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 March 31, 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 April 30, 2009 was 109,302,632 shares.



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SEPRACOR INC.  INDEX



Part IFinancial InformationItem 1.

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


3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008 (unaudited)


4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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


25Item 3.

Quantitative and Qualitative Disclosures About Market Risk


42Item 4.

Controls and Procedures


42Part IIOther InformationItem 1.

Legal Proceedings


43Item 1A.

Risk Factors


48Item 6.

Exhibits


75Signatures


76Exhibit Index


77


2

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PART 1FINANCIAL INFORMATION

Item I.    Financial Statements



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

March 31,
2009

December 31,
2008(Unaudited)

(as adjusted)AssetsCurrent assets:Cash and cash equivalents

$
512,371

$
629,255Short-term investments


73,945


62,376Accounts receivable, net


159,797


177,457Inventories


62,811


69,003Deferred tax asset


120,160


121,919Other current assets


37,509


32,417Total current assets


966,593


1,092,427Long-term investments


142,685


74,199Property and equipment, net


122,217


117,874Intangible assets, net


150,848


154,936Goodwill


19,470


19,898Deferred tax asset


320,690


342,200Other assets


5,127


5,790Total assets

$
1,727,630

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

$
14,584

$
20,429Accrued expenses


121,090


138,852Current portion of long-term debt


232,848


367,101Product sales allowances and reserves


288,080


276,589Restructuring


19,835


Other current liabilities


38,983


37,903Total current liabilities


715,420


840,874Long-term debt


148,020


148,326Deferred tax liabilities


4,625


5,577Other liabilities


88,896


87,908Total liabilities


956,961


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





Common stock, $.10 par value, 240,000 shares authorized at March 31, 2009 and December 31, 2008; 113,553 and 113,357 shares issued, 109,292 and
109,096 shares outstanding, at March 31, 2009 and December 31, 2008, respectively


11,355


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


(232,028
)

(232,028
)Additional paid-in capital


2,040,504


2,029,475Accumulated deficit


(1,029,260
)

(1,064,437
)Accumulated other comprehensive loss


(19,902
)

(19,706
)Total stockholders' equity


770,669


724,639Total liabilities and stockholders' equity

$
1,727,630

$
1,807,324


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

3

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

Three Months EndedMarch 31,
2009

March 31,
2008(as adjusted)Revenues:Product sales

$
306,854

$
305,544Royalties and license fees


23,318


15,235Total revenues


330,172


320,779Costs and expenses:Cost of product sold


31,703


27,587Cost of royalties


373


489Research and development


59,224


66,229Research and developmentin process upon acquisition





39,237Selling, marketing and distribution


120,591


155,331General and administrative


22,838


23,319Amortization of intangible assets


1,496


2,265Restructuring


27,536


(300
)Total costs and expenses


263,761


314,157Income from operations


66,411


6,622Other income (expense):Interest income


1,881


8,169Loss on extinguishment of debt


(490
)

Interest expense


(7,951
)

(6,696
)Equity in investee losses


(205
)

(203
)Other income (expense)


195


(78
)Income before income taxes


59,841


7,814Income taxes


24,664


696Net income

$
35,177

$
7,118Basic net income per common share

$
0.32

$
0.07Diluted net income per common share

$
0.31

$
0.06Shares used in computing basic and diluted net income per common share:Basic


109,206


107,770Diluted


114,414


115,710


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

4

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

Three Months EndedMarch 31,
2009

March 31,
2008(as adjusted)Cash flows from operating activities:Net income

$
35,177

$
7,118Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


8,867


7,312Research and developmentin process upon acquisition





39,237Interest accretion on license fee liabilities


3,099


Loss on extinguishment of debt


490


Settlement of accreted interest on convertible debt


(31,395
)

Interest related to accretion of debt discount


4,799


6,641Equity in investee losses


205


203Stock compensation


9,215


10,370Deferred income taxes


22,362


Changes in operating assets and liabilities:Accounts receivable


17,630


(57,202
)Inventories


5,876


(5,294
)Other assets


(5,472
)

(29,890
)Accounts payable


(5,782
)

13,725Accrued expenses


(17,634
)

(78,069
)Product sales allowances and reserves


11,491


6,482Other liabilities


19,432


12,421Net cash provided by (used in) by operating activities


78,360


(66,946
)Cash flows from investing activities:Purchases of available-for-sale investments


(71,498
)

(29,029
)Sales of available-for-sale investments


2,837


33,552Maturities of available-for-sale investments





16,925Purchases of held-to-maturity investments


(60,287
)

(108,630
)Maturities of held-to-maturity investments


50,040


174,686Additions to property and equipment


(9,966
)

(8,224
)Payments for purchased intangibles





(150,000
)Net cash used in investing activities


(88,874
)

(70,720
)Cash flows from financing activities:Net proceeds from issuance of common stock


1,833


1,311Repayments of long-term debt and capital leases


(108,028
)

(293
)Net cash (used in) provided by financing activities


(106,195
)

1,018Effect of exchange rate changes on cash and cash equivalents


(175
)

(99
)Net decrease in cash and cash equivalents


(116,884
)

(136,747
)Cash and cash equivalents at beginning of period

$
629,255

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

$
512,371

$
462,182Supplemental schedule of cash flow information:Cash paid during the period for interest

$
29

$
55Cash paid during the period for income taxes

$
5,914

$
2,827


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

5

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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 the 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 March 31, 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.

The
condensed consolidated results 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, filed with the Securities and Exchange Commission, or SEC. 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 "Adoption of Recent Accounting Standards and Revised Financial Statements."

The
preparation of financial statements in conformity with generally accepted accounting principles 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.

2. Recent Accounting Pronouncements

In April 2009, the FASB issued FSP Statement of Accounting Standards, or 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. We do not
expect the changes associated with adoption of this FSP will have a material effect on the determination or reporting of our financial results.

In
April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2,Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP changes existing guidance for determining whether an impairment of debt securities is other than temporary.
The FSP requires other than

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

2. Recent Accounting Pronouncements (Continued)

temporary
impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings
and the amount related to other factors, which is recognized in other comprehensive income. This noncredit loss component of the impairment may be classified only in other comprehensive income if the
holder of the security concludes that it does not intend to sell and it will not more likely than not be required to sell the security before it recovers its value. If these conditions are not met,
the noncredit loss must also be recognized in earnings. When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to
reclassify the noncredit component of a previously recognized other than temporary impairment from retained earnings to accumulated other comprehensive income. This FSP is effective for interim
periods ending after June 15, 2009. We do not expect the changes associated with adoption of this FSP will have a material effect on the determination or reporting of our financial results.

