales to Medicare Part B providers. Offsetting the increase in the net selling price was a decrease in
the number of units sold of approximately 30%, which we believe is primarily the result of a decline in units sold in the home health care market that are subject to reimbursement under Medicare
Part B. The reimbursement paid by Centers for Medicare and Medicaid Services, or CMS, for XOPENEX Inhalation Solution has fallen significantly since July 1, 2007 as a result of the
implementation of the blended Medicare Part B reimbursement rate for XOPENEX Inhalation Solution and generic albuterol. As a result, commencing January 1, 2009, we ceased contracting
with home health care providers for XOPENEX Inhalation Solution. Accordingly, our sales to Medicare Part B providers significantly decreased and, as a result, our aggregate unit sales and
revenues for this product have decreased. However, the decrease in revenues was proportionately less than the decrease in unit sales due to a commensurate reduction in Medicaid rebate liability that
has been incurred historically and that resulted from sales of XOPENEX Inhalation Solution at steeply discounted prices to home health care providers since the blended reimbursement rate went into
effect. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX HFA were $14.8 million and $14.1 million for the three months ended June 30, 2009 and 2008, respectively, an increase of approximately 5%. The
increase was primarily the result of a net selling price increase of approximately 5%, which was primarily due to a decrease in product sales allowances primarily attributed to government rebates and
contractual discounts. Partially offsetting the increase in the net selling price was a decrease in the number of units sold of less than 1%.
Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of BROVANA were $19.1 million and $13.3 million for the three months ended June 30, 2009 and 2008, respectively, an increase of approximately 43%. The increase
was primarily the result of an approximately 34% increase in the number of units sold, which is primarily due to increased sales in the home health care and retail markets, and an increase in net
selling price of 7%. Included in this net selling price increase is an increase in gross selling price of approximately 10% partially offset by a slight increase in product sales allowances as a
percentage of gross sales. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of OMNARIS Nasal Spray were $9.1 million and $7.4 million for the three months ended June 30, 2009 and 2008, respectively an increase of approximately 23%. We
commercially introduced OMNARIS Nasal Spray in April 2008. The increase was primarily the result of an approximately 12% increase in the number of units sold. In addition to the increase in the number
of units sold, there was a net selling price increase of approximately 10%. The net selling price increase consisted of a gross selling price increase of approximately 13% partially offset by an
increase in product sales allowances as a percentage of gross sales. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of ALVESCO HFA Inhalation Aerosol were $0 for the three months ended June 30, 2009 and 2008. In September 2008, we commercially introduced ALVESCO HFA Inhalation Aerosol
through a staged launch that was initially targeted primarily to specialists, and in early 2009 we expanded our sales and marketing efforts to include a broader group of physicians. We expect 2009
revenues for this product, if any, to take place in the latter part of the year as we reduce launch phase inventory.

35

---



Table of Contents

Adjustments
recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Analysis of gross sales to net sales.We record product sales net of the following significant categories of product sales
allowances: payment term
discounts, wholesaler fee-for-service discounts, government rebates and contractual discounts, returns and other discounts. We recompute these amounts each quarter and
historically our estimates have not materially differed from actual results, with the exception of estimates related to certain Medicaid discounts resulting from a material weakness, which has been
remediated, in our internal control over the process we used to identify transactions with the potential to establish a new Medicaid best price, as more fully described in Part II,
Item 9A "Controls and Procedures" of our Annual Report on Form 10-K for the year ended December 31, 2008. Calculating each of these items
involves significant estimates and judgments and requires us to use information from external sources. The following table presents the adjustments deducted from gross sales to arrive at total net
sales:

For the Three Months Ended June 30,2009

% of
Sales

2008

% of
Sales

$ Change

% Change(in thousands)Gross sales

$
387,095


100
%
$
402,942


100
%
$
(15,847
)

(4
)%Adjustments to gross sales:Payment term discounts


7,708


2.0
%

7,995


2.0
%

(287
)

(4
)%Wholesaler fee-for-service


10,768


2.8
%

1,123


0.3
%

9,645


859
%Government rebates and contractual discounts


67,286


17.4
%

115,488


28.7
%

(48,202
)

(42
)%Returns


8,598


2.2
%

4,178


1.0
%

4,420


106
%Other (includes product introduction discounts)


3,471


0.9
%

4,212


1.0
%

(741
)

(18
)%Sub-total adjustments


97,831


25.3
%

132,996


33.0
%

(35,165
)

(26
)%Net sales

$
289,264


74.7
%
$
269,946


67.0
%
$
19,318


7
%


The
decrease in adjustments to gross sales as a percentage of gross sales for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008
primarily reflects a net decrease in government rebates and contractual discounts as a result of:



These
decreases in government rebates and contractual discounts were partially offset by:



36

---



Table of Contents



Partially
offsetting this net decrease in government rebates and contractual discounts was an increase in wholesaler fee-for-service discounts given primarily due to credits
earned during the second quarter of 2008 due to LUNESTA and XOPENEX Inhalation Solution gross price increases in that period as well as an increase in product returns reserves primarily related
XOPENEX Inhalation Solution and LUNESTA.

Royalties and License Fees Revenue

Royalties and license fees were $37.0 million and $24.2 million for the three months ended June 30, 2009 and 2008,
respectively, an increase of approximately 53%.

Royalties
earned on the sales of ALLEGRA® (fexofenadine HCl) under our agreements with sanofi-aventis were $7.4 million and $7.8 million for the three months
ended June 30, 2009 and 2008, respectively, a decrease of approximately 6%. The decrease is primarily the result of a decline in royalties from sales of ALLEGRA in Europe, partially offset by
an increase in royalties from sales in Japan.

Royalties
earned on sales of CLARINEX® (desloratadine) under our agreement with Schering-Plough Corporation, or Schering-Plough, were $4.4 million and
$7.3 million for the three months ended June 30, 2009 and 2008, respectively, a decrease of approximately 39%. The decrease is the result of lower CLARINEX sales, particularly in the
United States, in the three months ended June 30, 2009 as compared to the same period in the prior year.

Royalties
earned on sales of XYZAL®/XUSAL (levocetirizine) under our agreements with UCB S.A. and UCB Farchim S.A, which we refer to as the UCB entities,
were an aggregate of $7.3 million and $6.7 million for the three months ended June 30, 2009 and 2008, respectively, an increase of approximately 10%. The increase is primarily the
result of the an increase in the sales of XYZAL in the United States.

License
fees recognized on our agreements with GSK and Eisai Co. Ltd., or Eisai, for the development and commercialization of our eszopiclone product, were
$17.6 million and $2.4 million for the three months ended June 30, 2009 and 2008, respectively. The increase relates to the recognition of deferred license fees of
$16.9 million in the second quarter of 2009 resulting from the mutual agreement terminating the GSK License Agreement in April 2009.

A
number of the patents we own and license to third parties for which we receive royalties are the subject of patent invalidation or revocation claims by companies seeking to introduce
generic equivalents of the products covered by such patents. We can provide no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties from whom we
receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions will not be excluded from marketing their generic versions of these
products. Introduction of generic copies of any of these products before the expiration of our patents or the patents of our licensees would cause a reduction in royalties received and could have a
material adverse effect on our business.

Costs of Revenues

Cost of Products Sold

Cost of products sold was $28.4 million and $26.7 million for the three months ended June 30, 2009 and 2008,
respectively.

37

---



Table of Contents

Cost of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 5% for both the three months ended June 30, 2009 and 2008.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 5% for both the three months ended June 30, 2009 and 2008.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 9% and 12% for the three months ended June 30, 2009 and 2008, respectively. The decrease in
the cost as a percentage of gross sales is primarily due to the reversal of a reserve related to potential inventory expiration, which had been recorded in the fourth quarter 2008. The reserved
inventory was sold during 2009.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 10% and 11% for the three months ended June 30, 2009 and 2008, respectively. The decrease in the cost
as a percentage of gross sales is primarily due to an increase in our gross selling price, while the cost structure remained relatively consistent from period to period.

Cost
of OMNARIS Nasal Spray sold as a percentage of OMNARIS Nasal Spray gross sales was approximately 25% and 23% for the three months ended June 30, 2009 and 2008, respectively.
We commercially introduced OMNARIS Nasal Spray in April 2008. The increase in the cost as a percentage of gross sales is primarily due to the reversal of a quality related reserve recorded in the
first quarter of 2008 and reversed during the three months ended June 30, 2008.

Cost
of ALVESCO HFA Inhalation Aerosol sold was approximately $590,000 and $0 for the three months ended June 30, 2009 and 2008, respectively. These costs were primarily related
to the amortization of the intangible asset related to ALVESCO HFA Inhalation Aerosol in the three months ended June 30, 2009. Upon commercial launch of this product in September 2008, we began
to expense amounts previously recorded under amortization of intangible assets through cost of sales.

Cost of Royalty Revenue

Cost of royalties earned was $450,000 and $580,000 for the three months ended June 30, 2009 and 2008, respectively, a decrease
of approximately 22%. The cost of royalties in both periods relates to an obligation to a third party as a result of royalties we earn from Schering-Plough based on its sales of CLARINEX. This
decrease in third-party obligations is due to the decrease in royalties earned in the three months ended June 30, 2009 as compared with the same period in 2008.

Research and Development

Research and development expenses were $72.7 million and $58.3 million for the three months ended June 30, 2009
and 2008, respectively, an increase of approximately 25%. The increase is primarily due to a $20.0 million milestone charge during the second quarter of 2009 related to our license agreement
with Bial for STEDESA. In addition, there was decreased spending related to discovery efforts, SEP-225441, SEP-228432, SEP-228425 and SEP-227162,
partially offset by increased spending related to SEP-225289 Phase II efforts, our STEDESA Phase III adult monotherapy study, OMNARIS HFA Nasal Aerosol Phase III
efforts and the LUNESTA pediatric trials.

Drug
development and approval in the United States is a multi-step process regulated by the FDA. The process begins with the filing of an Investigational New Drug
Application, or IND, which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study:
Phase I, II and III. The most significant costs in clinical development are in Phase III clinical trials, as they tend to be the longest and largest studies in the drug development
process. Following successful completion of Phase III clinical trials, an NDA must be submitted to, and accepted by, the FDA, and the FDA must approve the NDA, prior to commercialization of the
drug. We may elect either on our own, or at the request of the FDA, to

38

---



Table of Contents

conduct
further studies that are referred to as Phase IIIb and IV studies, which if conducted, could cause us to incur substantial costs. Phase IIIb studies are initiated while the NDA
is under FDA review. These studies are conducted under an IND. Phase IV studies, also referred to as post-marketing studies, are studies that are initiated and conducted after the
FDA has approved a product for marketing. Phase IV studies may be requested by the FDA either before or after the FDA has approved an NDA. These studies may also be independently initiated by
the company for which an NDA has been approved. The FDA and companies conducting post-marketing studies use them to gather additional information about a product's safety, efficacy or
optimal use.

Successful
development of our product candidates is highly uncertain. Completion dates and completion costs can vary significantly for each product candidate and are difficult to
predict. The lengthy process of seeking FDA approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to
obtain, or delay in obtaining, regulatory approvals could materially adversely affect our business. We cannot provide assurance that we will obtain any approval required by the FDA on a timely basis,
if at all.

For
additional discussion of the risks and uncertainties associated with completing development of potential product candidates, see "Risk Factors."

Below
is a summary of expenditure information for our products and product candidates that represent approximately 10% or more of our direct project research and development spending for
the three months ended June 30, 2009 and 2008, as well as the costs incurred at the end of such periods. The costs in this analysis include only direct costs and do not include certain indirect
labor, overhead, share-based compensation or other costs that benefit multiple projects. The "Estimate of Completion of Phase" column contains forward-looking statements regarding expected timing of
completion of product development phases. Completion of product development, if successful, culminates in the submission of an NDA to the FDA; however, there can be no assurance that the FDA will
accept for filing, or approve, any NDA. The actual timing of completion of phases could differ materially from the estimates provided in the table. In the table below, the one FDA approved product and
the six product candidates accounted for approximately 74% of our direct project research and development spending for the three months ended June 30, 2009.

Phase of
Development /
Estimate of
Completion of
Phase

Indication

Project costs
for the three
months ended
June 30,
2009

Project costs
to date
through
June 30,
2009

Project costs
for the three
months ended
June 30,
2008

Project costs
to date
through
June 30,
2008(in thousands)LUNESTA

*

Insomnia

$
5,689

$
284,764

$
3,926

$
259,739SEP-225289

**

Depression

$
4,680

$
48,677

$
1,748

$
28,465SEP-227162

***

Depression

$
1,165

$
36,228

$
2,488

$
25,476SEP-225441

****

Anxiety

$
272

$
24,592

$
4,376

$
14,640SEP-228432

I / 2010

Depression

$
204

$
8,472

$
2,996

$
6,410STEDESA

*****

Epilepsy

$
3,637

$
11,227

$
60

$
61OMNARIS HFA Nasal

III / 2010

Allergic Rhinitis

$
3,191

$
13,280

$
179

$
374


---

Due to the length of time necessary to develop a product, uncertainties related to the ability to obtain governmental approval for
commercialization, and difficulty in estimating costs of projects, we

39

---



Table of Contents

do
not believe it is possible to make accurate and meaningful estimates, with any degree of accuracy, of the ultimate cost to bring our product candidates that have not entered into Phase III
clinical trials to FDA approved status. We recently completed a Phase III clinical trial of OMNARIS HFA Nasal Aerosol for the treatment of seasonal allergic rhinitis, and we plan to commence
another Phase III clinical trial of this product in the third quarter of 2009 for the treatment of perennial allergic rhinitis. We estimate that it will cost approximately $50.0 million
to advance OMNARIS HFA Nasal Aerosol from its current stage of development through an NDA submission based on a targeted NDA submission in early 2011, provided that no significant delays are imposed
by internal resource constraints or unanticipated FDA requirements. In addition, we recently commenced a Phase III clinical trial for the development of an adult monotherapy indication for
STEDESA. As of June 30, 2009, the costs associated with development of this indication were $3.3 million. We estimate that it will cost approximately $30.0 million to advance the
adult monotherapy indication for STEDESA from its current stage of development through a supplemental New Drug Application, or sNDA, submission based on a target sNDA submission during 2012, provided
that the NDA for STEDESA is accepted for filing and no significant delays are imposed by internal resource constraints or unanticipated FDA requirements.

Research and developmentin process upon acquisition

Research and developmentin process upon acquisition, or IPR&D, expenses were $0 and $50.8 million for the three
months ended June 30, 2009 and 2008, respectively. These expenses represent the cost of acquiring rights to branded pharmaceutical products in development from third parties, which we expense
at the time of acquisition. For the three months ended June 30, 2008, IPR&D expenses included costs associated with our agreements with Arrow International Limited, or Arrow.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $122.0 million and $179.3 million for the three months ended
June 30, 2009 and 2008, respectively, a decrease of approximately 32%. The decrease was largely due to a reduction in marketing and promotional expenses related to costs to support LUNESTA and
a decrease in salary and other compensation related expenses resulting from our corporate restructuring and workforce reduction commenced during the first quarter of 2009.

General and Administrative

General and administrative costs were $25.2 million and $28.3 million for the three months ended June 30, 2009 and
2008, respectively, a decrease of approximately 11%. The change is primarily the result of a decrease in salary and other compensation related expenses as well as a decrease in professional fees
related to the work required in connection with the remediation of a material weakness in our internal controls and financial reporting, which was completed by year-end 2008.

Amortization of Intangible Assets

Amortization of intangible assets was $1.5 million and $1.9 million for the three months ended June 30, 2009 and
2008, respectively, a decrease of approximately 22%. In the second quarter of 2008, amortization for OMNARIS Nasal Spray, ALVESCO HFA Inhalation Aerosol and related core technology was expensed to
amortization of intangible assets, as these products were not commercially available. Effective upon commercial launch of OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol, we began to expense
amounts previously recorded under amortization of intangible assets through cost of sales. The decrease is the result of amortization of these products being expensed through cost of sales rather than
amortization of intangible assets. We expect the amortization of intangible assets to continue to decrease if and when more products are commercially launched.

40

---



Table of Contents

Restructuring

Restructuring expense was $2.6 million as compared to an expense reversal of $266,000 for the three months ended June 30,
2009 and 2008, respectively. In the first quarter of 2009, we commenced a corporate restructuring and workforce reduction plan, which was substantially completed as of June 30, 2009. During the
second quarter of 2009, we vacated a leased facility and implemented a nominal reduction in workforce. As a result, we recorded a net restructuring charge of $2.6 million. This net charge
consisted of approximately $860,000 relating to employee termination
benefits and approximately $2.3 million in charges related to future lease and lease-related obligations resulting from a vacancy and expected continued vacancy of a leased facility, offset by
a reversal of approximately $600,000 relating to the first quarter charges. These reductions, together with other anticipated cost-savings initiatives across the organization, have
resulted in a projected reduction in operating expenses of approximately $190.0 million in 2009. The expense reversal in 2008 was primarily the result of a change in estimate associated with
employee severance costs and contract terminations that were not recognized relating to a previous restructuring initiative.

Other Income (Expense)

Interest income was $2.1 million and $5.5 million for the three months ended June 30, 2009 and 2008, respectively,
a decrease of 62%. The decrease is primarily due to lower interest rates earned on our investments in the second quarter of 2009 as well as lower average balances of cash and short- and
long-term investments. For the three months ended June 30, 2009 and 2008, the average annualized interest rate that we earned on our investments was 1.19% and 2.53%, respectively.

Gain
on extinguishment of debt was $3.0 million and $0 for the three months ended June 30, 2009 and 2008, respectively. During the second quarter of 2009, we repurchased
and retired, at our option in privately negotiated transactions, an aggregate par amount of $50.8 million and $48.2 million of our 0% notes due 2024 and 0% notes due 2010, respectively.
In connection with these transactions, we recorded a gain on the debt extinguishments of $3.0 million.

Interest
expense was $6.2 million and $8.8 million for the three months ended June 30, 2009 and 2008, respectively, a decrease of approximately 30%. The decrease is
the result of having a lower debt balance throughout the second quarter of 2009. The debt discount related to our 0% notes due 2024 is amortized to earnings as interest expense.

Equity
in investee losses was $222,000 and $272,000 for the three months ended June 30, 2009 and 2008, respectively. The loss represents our portion of BioSphere
Medical, Inc., or BioSphere, losses.

Other
expense was $319,000 and $9.4 million for the three months ended June 30, 2009 and 2008, respectively. The expense in the three months ended June 30, 2008
primarily represents an impairment loss recorded related to our investment in ACADIA Pharmaceuticals Inc., or ACADIA.

Income Taxes

Income tax expense was $27.5 million for the three months ended June 30, 2009 and there was an income tax benefit of
$445.2 million for the three months ended June 30, 2008. Income tax expense in 2009 varies from the United States statutory rate principally as a result of the provision for state income
taxes, the benefit related to research tax credits and stock-based compensation. The net tax benefit for 2008 was principally due to a tax benefit of $443.4 million recorded upon our decision
in the second quarter of 2008 to release a valuation allowance recorded against net deferred tax assets in the United States and a foreign jurisdiction. Excluding the effect of these tax benefits, our
income tax provision in 2008 consisted primarily of income taxes owed on income generated by a foreign subsidiary and certain state income taxes.

41

---



Table of Contents

We
account for uncertain tax positions in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes,or FIN 48, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return
and also provides guidance on various related matters such as derecognition, interest, penalties and disclosure. At June 30, 2009, unrecognized tax benefits included approximately
$10.6 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deduction, $900,000 of tax positions related to
the shorter deductibility period, and approximately $13.2 million of tax positions related to certain tax credits which have not been utilized as of June 30, 2009. We recognize accrued
interest and penalties related to unrecognized tax benefits as a component of tax expense. For the quarter ended June 30, 2009, the amount of accrued interest related to unrecognized tax
benefits was not significant and no amount has been accrued for penalties.

Six Month Periods ended June 30, 2009 and 2008

Revenues

Product Sales Revenues

Product sales were $596.1 million and $575.5 million for the six months ended June 30, 2009 and 2008,
respectively, a decrease of approximately 4%.

Sales
of LUNESTA were $291.7 million and $283.7 million for the six months ended June 30, 2009 and 2008, respectively, an increase of approximately 3%. The increase
is primarily the result of a net selling price increase of approximately 13%. The net selling price increase consisted of a gross selling price increase of approximately 10% and a slight decrease in
product sales allowances primarily attributed to government rebates and contractual discounts. Partially offsetting the increase in the net selling price was a decrease in the number of units sold of
approximately 9%, which we believe is primarily the result of competition from generic products in the insomnia market, and a decline in the overall growth rate of the market for branded insomnia
products. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX Inhalation Solution were $208.0 million and $225.4 million for the six months ended June 30, 2009 and 2008, respectively, a decrease of
approximately 8%. The decrease is primarily the result of a decrease in number of units sold of approximately 32%, which we believe is primarily the result of a decline in units sold in the home
health care market that are subject to reimbursement under Medicare Part B. The reimbursement paid by CMS for XOPENEX Inhalation Solution has fallen significantly since July 1, 2007 as a
result of the implementation of the blended Medicare Part B reimbursement rate for XOPENEX Inhalation Solution and generic albuterol. As a result, commencing January 1, 2009, we ceased
contracting with home health care providers for XOPENEX Inhalation Solution. Accordingly, our sales to Medicare Part B providers significantly decreased and, as a result, our aggregate unit
sales and revenues for this product have decreased. However, the decrease in revenues was proportionately less than the decrease in unit sales due to a commensurate reduction in Medicaid rebate
liability that has been incurred historically and that resulted from sales of XOPENEX Inhalation Solution at steeply discounted prices to home health care providers since the blended reimbursement
rate went into effect. Partially offsetting the decrease in units sold is an increase in net selling price of approximately 36%, which included a gross selling price increase of approximately 19% and
a decrease in product sales allowances primarily related to lower sales to Medicare Part B providers, as described above. Adjustments recorded to gross sales are disclosed below under the
heading "Analysis of gross sales to net sales."

Sales
of XOPENEX HFA were $34.9 million and $34.2 million for the six months ended June 30, 2009 and 2008, respectively, an increase of approximately 2%. The
increase is primarily the result of an increase in number of units sold of approximately 6%. Partially offsetting this increase in units sold is a

42

---



Table of Contents

decrease
in net selling price of approximately 3%. The net selling price decrease consisted of a decrease in product sales allowances offset by a gross selling price increase of less than 1%.
Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of BROVANA were $37.7 million and $23.2 million for the six months ended June 30, 2009 and 2008, respectively, an increase of approximately 62%. The increase
was primarily the result of an increase in the number of units sold of approximately 43%, which is primarily due to increased sales in the home health care and retail markets, and an increase in net
selling price of 13%. The net selling price increase was primarily due to an increase in gross selling price. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of
gross sales to net sales."

Sales
of OMNARIS Nasal Spray were $15.0 million and $7.4 for the six months ended June 30, 2009 and 2008, respectively, an increase of approximately 102%. We commercially
introduced OMNARIS Nasal Spray in April 2008. The increase was primarily the result of an approximately 76% increase in the number of units sold. In addition to the increase in the number of units
sold was a net selling price increase of approximately 15%. The net selling price increase consisted of a gross selling price increase of approximately 13% and a slight decrease in product sales
allowances as a percent of gross sales. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of ALVESCO HFA Inhalation Aerosol were $0 for the six months ended June 30, 2009 and 2008. In September 2008, we commercially introduced ALVESCO HFA Inhalation Aerosol
through a staged launch that was initially targeted primarily to specialists, and in early 2009 we expanded our sales and marketing efforts to include a broader group of physicians. We expect 2009
revenues for this product, if any, to take place in the latter part of the year as we reduce launch phase inventory. Adjustments recorded to gross sales are disclosed below under the heading "Analysis
of gross sales to net sales."

Analysis of gross sales to net sales.The following table presents the adjustments deducted from gross sales to arrive at net
sales:

For the Six Months Ended June 30,2009

% of
sales

2008

% of
sales

$ Change

% Change(dollars in thousands)Gross sales

$
820,799


100.0
%
$
848,622


100.0
%
$
(27,823
)

3
%Adjustments to gross sales:Payment term discounts


15,992


1.9
%

16,961


2.0
%

(969
)

(6
)%Wholesaler fee for service


22,897


2.8
%

4,607


0.5
%

18,290


397
%Government and commercial rebates and discounts


163,794


20.0
%

235,510


27.8
%

(71,716
)

(30
)%Returns


14,940


1.8
%

10,640


1.3
%

4,300


40
%Other (includes product introduction discounts)


7,058


0.9
%

5,414


0.6
%

1,644


30
%Sub-total adjustments


224,681


27.4
%

273,132


32.2
%

(48,451
)

(18
)%Net sales

$
596,118


72.6
%
$
575,490


67.8
%
$
20,628


4
%


43

---



Table of Contents

The decrease in adjustments to gross sales as a percentage of gross sales for the six months ended June 30, 2009, as compared to the six months ended
June 30, 2008, primarily reflects an decrease in government rebates and contractual discounts as a result of:



These
decreases in government rebates and contractual discounts were partially offset by:



Partially
offsetting this net decrease in government rebates and contractual discounts was an increase in wholesaler fee-for-service discounts given primarily due to credits
earned during the first half of 2008 due to LUNESTA, XOPENEX Inhalation Solution and XOPENEX HFA gross price increases in that period.

Royalties and License Fees Revenue

Royalties and license fees were $60.3 million and $39.4 million for the six months ended June 30, 2009 and 2008,
respectively, an increase of approximately 53%.

Royalties
earned on the sales of ALLEGRA under our agreements with sanofi-aventis were $18.9 million and $15.6 million for the six months ended June 30, 2009 and
2008, respectively, an increase of approximately 21%. The increase is primarily the result of increased sales in Japan.

Royalties
earned on sales of CLARINEX under our agreement with Schering-Plough were $10.3 million and $13.4 million for the six months ended June 30, 2009 and 2008,
respectively, a decrease of approximately 23%. The decrease is primarily the result of a decrease in sales in the United States.

Royalties
received on sales of XYZAL/XUSAL under our agreements with the UCB entities were $11.8 million and $8.0 million for the six months ended June 30, 2009 and
2008, respectively, an increase of approximately 47%. The increase is primarily the result of an increase in the sales of XYZAL in the United States.

A
number of the patents we own and license to third parties for which we receive these royalties are the subject of patent invalidation or revocation claims by companies seeking to
introduce generic equivalents of the products covered by such patents. We can provide no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties from
whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions will not be excluded from marketing their generic versions of these
products. Introduction of generic copies of any of these products before the expiration of our patents or the patents of our licensees would cause a reduction in royalties received and could have a
material adverse effect on our business.

44

---



Table of Contents

Costs of Revenues

Cost of Products Sold

Cost of products sold was $60.2 million and $54.3 million for the six months ended June 30, 2009 and 2008,
respectively.

Cost
of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 5% for both the six months ended June 30, 2009 and 2008.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 5% for both the six months ended June 30, 2009 and 2008.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 11% and 13% for the six months ended June 30, 2009 and 2008, respectively. The decrease in
the cost as a percentage of gross sales is primarily due to the reversal of a reserve related to potential inventory expiration, which had been recorded in the fourth quarter 2008. The reserved
inventory was sold during 2009..

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 10% and 12% for the six months ended June 30, 2009 and 2008, respectively. The decrease in the cost
as a percentage of gross sales is primarily due to an increase in our gross selling price, while the cost structure remained relatively consistent from period to period.

Cost
of OMNARIS Nasal Spray sold as a percentage of OMNARIS Nasal Spray gross sales was approximately 29% and 26% for the six months ended June 30, 2009 and 2008, respectively.
The increase in the cost as a percentage of gross sales is primarily due to a 2008 contract manufacturing cost recorded in the six months ended June 30, 2009 related to a reconciliation of
estimated invoiced cost and actual cost incurred. We commercially introduced OMNARIS Nasal Spray in April 2009.

Cost
of ALVESCO HFA Inhalation Aerosol sold was approximately $1.1 million and $0 for the six months ended June 30, 2009 and 2008, respectively. These costs were primarily
related to the amortization of the intangible asset related to ALVESCO HFA Inhalation Aerosol in the six months ended June 30, 2009. Upon commercial launch of this product in September 2008, we
began to expense amounts previously recorded under amortization of intangible assets through cost of sales.

Cost of Royalty Revenue

Cost of royalties earned was $823,000 and $1.1 million for the six months ended June 30, 2009 and 2008, respectively, a
decrease of approximately 23%. The cost of royalties in both periods relates to an obligation to a third party as a result of royalties we earn from Schering-Plough based upon its sales of CLARINEX.
This decrease in third party obligations is due to the decrease in royalties earned during the six months ended June 30, 2009 as compared with the same period in 2008.

Research and Development

Research and development expenses were $132.0 million and $124.5 million for the six months ended June 30, 2009
and 2008, respectively, an increase of approximately 6%. The increase is primarily due to the $20.0 million milestone charge during the second quarter of 2009 related to our license agreement
with Bial for STEDESA. In addition, there was decreased spending related to SEP-225441, SEP-228432, discovery efforts and SEP-228425, partially offset by increased
spending relate to our STEDESA Phase III adult monotherapy study, OMNARIS HFA Nasal Aerosol Phase III efforts and SEP-225289 Phase II efforts.

Below
is a summary of expenditure information for our products and product candidates that represent approximately 10% or more of our direct project research and development spending for
the six months ended June 30, 2009 and 2008, as well as the costs incurred at the end of such periods. The costs in this analysis include only direct costs and do not include certain indirect
labor, overhead, share-based compensation or other costs that benefit multiple projects. The "Estimate of Completion of

45

---



Table of Contents

Phase"
column contains forward-looking statements regarding expected timing of completion of product development phases. Completion of product development, if successful, culminates in the submission
of an NDA to the FDA; however, there can be no assurance that the FDA will accept for filing, or approve, any NDA. The actual timing of completion of phases could differ materially from the estimates
provided in the table. In the table below, the FDA approved product and four product candidates listed accounted for approximately 74% of our direct project research and development spending for the
six months ended June 30, 2009.

Phase of
Development /
Estimate of
Completion of
Phase

Indication

Project costs
for the six
months ended
June 30,
2009

Project costs
to date
through
June 30,
2009

Project costs
for the six
months ended
June 30,
2008

Project costs
to date
through
June 30,
2008(in thousands)LUNESTA

*

Insomnia

$
13,432

$
284,764

$
14,642

$
259,739OMNARIS HFA

III / 2010

Allergic Rhinitis

$
9,220

$
13,280

$
374

$
374SEP-225289

**

Depression

$
9,643

$
48,677

$
4,272

$
28,465SEP-225441

***

Anxiety

$
1,661

$
24,592

$
7,407

$
14,640STEDESA

****

Epilepsy

$
7,497

$
11,227

$
61

$
61


---

Research and developmentin process upon acquisition

IPR&D expenses were $0 and $90.0 million for the six months ended June 30, 2009 and 2008, respectively. These expenses
represent the cost of acquiring rights to branded pharmaceutical products in development from third parties, which we expense at the time of acquisition. For the six months ended June 30, 2008,
IPR&D expenses included costs associated with our Nycomed and Arrow transactions.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $242.6 million and $334.6 million for the six months ended
June 30, 2009 and 2008, respectively, a decrease of approximately 27%. The decrease was largely due to a reduction in marketing and promotional expenses related to costs to support LUNESTA and
a decrease in salary and other compensation related expenses resulting from our corporate restructuring and workforce reduction commenced during the first quarter of 2009, partially offset by an
increase in marketing and promotional expenses related to our OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol products.

General and Administrative

General and administrative costs were $48.0 million and $51.6 million for the six months ended June 30, 2009 and
2008, respectively, a decrease of approximately 7%. The decrease is primarily the result of a decrease in salary and other compensation related expenses as well as a decrease in professional fees
related to the work required in connection with the remediation of a material weakness in our internal controls and financial reporting, which was completed by year-end 2008.

Amortization of Intangible Assets

Amortization of intangible assets was $3.0 million and $4.2 million for the six months ended June 30, 2009 and
2008, respectively, a decrease of approximately 28%. The decrease is the result of amortization expense for our commercially launched products being expensed through cost of sales

46

---



Table of Contents

rather
than amortization of intangible assets. We expect the amortization of intangible assets to continue to decrease if and when more products are commercially launched.

Restructuring

Restructuring expense was $30.1 million as compared to an expense reversal of $566,000 for the six months ended June 30,
2009 and 2008, respectively. In the first quarter of 2009, we commenced a corporate restructuring and workforce reduction plan, which was substantially completed as of June 30, 2009. In the
first half of 2009, we recorded approximately $22.7 million related to severance and benefit costs for the employees that were terminated, approximately $8.0 million related to
terminated contracts associated with excess computer equipment and a contract sales organization as well as future lease and lease-related obligations resulting from vacancies and expected continued
vacancies of certain leased facilities. These charges were offset by a reversal of approximately $600,000 relating to the first quarter charges. These reductions, together with other anticipated
cost-savings initiatives across the organization, have resulted in a projected reduction in operating expenses of approximately $190.0 million in 2009. The expense reversal in 2008
was primarily the result of a change in estimate associated with employee severance costs and contract terminations that were not recognized related to a previous restructuring initiative.

Other Income (Expense)

Interest income was $4.0 million and $13.7 million for the six months ended June 30, 2009 and 2008, respectively,
a decrease of approximately 71%. The decrease is primarily due to lower average balances of cash and short- and long-term investments and lower interest rates earned on investments in the
six months ended June 30, 2009 compared to the same period in 2008. For the six months ended June 30, 2009 and 2008, the average annualized interest rate that we earned on our
investments was 1.07% and 3.12%, respectively.