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. This FSP provides additional guidance on estimating fair value when the volume and level of activity
for an asset or liability have 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 do not believe the adoption of this FSP will have a material impact on our condensed
consolidated interim financial statements.

3. Adoption of Recent Accounting Standards and 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

7

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. Adoption of Recent Accounting Standards and Revised Financial Statements (Continued)

$500.0 million
principal amount, and the equity component (or conversion feature) is valued at $127.5 million of the original $500.0 million principal 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 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 consolidated statements of operations. The
interest expense
attributed to the adoption of FSP APB 14-1 for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 was $25.6 million, $25.8 million,
$24.3 million, $22.9 million and $5.5 million, respectively. This excludes approximately $800,000 of interest in 2008 that has been capitalized related to qualifying assets under
SFAS No. 34,Capitalization of Interest Costs. The interest expense attributed to the adoption of FSP APB 14-1 for the three
months ended March 31, 2009 and 2008 was $4.8 million and $6.6 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 deferred financing costs associated with the issuance of the 0% notes due 2024 were previously reported at
$14.1 million. These costs have been allocated proportionally between the liability and equity components. The issuance costs associated with the liability component continues to be included in
other assets on our condensed consolidated balance sheets, whereas the issuance costs associated with the equity component are included in additional paid-in-capital and are
not amortized.

During
the third and fourth quarter of 2008, we completed partial early extinguishments of the 0% notes due 2024, repurchasing notes with a par value of $117.6 million. We
originally reported a net gain on extinguishment of $10.1 million for the year ended December 31, 2008. The adoption of FSP APB 14-1 also decreased the gain on
extinguishment to $4.2 million as a result of $5.9 million of accelerated interest expense, which was recorded against the original gain amount.

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 our diluted earnings per share, or EPS, reported for the years ended December 31, 2008, 2007, 2006 and 2005 was a decrease of $0.32, $0.22, $0.20 and $0.21,
respectively. The impact to diluted EPS for the three months ended March 31, 2009 and 2008 was a decrease of $0.08 and $0.06, respectively.

The
principal amount of the outstanding 0% notes due 2024, the unamortized discount and the net carrying value at March 31, 2009 was $239.0 million, $6.9 million and
$232.1 million, respectively, and at December 31, 2008 was $382.5 million, $16.5 million and $366.0 million, respectively. The unamortized discount will continue to
be recognized until October 2009, which is when we expect the

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. Adoption of Recent Accounting Standards and Revised Financial Statements (Continued)

0%
notes due 2024 to be fully converted into cash by the noteholders. The table below presents the as adjusted and as previously reported December 31, 2008 balance sheets data and the
March 31, 2008 statement of operations data materially affected by the adoption of FSP 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, 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. The condensed consolidated statements of operations presented herein have been prepared to
reflect the adoption of FSP EITF 03-6-1, which had no impact to our diluted EPS for the three months ended March 31, 2009 and 2008. The impact to reported diluted
EPS at December 31, 2008 was a decrease of $0.04 per share, which was originally reported as $4.47, and there was no impact to the reported diluted EPS at December 31, 2007.



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 rates securities, which lead
to a $1.8 million overstatement of interest income in 2008. To correct the amount overstated for the three months ended March 31, 2008, we reduced interest income by approximately
$564,000 for that period. 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 over 2008, 2007, 2006 and 2005 of $2.4 million, $1.0 million, $1.2 million and $1.2 million, respectively; and an overstatement in
sales, marketing and distribution expense related to product samples in 2008 and 2007 of $548,000 and $66,000, respectively. To correct this overstatement, in the three months ended March 31,
2008, we reduced cost of product sold by approximately $1.7 million for that period. The net impact of these items was an increase to income before income taxes for these items of
$1.2 million, $1.1 million, $1.2 million and $1.2 million for 2008, 2007, 2006 and 2005, respectively and $1.2 million for the three month period ended
March 31, 2008. Diluted EPS reported for the years ended December 31, 2008, 2007, 2006 and 2005 was increased by $0.01 for each of the years, respectively, and increased $0.01 for the
three months ended March 31, 2008, due to the correction of these prior period accounting errors.

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

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. Adoption of Recent Accounting Standards and Revised Financial Statements (Continued)

months
ended March 31, 2008 and our condensed consolidated balance sheets as of December 31, 2008:

March 31, 2008
(as previously
reported)

Adjustments

March 31, 2008
(as adjusted)(in thousands)Total costs and expenses

$
316,081

$
(1,924
)
$
314,157Income from operations

$
4,698

$
1,924

$
6,622Interest income

$
8,733

$
(564
)
$
8,169Interest expense

$
(55
)
$
(6,641
)
$
(6,696
)Income before income taxes

$
13,095

$
(5,281
)
$
7,814Income taxes

$
903

$
(207
)
$
696Net income

$
12,192

$
(5,074
)
$
7,118Basic net income per common share

$
0.11

$
(0.04
)
$
0.07Diluted net income per common share

$
0.11

$
(0.05
)
$
0.06




December 31,
2008
(as previously
reported)

Adjustments

December 31,
2008
(as adjusted)(in thousands)Accrued expenses

$
146,109

$
(7,257
)
$
138,852Convertible subordinated debt

$
382,450

$
(16,511
)
$
365,939Additional paid-in capital

$
1,905,627

$
123,848

$
2,029,475Accumulated deficit

$
(956,606
)
$
(107,831
)
$
(1,064,437
)Deferred tax asset

$
470,483

$
(6,364
)
$
464,119Other current assets

$
34,254

$
(1,837
)
$
32,417


4. Basic and Diluted Earnings Per Common Share

Basic EPS has been calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS has been calculated by dividing net income by the
weighted-average number of shares outstanding during the period plus the dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common
shares include outstanding employee stock options, employee restricted stock units and convertible debt. Potential common shares are not included in the per share calculation when the effect of their
inclusion would be anti-dilutive.