Gain
on extinguishment of debt was $2.5 million and $0 for the six months ended June 30, 2009 and 2008, respectively. During the first quarter of 2009, we commenced and
completed a cash tender offer to purchase up to all of our outstanding 0% notes due 2024 at a price of $970 for each $1,000 par amount of notes tendered. An aggregate par amount of
$143.4 million of our 0% notes due 2024 were validly tendered and accepted in the offer. We paid a total of $139.1 million in cash to repurchase these tendered notes. During the second
quarter of 2009, we repurchased and retired, at our option in privately negotiated transactions, an aggregate of $48.2 million and an aggregate of $50.8 million par amount of our 0%
notes due 2010 and 0% notes due 2024, respectively. We paid a total of $43.8 million and $50.5 million in cash to repurchase the 0% notes due 2010 and 0% notes due 2024, respectively. In
connection with these transactions we recorded a gain on the debt extinguishments of $2.5 million.

Interest
expense was $14.1 million and $15.5 million for the six months ended June 30, 2009 and 2008, respectively, a decrease of approximately 9%. The decrease from
the prior year is the result of having a lower debt balance throughout the first half of 2009. The debt discount related to our 0% notes due 2024 is amortized to earnings as interest expense.

Equity
in investee losses was $427,000 and $475,000 for the six months ended June 30, 2009 and 2008, respectively. The loss represents our portion of BioSphere losses.

Other
expense was $514,000 and $9.4 million for the six months ended June 30, 2009 and 2008, respectively. The expense in the six months ended June 30, 2008
primarily represents an impairment loss recorded related to our investment in ACADIA.

Income Taxes

Income tax expense was $52.2 million for the six months ended June 30, 2009 and a tax benefit of $444.5 million
for the three months ended June 30, 2008. Income tax expense in 2009 varies from the

47

---



Table of Contents

United
States statutory rate principally as a result of the provision for state income taxes, the benefit related to research tax credits and stock-based compensation. The net tax benefit recorded for
the six months ended June 30, 2008 was principally due to a tax benefit of $443.4 million recorded upon our decision in the second quarter of 2008 to release a valuation allowance
recorded against net deferred tax assets in the United States and a foreign jurisdiction. Excluding the effect of these tax benefits, our income tax provisions for the six months ended June 30,
2008 consisted primarily of income taxes owed on income generated by a foreign subsidiary and certain state income taxes.

Liquidity and Capital Resources

Our liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses,
in-licensing fees, capital expenditures, working capital, debt service and general corporate expenses. Historically, we have funded these requirements and the growth of our business
primarily through convertible subordinated debt offerings, the issuance of common stock, including the exercise of stock options, sales of our products and fees and royalties under license agreements
for our drug compounds. Although we may use one or more of these financing mechanisms in the future, we now expect to fund our liquidity requirements primarily with operating profits generated from
product sales. We also believe we have the ability to meet our short-term liquidity needs through the use of our cash and short-term investments on hand at June 30,
2009.

As
of June 30, 2009, our total convertible debt was approximately $285.4 million, which consists of $99.8 million of outstanding 0% notes due 2010 and
$185.5 million of outstanding 0% notes due 2024. While the carrying value of our 0% notes due 2024 was $185.5 million at June 30, 2009, the par value of these notes was
$188.3 million.

During
the second quarter of 2009, we repurchased and retired, at our option in privately negotiated transactions, an aggregate of $48.2 million par amount of our 0% notes due
2010. We paid a total of $43.8 million in cash to repurchase these notes. In connection with these transactions, we recorded a net
gain on the extinguishment of debt of approximately $4.0 million. At June 30, 2009 and December 31, 2008, $99.8 million and $148.0 million of our 0% notes due 2010
remained outstanding, respectively.

During
the first quarter of 2009, we commenced and completed a cash tender offer to purchase up to all of our outstanding 0% notes due 2024 at a price of $970 for each $1,000 par amount
of notes tendered. An aggregate par amount of $143.4 million of our 0% notes due 2024 were validly tendered and accepted in the offer. We paid a total of $139.1 million in cash to
repurchase these tendered notes. During the second quarter of 2009, we purchased and retired, at our option in privately negotiated transactions, an aggregate of $50.8 million par amount of our
0% notes due 2024. We paid a total of $50.5 million in cash to repurchase these notes. In connection with both of these transactions, we recorded net losses on the debt extinguishments of
approximately $1.5 million. At June 30, 2009 and December 31, 2008, $185.5 million and $365.9 million of our 0% notes due 2024 remained outstanding, respectively.

Based
on our current operating plan, we believe that we will not be required to raise additional capital to fund the repayment of our outstanding convertible debt when due; however, we
may choose to do so. If we are not able to successfully maintain our revenue and properly manage our expenses, it is likely that our business would be materially and adversely affected and that we
would be required to raise additional funds in order to repay our outstanding convertible debt. We cannot assure that, if required, we would be able to raise the additional funds on favorable terms,
if at all.

At
June 30, 2009, $71.3 million of our investment portfolio was invested in AAA rated auction-rate securities. These investments were rated AAA by one or more
rating agencies. Auction-rate securities are long-term variable rate bonds tied to short-term interest rates. After the initial issuance of the securities, the
interest rate on the securities were reset periodically, at intervals established at the time of issuance (primarily every 28 days), based on market demand for a reset period.
Auction-rate

48

---



Table of Contents

securities
are bought and sold in the marketplace through a competitive bidding process often referred to as an auction. If there is insufficient interest in the securities at the time of an auction,
the auction may not be completed and the rates may be reset to predetermined "penalty" or "maximum" rates. These rates are determined by each auction-rate securities' prospectus and may be
below market rates or even zero.

Substantially
all of our auction-rate securities are backed by pools of student loans guaranteed by the Federal Family Education Loan Program, or FFELP. Auctions for these
securities began failing in the first quarter of 2008 and continued to fail throughout the first half of 2009. Consequently, the investments are not currently liquid, and we will not be able to access
these funds until a future auction of these investments is successful, a buyer is found outside of the auction process, the security is resecuritized, or is called, the underlying securities have
matured, or the arbitration proceedings related to these securities is resolved in our favor. At the time of our initial investment and through the date of this report, a substantial majority of our
auction-rate securities
remain AAA rated by one or more rating agencies. We intend to hold these investments until the lack of liquidity in these markets is resolved. As a result, we continue to classify the entire balance
of our auction-rate securities as non-current available-for-sale investments at fair value on our consolidated balance sheets.

Typically,
the fair value of auction-rate securities investments approximates par value due to the frequent resets through the auction process. While we continue to earn
interest on our auction-rate securities investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value.
Accordingly, the estimated fair value of the auction-rate securities no longer approximates par value.

At
June 30, 2009, because of the failed auction status and lack of liquidity for the auction-rate securities, we have classified our auction-rate securities at Level 3, as
defined under the SFAS 157 framework and described in Note 11 "Fair Value Measurements" of our condensed consolidated interim financial statements included in this quarterly report on
Form 10-Q, with a fair value of $71.3 million. The fair value of these auction-rate securities is estimated utilizing a trinomial discounted cash flow analysis, which was compared, when
possible, to other observable market data or inputs with similar characteristics. The assumptions used in preparing the discounted cash flow analysis include estimates for the maximum interest rate,
the probability of passing, failing or default at each auction, the severity of default and the discount rate. The fair value of these investments as of June 30, 2009 is estimated to be
$5.6 million below par value. We continue to classify our entire balance of auction-rate securities as non-current available-for-sale investments at fair value on our unaudited condensed
consolidated balance sheets. If current market conditions deteriorate further, we may be required to record additional other-than-temporary impairments in other comprehensive income. If the credit
ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur, or we need funds from the auction-rate securities to meet working capital needs, we may be
required to adjust the carrying value of these investments through other-than-temporary impairment charges recorded to earnings, as appropriate, which could be material.

Cash,
cash equivalents and short- and long-term investments totaled $707.2 million, or 43% of total assets, at June 30, 2009, compared to $765.8 million,
or 42% of total assets, at December 31, 2008.

Net
cash provided by operating activities for the six months ended June 30, 2009 was $134.7 million, which includes net income of $80.0 million. Our net income for
this period includes non-cash charges of $54.2 million, consisting primarily of depreciation and amortization, interest accretion on license fee liabilities, gain on debt
extinguishment, interest expense related to accretion of debt discount, equity in investee losses, share-based compensation, settlement of accreted interest on convertible debt and deferred income
taxes. Accounts receivable decreased by $42.1 million primarily due to strong collection efforts in the first half of 2009. Product sales allowances and reserves decreased by
$46.5 million primarily due to a decrease in government rebates and contractual discounts

49

---



Table of Contents

reserves.
Other liabilities decreased by $8.8 million primarily due to the recognition of the remaining deferred revenue as a result of the termination of the GSK License Agreement in the
second quarter of 2009.

Net
cash used in investing activities for the six months ended June 30, 2009 was $209.6 million, which is primarily attributable to the purchases of short- and
long-term investments of $306.7 million offset by the cash provided by net sales and maturities of short- and long-term investments of $108.7 million.

Net
cash used in financing activities for the six months ended June 30, 2009 was $186.5 million. We received proceeds of $4.6 million from issuing common stock upon
the exercise of stock options issued under our stock option plans, and we used $234.0 million to repay capital lease obligations and long-term debt, which is comprised of
$191.1 million related to repayments of long-term debt and $42.9 million related to the settlement of accreted interest on our convertible debt. The $42.9 million
related to the settlement of accreted interest is included in our non-cash charges as part of our cash flows from operating activities.

We
believe our existing cash and the cash flow that we anticipate from operations will be sufficient to support existing operations through at least the next 12 months. In the
longer term, we expect to continue to fund our existing operations with operating profits generated from product sales. Our actual future cash requirements and our ability to generate revenue,
however, will depend on many factors, including:



If
our assumptions underlying our beliefs regarding future revenues and expenses change, or if opportunities or needs arise, we may seek to raise additional cash by selling debt or
equity securities or otherwise borrowing money. However, we may not be able to raise such funds on favorable terms, if at all.

50

---



Table of Contents

Critical Accounting Policies and Estimates

We identified critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended
December 31, 2008. These critical accounting policies relate to product revenue recognition, royalty revenue recognition, product sales allowance and reserves, license fee revenue recognition,
accounts receivable and bad debt, impairment of goodwill and intangible assets, impairment of long lived assets, other-than-temporary impairments of
available-for-sale investments, fair value measurements, inventory write-downs, stock-based compensation, research and development expense and IPR&D expense. These policies
require us to make estimates in the preparation of our financial statements as of a given date. Because of the uncertainty inherent in these matters, our actual results could differ from the estimates
we use in applying the critical accounting policies.

A
summary of accounting policies that are considered critical can be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2008 in the "Critical Accounting Policies" section. Other than as described below, our critical accounting policies and estimates are as set forth in the
Form 10-K.

Product sales allowances and reserves.The following table summarizes activity in each of our product sales allowances and
reserve categories for the
six months ended June 30, 2009:

Payment
Term
Discount

Wholesaler
Fee
for Service

Government
Rebates and
Contractual
Discounts

Returns

Other
Discounts

Total(in thousands)Balance at December 31, 2008

$
(3,750
)
$
(11,479
)
$
(239,909
)
$
(23,227
)
$
(1,974
)
$
(280,339
)Current provision:Current year


(15,992
)

(22,897
)

(160,809
)

(11,583
)

(6,449
)

(217,730
)Prior year








(2,985
)

(3,357
)

(609
)

(6,951
)Total


(15,992
)

(22,897
)

(163,794
)

(14,940
)

(7,058
)

(224,681
)Actual:Current year


13,480


11,953


44,489


80


3,544


73,546Prior year


3,548


11,561


169,703


11,248


2,585


198,645Total


17,028


23,514


214,192


11,328


6,129


272,191Balance at June 30, 2009

$
(2,714
)
$
(10,862
)
$
(189,511
)
$
(26,839
)
$
(2,903
)
$
(232,829
)


Calculating
each of these product sales allowances and reserves involves significant estimates and judgments and requires us to use information from external sources. Based on known
market events and trends, internal and external historical trends, third-party data, customer buying patterns and current knowledge of contractual and statutory requirements, we believe that we are
able to make reasonable estimates of sales discounts.

Contractual Obligations

As of June 30, 2009, our contractual obligations described in our Annual Report on Form 10-K for the year
ended December 31, 2008 have not materially changed, with the exception of our outstanding convertible subordinated debt obligations. During the first quarter of 2009, we commenced and
completed a cash tender offer to purchase up to all of our
outstanding 0% notes due 2024, and an aggregate par amount of $143.4 million of these notes were validly tendered and accepted. During the second quarter of 2009, we repurchased and retired, at
our option in privately negotiated transactions, an aggregate of $48.2 million and $50.8 million par amount of our 0% notes due 2010 and our 0% notes due 2024, respectively. As of
June 30, 2009, $99.8 million of our 0% notes due 2010 remained outstanding on our condensed consolidated balance sheets. As of June 30, 2009, the carrying value and par value of
our 0% notes due 2024 that remained outstanding was $185.5 million and $188.3 million, respectively. See Note 7 "Convertible Subordinated Debt" to the condensed consolidated
interim financial statements for further discussion.

51

---





Table of Contents



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates and equity prices, which could affect our future results of operations and
financial condition. These risks are described in our Annual Report on Form 10-K for the year ended December 31, 2008. As of August 5, 2009, there have been no
material changes to the market risks described in our Annual Report on Form 10-K for the year ended December 31, 2008. Additionally, we do not anticipate any
near-term changes in the nature of our market risk exposures or in our management's objectives and strategies with respect to managing such exposures.

We
hold auction-rate security investments, which are AAA rated, and the underlying assets are backed by pools of student loans guaranteed by FFELP. Auctions for these
securities began failing in the first quarter of 2008 and continued to fail throughout the first half of 2009. Consequently, the investments are not currently liquid, and we will not be able to access
these funds until a future auction of these investments is successful, a buyer is found outside of the auction process, the security is resecuritized, or called, the underlying securities have
matured, or the arbitration proceedings related
to these securities is resolved in our favor. As described below, we initiated arbitration proceedings seeking to rescind our purchase of our initial investment of these securities. The fair value of
those investments as of June 30, 2009 is estimated to be $5.6 million below par value. We continue to classify our entire balance of auction-rate securities as
non-current available-for-sale investments at fair value on our unaudited condensed consolidated balance sheets, and we intend to hold these investments until the
lack of liquidity in these markets is resolved. If current market conditions deteriorate further, we may be required to record additional other-than-temporary impairments in
other comprehensive income. If the credit ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur, or we need funds from the auction-rate
securities to meet working capital needs, we may be required to adjust the carrying value of these investments through other-than-temporary impairment charges recorded to
earnings, as appropriate, which could be material.

On
June 25, 2009, we initiated arbitration proceedings before the Financial Industry Regulatory Authority, or FINRA, against Banc of America Investment Services, Inc. and
Banc of America Securities, LLC. In the arbitration, we claim that these parties violated the Massachusetts Uniform Security Law and certain FINRA rules by, among other things, making false
representations and/or material omissions concerning auction-rate securities, inappropriately advising investment in auction-rate securities, making unauthorized trades in
auction-rate securities, and failing to supervise their employees. We seek to rescind our purchase of the initial investment in auction-rate securities. We have also requested
interest at six percent per annum, punitive damages, and other relief. We are unable to provide a reasonable assessment of the outcome of this matter.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has carried out an evaluation, under the supervision and with the participation of our President and Chief Executive
Officer and Executive Vice President and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009. The term
"disclosure controls and procedures," as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls
and other procedures of a company that are designed to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its

52

---



Table of Contents

principal
executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based upon our management's evaluation, the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that, as of
June 30, 2009, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during our quarter ended June 30, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

53

---





Table of Contents



PART II        OTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS

Litigation Related to Generic Competition

Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the duration or outcome of any
patent-related lawsuits. If we, third parties from whom we receive royalties, or third parties from whom we have licensed products or received other rights to commercialize products, are not
successful in enforcing our respective patents, the companies seeking to market generic versions of our marketed drugs and the drugs of our licensees will not be excluded, for the full term of the
respective patents, from marketing their generic versions of our marketed products or third-party products for which we have licensed rights to our patents. Introduction of generic equivalents of any
of our marketed products or third-party products for which we have licensed rights to our patents before the expiration of our or our collaborators' patents would have a material adverse effect on our
business, financial condition and results of operations.



In September 2005, we received notification that the FDA had received an ANDA from Breath Limited, or Breath, seeking approval of
generic versions of our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Breath's submission includes a Paragraph IV certification alleging that our patents
listed in the Orange Book for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the generic versions for which Breath sought approval. In October 2005,
we filed a civil action against Breath for patent infringement in the United States District Court for the District of Massachusetts, No. 1:06-CV-10043.