For
the three months ended March 31, 2009 and 2008, 9.0 million and 7.3 million shares, respectively, were not included in the computation of diluted EPS because
inclusion of such shares would be anti-dilutive for the period. In addition, we have issued 0% convertible subordinated notes due 2024, which were not convertible into equity as of March 31,
2009 or 2008, or at any time during the three months ended March 31, 2009 or 2008. If and when these notes become convertible into equity, 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.

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

See
Note 3 "Adoption of Recent Accounting Standards and Revised Financial Statements" for a discussion of the retrospective accounting change resulting from the adoption of FSP
APB 14-1 and FSP EITF 03-6-1 effective January 1, 2009.

5. Inventories

Inventories consist of the following:

March 31,
2009

December 31,
2008(in thousands)Raw materials

$
29,482

$
28,306Finished goods


33,329


40,697Total

$
62,811

$
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 $19.5 million and $19.9 million at
March 31, 2009 and December 31, 2008, respectively. The decrease is due to currency translation adjustments of approximately $400,000.

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

March 31, 2009

December 31, 2008(in thousands)Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amounts

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountsSPI's intangible assets

$
27,058

$
(2,667
)
$
24,391

$
27,839

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


28,238


(1,726
)

26,512


28,238


(1,255
)

26,983Intangible assetsNycomed transactions


110,763


(11,156
)

99,607


110,763


(8,925
)

101,838Patents and other intangible assets


2,259


(1,921
)

338


2,259


(1,889
)

370Total intangible assets

$
168,318

$
(17,470
)
$
150,848

$
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.

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6. Goodwill and Intangible Assets (Continued)

The
gross carrying value of intangible assets decreased by approximately $800,000 for the three months ended March 31, 2009 due to the effect of foreign currency translation.

7. Convertible Subordinated Debt

Convertible subordinated debt, adjusted for the impact of FSP APB 14-1, consists of the following:

March 31,
2009

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

$
148,020

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


232,078


365,939Total

$
380,098

$
513,959






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 principal
amount of notes tendered. An aggregate principal amount of $143.4 million of our 0% notes due 2024 were validly tendered and accepted in the offer. In connection with this transaction, we
recorded a loss on the extinguishment of $490,000. The loss is comprised of a gain on extinguishment of approximately $4.0 million offset by approximately $4.5 million of accelerated
interest due to the adoption of FSP APB 14-1. The total consideration was paid to the tendering holders on the settlement date, March 18, 2009. At March 31, 2009, an
aggregate of $232.1 million of our 0% notes due 2024 remained outstanding on our condensed consolidated balance sheets.

8. Comprehensive Income (Loss)

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

Three Months EndedMarch 31,
2009

March 31,
2008
(as adjusted)(in thousands)Comprehensive income (loss):Net income

$
35,177

$
7,118Net foreign currency translation adjustment


(1,572
)

(943
)Net unrealized gain (loss) on available-for-sale securities


1,376


(7,447
)Total comprehensive income (loss)

$
34,981

$
(1,272
)


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9. Legal Proceedings

Litigation Related to Generic Competition and Patent Infringement

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 a generic version 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 version 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 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

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9. Legal Proceedings (Continued)

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 a generic
version 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 version 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 2007, we received notification that the FDA had received an ANDA from Barr Laboratories, Inc., or Barr, seeking approval
of a generic version 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 version for which Barr has sought approval. In July 2007, we filed a
civil action against Barr for patent infringement.

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9. Legal Proceedings (Continued)

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.
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. The 30-month stay against Breath's ANDA expired on March 7, 2008. 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 those three dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the
30-month stay. For those three dosages, the 30-month stay against Dey, L.P. expired on July 9, 2008 and the 30-month stay against Barr expires on or
about November 30, 2009.

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

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9. Legal Proceedings (Continued)

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 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 Pharmaceuticals USA, Inc. and Teva Pharmaceuticals Industries, Ltd., collectively referred to as the
Teva entities, Cobalt Laboratories Inc. and Cobalt Pharmaceuticals, Inc., collectively referred to as Cobalt Laboratories, Dr. Reddy's Laboratories Ltd. and
Dr. Reddy's Laboratories, Inc., collectively referred to as Dr. Reddy's, Orchid Healthcare, a division of Orchid Chemicals & Pharmaceuticals Ltd., and Orchid
Chemicals & Pharmaceuticals, Ltd., collectively referred to as Orchid, Glenmark Generics, Inc., USA, Glemnark Generics, Ltd. and Glenmark Pharmaceuticals, Ltd.,
collectively referred to as Glenmark Generics, Roxane Laboratories, Inc., or Roxane, Lupin Ltd. and Lupin Pharmaceuticals, Inc., collectively referred to as Lupin, Wockhardt
Limited and Wockhardt USA, Inc., collectively referred to as Wockhardt, Sun Pharma Global Inc., Sun Pharmaceutical Industries Inc. and Sun Pharmaceutical Industries Ltd.,
collectively referred to as Sun Global, Orgenus Pharma Inc., or Orgenus, Mylan Inc., or Mylan, and Alphapharm Pty. Ltd., or Alphapharm.

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. 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. 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.

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9. Legal Proceedings (Continued)



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 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 six of the ANDA filers that we sued. In addition, we and the
University of Massachusetts have submitted two additional stipulations of dismissal without prejudice that are awaiting approval by the court and have actions remaining against two additional ANDA
filers. 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.



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 a
generic version 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

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9. Legal Proceedings (Continued)

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, amended the ANDA to change the Paragraph IV certification to a Paragraph III certification, thereby withdrawing the challenge to our patent. As a
result, in April 2009 the parties submitted an agreed stipulation of dismissal without prejudice, which the court approved. Thus, the action against Barr/Pliva is 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.

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 in the United States District Court for the Middle District of Florida. On March 27, 2009, we
filed a Defendant's Memorandum Regarding Collective Action Issues under the FLSA in the Arizona court in opposition

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9. Legal Proceedings (Continued)

to
the plaintiffs' motion for class certification in the Greeves litigation. 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 March 31, 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 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 months ended March 31, 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 months ended March 31, 2008 consisted primarily of Federal and state
alternative minimum taxes, state income taxes and foreign income tax.