In
April 2008, we entered into a settlement and license agreement with Breath to resolve this litigation. The agreement permits Breath to sell its generic versions of these XOPENEX
Inhalation Solution products in the United States under the terms of an exclusive 180-day license commencing on August 20, 2012 and a non-exclusive license thereafter.
Upon launch, Breath will pay us a double-digit royalty on gross profits generated from the sales of generic versions of these XOPENEX Inhalation Solution products. Under the agreement, Breath agreed
not to sell any of the products covered by our patents that are the subject of the license before the date on which the
license commences. On May 1, 2008, the parties submitted to the court an agreed order of dismissal without prejudice, which the court approved. The litigation is now concluded.

In
connection with the settlement and license agreement with Breath, in April 2008 we also entered into a supply agreement with Breath whereby, effective August 20, 2012, we may
exclusively supply levalbuterol products (1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL)to Breath, under our NDA for a period of 180 days, which
we refer to as the Initial Term, and on a non-exclusive basis for two and one-half years thereafter. In addition to the royalties described above, Breath will pay us on a cost
plus margin basis for supply of these levalbuterol products. The supply agreement contains provisions regarding termination for cause and convenience, including either party's right to terminate the
agreement at any time after the Initial Term upon nine months written notice. Both the exclusive license under the settlement and license agreement and the exclusive supply obligations under the
supply agreement could become effective prior to August 20, 2012 if a third-party launches a generic version of those dosages of XOPENEX Inhalation Solution or if the parties otherwise mutually
agree.

54

---



Table of Contents



In January 2006, we received notification that the FDA had received an ANDA from Dey, L.P., seeking approval of generic versions
of our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3 mL XOPENEX Inhalation Solution. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the
Orange Book for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable, or not infringed by the generic versions for which Dey, L.P. has sought approval. In February
2006, we filed a civil action against Dey, L.P. for patent infringement, and the case is pending in the United States District Court for the District of Delaware, C.A.
No. 06-113.

In
August 2006, we received notification that the FDA had received an ANDA from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL XOPENEX Inhalation Solution
concentrate. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate
are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. has sought approval. In September 2006, we filed a civil action against Dey, L.P. for patent
infringement in the United States District Court for the District of Delaware, C.A. No. 06-604. In September 2006, both civil actions we filed against Dey, L.P. were
consolidated into a single suit.

The
court held a Markman hearing in July 2008 to address the parties' disputed issues of patent claim interpretation and issued its written decision and ruling on these matters in
December 2008. A pretrial conference is scheduled for September 2009, and trial is currently scheduled to begin within 120 days of the pretrial conference.

In
June 2008, Dey, L.P. filed a Complaint against us in the United States District Court for the District of Delaware, C.A. No. 08-372. The Complaint is a
declaratory judgment action in which Dey, L.P. seeks a declaration of non-infringement and invalidity of United States Patent 6,451,289 owned by us. Dey, L.P. had previously
sent us notice that its ANDA contained a Paragraph IV certification alleging that patent 6,451,289 is invalid, unenforceable or not infringed, and we did not commence litigation in response. We
filed a Motion to Dismiss for lack of subject matter jurisdiction in response to the Complaint. In January 2009, the court entered an order denying our Motion to Dismiss and issued a corresponding
opinion shortly thereafter. In February 2009, we filed a Motion for Certification of the court's order denying our Motion to Dismiss and to stay the proceedings pending resolution of appeal, which was
denied by the court in April 2009. In May 2009, we filed our Answer to the Complaint, and in response Dey, L.P. filed a Motion for Judgment on the pleadings of non-infringement,
which is currently pending before the Court.



In May 2007, we received notification that the FDA had received an ANDA from Barr seeking approval of generic versions of our 1.25 mg/3
mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Barr's submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three
dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the generic versions for which Barr has sought approval. In July 2007, we filed a civil action against Barr for
patent infringement.

In
March 2009, we entered into a settlement and license agreement with Teva and Barr, a wholly owned subsidiary of Teva, to resolve this litigation with Barr and to grant a license to
Barr and Teva. The settlement and license agreement permits Barr and Teva to launch generic versions of these XOPENEX Inhalation Solution dosages under terms of a non-exclusive license
commencing on February 17, 2013. The agreement also contains provisions whereby the effective date of Barr's and Teva's license can be earlier under certain circumstances. Upon launch, Teva and
Barr will pay us a royalty on their respective profit margins generated from the sales of generic versions of these

55

---



Table of Contents

XOPENEX
Inhalation Solution dosages. On March 11, 2009, the parties submitted to the court an agreed Consent Final Judgment and Dismissal, which the court approved.



The filing of an action for patent infringement under the Hatch-Waxman Act results in an automatic 30-month stay of the
FDA's authority to grant final marketing approval to those companies that filed an ANDA containing a Paragraph IV certification against one or more of our XOPENEX Inhalation Solution patents.
However, if an ANDA submission that includes a Paragraph IV certification is filed against a patent for a drug that has been granted five-year new chemical entity data exclusivity,
and that ANDA is filed between years four and five of the date the data exclusivity was awarded, such as in the case of the recently filed ANDAs with Paragraph IV certifications regarding
LUNESTA, the statutory stay will run for 7.5 years from the NDA approval date. The first filer of an ANDA with a Paragraph IV certification is potentially entitled to a
180-day period of semi-exclusivity during which the FDA cannot approve subsequently filed ANDAs. The 180-day semi-exclusivity period would begin to run
only upon first commercial marketing by the first filer. There are, however, also certain events that could cause the first filer to forfeit the 180-day semi-exclusivity
period, which we refer to as a forfeiture event.

For
our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3 mL dosages of XOPENEX Inhalation Solution, we believe that Breath is the sole first filer and potentially entitled to 180 days of
semi-exclusivity against subsequent ANDA filers for those three dosages. On April 9, 2008, the FDA granted final approval to Breath's ANDA for all three dosages. However, if a
forfeiture event occurs and the FDA determines that Breath has forfeited the 180-day semi-exclusivity period for one or more of those three dosages, other ANDA filers could be
granted final approval by the FDA and could subsequently commence an "at risk" launch. For those three dosages, the 30-month stay against Dey, L.P. expired on July 9, 2008.
In addition, a forfeiture could also accelerate the effective date of Barr's and Teva's license.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey, L.P. is the sole first filer and potentially entitled to 180 days of
semi-exclusivity for that concentration. The 30-month stay against Dey, L.P.'s ANDA for that concentration expired on February 14, 2009. Dey, L.P. received
final approval to sell 1.25 mg/0.5 mL levalbuterol from the FDA on March 20, 2009 and could commence an "at risk" launch of this product at any time.

Although
we could seek recovery of any damages sustained in connection with any activities conducted by a party that infringes a valid and enforceable claim in our patents, whether we
are ultimately entitled to such damages would be determined by a court of law. If any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution products prior
to the resolution of ongoing legal proceedings or in violation of any settlement agreement, or there is a court determination that the products these companies wish to market do not infringe our
patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our business, financial condition and results of operations. In addition, our previously issued
guidance regarding our projected financial results may no longer be accurate, and we would have to revise such guidance.

In
May 2008 and March 2009, we provided to the Federal Trade Commission and Department of Justice Antitrust Division the notifications of the settlement with Breath and Barr,
respectively, as required under Section 1112(a) of the Medicare Prescription Drug Improvement Act of 2003, or MMA. The settlements with these parties as well as the other agreements with Breath
and its affiliates, including the supply agreement, the agreement for the acquisition of Oryx and license agreements with Arrow, may be reviewed by antitrust enforcement agencies, such as the Federal
Trade Commission and Department of Justice Antitrust Division. There can be no assurances that governmental authorities will not seek to challenge the settlement with Breath or Barr/Teva or that a
competitor, customer or

56

---



Table of Contents

other
third-party will not initiate a private action under antitrust or other laws challenging either or both of these settlements. We may not prevail in any such challenges or litigation and, in any
event, may incur significant costs in the event of an investigation or in defending any action under antitrust laws.



In March 2009, we filed a lawsuit in the U.S. District Court for the District of New Jersey alleging infringement of our U.S. Patent
Numbers 6,319,926; 6,444,673; 6,864,257; and 7,381,724, against each of the Teva entities, Cobalt Laboratories, Dr. Reddy's, Orchid, Glenmark Generics, Roxane, Lupin, Wockhardt, Sun
Global, Orgenus, Mylan and Alphapharm. In April 2009, we also filed a lawsuit in the United States District Court for the Southern District of New York alleging infringement of these patents against
Mylan and Alphapharm, which was subsequently dismissed pursuant to agreement by the parties. Beginning in February 2009, we received notices from each of these parties indicating that each had filed
an ANDA with the FDA for generic versions of eszopiclone tablets (1 mg, 2 mg and 3 mg). Each submission includes a Paragraph IV certification alleging that one or more of our patents listed in
the Orange Book for LUNESTA is invalid, unenforceable or not infringed by their respective proposed generic products. We may receive additional notices that other ANDAs with Paragraph IV
certifications have been filed by different generic pharmaceutical companies.

Due
to the commencement of this litigation, ANDA approval will be stayed until approximately June 15, 2012 (or potentially six months thereafter if we successfully obtain a
pediatric exclusivity extension) or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier. Should we successfully enforce our patents, ANDA approval
should not occur until expiration of the applicable patents, one of which may be extended by our outstanding patent term extension application.



Certain of Schering-Plough's CLARINEX products for which we receive sales royalties are currently the subject of patent infringement
litigation. Since June 2007, the FDA has received ANDAs relating to various dosage forms of CLARINEX from eleven different generic pharmaceutical companies. These ANDA submissions include
Paragraph IV certifications alleging that our patents, which Schering-Plough (as exclusive licensee of such patents) listed in the Orange Book for these products, are invalid, unenforceable
and/or not infringed by the submitter's proposed product. Starting in July 2007, we and the University of Massachusetts, co-owners of certain patents listed in the Orange Book, filed civil
actions against these parties for patent infringement in the United States District Court for the District of New Jersey. In April 2008, the trial judge consolidated these cases for all purposes
including discovery and trial. The court has not set a trial date. We believe that all of these ANDAs are subject to a statutory stay of approval until at least December 21, 2009 based on
previous litigation commenced by Schering-Plough against these parties in separate civil actions involving another patent.

In
March 2008, we entered into a consent agreement with Glenmark Pharmaceuticals, Inc., or Glenmark, one of the eleven generic pharmaceutical companies that filed a
Paragraph IV certification against our patents, whereby Glenmark agreed not to pursue its case and to not market CLARINEX 5 mg tablets until the expiration of our patents listed by
Schering-Plough in the Orange Book or until these patents are found invalid or unenforceable.

As
a result of separate formal settlement agreements that Schering-Plough has entered into with several ANDA filers involved in litigation with Schering-Plough, or Schering-Plough
Settlement Agreements, we and the University of Massachusetts submitted, and the court approved, stipulations of dismissal without prejudice against eight of the ANDA filers that we sued. The
Schering-Plough Settlement Agreements entered to date permit generic entry of CLARINEX-D® 12 Hour,

57

---



Table of Contents

CLARINEX-D®
24 Hour and CLARINEX® REDITABS® on January 1, 2012 and CLARINEX 5 mg tablet on July 1, 2012. Upon generic entry
of each product by a party to a Schering-Plough Settlement Agreement, our right to receive royalties on sales of such product will be significantly reduced.



Beginning in February 2008, we and UCB S.A. received notices from Synthon Pharmaceuticals, Inc., or Synthon, Sun
Pharmaceutical Industries Limited of Andheri (East), or Sun, Sandoz Inc., or Sandoz, and Pliva Hrvatska D.O.O. and Barr, or Pliva/Barr, that each has filed an ANDA seeking approval to market
generic versions of XYZAL 5 mg tablets, and that each ANDA contained a Paragraph IV certification alleging that United States Patent 5,698,558, owned by us and exclusively licensed to
UCB S.A., is invalid, unenforceable or not infringed. Beginning in April 2008, UCB S.A. filed in its name and on our behalf civil actions for patent infringement in the United States
District Court for the Eastern District of North Carolina against Synthon, Sun, Sandoz, Pliva/Barr. We believe that all of these ANDAs are subject to a 30-month statutory stay of approval,
resulting from the filing of lawsuits for patent infringement, the earliest of which, against Synthon, is scheduled to expire on or about August 29, 2010. In August 2008, the trial judge
consolidated these cases for all purposes including discovery and trial. The court has not set a trial date.

Barr,
as agent for Pliva, and Sun amended their ANDAs to change their Paragraph IV certifications to Paragraph III certifications, thereby withdrawing the challenges to our
patent. As a result, in April and May 2009, respectively, the parties submitted agreed stipulations of dismissal without prejudice, which the court approved. Thus, the actions against Pliva/Barr and
Sun are complete.

BROVANA Patent Infringement Claim

In April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York, C.A.
No. 1:07-cv-2353, by Dey, L.P. and Dey, Inc., collectively referred to as Dey, alleging that the manufacture and sale of BROVANA infringes or will induce
infringement of a single United States patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaims to this Complaint seeking to invalidate the
originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent. In March 2008, United States Patent 7,348,362, or the '362 patent,
entitled "Bronchodilation b-agonist compositions and Methods" issued, and Dey, L.P. is the assignee of the patent. In August 2008, the court granted our Motion to Amend our Answer
and Counterclaims to seek declaratory judgment that the '362 patent is invalid and unenforceable and to add Mylan, Dey, L.P.'s parent corporation, as a party. Between December 2008 and January
2009, U.S. patents 7,462,645; 7,465,756; and 7,473,710 all entitled "Bronchodilation b-agonist compositions and Methods" issued. These three patents claim priority to the same parent
patent application that issued as the '362 patent. In January 2009, Dey filed a motion to add these three patents to the case, which we did not oppose and was granted by the court. In March 2009, Dey
filed a Supplemental Complaint to add these three patents to the case, and in April 2009 we filed and an Answer and Counterclaims to this Supplemental Complaint. In July 2009, in response to our
filings ofex partereexamination requests, the United States Patent and Trademark Office issued orders granting the reexamination requests for certain
claims of Dey, L.P.s U.S. Patents 6,814,953 and 6,667,344.

Under
the current trial scheduling order, the trial will begin no earlier than February 26, 2010. It is too early to make a reasonable assessment as to the likely outcome or
impact of this litigation. We are unable to reasonably estimate any possible range of loss or liability related to this lawsuit due to its uncertain resolution.

58

---



Table of Contents

Other Legal Proceedings

We have been named as the defendant in two separate lawsuits filed in the United States District Court for the Middle District of
Florida (Sharp, et al., filed July 17, 2008) and the United States District Court for the District of Arizona (Greeves, et al., served September 9, 2008) claiming that our pharmaceutical
sales representatives should have been categorized as "non-exempt" rather than "exempt" employees under the Fair Labor Standards Act, or FLSA. Both lawsuits claim that we owe damages,
overtime wages, interest, costs and attorneys' fees for periods preceding the filing of the respective actions. Other companies in the pharmaceutical industry face substantially similar lawsuits. We
filed an Answer to the Complaint in each of the Sharp and Greeves litigation on October 10, 2008 and October 15, 2008, respectively. On March 4, 2009, we filed before The Judicial
Panel for Multidistrict Litigation a motion seeking to consolidate both actions into one lawsuit. On June 23, 2009, the Judicial Panel approved Sepracor's motion for consolidation and
transferred the Florida proceeding to Arizona. In addition, on March 27, 2009, we filed a Defendant's Memorandum Regarding Collective Action Issues under the FLSA in the Arizona court in
opposition to the plaintiffs' motion for class certification in the Greeves litigation. To date, the court has not ruled on the merits of this motion, but has instructed the plaintiffs to refile the
motion as part of the Multidistrict Litigation docket in the U.S. District Court (District of Arizona). Discovery in each case is proceeding and no trial dates have been set. Based upon the facts as
presently known, we do not believe that it is likely that either collective action will result in liability that would be material to our financial position.

From
time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a material adverse effect on our
business, financial condition or results of operations.

ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below in addition to the other information contained in this report, before making an
investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face.
Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations, financial condition
or results from operations.

Risks Related to Our Financial Results and Our Common Stock

We have a history of net losses and we may not be able to generate revenues sufficient to achieve and maintain profitability on a quarterly and annual basis.

Until the year ended December 31, 2006, we had incurred net losses each year since our inception. It is possible we will not be
able to maintain profitability on a quarterly or annual basis. We expect to continue to incur significant operating expenditures to further develop and commercialize our products and product
candidates and in order to allow us to otherwise expand our product portfolio through drug discovery and business development efforts. As a result, we will need to generate significant revenues in
future periods to achieve and maintain profitability. We cannot provide assurance that we will be able to maintain profitability for any substantial period of time. If revenues grow more slowly than
we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected.
In addition, if we are unable to achieve, maintain or increase profitability on a quarterly or annual basis, the market price of our common stock may decline.