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 March 31, 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 March 31, 2009. We recognize accrued
interest and penalties related to unrecognized tax benefits as a component of tax expense. For the quarter ended March 31, 2009, the amount of accrued interest related to unrecognized tax
benefits was not significant and no amount has been accrued for penalties.

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10. Income Taxes (Continued)

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.

We
recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the three months ended March 31, 2009, the amount of
accrued interest related to unrecognized tax benefits was not significant and no amount has been accrued for penalties.

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 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 securities and corporate debt
that is 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 other marketable 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.

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(UNAUDITED)

11. Fair Value Measurements (Continued)

In
accordance with the fair value hierarchy described above, the following tables show the fair value of our financial assets and liabilities that are measured at fair value on a
recurring basis as of March 31, 2009 and December 31, 2008:

Quoted Prices
in Active
Markets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Carrying
Value at
March 31,
2009Level 1

Level 2

Level 3

Total(in thousands)Money market funds

$
431,374

$


$


$
431,374Asset-backed securities





574





574Equity securities


4,429








4,429Commercial paper


49,887








49,887Government agency securities


14,989








14,989Corporate bonds


34,962








34,962Auction-rate securities








71,103


71,103Total

$
535,641

$
574

$
71,103

$
607,318




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.

Substantially
all of our auction-rate investments, approximately $71.1 million at March 31, 2009, are backed by pools of student loans guaranteed by the Federal
Family Education Loan Program, or FFELP, and we continue to believe that the credit quality of these securities is high based on this guarantee and other collateral. Auctions for these securities
began failing in the first quarter of 2008 and continued to fail through the first quarter of 2009, which we believe is a result of the recent uncertainties in the credit markets. 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 called or the underlying securities have matured. At the time of the initial investment and through the date of this report, all of these auction-rate securities remain AAA
rated by one or more rating agency. We believe we have the ability to hold

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

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.

Because
of the temporary declines in fair value for the auction-rate securities, which we attribute to liquidity matters rather than credit issues as discussed above, we have
recorded an unrealized loss of $7.3 million to other comprehensive income as of March 31, 2009. The decline in the fair value of our auction-rate securities investments was
primarily the result of the assumed delay in the return of liquidity to this investment market-sector. Any future fluctuation in fair value related to these instruments that we deem to be temporary,
including any recoveries of previous write-downs, would be recorded to other comprehensive income. If current market conditions deteriorate further, we may be required to record additional unrealized
losses 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 impairment charges recorded to earnings, as appropriate,
which could be material.

The
fair values of these auction-rate securities are estimated utilizing a trinomial discounted cash flow valuation model as of March 31, 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.

All
of our assets measured at fair value on a recurring basis using significant Level 3 inputs as of March 31, 2009 and March 31, 2008 were auction-rate
securities. The following tables summarize the change in balances for the three-month periods ended March 31, 2009 and March 31, 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

$
71,103




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

$
80,241


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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

11. Fair Value Measurements (Continued)

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 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 March 31, 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 consist 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 and lease termination fees associated with office locations, equipment
and automobiles.

The
following table sets forth the restructuring accrual activity during the three months ended March 31, 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

$
19,835


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.

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.

23

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Business Segment Reporting (Continued)

The
tables below represent segment information for the periods identified and provides a reconciliation of segment information to total consolidated information. Reconciliation of
segment information for the three months ended March 31, 2008 is not presented as Sepracor had only one segment during that period. For the Sepracor segment and SPI, 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 March 31, 2009Sepracor

SPI

Consolidated(in thousands)Product revenues

$
302,999

$
3,855

$
306,854Royalties and license fees


23,041


277


23,318Total revenues

$
326,040

$
4,132

$
330,172Income (loss) from operations

$
66,848

$
(437
)
$
66,411Total assets

$
1,675,719

$
51,911

$
1,727,630Depreciation and amortization

$
8,032

$
835

$
8,867


Reconciling
information between reportable segments and consolidated totals is shown in the following table:

Three Months
Ended
March 31, 2009(in thousands)Income (loss) from operations

$
66,411Interest income


1,881Loss on extinguishment of debt


(490
)Interest expense


(7,951
)Equity in investee losses


(205
)Other income (expense)


195Income before income taxes

$
59,841


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

14. Subsequent Events

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. Accordingly, we intend to
recognize the remaining $17.0 million in deferred revenue as license fees in the second quarter of 2009.

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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:



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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 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 March 31, 2009, we had
substantially completed this restructuring and workforce reduction and expect it to be complete 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. 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).

As
a result of this restructuring and reduction in workforce, in the first quarter of 2009, we recorded restructuring charges of approximately $27.5 million. These charges consist
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
and lease termination fees associated with office locations, equipment and automobiles.

During
the second quarter of 2009, we expect to implement a facility lease termination and nominal reduction in workforce. As a result, we expect to record restructuring charges and make
future payments of between approximately $5.0 million and $7.0 million, a substantial portion of which we anticipate will be recorded in the second quarter of 2009. We currently expect
these charges to consist of approximately $4.0 million to $5.0 million relating to the facility lease termination and approximately $1.0 million relating to employee termination
benefits. Our estimated restructuring charges are based

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on
a number of assumptions. 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 outstanding convertible debt of
$380.1 million. If not converted, repurchased at the noteholders' or our option, or otherwise refinanced earlier, the principal amount of this debt becomes due as follows:

Principal Amount of Convertible Debt

Maturity Date$148,020,000


2010$232,078,000


2024
(1)


---

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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 implement our corporate restructuring and workforce reduction 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.

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



28

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29

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Three Month Periods ended March 31, 2009 and 2008

Adoption of Recent Accounting Standards and Revised Financial Statements

In the first quarter of 2009, as a result of our adoption of FSP APB 14-1 and its impact on our 0% notes due 2024,
interest expense and general and
administrative amounts 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. The correction of the errors has been
recorded in the applicable periods in 2008, 2007, 2006 and 2005. For purposes of the three month periods ended March 31, 2009 and 2008 comparisons below, we have adjusted our first quarter 2008
interest income, cost of revenue, interest expense and general and administrative amounts to reflect the adjusted amounts. See Note 3 "Adoption of Recent Accounting Standards and 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.

Revenues

Product sales were $306.9 million and $305.5 million for the three months ended March 31, 2009 and 2008,
respectively, an increase of less than 1%.

Sales
of LUNESTA were $140.4 million and $135.6 million for the three months ended March 31, 2009 and 2008, respectively, an increase of approximately 4%. The
increase was primarily the result of a net selling price increase of approximately 12%. The net selling price increase consisted of a gross selling price increase of approximately 11% and a slight
decrease in product sales allowances. Partially offsetting the increase in the net selling price was an approximately 8% 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 the overall growth rate of the branded market for insomnia products. Adjustments recorded to gross sales are disclosed
below under the heading "Analysis of gross sales to net sales."

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Sales
of XOPENEX Inhalation Solution were $118.1 million and $140.0 million for the three months ended March 31, 2009 and 2008, respectively, a decrease of
approximately 16%. The decrease was primarily due to a decrease in number of units sold of approximately 33%, 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 decreased and, as a
result, our aggregate unit sales and revenues for this product has 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. In addition, we believe the decrease in units sold was also partially attributed to the disruption related to our sale
force restructuring. Partially offsetting the decrease in the number of units sold was a net selling price increase of approximately 27%. The net selling price increase consisted of a gross selling
price increase of approximately 20% 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 $20.1 million and $20.0 million for the three months ended March 31, 2009 and 2008, respectively, an increase of less than 1%. The increase
was primarily the result of an approximately 11% increase in the number of units sold. Partially offsetting the increase in the number of units sold was a net selling price decrease of approximately
10%. The net selling price decrease consisted of a gross selling price increase of less than 1% offset by an increase in product sales allowances primarily attributed to an increase in government
rebates and contractual discounts and an increase in wholesaler fee-for-service discounts related to credits earned in the first quarter of 2008 due to a XOPENEX HFA gross
price increase in that period. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of BROVANA were $18.5 million and $9.9 million for the three months ended March 31, 2009 and 2008, respectively, an increase of approximately 87%. The increase
was primarily the result of an approximately 55% increase in the number of units sold and a net selling price increase of approximately 21%. The net selling price increase consisted of a gross selling
price increase of approximately 17% and a decrease 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 $5.9 million and $0 for the three months ended March 31, 2009 and 2008, respectively. We commercially introduced OMNARIS Nasal Spray in
April 2008. 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 March 31, 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 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We record product sales net of the following significant categories of product sales allowances: payment term
discounts, wholesaler fee-for-service discounts,

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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 March 31,2009

% of
Sales

2008

% of
Sales

$ Change

% Change(in thousands)Gross sales

$
433,704


100
%
$
445,680


100
%
$
(11,976
)

(3
)%Adjustments to gross sales:Payment term discounts


8,284


1.9
%

8,966


2.0
%

(682
)

(8
)%Wholesaler fee-for-service


12,129


2.8
%

3,484


0.8
%

8,645


248
%Government rebates and contractual discounts


96,508


22.3
%

120,022


26.9
%

(23,514
)

(20
)%Returns


6,342


1.5
%

6,462


1.4
%

(120
)

(2
)%Other (includes product introduction discounts)


3,587


0.8
%

1,202


0.3
%

2,385


198
%Sub-total adjustments


126,850


29.3
%

140,136


31.4
%

(13,286
)

(9
)%Net sales

$
306,854


70.7
%
$
305,544


68.6
%
$
1,310


0
%


The
decrease in adjustments to gross sales as a percentage of gross sales for the three months ended March 31, 2009 as compared to the three months ended March 31, 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 partial offset by:



In
addition to the net decrease in government rebates and contractual discounts, product returns reserves decreased overall primarily related XOPENEX Inhalation Solution as we experienced a lower rate
of actual returns, partially offset by a slight increase in product returns reserves related to BROVANA, OMNARIS Nasal Spray and XOPENEX HFA.

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The
decrease in government rebates and contractual discounts and product returns reserves was partially offset by:



Royalties and License Fees Revenue

Royalties and license fees were $23.3 million and $15.2 million for the three months ended March 31, 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 $11.5 million and $7.7 million for the three months
ended March 31, 2009 and 2008, respectively, an increase of approximately 49%. The increase is primarily the result of increased sales in Japan.

Royalties
earned on sales of CLARINEX® (desloratadine) under our agreement with Schering-Plough Corporation, or Schering-Plough, were $5.9 million and
$6.1 million for the three months ended March 31, 2009 and 2008, respectively, a decrease of approximately 4%. The decrease is the result of slightly lower CLARINEX sales in the three
months ended March 31, 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. were an aggregate of
$4.5 million and $1.3 million for the three months ended March 31, 2009 and 2008, respectively, an increase of approximately 230%. The increase is the result of the
commercialization of XYZAL in the United States beginning in the fourth quarter of 2007, for which we started receiving payments during the second quarter of 2008.

License
fees recognized on our agreements with GSK and Eisai Co. Ltd., or Eisai, for the development and commercialization of our eszopiclone product, were
$1.2 million and $58,000 for the three months ended March 31, 2009 and 2008, respectively. The increase relates to additional GSK and Eisai license revenue earned in the first quarter of
2009. In April 2009, we announced the mutual termination of the GSK License Agreement.

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 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 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 $31.7 million and $27.6 million for the three months ended March 31, 2009 and 2008,
respectively.

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Cost of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 5% for the three months ended March 31, 2009 and 2008.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 5% for the three months ended March 31, 2009 and 2008.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 13% for the three months ended March 31, 2009 and 2008.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 11% and 12% for the three months ended March 31, 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 36% for the three months ended March 31, 2009. We commercially introduced
OMNARIS Nasal Spray in April 2008.

Cost
of ALVESCO HFA Inhalation Aerosol sold as a percentage of ALVESCO HFA Inhalation Aerosol gross sales was approximately 2,033% for the three months ended March 31, 2009, as we
had minimal gross sales of ALVESCO HFA Inhalation Aerosol and approximately $475,000 of costs in the three months ended March 31, 2009. We commercially introduced ALVESCO HFA Inhalation Aerosol
in September 2008.

Cost of Royalty Revenue

Cost of royalties earned was $373,000 and $489,000 for the three months ended March 31, 2009 and 2008, respectively, a decrease
of approximately 24%. 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 March 31, 2009 as compared with the same period in 2008.