59

---



Table of Contents

Almost all of our revenues are derived from sales of LUNESTA and XOPENEX Inhalation Solution, and our future success depends on the continued commercial success of these
products as well as our other products.

Approximately 74% of our total revenues for the quarter ended June 30, 2009 resulted from sales of LUNESTA and XOPENEX
Inhalation Solution, and we expect that sales from these two products will continue to represent a significant majority of our revenues for the coming year. However, unit sales for both LUNESTA and
XOPENEX Inhalation Solution decreased during the year ended December 31, 2008, as compared to the same period during the prior year, and may continue to decrease. LUNESTA's market share and
unit sales may continue to decrease as a result of the introduction of zolpidem tartrate, the generic equivalent to AMBIEN®, in 2007, other competitive products being marketed or developed
by others, such as a generic equivalent to AMBIEN CR®, which could be introduced at any time, and potential disruption to our business as we complete the implementation of our corporate
restructuring and workforce reduction plan. Moreover, the growth rate of the overall non-generic pharmaceutical market, which includes branded drugs such as LUNESTA and XOPENEX Inhalation
Solution, has been declining, and may continue to decline, as a result of economic conditions and managed care trends. If we do not maintain sales of LUNESTA and if sales of XOPENEX Inhalation
Solution in other markets do not offset the reduction in revenues resulting from our decision to no longer contract with home health providers for XOPENEX Inhalation Solution beginning
January 1, 2009, we may not have sufficient revenues to achieve our business plan or repay our outstanding debt, and our business will not be successful.

We
do not have long-term sales contracts with our customers, and we rely primarily on purchase orders for sales of LUNESTA, XOPENEX Inhalation Solution and our other marketed
products. Reductions, delays or cancellations of orders for LUNESTA, XOPENEX Inhalation Solution or our other marketed products could adversely affect our operating results. Any other adverse
developments with respect to the sale of LUNESTA or XOPENEX Inhalation Solution could significantly reduce revenues and have a material adverse effect on our ability to maintain profitability and
achieve our business plan.

We
cannot be certain that we will be able to successfully market and sell LUNESTA and/or XOPENEX Inhalation Solution, that we will be able to successfully market and sell BROVANA,
XOPENEX HFA, OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol, or that any of our marketed products will be accepted in their markets. Specifically, the following factors, among others, could
affect the level of success and market acceptance of our products:



60

---



Table of Contents



In
addition, a number of the patents we own and/or license to third parties and for which we receive sales revenues or royalties are the subject of patent invalidation or revocation
claims by companies seeking to introduce generic equivalents of the products covered by such patents. We can provide no assurance concerning the duration or outcome of any patent-related lawsuits. If
we, or third parties from whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions will not be excluded from marketing their
generic versions of these products. Introduction of generic equivalents of any of these products before the expiration of our patents or the patents of our licensees could have a material adverse
effect on our business.

We have significant debt, and we may not be able to make principal payments when due.

As of June 30, 2009, the carrying value of our total convertible debt was approximately $285.4 million. None of our 0%
notes due 2010 or our 0% notes due 2024 restricts us or our subsidiaries' ability to incur additional indebtedness, including debt that ranks senior to the notes. The 0% notes due 2024 are senior to
the 0% notes due 2010. Additional indebtedness that we incur may in certain circumstances rank senior to or on parity with this debt. Our ability to satisfy our obligations will depend upon our future
performance, which is subject to many factors, including factors beyond our control. Our 0% notes due 2010 are convertible into our common stock at the option of the holders and the conversion price
is $29.84. If the market price for our common stock does not exceed the conversion price, the holders of our 0% notes due 2010 may decide not to convert their securities into common stock. For
example, the holders of our 0% Series A notes due 2008 did not convert such notes into common stock, and on December 15, 2008, the maturity date for the 0% Series A notes due
2008, we repaid in cash the entire par amount of $72.8 million.

As
of June 30, 2009, our total cash, cash equivalents and short- and long-term investments totaled $707.2 million. Our 0% notes due 2024 are convertible into
cash and into shares of our common stock under a conversion formula that becomes applicable if and when our common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to our
stock exceeding such price, the notes are convertible at the option of the holders in October 2009, 2014, 2019 and 2024, as well as under certain other circumstances.

Based
on our current operating plan, we believe that we will not be required to raise additional capital to fund the repayment of our outstanding convertible debt when due; however, we
may choose to do so. If we are not able to maintain our revenue and properly manage our expenses, it is likely that our business would be materially and adversely affected and that we would be
required to raise additional funds in order to repay our outstanding convertible debt. We cannot assure that, if required, we would be able to raise the additional funds on favorable terms, if at all.

If we exchange debt for shares of common stock, there will be additional dilution to holders of our common stock.

As of June 30, 2009, we had approximately $99.8 million of outstanding debt that could be converted into shares of our
common stock and an additional $185.5 million of outstanding debt that could be converted into cash and, if applicable, shares of our common stock. In order to reduce future payments due at
maturity, we have in the past and may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for shares of our

61

---



Table of Contents

common
stock, warrants, preferred stock, debt or other consideration; or a combination of any of the foregoing. The amounts involved in any such transactions, individually or in the aggregate, could
be material. If we exchange shares of our capital stock, or securities convertible into or exercisable for our capital stock, for outstanding convertible debt or use proceeds from the issuance of
convertible debt to fund redemption of outstanding convertible debt with a higher conversion ratio, the number of shares that we might issue as a result of such exchanges would significantly exceed
the number of shares originally issuable upon conversion of such debt and, accordingly, such exchanges would result in material dilution to holders of our common stock. Repurchase of the notes could
also adversely affect the trading market for such notes if the public float in such notes is materially reduced. We cannot provide assurance that we will repurchase or exchange any additional
outstanding convertible debt.

If we identify a material weakness in our internal control over financial reporting it could adversely affect our ability to meet reporting obligations and negatively affect
the trading price of our stock.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness
increases the risk that the financial information we report contains material errors. As more fully described in Part II, Item 9A, "Controls and Procedures" of our Annual Report on
Form 10-K for the year ended December 31, 2008, we recently remediated a material weakness in our internal control over the process to identify transactions with the
potential to establish a new Medicaid best price, which affected the accuracy of our net revenues and product sales allowance and return accounts. However, we may identify additional control
deficiencies in the future that individually or in the aggregate constitute a material weakness. If there are other undetected or uncorrected deficiencies in our internal controls, we could fail to
meet our reporting obligations, we could have material misstatements in our financial statements and, under certain circumstances, could be subject to legal liability. In addition, inferior controls
could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

If the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in
our projections and accruals.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, net revenues and expenses, the amounts of charges
accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. We cannot provide assurance, however, that our estimates, or the assumptions underlying them, will not be materially different from actual results. For example, our royalty revenues are
recognized based upon our estimates of our collaboration partners' sales during the period and, if these sales estimates are greater than the actual sales that occur during the period, our net income
would be reduced. In addition, we estimate product sales allowances, including payment term discounts, government and commercial rebates and returns and other discounts. If actual amounts differ from
these estimates, net income could be adversely affected. Each, in turn, could adversely affect our financial condition, results from operations and stock price.

62

---



Table of Contents

If sufficient funds to finance our business are not available to us when needed or on acceptable terms, then we may be required to delay, scale back, eliminate or alter our
business strategy.

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit
of regulatory approvals, license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically, we have satisfied our funding needs through
collaboration arrangements with corporate partners, sales of products and equity and debt financings. These funding sources may not be available to us when needed in the future. In addition, the
recent economic crisis has severely diminished the availability of capital. The cost and terms of any such future financing is unclear, and we can provide no assurance that we will be able to raise
additional funds on terms acceptable to us, if at all. We may also need to issue equity securities with rights, preferences and privileges senior to our common stock or issue debt securities
containing limitations or restrictions on our ability to engage in certain transactions in the future.

Insufficient
funds could require us to delay, scale back, eliminate or alter certain of our research and product development programs and/or commercialization efforts or to enter into
license agreements with third parties to commercialize products or technologies that we would otherwise develop or commercialize ourselves. Our cash requirements may vary materially from those now
planned because of factors including:



Our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.

Our effective tax rate could be adversely affected by several factors, many of which are outside of our control,
including:



63

---



Table of Contents



Our long-term investments include auction-rate securities that may not be accessible within the next 12 months and may experience a decline in
value, which may adversely affect our liquidity and income.

At June 30, 2009, $71.3 million of our investment portfolio was invested in AAA-rated
auction-rate securities. These investments were rated AAA by one or more rating agencies. Auction-rate securities are long-term variable rate bonds tied to
short-term interest rates. After the initial issuance of the securities, the interest rate on the securities were reset periodically, at intervals established at the time of issuance
(primarily every 28 days), based on market demand for a reset period. Auction-rate securities are bought and sold in the marketplace through a competitive bidding process often
referred to as an auction. If there is insufficient interest in the securities at the time of an auction, the auction may not be completed and the rates may be reset to predetermined "penalty" or
"maximum" rates. These rates are determined by each auction-rate securities' prospectus and may be below market rates or even zero.

Substantially
all of our auction-rate securities are backed by pools of student loans guaranteed by the FFELP. Auctions for these securities began failing in the first
quarter of 2008 and continued to fail throughout the first half of 2009. Consequently, the investments are not currently liquid, and we will not be able to access these funds until a future auction of
these investments is successful, a buyer is found outside of the auction process, the security is resecuritized, or called, the underlying securities have matured, or the arbitration proceedings
related to these securities is resolved
in our favor. As described below, we initiated arbitration proceedings seeking to rescind our purchase of our initial investment of these securities. At the time of our initial investment and through
the date of this report, a substantial majority of our auction-rate securities remain AAA rated by one or more rating agencies. We intend to hold these investments until the lack of
liquidity in these markets is resolved. As a result, we continue to classify the entire balance of auction-rate securities as non-current
available-for-sale investments at fair value on our consolidated balance sheets.

Typically,
the fair value of auction-rate securities investments approximates par value due to the frequent resets through the auction process. While we continue to earn
interest on our auction-rate securities investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value.
Accordingly, the estimated fair value of the auction-rate securities no longer approximates par value.

At
June 30, 2009, because of the failed auction status and lack of liquidity for the auction-rate securities, we have classified our auction-rate
securities at Level 3, as defined under the SFAS 157 framework described in Note 11 "Fair Value Measurements" of our condensed consolidated interim financial statements included
in this Quarterly Report on Form 10-Q, with a fair value of $71.3 million. This amount is estimated to be $5.6 million below par value. We continue to classify our
entire balance of auction-rate securities as non-current available-for-sale investments at fair value on our unaudited condensed consolidated balance
sheets. If current market conditions deteriorate further, we may be required to record additional other-than-temporary impairments in other comprehensive income. If the credit
ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur, or we need funds from the auction-rate securities to meet working capital needs, we
may be

64

---



Table of Contents

required
to adjust the carrying value of these investments through other-than-temporary impairment charges recorded to earnings, as appropriate, which could be material.

On
June 25, 2009, we initiated arbitration proceedings before the FINRA against Banc of America Investment Services, Inc. and Banc of America Securities, LLC. In the
arbitration, we claim that these parties violated the Massachusetts Uniform Security Law and certain FINRA rules by, among other things, making false representations and/or material omissions
concerning auction-rate securities, inappropriately advising investment in auction-rate securities, making unauthorized trades in auction-rate securities, and
failing to supervise their employees. We seek to rescind our purchase of the initial investment in auction-rate securities. We have also requested interest at six percent per annum,
punitive damages, and other relief. We are unable to provide a reasonable assessment of the outcome of this matter.

Fluctuations in the demand for our products, the success and timing of clinical trials, regulatory approvals, product introductions, collaboration and licensing
arrangements, any termination of development efforts and other material events will cause fluctuations in our quarterly operating results, which could cause volatility in our stock price.

Our quarterly operating results are likely to fluctuate significantly, which could cause our stock price to be volatile. These
fluctuations will depend on many factors, including:



65

---



Table of Contents



We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders' ability to sell their shares for a premium in a change
of control transaction.

Various provisions of our certificate of incorporation and by-laws and of Delaware corporate law may discourage, delay or
prevent a change of control or takeover attempt of our company by a third-party that is opposed by our management and board of directors. Public stockholders who might desire to participate in such a
transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or
change in our management and board of directors. These provisions include:



In
addition, in June 2002, our board of directors adopted a shareholder rights plan, the provisions of which could make it more difficult for a potential acquirer of Sepracor to
consummate an acquisition transaction.

The price of our common stock historically has been volatile, which could cause the loss of part or all of an investment in Sepracor.

The market price of our common stock, like that of the common stock of many other pharmaceutical and biotechnology companies, has been
highly volatile. In addition, the stock market has experienced extreme price and volume fluctuations. The volatility and market prices of securities of many pharmaceutical and biotechnology companies
have been significantly affected for reasons frequently unrelated to, or disproportionate to, the operating performance of the specific companies. These broad market fluctuations may adversely affect
the market price of our common stock. Prices for our common stock are determined in the marketplace and may be influenced by many factors, including variations in our financial results and investors'
perceptions of us, and changes in recommendations by securities analysts as well as their perceptions of general economic, industry and market conditions.

66

---



Table of Contents

Risks Related to Commercialization, Marketing and Sales

We face intense competition, and many of our competitors have greater resources and capabilities than we have.

We face intense competition in the sale of our current products, and expect to face intense competition in the sale of any future
products we sell. If we are unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may not achieve our product revenue
objectives and because we may use our financial resources to seek to differentiate ourselves from our competition. Large and small companies, academic institutions, governmental agencies and other
public and private organizations conduct research, seek patent protection, develop and acquire products, establish collaborative arrangements for product development and sell or license products in
competition with us. Many of our competitors and potential competitors have substantially greater resources, manufacturing and sales and marketing capabilities, research and development staff and
production facilities than we have. Moreover, the therapeutic categories in which we compete are subject to rapid and substantial technological change. Our competitors may be able to respond more
quickly to new or emerging technologies or to devote greater resources to the development, manufacture and marketing of new products and/or technologies
than we can. As a result, any products and/or technologies that we develop may become obsolete or noncompetitive before we can recover expenses incurred in connection with their development.

For
all of our marketed products, we need to demonstrate to physicians, patients and third-party payors the benefits of the products in terms of their safety, efficacy and cost, both on
a stand-alone basis and, where appropriate, relative to competing products. The growth rate of the overall market for branded pharmaceutical products, such as ours, has been decreasing, and we expect
it will continue to decrease, due to increased generic competition, economic conditions and managed care trends. In addition, if competitors introduce new products or develop new processes or new
information about existing products, then our marketed products, even those protected by patents, may be replaced in the marketplace or we may be required to lower our prices.

Competition in the United States



For insomnia treatments, LUNESTA faces intense competition from established branded and generic products in several drug classes
including benzodiazepines, non-benzodiazepines, melatonin agonists, select antidepressants and others. We estimate that our existing LUNESTA prescriptions account for less than 8% of the
total annual prescriptions currently being written in the United States for anti-insomnia pharmaceutical therapies. Furthermore, LUNESTA faces substantial competition from
non-prescription, over-the-counter and dietary supplement insomnia product options. During 2008 and through the second quarter of 2009, partially as a result of
increasing competition, LUNESTA unit sales and market share decreased. We expect that LUNESTA will face increasing competition from a generic version of AMBIEN that was introduced in April 2007, a
generic version of AMBIEN CR, which could be introduced at any time, and therapies in clinical development or under FDA review for the treatment of insomnia. We may also face additional competition in
the event of commercial introduction of a generic version of LUNESTA. To be successful with LUNESTA, we must demonstrate to physicians, patients and payors the safety and efficacy benefits of the
product, both on a stand-alone basis and, where appropriate, relative to competing products, both generic and branded.



For asthma and COPD treatments, XOPENEX Inhalation Solution and XOPENEX HFA face intense competition from a variety of products.
Patients with asthma and COPD turn to numerous classes of drugs, including corticosteroids, long-acting beta-agonists, short-acting beta-agonists,

67

---



Table of Contents

leukotriene
modifiers, anticholingerics, and others, as well as certain combinations thereof. XOPENEX Inhalation Solution and XOPENEX HFA together account for approximately 3.3% of the total annual
prescriptions currently being written in the United States for asthma and COPD pharmaceutical therapies. XOPENEX Inhalation Solution and XOPENEX HFA also face intense competition specifically within
the beta-agonist classes of asthma and COPD treatments. We estimate that our existing XOPENEX prescriptions account for approximately 10.1% of the total annual prescriptions currently
being written in the United States for beta-agonist asthma and COPD pharmaceutical therapies.