Research and Development

Research and development expenses were $59.2 million and $66.2 million for the three months ended March 31, 2009
and 2008, respectively, a decrease of approximately 11%. The decrease is primarily due to the $10.0 million milestone payment to Bial during the first quarter of 2008 pursuant to the license
agreement for STEDESA, decreased spending on LUNESTA and BROVANA Phase IV programs and decreased spending on certain early-stage programs (SEP-225441, SEP-228425 and
SEP-228432), partially offset by increased spending on the ciclesonide products in development and SEP-225289 Phase II efforts.

Research
and developmentin process upon acquisition, or IPR&D, expenses were $0 and $39.2 million for the three months ended March 31, 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 March 31, 2008, IPR&D expenses included costs associated with our agreement with Nycomed to develop, market and commercialize OMNARIS HFA Nasal Aerosol, ALVESCO HFA Inhalation
Aerosol and certain other ciclesonide product candidates.

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

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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 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 March 31, 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. The one FDA approved product and the four
product candidates listed in the table below accounted for approximately 78% of our direct project research and development spending for the three months ended March 31, 2009.

Phase of
Development /
Estimate of
Completion of
Phase

Indication

Project costs
for the three
months ended
March 31,
2009

Project costs
to date
through
March 31,
2009

Project costs
for the three
months ended
March 31,
2008

Project costs
to date
through
March 31,
2008(in thousands)LUNESTA (eszopiclone)

*

Insomnia

$
7,743

$
279,075

$
10,716

$
255,813OMNARIS HFA

III / 2010

Allergic Rhinitis

$
6,029

$
10,089

$
0

$
0SEP-225289

II / 2009

Depression

$
4,963

$
43,997

$
2,524

$
26,717SEP-225441

II / 2009

Anxiety

$
1,389

$
24,320

$
3,031

$
10,264STEDESA

**

Epilepsy

$
3,860

$
7,590

$
0

$
0


---

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 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

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Aerosol
for the treatment of seasonal allergic rhinitis, and we plan to commence another Phase III clinical trial of this product in 2009 for the treatment of perennial allergic rhinitis. We
estimate that it will cost approximately $40.0 million to $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 during in late 2010 or 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 March 31, 2009, the costs associated with development of this indication
were $2.7 million. We estimate that it will cost approximately $40.0 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.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $120.6 million and $155.3 million for the three months ended
March 31, 2009 and 2008, respectively, a decrease of approximately 22%. The change was largely due to a decrease in marketing, advertising 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 plan commenced during the first quarter of 2009, 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 $22.8 million and $23.3 million for the three months ended March 31, 2009
and 2008, respectively, a decrease of approximately 2%. The change is primarily the result of 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 $2.3 million for the three months ended March 31, 2009 and
2008, respectively, a decrease of approximately 34%. In the first 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 each 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.

Restructuring

Restructuring expense was $27.5 million as compared to an expense reversal of $300,000 for the three months ended
March 31, 2009 and 2008, respectively. In the first quarter of 2009, we implemented a corporate restructuring and workforce reduction plan, which was substantially completed as of
March 31, 2009 and expected to be completed by the end of the second quarter of 2009. In the first quarter of 2009, approximately $21.8 million was spent on severance and benefit costs
for the employees that were terminated and approximately $5.7 million was spent on terminated contracts associated with excess leased facilities, computer equipment and a contract sales
organization. These

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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 $300,000 expense reversal in 2008 was primarily the result of a change in estimate associated with employee severance costs and contract terminations from a previous
restructuring initiative.

Other Income (Expense)

Interest income was $1.9 million and $8.2 million for the three months ended March 31, 2009 and 2008,
respectively, a decrease of 77%. The decrease is primarily due to lower interest rates earned on our investments in the first quarter of 2009 as well as lower average balances of cash and short- and
long-term investments. For the three months ended March 31, 2009 and 2008, the average annualized interest rate that we earned on our investments was 0.95% and 3.97%, respectively.

Loss
on extinguishment of debt was $490,000 and $0 for the three months ended March 31, 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. An aggregate principal amount of $143.4 million of our 0% notes due 2024 was validly tendered and accepted in the
offer. In connection with this transaction, we recorded a loss on the extinguishment of $490,000.

Interest
expense was $8.0 million and $6.7 million for the three months ended March 31, 2009 and 2008, respectively, an increase of approximately 19%. As a result of
the adoption of FSP APB 14-1 and its impact on our 0% notes due 2024, the debt discount is amortized to earnings as an increase in interest expense. The increase from the prior year
is the result of using the
interest method for amortizing the debt discount, which results in a higher interest expense at the end of the instrument's expected life.

Our
share of equity losses was $205,000 and $203,000 for the three months ended March 31, 2009 and 2008, respectively. The equity loss represents our portion of BioSphere
Medical, Inc. losses.

Income Taxes

Income tax expense was $24.7 million and $696,000 for the three months ended March 31, 2009 and 2008, respectively.
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 income tax provision for 2008 includes Federal and state alternative minimum tax, or AMT, state income taxes and foreign income tax. Although we had Federal and state tax net
operating loss carryforwards as of December 31, 2008 and 2007, the utilization of these loss carryforwards is limited in the calculation of AMT. 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. As of March 31, 2008, we
maintained a valuation allowance for the full amount of our deferred tax assets.

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 March 31, 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 March 31, 2009. We recognize accrued
interest and penalties related to unrecognized tax benefits as a component of tax expense. For the quarter ended March 31, 2009, the amount of accrued interest related to unrecognized tax
benefits was not significant and no amount has been accrued for penalties.

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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 March 31,
2009.

As
of March 31, 2009, our total convertible debt was approximately $380.1 million, which consists of $148.0 million of outstanding 0% Series B notes due
December 2010 and $232.1 million of outstanding 0% notes due 2024.

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 principal
amount of notes tendered. An aggregate principal amount of $143.4 million of our 0% notes due 2024 were validly tendered and accepted in the offer. At March 31, 2009, an aggregate of
$232.1 million of our 0% notes due 2024 remained outstanding on our condensed consolidated balance sheets and may be converted into cash at the option of the noteholders in October 2009, 2014,
2019 and 2024, as well as under certain conditions. As of March 31, 2009, $239.0 million par value of our 0% notes due 2024 remained outstanding.