Both
monotherapy and combination therapy beta-agonist treatments compete directly with our XOPENEX products for the treatment of asthma and COPD. Albuterol, a short-acting
beta-agonist, has been available generically for many years. Products containing albuterol as an active ingredient are well established and sell at prices substantially lower than XOPENEX
Inhalation Solution and XOPENEX HFA. XOPENEX HFA also faces direct competition from branded HFA albuterol MDIs. Furthermore, as a consequence of our ongoing commercialization of BROVANA, prescription
levels for XOPENEX Inhalation Solution may be adversely affected to the extent that a significant number of physicians prescribe BROVANA, which could reduce the concomitant need for XOPENEX products.
We may also face additional competition in the event of the commercial introduction of generic versions of our XOPENEX products.

To
be successful with our XOPENEX products, we must demonstrate that the efficacy and safety features of these drugs outweigh the higher price as compared to generic albuterol and other
competing products and that these attributes differentiate these products from other asthma and COPD treatments, including beta-agonist asthma and COPD treatments.



For COPD treatments, BROVANA faces competition from a variety of products. Competitive products include all products used in the
treatment of COPD. Patients with
COPD turn to numerous classes of drugs including anticholingerics, corticosteroids, mukolytics, long-acting beta-agonists, short-acting beta-agonists,
theophyllines, and others to treat their condition. We estimate that our existing BROVANA prescriptions account for less than 1% of the total annual prescriptions currently being written in the United
States for COPD pharmaceutical therapies, and less than 1% of beta-agonist COPD pharmaceutical therapies, specifically. Even though BROVANA is a nebulized product, it also faces
competition from long-acting beta-agonists and anticholinergics delivered by MDI and dry-powder inhaler. BROVANA also competes with combination therapy products
used for COPD. To be successful with BROVANA, we must demonstrate to physicians, patients and payors the safety and efficacy benefits of the product, both on a stand-alone basis and, where
appropriate, relative to competing products, both generic and branded.



OMNARIS Nasal Spray, a corticosteroid nasal spray, competes with perennial and seasonal allergic rhinitis treatments, and faces
competition from oral antihistamines, intranasal antihistamines, intranasal decongestants, other intranasal corticosteroids, intranasal mast cell stabilizers, and antileukotrienes. We estimate that
our existing OMNARIS Nasal Spray prescriptions account for approximately 1% of the total annual prescriptions currently being written in the United States for allergic rhinitis pharmaceutical
therapies, and less than 1% of inhaled nasal corticosteroid allergic rhinitis pharmaceutical therapies, specifically. To be successful with OMNARIS Nasal Spray, we must demonstrate to physicians,
patients and payors the safety and efficacy benefits of the product, both on a stand-alone basis and, where appropriate, relative to competing branded and generic products, some of which may be less
expensive than OMNARIS Nasal Spray and may be available without a prescription.

68

---



Table of Contents

We
may also face additional competition in the event of commercial introduction of a generic version of OMNARIS Nasal Spray.



ALVESCO HFA Inhalation Aerosol, an inhaled corticosteroid in an MDI, competes with other asthma therapies, including asthma controller
therapies, and faces competition from leukotriene receptor antagonists, inhaled corticosteroid/long-acting beta-agonist combinations, monotherapy long-acting
beta-agonists and other monotherapy inhaled corticosteroids. Several of these categories will have generic product entries in the future, which will likely result in competitive products
that are less expensive than ALVESCO HFA Inhalation Aerosol. We estimate that our existing ALVESCO HFA
Inhalation Aerosol prescriptions account for less than 1% of the total annual prescriptions currently being written in the United States for asthma therapies. To be successful with ALVESCO HFA
Inhalation Aerosol, we must demonstrate to physicians, patients and payors the safety and efficacy benefits of the product, both on a stand-alone basis and, where appropriate, relative to competing
products, both generic and branded.



SPI faces competition from Canadian specialty pharmaceutical companies and large multi-national companies that commercialize competing
products in Canada. Competition and innovation from these or other sources could potentially have a negative impact on sales of our products marketed in Canada, or make them obsolete. In addition,
when seeking to license new products for distribution in Canada, we face competition from companies such as Paladin Labs Inc., Axcan Pharma Inc., Biovail Corporation, and other
small-to mid-tier pharmaceutical companies that have the same or similar in-licensing strategies. SPI may also be at a competitive marketing disadvantage against
companies that have broader product lines and whose sales personnel are able to offer more complementary products than SPI. In addition, SPI could face competition in the event of commercial
introduction of generic versions of one or more of its marketed products.

We may be unable to successfully commercialize products for which we receive approval from the FDA or similar foreign agencies.

Commercialization of a product for which we have received an approval letter from the FDA or similar foreign agency could be delayed
for a number of reasons, some of which are outside of our control, including delays in delivery of the product due to importation regulations and/or problems with our distribution channels or delays
in the issuance of approvals from, or the completion of, required procedures by agencies other than the FDA, such as the United States Drug Enforcement Administration. In addition, commercialization
of approved products may be delayed by our failure to timely finalize distribution arrangements, manufacturing processes and arrangements, produce sufficient inventory and/or properly prepare our
sales force. If we are unable to successfully commercialize a product promptly after receipt of an approval letter, our business and financial position may be materially adversely affected due to
reduced revenues from product sales during the period or periods that commercialization is delayed and the shortening of any lead time to market we may have had over our competitors. In addition, the
exclusivity period, which is the time during which the FDA or similar foreign agency will prevent generic pharmaceutical companies from introducing a generic copy of the product, begins to run upon
approval and, therefore, to the extent we are unable to successfully commercialize a product promptly after receipt of an approval letter, our long-term product sales and revenues could be
adversely affected.

Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, if we fail to comply with the applicable regulatory requirements, we may be forced to suspend
and/or cease commercialization of the product due to suspension or withdrawal of regulatory approvals, product

69

---



Table of Contents

recalls,
seizures of products and/or operating restrictions and may be subject to fines and criminal prosecution. In any such event, our ability to successfully commercialize the product would be
impaired and sales and revenues could be materially adversely affected.

We sell our products primarily through a direct sales force, and if we are not successful in attracting and retaining qualified sales personnel, we may not be successful in
commercializing our products. In addition, our recent decision to significantly reduce the number of our sales positions could impair our ability to maintain or increase sales levels or successfully
commercialize new products.

We have established a sales force to market our products. Our ability to realize significant revenues from direct marketing and sales
activities depends on our ability to attract and retain qualified sales personnel. Competition for qualified sales personnel is intense. In January 2009, we decided to reduce the number of our sales
force positions, which included the reduction of approximately 350 field-based positions and the elimination of approximately 410 sales representative positions from a contract sales organization.
This sales force reduction could harm our ability to attract and retain qualified sales personnel. Any failure to attract or retain qualified sales personnel could prevent us from successfully
commercializing our products, impair our ability to maintain sales levels and/or support potential sales growth and sales of additional products we may commercialize in the future. The recently
announced sales force reduction could also result in lack of focus and reduced productivity among our sales personnel and could result in an adverse impact on our revenues. If our sales organization
does not devote the time and resources necessary to attain sales projections, we may not be able to achieve anticipated revenues and our financial condition and operating results could be harmed.

We
may increase or decrease the size of our sales force in the future based on assumptions that prove inaccurate. For example, such increases may be done in anticipation of approvals
and/or expected sales growth that are not realized. Any future expansion of the direct sales force will require us to incur significant expenses. To the extent we expand our direct sales force in
anticipation of receiving marketing approval for products under development, commercially introducing newly developed or acquired products and/or expected sales growth, we may again be forced to
reduce our sales force if our expectations are not realized. In addition, our recently announced sales force reduction, and any future sales force reduction, may make it more difficult for us to
attract the qualified sales people necessary to implement any sales force expansion. We may also need to enter into additional co-promotion, contract sales force or other such arrangements
with third parties, for example, where our own direct sales force is not large enough or sufficiently well aligned to achieve maximum penetration in the market. We may not be successful in entering
into any co-promotion, contract sales force or other such arrangements, and the terms of any co-promotion, contract sales force or other such arrangements may not be favorable
to us.

Our corporate restructuring and workforce reduction plan may not result in anticipated savings, could result in total costs and expenses that are greater than expected and
could disrupt our business.

In January 2009, we announced a corporate restructuring and workforce reduction plan pursuant to which we reduced our workforce by
approximately 20%, which we substantially completed by the end of the second quarter of 2009. In addition, during the first quarter of 2009, we eliminated approximately 410 sales representative
positions from a contract sales organization. These representatives marketed OMNARIS Nasal Spray, ALVESCO HFA Inhalation Aerosol and our XOPENEX products from September 2008 through January 2009. This
restructuring is intended to reduce costs, streamline operations and improve our cost structure, and we expect that this restructuring plan will result in a significant reduction in operating
expenses.

70

---



Table of Contents

In the first quarter of 2009, we recorded $27.5 million of restructuring charges. These charges consisted of approximately $21.8 million relating to
employee termination benefits and approximately $5.7 million relating to other charges, including contract sales organization termination fees, lease termination fees associated with equipment
and automobiles, and future lease and lease-related obligations related to office vacancies. During the second quarter of 2009, we vacated a leased facility and implemented a nominal reduction in
workforce. As a result, we recorded a net restructuring charge of $2.6 million. This net charge consisted of approximately $860,000 relating to employee termination benefits and approximately
$2.3 million in charges relating to future lease and lease-related obligations resulting from a vacancy and expected continued vacancy of a leased facility, offset by a reversal of
approximately $600,000 relating to the first quarter charges.

While
we have substantially completed the implementation of our restructuring and workforce reduction plan, we may incur additional charges as we complete the implementation of this
plan. We do not currently believe any additional charges will be material. However, our estimates are based on a number of assumptions and actual results may differ materially and additional charges
not currently expected may be incurred in connection with, or as a result of, these activities.

Our
restructuring plan may be disruptive to our operations. For example, cost savings measures may distract management from our core business, harm our reputation, yield unanticipated
consequences, such as attrition beyond planned reductions in workforce, or increased difficulties in our day-to-day operations, and may adversely affect employee morale. Our
workforce reductions could also harm our ability to attract and retain qualified management, scientific,
manufacturing and sales and marketing personnel who are critical to our business. Any failure to attract or retain qualified personnel could prevent us from successfully developing and commercializing
our products and product candidates, impair our ability to maintain sales levels and/or support potential sales growth and sales of additional products we may commercialize in the future. Moreover,
although we believe it is necessary to reduce the cost of our operations to improve our performance, these initiatives may preclude us from making potentially significant expenditures that could
improve our product offerings and competitiveness over the longer term.

We may not be able to meet the unique operational, legal and financial challenges that we will encounter in our international operations, which may limit the growth of our
business.

Our success will depend in part on our ability to obtain approval for, and market and sell, our products in foreign markets. We
undertake these activities both on our own and in conjunction with strategic partners. Expanding sales of our products and operations internationally could impose substantial burdens on our resources,
divert management's attention from domestic operations and otherwise adversely affect our business. Furthermore, international operations are subject to several inherent risks
including:



71

---



Table of Contents



If
we are unable to meet and overcome these challenges, our international operations may not be successful, which would limit the growth of our business and could adversely impact our
results of operations.

If we, our collaboration partners or our third-party manufacturers, do not comply with cGMP regulations, then the FDA or other regulatory authorities could refuse to approve
marketing applications or force us to recall or withdraw our marketed products.

The FDA and other regulatory authorities require that our marketed products be manufactured according to their current good
manufacturing practices, or cGMP, regulations. The failure by us, our collaborative partners or our third-party manufacturers to comply with cGMP regulations could lead to delay in our development
programs or refusal by the FDA or other regulatory authorities to approve marketing applications. Following marketing approval of a product, failure in either respect could also impede commercial
introduction or ongoing distribution of the product and/or be the basis for action by the FDA or other regulatory authorities to withdraw approvals previously granted, to recall products and for other
regulatory action.

We could be exposed to significant liability claims that could prevent or interfere with our product commercialization efforts.

We may be subject to product liability claims that arise through clinical testing, manufacturing, marketing, sale and use of
pharmaceutical products. Product liability claims could distract our management and key personnel from our core business, require us to spend significant time and money in litigation or to pay
significant damages, which could prevent or interfere with our product commercialization efforts and could adversely affect our business. Claims of this nature could also subject us to product recalls
or adversely affect our reputation, which could damage our position in the market. Although we maintain product liability insurance coverage for our clinical trials and products we commercialize, it
is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all, and that our insurance coverage may not provide adequate coverage against all
potential claims.

Buying patterns of our wholesalers may vary from time to time, which could have a material impact on our financial condition, cash flows and results of operations.

Sales of our products to wholesalers represent a substantial portion of our total sales. Buying patterns of our wholesalers may vary
from time to time, in part as a result of pricing, seasonality or stage of a product in its life cycle. Wholesalers, or direct customers of wholesalers, may accumulate inventory in one quarter and
limit product purchases in subsequent quarters, which could have a material impact on our financial condition, cash flows and results of operations.

We
have entered into wholesaler fee-for-service agreements, or FFSAs, with several of our customers. Under the FFSAs, we pay a fee, a portion of which relates to
the maintenance of certain

72

---



Table of Contents

minimum
inventory levels. We believe it is beneficial to enter into FFSAs to establish specified levels of product inventory to be maintained and to obtain more precise information as to the level of
our product inventory available throughout the product distribution channel. We record the cost associated with the FFSAs as revenue deductions. We cannot be certain that the FFSAs will be effective
in limiting speculative purchasing activity, that there will not be a future drawdown of inventory or that the inventory level data provided through our FFSAs are accurate. If speculative purchasing
does occur, if these customers significantly decrease their inventory levels, or if inventory level data provided through FFSAs is inaccurate, our business, financial condition, cash flows and results
of operations may also be adversely affected.

Risks Related to the Regulatory Environment

If our product candidates do not receive government approval, we will not be able to commercialize them.

The FDA and similar foreign agencies must approve for commercialization in the relevant jurisdiction any pharmaceutical products
developed by us or our development partners. These agencies impose substantial requirements on drug manufacturing and marketing. Any unanticipated preclinical and clinical studies we or our
collaboration development partners are required to undertake could result in a significant increase in the cost of advancing our products to commercialization. In addition, failure by us or our
collaborative development partners to obtain regulatory approval on a timely basis, or at all, or the attempt by us or our collaborative development partners to receive regulatory approval to achieve
labeling objectives, could prevent or adversely affect the timing of commercial introduction of, or our ability to market and sell, our products.

If we fail to successfully develop and receive regulatory approval for product candidates, we will be unable to commercialize the product candidates, and future sales and
earnings growth will be substantially hampered.

Our ability to maintain profitability will depend in large part on successful development and commercialization of additional products.
Most of our product candidates are in the early stages of development. We cannot assure you that we will be able to develop or acquire and commercially introduce new products in a timely manner or
that new products, if developed or acquired, will be approved for the indications and/or with the labeling we expect, or that they will achieve market acceptance. Before we commercialize any other
product candidate in the United States, we will need to successfully develop the product candidate by completing successful clinical trials, submitting an NDA for the product candidate that is
accepted for filing by the FDA and receiving FDA approval to market the candidate. We must comply with similar requirements in foreign jurisdictions before commercializing any products in the
jurisdiction. In addition, approval of marketing authorization in one jurisdiction does not guarantee approval in any other jurisdiction. If we fail to successfully develop a product candidate and/or
the FDA or similar foreign agency delays or denies approval of any NDA, or foreign equivalent, that we have submitted or submit in the future, including the NDA submitted for STEDESA in March 2009,
then commercialization of such product or products under development may be delayed or terminated, which could have a material adverse effect on our business.

A
number of problems may arise during the development of our product candidates, including the following:



73

---



Table of Contents



Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, the approval may take longer than we anticipate, may be subject to limitations on the indicated
uses for which the product may be marketed or may contain requirements for costly post-marketing follow-up studies. Moreover, if we fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

In
addition, our growth is in part dependent on our continued ability to penetrate new markets where we have limited experience and competition is intense. We cannot be certain that the
markets we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that our products will achieve customer acceptance or sufficient coverage and
reimbursement in these markets, that competitors or regulators will not force prices to an unacceptably low level or take market share from us, or that we can achieve or maintain profits in these
markets.

Our sales depend on payment and reimbursement from third-party payors, and limitations on coverage availability or a reduction in payment rate or reimbursement could result
in decreased use or sales of our products.

Sales of our products are dependent, in part, on the availability of reimbursement from third-party payors such as Federal, state and
foreign government agencies under programs such as Medicare and Medicaid, and private insurance plans. Third-party payors continually attempt to contain or reduce the cost of health care by
challenging the prices charged or limiting the coverage for medical products and services. We may not be able to sell our products profitably if reimbursement is unavailable or coverage is limited in
scope or amount.