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 continue to grow 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
March 31, 2009, $71.1 million of our investment portfolio was invested in AAA rated auction-rate securities. These investments were rated AAA by one or more
rating agency. 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.

Substantially
all of our auction-rate securities are backed by pools of student loans guaranteed by the Federal Family Education Loan Program, or FFELP, and we continue to
believe that the credit quality of these securities is high based on this guarantee and other collateral. Auctions for these securities began failing in the first quarter of 2008 and continued to fail
throughout the first quarter of 2009, which we believe is a result of the recent uncertainties in the credit markets. 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 called or the underlying securities have matured. At the
time of our initial investment and through the date of this report, all of our auction-rate securities remain AAA rated by one or more rating agency. We believe we have the ability 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.

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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
March 31, 2009, because of the temporary declines in fair value for the auction-rate securities, which we attribute to liquidity matters rather than credit issues
as discussed above, 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 $71.1 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. Based on this assessment of fair value, as of March 31, 2009, we determined there was a decline in fair value of our auction-rate
securities investments of $7.3 million, which was deemed temporary on the basis that substantially all of our auction-rate securities are backed by pools of student loans guaranteed
by FFELP, and we continue to believe that the credit quality of these securities is high based on this guarantee and other collateral. The decline in the fair value of our auction-rate
securities investments was primarily the result of the assumed delay in the return of liquidity to this investment market-sector. If current market conditions deteriorate further, we may be required
to record additional unrealized losses 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 impairment charges recorded to earnings, as appropriate, which could be material.

Cash,
cash equivalents and short- and long-term investments totaled $729.0 million, or 42% of total assets, at March 31, 2009, compared to
$765.8 million, or 42% of total assets, at December 31, 2008.

Net
cash provided by operating activities for the three months ended March 31, 2009 was $78.4 million, which includes net income of $35.2 million. Our net income for
this period includes non-cash charges of $17.6 million, consisting primarily of depreciation and amortization, interest accretion on license fee liabilities, loss 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 $17.6 million primarily due to strong collection efforts. Accrued expenses decreased by $17.6 million primarily due to payments made relating to
accrued bonuses, inventory purchases, royalties and taxes. Product sales allowances and reserves increased $11.5 million primarily due to product revenue rebates related to LUNESTA and XOPENEX
Inhalation Solution product sales. Other liabilities increased by $19.4 million primarily as a result of the increase in our corporate restructuring reserve.

Net
cash used in investing activities for the three months ended March 31, 2009 was $88.9 million, which is primarily attributable to the purchases of short- and
long-term investments of $131.8 million offset by the cash provided by net sales and maturities of short- and long-term investments of $52.9 million.

Net
cash used in financing activities for the three months ended March 31, 2009 was $106.2 million. We received proceeds of $1.8 million from issuing common stock
upon the exercise of stock options issued under our stock option plans, and we used $139.4 million to repay capital lease

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obligations
and long-term debt, which is comprised of $108.0 million related to repayments of long-term debt and $31.4 million related to the settlement of
accreted interest on our convertible debt.

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.

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

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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 may 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
three months ended March 31, 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


(8,284
)

(12,129
)

(94,561
)

(5,375
)

(2,979
)

(123,328
)Prior year








(1,947
)

(967
)

(608
)

(3,522
)Total


(8,284
)

(12,129
)

(96,508
)

(6,342
)

(3,587
)

(126,850
)Actual:Current year


5,271





7,588





1,593


14,452Prior year


3,548


5,313


85,314


4,899


2,368


101,442Total


8,819


5,313


92,902


4,899


3,961


115,894Balance at March 31, 2009

$
(3,215
)
$
(18,295
)
$
(243,515
)
$
(24,670
)
$
(1,600
)
$
(291,295
)


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 March 31, 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. An aggregate principal amount of $143.4 million of our 0% notes due 2024 were validly tendered and accepted in the offer, and $232.1 million of our 0%
notes due 2024 remain outstanding as of March 31, 2009 on our condensed consolidated balance sheets, which had a par value of $239.0 million. See Note 7 "Convertible Subordinated
Debt" to the condensed consolidated interim financial statements for further discussion.

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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 May 8, 2008, 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. Due to the recent
uncertainties in the credit market, these securities have been rendered temporarily illiquid, and the fair value of those investments as of March 31, 2009 is estimated to be $7.3 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. We believe we have the ability 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 unrealized losses 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 impairment charges recorded to
earnings, as appropriate, which could be material.

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 March 31, 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, procesed,
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 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 March 31, 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 March 31, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II        OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Litigation Related to Generic Competition and Patent Infringement

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 a
generic version 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 version 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.

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In January 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/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 version 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 2007, we received notification that the FDA had received an ANDA from Barr seeking approval of a generic version 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 version 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 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.

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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.
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. The 30-month stay against Breath's ANDA expired on March 7, 2008. 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 those three dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the
30-month stay. For those three dosages, the 30-month stay against Dey, L.P. expired on July 9, 2008 and the 30-month stay against Barr expires on or
about November 30, 2009.

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 International Limited, or 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 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

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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. 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. 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. 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 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 six of the ANDA filers that we sued. In addition, we and the
University of Massachusetts have submitted two additional stipulations of dismissal without prejudice that are awaiting approval by the court and have actions remaining against two additional ANDA
filers.

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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.



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 a
generic version 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, amended the ANDA to change the Paragraph IV certification to a Paragraph III certification, thereby withdrawing the challenge to our patent. As a
result, in April 2009 the parties submitted an agreed stipulation of dismissal without prejudice, which the court approved. Thus, the action against Barr/Pliva is 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.

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.

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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 in the United States District Court for the Middle District of Florida. 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.
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.

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 78% of our total revenues for the quarter ended March 31, 2009 resulted from sales of LUNESTA and XOPENEX
Inhalation Solution, and we expect that sales from these two

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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 we
believe could be introduced at any time, and potential disruption to our business as we implement 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:



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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 March 31, 2009, our total convertible debt was approximately $380.1 million. None of our 0% Series B notes
due December 2010 or our 0% notes due October 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 Series B 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% Series B 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% Series B 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 principal amount of $72.8 million.