There
have been, there are, and we expect there will continue to be, state and Federal legislative and/or administrative proposals that could limit the amount that state or Federal
governments will pay to reimburse the cost of pharmaceutical products, including acts that may be part of any final health care reform legislation passed by Congress and signed into law by President
Obama. Legislative or administrative acts including, but not limited to, bundling multiple products into the same reimbursement code, imposing least costly alternative reimbursement mechanisms that
reference the reimbursement for our products to that of lower priced alternative therapies, conducting comparative effectiveness evaluations, and changing the manner in which reimbursement is
calculated for prescription drugs, can reduce reimbursement for our products and could adversely affect our business. In addition, private insurers, such as MCOs, may adopt their own coverage
restrictions or demand price concessions in response to legislation or administrative action. Reduction in reimbursement for our products could have a material adverse effect on our results of
operations. Also, the increasing emphasis on managed care in the United States may put increasing pressure on the price and usage of our products, which may adversely affect product sales. Further,
when a new drug product is approved, governmental and/or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed and the extent of coverage for
the product. We cannot predict future availability or amount of reimbursement for our approved products or product candidates and current reimbursement policies for our marketed products may change at
any time.

The
MMA established a prescription drug benefit beginning in 2006 for all Medicare beneficiaries. We do not know the extent to which our marketed products that are included in the
Medicare prescription drug benefit will continue to be included, and we may be required to provide significant discounts or rebates to drug plans participating in the Medicare drug benefit. Moreover,
Congress may

74

---



Table of Contents

enact
legislation that permits the Federal government to directly negotiate price and demand discounts on pharmaceutical products that may implicitly create price controls on prescription drugs. In
addition, MCOs, Health Maintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs, health care institutions and other government agencies continue to seek price discounts. MCOs,
HMOs, PPOs and private health plans administer the Medicare drug benefit, leading to managed care and private health plans influencing prescription decisions for a larger segment of the population. In
addition, certain states have proposed, and certain other states have adopted, various programs to control prices for their seniors' and low-income drug programs, including price or
patient reimbursement constraints, restrictions on access to certain products, importation from other countries, such as Canada, and bulk purchasing of drugs.

As
we enter into agreements to license our products for commercialization outside of the United States, we may be subject to pricing decisions made by regulatory bodies and private
insurers around the world. Such pricing decisions may affect royalty rates and payments made to us under those agreements, or decisions whether or not to commercialize our products in the applicable
jurisdiction. Efforts to obtain pricing decisions are often the responsibility of our third-party licensees, and we cannot predict the success of any third-party in obtaining desirable pricing, or how
the actions of such third-party or any regulatory body or private insurer will affect the ultimate commercial benefits of those transactions.

If
reimbursement and/or coverage for our marketed products changes adversely or if we fail to obtain adequate reimbursement for our other current or future products, health care
providers may limit how much or under what circumstances they will prescribe or administer them, which could reduce use of our products or cause us to reduce the price of our products.

We will spend considerable time and money complying with Federal, state and foreign laws and regulations and, if we are unable to fully comply with such laws and
regulations, we could face substantial penalties.

We are subject to extensive regulation by Federal, state and foreign governments. The laws that directly or indirectly affect our
business include, but are not limited to, the following:



75

---



Table of Contents



If
our past, present or future operations are found to be in violation of any of the laws described above or other governmental regulations to which we or our customers are subject, we
may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from Medicare and Medicaid programs and curtailment or
restructuring of our operations. Similarly, if our customers are found non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us.
In addition, if we are required to obtain permits or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense.
Any penalties, damages, fines, exclusion from Medicare and Medicaid programs or curtailment or restructuring of our operations would adversely affect our ability to operate our business and our
financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and
their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses, divert our management's attention from operating our business and damage our reputation.

Federal
and state government agencies also continue to promote efforts to reduce health care costs, including those associated with the Medicare and Medicaid programs. These efforts may
include supplemental rebates and restrictions on the amounts that agencies will reimburse for the use of products. In addition, both the Federal and state governments have initiated investigations and
lawsuits concerning the Medicaid price reporting practices of many pharmaceutical companies to ensure compliance with the Medicaid rebate program. For example, in November 2008, along with
approximately 30 other pharmaceutical companies, we were sued by the State of Kansas in state court for allegedly inducing fraudulent payments for our products by Kansas Medicaid through our alleged
manipulation of the average wholesale prices for our products. We joined other branded product defendants in filing a motion to dismiss this cause of action, which was subsequently denied by the state
trial court assigned to this matter. We have filed an answer to the complaint and responded to the initial request for interrogatories submitted by the State of Kansas. No trial date has been set and
no discovery has been initiated. While we are prepared to defend against these allegations, it is too early to make a reasonable assessment as to the likely outcome of this litigation. We could be
subject to damages and penalties as a consequence of this lawsuit, if we are found liable.

76

---



Table of Contents

The approval of the sale of certain medications without a prescription may adversely affect our business.

In May 2001, an advisory panel to the FDA recommended that the FDA allow certain popular allergy medications to be sold without a
prescription. In November 2002 and November 2007, the FDA approved CLARITIN® and ZYRTEC®, respectively, both allergy medications, to be sold without a prescription. In the
future, the FDA may allow the sale of additional allergy medications without a prescription. The sale of CLARITIN, ZYRTEC and/or, if allowed, other allergy medications without a prescription, may have
a material adverse effect on our business because the market for prescription drugs, including CLARINEX and XYZAL/XUSAL for which we receive royalties on sales, has been and may continue to be,
adversely affected.

We provided Public Health Service discounts to entities we have determined are ineligible for such pricing in periods prior to 2008. This circumstance creates uncertainty as
to whether a new Medicaid best price was set in these prior periods. If a new best price was set, we will be required to pay additional Medicaid rebates. In addition, we may face an increased risk of
investigation or litigation concerning our Medicaid price reporting or other price reporting obligations.

Under the Medicaid rebate program, we are obligated to pay a rebate to each participating state Medicaid program for each unit of our
product reimbursed by that program. The amount of the rebate for each product is set by law as the greater of (a) 15.1% of the average manufacturer's price, or AMP, although we expect this
amount will be increase to 22.1% in late 2009 or
early 2010, or (b) the difference between AMP and the Medicaid best price, which is the lowest price available from us to any customer not excluded by law from that determination. The rules
related to determining AMP and best price are complicated. We compute best price and the required rebate payments each quarter based on our knowledge of the statutory requirements, the current CMS
guidance and our understanding of which customers are properly excluded from best price consideration.

In
January 2008, we notified CMS that we had identified potential errors in our determination of the best price used to calculate Medicaid rebate amounts in prior periods. As a result of
these potential errors, in the first quarter of 2008 we reduced and restated revenues for periods prior to 2008 for contingent rebates based on management's best estimates and assumptions made prior
to any concurrence by CMS. We have been in regular contact with CMS regarding our process for addressing these potential errors. We have begun applying the processes and procedures resulting from our
remediation efforts to our historical price reporting submissions and we plan to communicate the final results of our review in 2009 to CMS and, as necessary, the Health Resources and Services
Administration and state Medicaid programs. The extent to which we reduced our revenues in prior periods due to contingent rebates may change as a result of our continued review and future
communications with CMS, and we are uncertain whether we have overestimated the amount of additional rebates we may be required to pay, or whether we will be subject to fines, penalties or interest.

Both
the federal government and state governments have initiated investigations and lawsuits concerning the Medicaid price reporting practices of many pharmaceutical companies to ensure
compliance with the requirements of the Medicaid rebate program legislation. As a result of the errors that we identified in our calculation of Medicaid rebate reserve amounts, we may face an
increased risk of a government investigation or lawsuits concerning our Medicaid or other price reporting. If any such investigation or lawsuit is initiated, we may be required to pay additional
rebates or other amounts related to sales made in prior periods, and we may be subject to fines, penalties or interest. In addition, an investigation or lawsuit concerning our Medicaid price reporting
could be costly, could divert the attention of our management from our core business and could damage our reputation.

77

---



Table of Contents

If our drugs are not included on state Preferred Drug Lists, use of our drugs may be negatively affected.

Several state Medicaid programs have implemented a Preferred Drug List, or PDL, and more states may adopt this practice. Products
placed on a state Medicaid program's PDL are not subject to restrictions on their utilization by Medicaid patients, such as the need to obtain authorization prior to prescribing. If our drugs are not
included on Medicaid PDLs, use of our drugs in the Medicaid program may be adversely affected. In some states that have adopted PDLs, we have
been, and may continue to be, required to provide substantial supplemental rebates to state Medicaid authorities in order for our drugs to be included on the PDL.

Failure to comply with existing and future environmental, safety and health laws and regulations could adversely affect our results of operations and financial condition.

We are subject to numerous environmental, safety and health laws and regulations. These laws and regulations govern, among other
things, the generation, use and storage of hazardous materials as well as the health and safety of our employees. Our operations can involve the handling of hazardous and other highly regulated
materials which, if not properly handled or disposed of, could subject us to civil and criminal liabilities under these laws and regulations. We may have not been, and we may not at all times in the
future be, in compliance with such environmental, safety and health laws and regulations.

The
costs of complying with existing and future environmental, safety and health laws and regulations may be significant. In addition to these costs, the costs and expenses associated
with any future claims for personal injury or the clean-up of hazardous materials could adversely affect our results of operations and financial condition.

Risks Related to Our Intellectual Property

If we or our collaboration partners fail to adequately protect or enforce our respective intellectual property rights, then we could lose revenue under our licensing
agreements or lose sales to generic equivalents of our marketed products.

Our success depends in large part on our ability, and the ability of our collaboration partners, to obtain, maintain and successfully
enforce patents, and protect trade secrets. Our ability to commercialize any drug successfully will largely depend upon our ability, and the ability of our collaboration partners, to obtain and
maintain patents, including successful enforcement of those patents, of sufficient scope to prevent third parties from developing the same or substantially equivalent products. Our revenues under
collaboration agreements with pharmaceutical companies also depend in part on the existence and scope of issued patents. In the absence of patent and trade secret protection, competitors may adversely
affect our business by independently developing and marketing the same or substantially equivalent products. It is also possible that we could incur substantial costs if we are required to initiate
litigation against others to protect or enforce our intellectual property rights.

We
have filed patent applications covering composition of, methods of making, and/or methods of using, our products and product candidates. We and our collaboration partners may not be
issued patents based on patent applications already filed or that may be filed in the future and if patents are issued, they may be insufficient in scope to cover our products, product candidates and
the products licensed under any collaboration agreements. Generally, we do not receive royalty revenues from sales of products licensed under collaboration agreements in countries where we do not have
a patent for such products. The issuance of a patent in one country does not ensure the issuance of a patent in any other country. Furthermore, the patent position of companies in the pharmaceutical
industry generally involves complex legal and factual questions, and has been, and remains the subject of, much litigation. Legal standards relating to scope and validity of patent claims are
evolving. Any patents we and/or our collaboration partners have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United States Patent and Trademark
Office may commence interference

78

---



Table of Contents

proceedings
involving our patents or patent applications or those of our collaboration partners. Any challenge to, or invalidation or circumvention of, our patents or patent applications would be
costly, would require significant time and attention of our management and could have a material adverse effect on our business. In addition, if we or our collaboration partners are not successful in
obtaining patents of sufficient scope and enforcing our patents, we and/or our collaboration partners will not be able to prevent others from introducing generic versions of our marketed products and
those of our collaboration partners for which we receive royalties.

If we or our licensees do not prevail against those parties seeking to market generic versions of our products or products for which we receive royalties, our business will
be adversely affected and we may not have sufficient revenues to achieve our business plan or repay our outstanding debt.

With respect to XOPENEX Inhalation Solution, Breath, Dey, L.P., Barr, Teva, Watson Laboratories, Inc., or Watson, and
Apotex Inc., or Apotex, have filed ANDAs including Paragraph IV certifications with the FDA seeking to market a generic version of levalbuterol hydrochloride inhalation solution before
our patents expire. We brought civil actions against Breath, Dey, L.P. and Barr for patent infringement, and in April 2008 and March 2009, respectively, we settled the Breath and Barr matters
and these litigations are now concluded. However, patent infringement litigation remains outstanding against Dey, L.P. Our settlements with Breath and Barr and on-going litigation
with Dey, L.P. are described in detail in Part II, Item 1 "Legal Proceedings" of this Quarterly Report on Form 10-Q. We have decided not to commence litigation
against Watson, Teva and Apotex as their respective Paragraph IV certifications are limited to a single patent that expires in 2021.

In
May 2008 and March 2009, respectively, we provided to the Federal Trade Commission and Department of Justice Antitrust Division the notifications of the settlement with Breath and
Barr as required under Section 1112(a) of the MMA. The settlements with these parties as well as the other
agreements with Breath and its affiliates, including the supply agreement, the agreement for the acquisition of Oryx and license agreements with Arrow, may be reviewed by antitrust enforcement
agencies, such as the Federal Trade Commission and Department of Justice Antitrust Division. There can be no assurances that governmental authorities will not seek to challenge the settlement with
Breath or Teva/Barr or that a competitor, customer or other third-party will not initiate a private action under antitrust or other laws challenging either or both of these settlements. We may not
prevail in any such challenges or litigation and, in any event, may incur significant costs in the event of an investigation or in defending any action under antitrust laws.

In
March 2009, we filed a lawsuit in the U.S. District Court for the District of New Jersey alleging infringement of our U.S. Patent Numbers 6,319,926; 6,444,673; 6,864,257; and
7,381,724, against each of the Teva entities, Cobalt Laboratories, Dr. Reddy's, Orchid, Glenmark Generics, Roxane, Lupin, Wockhardt, Sun Global, Orgenus, Mylan and Alphapharm. In April 2009, we
also filed a lawsuit in the United States District Court for the Southern District of New York alleging infringement of these patents against Mylan and Alphapharm, which was subsequently dismissed
pursuant to agreement by the parties. Beginning in February 2009, we received notices from each of these parties indicating that each had filed an ANDA with the FDA for generic versions of eszopiclone
tablets (1 mg, 2 mg and 3 mg). Each submission includes a Paragraph IV certification alleging that one or more of our patents listed in the Orange Book for LUNESTA is
invalid, unenforceable or not infringed by their respective proposed generic products. We may receive additional notices that other ANDAs with Paragraph IV certifications have been filed by
different generic pharmaceutical companies for generic versions of eszopiclone tablets. Due to the commencement of this litigation, ANDA approval will be stayed until approximately June 15,
2012 (or potentially six months thereafter if we successfully obtain a pediatric exclusivity extension) or until a court decides that our patents are invalid, unenforceable or not infringed, whichever
is earlier. Should we successfully enforce our patents, ANDA approval should not occur until expiration of the applicable patents, one of which may be extended by our outstanding patent term extension
application.

79

---





Table of Contents

Certain of Schering-Plough's CLARINEX products for which we receive sales royalties are currently the subject of patent infringement litigation. Since June 2007,
the FDA has received ANDAs relating to various dosage forms of CLARINEX from eleven different generic pharmaceutical companies. These ANDA submissions include Paragraph IV certifications
alleging that our patents, which Schering-Plough (as exclusive licensee of such patents) listed in the Orange Book for these products, are invalid, unenforceable and/or not infringed by the
submitter's proposed product. We and the University of Massachusetts, co-owners of certain patents listed in the Orange Book, filed civil actions against these parties for patent
infringement in the United States District Court for the District of New Jersey. In April 2008, the trial judge consolidated these cases for all purposes including discovery and trial. The court has
not set a trial date. We believe that all of these ANDAs are subject to a statutory stay of approval until at least December 21, 2009 based on previous litigation commenced by Schering-Plough
against these parties in separate civil actions involving another patent.

We
entered into a consent agreement with one of these ANDA filers whereby the ANDA filer agreed not to pursue its case or market its CLARINEX product until the expiration of our patents
listed by Schering-Plough in the Orange Book or until our patents for the product are found invalid or unenforceable. In addition, as a result of separate formal settlement agreements that
Schering-Plough has entered into with several ANDA filers involved in litigation with Schering-Plough, or Schering-Plough Settlement Agreements, we and the University of Massachusetts submitted, and
the court approved, stipulations of dismissal without prejudice against eight of the ANDA filers that we sued. The Schering-Plough Settlement Agreements entered to date permit generic entry of
CLARINEX-D -12 Hour, CLARINEX-D 24 Hour and CLARINEX REDITABS on January 1, 2012 and CLARINEX 5 mg tablet
on July 1, 2012. Upon generic entry of each product by a party to a Schering-Plough Settlement Agreement, our right to receive royalties on sales of such product will be significantly reduced.

UCB S.A.'s
XYZAL 5 mg product, for which we receive royalties, is currently the subject of patent infringement litigation. The FDA has received ANDAs from four generic
pharmaceutical companies that include Paragraph IV certifications alleging that one of our patents, which UCB S.A. (as NDA holder and licensee of the patent) listed in the Orange Book
for this product, is invalid, unenforceable and/or not infringed by the ANDA filer's product. UCB S.A., on its own and on our behalf, commenced patent infringement litigation against all of
these parties. Two of these companies subsequently amended their ANDAs to change their Paragraph IV certifications to Paragraph III certifications, thereby withdrawing the challenges to
our patent. We believe that the remaining ANDAs are subject to a statutory stay of approval until at least on or about August 29, 2010.