As
of March 31, 2009, our total cash, cash equivalents and short- and long-term investments totaled $729.0 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.

Historically,
we have had negative cash flow from operations, and since 2006 we have experienced positive cash flow from operating activities. Unless we have sufficient cash or are able
to generate sufficient operating cash flow to pay off the principal of our outstanding debt, we will be required to raise additional funds or default on our obligations under the notes. If operating
profits generated from sales of our products do not meet expected levels, it is unlikely that we would have sufficient cash flow to repay our outstanding convertible debt and/or make cash payments
upon maturity of the 0% Series B notes due 2010. There can be no assurance 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 March 31, 2009, we had approximately $148.0 million of outstanding debt that could be converted into shares of our
common stock and an additional $232.1 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 common stock,
warrants, preferred stock, debt or other consideration; or a combination of any of the

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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.

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

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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 current 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:



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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 March 31, 2009, $71.1 million of our investment portfolio was invested in AAA-rated
auction-rate securities. These investments were rated AAA by one or more rating agency. 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.

Substantially
all of our auction-rate securities are backed by pools of student loans guaranteed by the FFELP and we continue to believe that the credit quality of these
securities is high based on this guarantee and other collateral. Auctions for these securities began failing in the first quarter of 2008 and continued to fail throughout the first quarter of 2009,
which we believe is a result of the recent uncertainties in the credit markets. 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 called or the underlying securities have matured. At the time of our initial investment and
through the date of this report, all of our auction-rate securities remain AAA rated by one or more rating agency. We believe we have the ability 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
March 31, 2009, because of the temporary declines in fair value for the auction-rate securities, which we attribute to liquidity matters rather than credit issues
as discussed above, 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 $71.1 million. The fair value of
these auction-rate securities are 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. Based on this assessment of fair value, as of March 31, 2009, we determined there was a decline in fair value of our auction-rate
securities investments of $7.3 million, which we deem temporary. If current market conditions deteriorate further, we may be required to record additional unrealized losses 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 impairment charges recorded to earnings, as appropriate, which could be material.

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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:



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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.

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

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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 9% of the
total annual prescriptions currently being written in the United States for insomnia pharmaceutical therapies. Furthermore, LUNESTA faces substantial competition from non-prescription,
over-the-counter and dietary supplement insomnia product options. During 2008 and the first 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 we believe
could be introduced as 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, leukotriene
modifiers, anticholingerics, and others, as well as certain combinations thereof. XOPENEX Inhalation Solution and XOPENEX HFA together account for approximately 3.5% 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 10.5% of the total annual prescriptions currently being
written in the United States for beta-agonist asthma and COPD pharmaceutical therapies.

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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 less than 1% of the total annual prescriptions currently being written in the United States for allergic rhinitis pharmaceutical therapies,
and less and 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. 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

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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. 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 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

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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 necessary 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%. As of March 31, 2009, we had substantially completed this restructuring and workforce reduction and expect it to be complete 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. We are taking these actions in order 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.

As
a result of this restructuring and reduction in workforce, in the first quarter of 2009, we recorded restructuring charges of approximately $27.5 million. These charges consist
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
and lease termination fees associated with office locations, equipment and automobiles.

During
the second quarter of 2009, we expect to implement a facility lease termination and nominal reduction in workforce. As a result, we expect to record restructuring charges and make
future payments of between approximately $5.0 million and $7.0 million, a substantial portion of which we anticipate will be recorded in the second quarter of 2009. We currently expect
these charges to consist of approximately $4.0 million to $5.0 million relating to the facility lease termination and approximately $1.0 million relating to employee termination
benefits. Our estimated restructuring charges are based

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on
a number of assumptions. 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 addition, we
may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from our restructuring efforts due to unforeseen difficulties, delays or unexpected costs.
If we are unable to achieve the anticipated benefits, savings or improvements in our cost structure in the expected time frame or other unforeseen events occur, our business and results of operations
may be adversely affected.

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:



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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 to maintain certain 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 as a result of minimum inventory requirements, or otherwise, 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.

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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 our 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:



Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, the approval may take longer than we anticipate and may be subject to limitations on the indicated
uses for which the product may be marketed or 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.

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In
addition, our growth is 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 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 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. 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 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.

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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 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:



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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
trail court assigned to this matter. We are in the process of preparing an answer to the complaint, which we intend to file in the near future. 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.

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.

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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.

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.

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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 may not be issued patents based on patent
applications already filed or that we file in the future and if patents are issued, they may be insufficient in scope to cover the products licensed under these collaboration agreements and/or those
of potential competitors. 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 have
obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United States Patent and Trademark Office may commence interference proceedings involving our patents
or patent applications. 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 are not successful in obtaining patents of sufficient scope and enforcing our patents, we will not be able to prevent others
from introducing generic versions of our products.

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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 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. 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.

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.

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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 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 six of the ANDA filers that we sued. In addition, we and the University of Massachusetts, have submitted two additional stipulations of
dismissal without prejudice that are awaiting approval by the court and have actions remaining against two additional ANDA filers. 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. We believe that these 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 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

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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. 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. 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 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 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 Inc., Dey'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 an Answer and Counterclaims to this Supplemental Complaint.

Under
the current trial scheduling order, the trial will begin no earlier than October 2, 2009. 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.

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 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

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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. Most recently, 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, on April 29, 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 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.

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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, is the sole manufacturer of LUNESTA, although we plan to enter into an
agreement with a second manufacturer of LUNESTA during 2009, and 3M is the sole manufacturer and supplier of XOPENEX HFA. Certain components of XOPENEX HFA are available from only a single source. If
Catalent, Holopack, Patheon, 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 these parties 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.

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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
in March 2009 we submitted an NDA for STEDESA. 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

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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.

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ITEMS 2-5.    NONE

ITEM 6.    EXHIBITS

10.1

Mutual Termination Agreement dated April 29, 2009, by and between the Registrant and Glaxo Group Limited.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.


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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: May 8, 2009

By:

/s/ ADRIAN ADAMS Adrian Adams President and Chief Executive Officer
(Principal Executive Officer)Date: May 8, 2009

By:

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


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Exhibit Index

Exhibit No.

Description10.1

Mutual Termination Agreement dated April 29, 2009, by and between the Registrant and Glaxo Group Limited.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.


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