In
addition, a number of our foreign patents that we have out-licensed to Schering-Plough, sanofi-aventis and the UCB Farchim S.A. in connection with the sale of
CLARINEX, ALLEGRA and XYZAL/XUSAL, respectively, are subject to patent invalidity claims. If patent-based exclusivity is lost for one or more of these products in any foreign jurisdiction, our rights
to receive royalty revenue with respect to such product in the relevant jurisdiction will terminate, which may have a material adverse effect on our business, financial condition and results of
operations. Should the courts uphold our foreign patents, companies seeking to market generic versions of our drugs and the drugs of our licensees should be deterred from market entry until the
expiration of the applicable patent(s).

Patent
litigation involves complex legal and factual questions. We can provide no assurance concerning the duration or outcome of any patent-related lawsuits. If we, third parties from
whom we receive royalties, or third parties from whom we have licensed products or received other rights to commercialize products, are not successful in enforcing relevant patents, the companies
seeking to market generic versions of our marketed drugs and the drugs of our licensees will not be excluded, for the full term of our patents, from marketing their generic versions of our marketed
products or third-party products for which we have licensed rights to our patents. Introduction of generic equivalents of

80

---



Table of Contents

any
of our marketed products or third-party products for which we have licensed rights to our patents before the expiration of our patents would have a material adverse effect on our business.

Additionally,
the costs to us of these proceedings, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management
and other key personnel from our core business and our resources in general. Uncertainties resulting from the initiation and continuation of these and any other litigation proceedings could harm our
ability to compete in the marketplace.

If we face a claim of intellectual property infringement by a third party, we could be liable for significant damages or be prevented from commercializing our products.

Our success depends in part on our ability to operate without infringing the proprietary rights of others, including patent and
trademark rights. Third parties, typically pharmaceutical companies, may hold patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for
some of our drug candidates. Third parties may also hold patents relating to drug delivery technology that may be necessary for development or commercialization of some of our drug candidates. In each
of these cases, unless we have or obtain a license agreement, or unless we are able to prove that the third party's patents are invalid or unenforceable, we generally may not commercialize the drug
candidates until these third-party patents expire or are declared invalid or unenforceable by the courts. Licenses may not be available to us on acceptable terms, if at all.

Others
may file suit against us alleging that our marketed products or product candidates infringe patents they hold. For example, in April 2007, we were served with a Complaint filed by
Dey alleging that the manufacture and sale of BROVANA infringes or will induce infringement of a United States patent for which Dey owns all rights, title and interest. Our patent infringement
litigation with Dey is described in detail in Part II, Item 1 "Legal Proceedings" of this Quarterly Report on Form 10-Q. It is too early to make a reasonable
assessment as to the likely outcome or impact of the litigation with Dey, and we are unable to reasonably estimate any possible range of loss or liability related to this lawsuit due to its uncertain
resolution.

Even
if resolved in our favor, any patent infringement litigation would be costly, would require significant time and attention of our management, could prevent us from commercializing
our marketed products for a period of time, could require us to pay significant damages and could have a material adverse effect on our business. If the matter is not resolved in our favor, we could
be required to pay significant damages and/or be prevented from commercializing the product and our business could be materially adversely affected

If
any of our trademarks or the trademarks we license from our third-party collaborators, or our use of any of these trademarks in connection with products we commercialize, is
challenged, we or our third-party collaborators may be forced to rename the affected product or product candidate, which could be costly and time consuming, and would result in the loss of any brand
equity associated with the product name.

Risks Related to Our Dependence on Third Parties

If any third-party collaborator is not successful in development or commercialization of our products or product candidates, we may not realize the potential commercial
benefits of the arrangement and our results of operations could be adversely affected.

In December 2001, we entered into a collaboration agreement with 3M Company, or 3M, for the manufacturing of XOPENEX HFA. Under this
agreement, we license certain proprietary technology from 3M, and it is responsible for manufacturing the MDI formulation of XOPENEX. In July 2007, we entered into an agreement with Eisai for
development and commercialization of our eszopiclone

81

---



Table of Contents

product,
marketed as LUNESTA in the United States. Under the Eisai agreement, Eisai will be responsible for completing remaining clinical trials necessary for obtaining marketing approval from the
Japanese regulatory authorities and, contingent on regulatory approval, commercialization of the product in Japan. In December 2007, we entered into a license agreement with Bial for the development
and commercialization in the United States and Canada of STEDESA. Under this agreement, Bial is responsible for certain development activities and prosecuting all patents and patent applications it
licensed to us. In January 2008, we entered into a distribution and development agreement with Nycomed for the development, commercialization and distribution in the United States, its territories and
possessions of Nycomed's ciclesonide compound, and certain products incorporating such compound, including ALVESCO HFA Inhalation Aerosol and OMNARIS Nasal Spray. Under this agreement, Nycomed is
responsible for prosecuting all patents and patent applications with respect to these products. In April 2008, we entered into two license and development agreements with Arrow for the development and
commercialization of Arrow's levalbuterol/ipratropium combination product candidate and for the development and commercialization of a ciclesonide standalone product and a ciclesonide/arformoterol
combination product utilizing Arrow's know-how and intellectual property rights related to stable sterile suspension formulations and other technology.

If
3M, Eisai, Bial, Nycomed, Arrow or any future development or commercialization collaborator does not devote sufficient time and resources to its collaboration arrangement with us,
breaches or terminates its agreement with us, fails to perform its obligations to us in a timely manner, is unsuccessful in its development and/or commercialization efforts, or is unsuccessful in
obtaining, maintaining or enforcing patents, and/or protecting trade secrets we license to or from such collaborator, we may not realize the potential commercial benefits of the arrangement and our
results of operations may be adversely affected. In addition, if regulatory approval or commercialization of any product candidate under development by, or in collaboration with, a partner is delayed
or limited, we may not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement.
For example, as a result of the decision by the CHMP of the EMEA to recommend granting marketing authorization for LUNIVIA but without designating it as a new active substance, in April 2009, we
entered into the Termination Agreement with GSK pursuant to which the parties mutually agreed to terminate the GSK License Agreement. Pursuant to the GSK License Agreement, GSK obtained rights for the
development and commercialization of LUNIVIA (marketed as LUNESTA in the United States) for all markets worldwide excluding the United States, Canada, Mexico and Japan.

The royalties and other payments we receive under licensing arrangements could be delayed, reduced or terminated if our licensing partners terminate, or fail to perform
their obligations under, their agreements with us, or if our licensing partners are unsuccessful in their sales efforts.

We have entered into licensing arrangements pursuant to which we license patents to pharmaceutical companies, and our revenues under
these licensing arrangements consist primarily of milestone payments, royalties on sales of products and supply payments. Payments and royalties under these arrangements depend in large part on the
efforts of our licensing partners in countries where we hold patents, including development and sales efforts and enforcement of patents, which we cannot control. If any of our licensing partners does
not devote sufficient time and resources to its licensing arrangement with us or focuses its efforts in countries where we do not hold patents, we may not realize the potential commercial benefits of
the arrangement, our revenues under these arrangements may be less than anticipated and our results of operations may be adversely affected. If any of our licensing partners was to breach or terminate
its agreement with us or fail to perform its obligations to us in a timely manner, the royalties and other payments we receive under the licensing agreement could decrease or cease. If we are unable
or fail to perform, or are in breach of our obligations under a licensing agreement, the royalties and other payments and benefits to which we are otherwise entitled under the agreement could be
reduced or eliminated. Any delay or termination of this type could have a material adverse effect on our financial condition and results of operations because we may lose

82

---



Table of Contents

technology
rights and milestone, royalty and/or supply payments from licensing partners and revenues from product sales, if any, could be delayed, reduced or terminated.

We rely on third-party manufacturers, and this reliance could adversely affect our ability to meet our customers' demands.

We currently operate a manufacturing plant that we believe can meet our commercial requirements of the active pharmaceutical agreement,
or API, for XOPENEX Inhalation Solution, XOPENEX HFA and BROVANA, partially fulfill our commercial requirements of the API for LUNESTA, and support production of our internally developed product
candidates in amounts needed for our clinical trials. However, we do not have facilities for manufacturing pharmaceutical dosage forms or finished drug products. Developing and obtaining this
capability would be time
consuming and expensive. Unless and until we develop this capability, we will rely substantially, and in some cases, entirely, on third- party manufacturers. Catalent Pharma Solutions, LLC, or
Catalent, formerly Cardinal Health, Inc., and Holopack International Corporation, or Holopack, are currently our only finished goods manufacturers of our XOPENEX Inhalation Solution, and
Catalent is currently the sole finished goods manufacturer of BROVANA. Patheon Inc., or Patheon, and Norwich Pharmaceuticals, Inc., or NPI, are currently our only manufacturers of LUNESTA, and
3M is the sole manufacturer and supplier of XOPENEX HFA. Certain components of XOPENEX HFA are available from only a single source. If we are unable to produce sufficient quantities of API for our
products in a timely manner, or if Catalent, Holopack, Patheon, NPI, 3M, or any of our sole-source component suppliers experiences delays or difficulties in producing, packaging or
delivering XOPENEX Inhalation Solution, XOPENEX HFA or its components, BROVANA or LUNESTA, as the case may be, we could be unable to meet our customers' demands for such products, which could lead to
lost sales, customer dissatisfaction and damage to our reputation. Moreover, if we experience delays or difficulties meeting our supply obligations to Eisai as a result of our third-party suppliers
and manufacturers not meeting our demands, or for any other reason, we may not realize the potential commercial benefits of our supply and/or licensing arrangements with Eisai and our results of
operations may be adversely affected. If we are required to change manufacturers, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality
standards and with all applicable regulations and guidelines, including FDA guidelines. The delays associated with the verification of a new manufacturer for XOPENEX Inhalation Solution, XOPENEX HFA
or its components, BROVANA or LUNESTA could adversely affect our ability to produce such products in a timely manner or within budget.

Pursuant
to our distribution, development and commercialization agreement with Nycomed, Nycomed will be responsible for exclusively manufacturing and supplying us with our requirements
of ALVESCO HFA Inhalation Aerosol and OMNARIS Nasal Spray. Furthermore, in the event that we develop and commercialize any additional products containing the ciclesonide compound, including OMNARIS
HFA Nasal Aerosol, we will rely on Nycomed and/or other third parties for the manufacture and supply of such products. If the manufacturer of a ciclesonide product experiences delays or difficulties
in producing, packaging or delivering such product, we could be unable to meet our customers' demands for the product, which could lead to lost sales, customer dissatisfaction and damage to our
reputation.

We
license certain proprietary technology required to manufacture our XOPENEX HFA from 3M. If 3M is unable or unwilling to fulfill its obligations to us under our agreement, we may be
unable to manufacture XOPENEX HFA on terms that are acceptable to us, if at all. Our other current contract manufacturers, as well as any future contract manufacturers, may also independently own
technology related to manufacturing of our products. If so, we would be heavily dependent on such manufacturer and such manufacturer could require us to obtain a license in order to have another party
manufacture our products.

83

---



Table of Contents

Risks Related to Growth of Our Business

If we fail to acquire and develop additional product candidates or approved products, our ability to grow will be impaired.

We are currently commercializing six products. In addition, OMNARIS HFA Nasal Aerosol is in Phase III clinical development and
our NDA for STEDESA has been accepted for filing and is under formal review by the FDA. However, all of our other product candidates are in the early stages of development. In order to increase the
likelihood that we will be able to successfully develop and/or commercialize additional drugs, we intend to acquire and develop additional product candidates and/or approved products. The success of
this growth strategy depends upon our ability to correctly establish criteria for such acquisitions and successfully identify, select and acquire product candidates and/or products that meet such
criteria. We will be required to integrate any acquired product candidates, including the product candidates we licensed from Bial and Arrow and product candidates we are developing pursuant to our
agreement with Nycomed, into our research and development operations and any acquired products into our sales and marketing operations. Managing the development and/or commercialization of a new
product involves numerous other financial and operational risks, including difficulties allocating resources between existing and acquired assets and attracting and retaining qualified employees to
develop and/or sell the product.

Any
product candidate we acquire may require additional research and development efforts prior to commercial sale, including extensive preclinical and/or clinical testing and approval by
the FDA or foreign regulatory authorities. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate
will not be safe and effective or approved by regulatory authorities.

In
addition, we cannot be certain that any products that we develop or acquire will be:



Proposing,
negotiating and implementing an economically viable acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial,
marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and
approved products on terms that we find acceptable, or at all.

We may undertake strategic acquisitions in the future and any difficulties from integrating acquired businesses, products and product candidates could adversely affect our
stock price, business operations, financial condition or results from operations.

We may acquire additional businesses, products or product candidates that complement or augment our existing business. We have limited
acquisition experience and may not be able to integrate any acquired business, product or product candidate successfully or operate any acquired business profitably. Integrating any newly acquired
business, product or product candidate could be expensive and time-consuming. Integration efforts often place a significant strain on managerial, operational and financial resources and
could prove to be more difficult or expensive than we predict. The diversion of our management's attention and any delay or difficulties encountered in connection with any future acquisitions we may
consummate could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to

84

---



Table of Contents

maintain
relationships with customers, suppliers, collaborators, employees and others with whom we have business dealings. Moreover, we may need to raise additional funds through public or private
debt or equity financing to acquire any businesses, products or product candidates, which may result in dilution for stockholders or the incurrence of indebtedness.

As
part of our efforts to acquire businesses, products and product candidates or to enter into other significant transactions, we conduct business, legal and financial due diligence with
the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result,
might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from acquisitions we have consummated or may consummate in the future, whether as a result of
unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected. We will also need to make
certain assumptions regarding acquired product candidates, including, among other things, development costs, the likelihood of receiving regulatory approval and the market for such product candidates.
Our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions.

In
addition, we will likely experience significant charges to earnings in connection with our efforts, if any, to consummate acquisitions. These charges may include fees and expenses for
investment bankers, attorneys, accountants and other advisers in connection with our efforts, and may be incurred whether or not an acquisition is consummated. Even if our efforts are successful, we
may incur as part of a transaction substantial charges for closure costs associated with elimination of duplicate operations and facilities and IPR&D expenses. In either case, the incurrence of these
charges could adversely affect our results of operations for particular quarterly or annual periods.

Development and commercialization of our product candidates could be delayed or terminated if we are unable to enter into collaboration agreements in the future or if any
future collaboration agreement is subject to lengthy government review.

Development and commercialization of some of our product candidates may depend on our ability to enter into additional collaboration
agreements with pharmaceutical companies to fund all or part of the costs of development and commercialization of these product candidates. We may not be able to enter into collaboration agreements
and the terms of the collaboration agreements, if any, may not be favorable to us. Inability to enter into collaboration agreements could delay or preclude development, manufacture and/or
commercialization of some of our product candidates and could have a material adverse effect on our financial condition and results of operations because:



We
are required to file a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, for certain agreements containing
exclusive license grants and to delay the effectiveness of any such exclusive license until expiration or earlier termination of the notice and waiting period under the HSR Act. If expiration or
termination of the notice and waiting period under the HSR Act is delayed because of lengthy government review, or if the Federal Trade Commission or Department of Justice successfully challenges such
a license, development and commercialization could be delayed or precluded and our business could be adversely affected.

85

---



Table of Contents

ITEMS 2-3. NONE



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual meeting of stockholders was held on May 14, 2009. The following represents the results of the voting on proposals
submitted to a vote of stockholders at the annual meeting:



For

Withheld AuthorityRobert J. Cresci


74,864,658


25,622,285James F. Mrazek


74,239,820


26,247,123


The
terms of office of the following directors continued after the annual meeting:

Adrian Adams

(Class II Director whose term expires in 2011)Timothy J. Barberich

(Class II Director whose term expires in 2011)Digby W. Barrios

(Class III Director whose term expires in 2010)Lisa Ricciardi

(Class III Director whose term expires in 2010)Timothy J. Rink

(Class II Director whose term expires in 2011)Alan A. Steigrod

(Class III Director whose term expires in 2010)




For

Against

Abstain

Broker Non-Votes62,796,038


28,692,300


50,717


8,947,888




For

Against

Abstain

Broker Non-Votes90,723,397


774,104


41,554


8,947,888




For

Against

Abstain98,336,981


2,109,284


40,677


ITEM 5.    NONE



ITEM 6.    EXHIBITS

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


86

---





Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

SEPRACOR INC.Date: August 5, 2009

By:

/s/ ADRIAN ADAMS Adrian Adams President and Chief Executive Officer
(Principal Executive Officer)Date: August 5, 2009

By:

/s/ ROBERT F. SCUMACI Robert F. Scumaci
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


87

---





Table of Contents



Exhibit Index

Exhibit No.

Description31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


88

---