** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

**[MARK ONE]**

 

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**For the quarterly period ended September 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**For the transition periodfrom                          to                          **

**Commission File No. 000-30123**

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**SCIELE PHARMA, INC.**

(Exact name ofregistrant as specified in its charter)
| **Delaware**                                               | ** ** | **58-2004779**                           |
|------------------------------------------------------------|------------|------------------------------------------|
| (State of  incorporation)                                  |       | (I.R.S. Employer  Identification Number) |
|                                                       |       |                                     |
| **Five  Concourse Parkway, Suite 1800,  Atlanta, Georgia** | ** ** | **30328**                                |
| (Address of principal  executive offices)                  |       | (Zip code)                               |

 

**(770)442-9707**

(Registrant’stelephone number, including area code):

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o   |
|---------------------------|--------|---------------------|--------|-------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

o Yes   x No

As of October 24, 2007, there were 35,648,529 shares of the Registrant’sCommon Stock outstanding.

 

 

 

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**SCIELE PHARMA, INC.FORM 10-QINDEX**
| PART I.    FINANCIAL INFORMATION |                                                                                                                 |
|------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                                 |                                                                                                                 |   |
| Item 1.                                         | Consolidated Balance Sheets at September 30, 2007 and  December 31, 2006                                             |   |
|                                                 |                                                                                                                 |   |
|                                                 | Consolidated Statements of Operations for the three and  nine months ended September 30, 2007 and September 30, 2006 |   |
|                                                 |                                                                                                                 |   |
|                                                 | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2007 and September 30, 2006           |   |
|                                                 |                                                                                                                 |   |
|                                                 | Notes to Consolidated Financial Statements                                                                           |   |
|                                                 |                                                                                                                 |   |
| Item 2.                                              | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                          |   |
|                                                 |                                                                                                                 |   |
| Item 3.                                              | Quantitative and Qualitative  Disclosures about Market Risk                                                          |   |
|                                                 |                                                                                                                 |   |
| Item 4.                                              | Controls and Procedures                                                                                              |   |
|                                                 |                                                                                                                 |   |
| PART II.    OTHER INFORMATION    |                                                                                                                 |
|                                                 |                                                                                                                 |   |
| Item 1.                                              | Legal Proceedings                                                                                                    |   |
|                                                 |                                                                                                                 |   |
| Item 2.                                              | Unregistered Sales of Equity  Securities and Use of Proceeds                                                         |   |
|                                                 |                                                                                                                 |   |
| Item 4.                                              | Submission of Matters to a Vote  of Security Holders                                                                 |   |
|                                                 |                                                                                                                 |   |
| Item 5.                                              | Other Information                                                                                                    |   |
|                                                 |                                                                                                                 |   |
| Item 6.                                         | Exhibits                                                                                                             |   |
|                                                 |                                                                                                                 |   |
|                                                 | Signatures                                                                                                           |   |
|                                                 |                                                                                                                 |   |
|                                                 | Certifications                                                                                                       |   |

 

 

2

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**SCIELE PHARMA, INC.**

**CONSOLIDATEDBALANCE SHEETS (in thousands, except share data)**
| ** **                                                                                                                                                  | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                  | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                             |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                       | 156,273    |                        | $          | 45,261 |   |
| Marketable  securities                                                                                                                                      |       | 47,943                  |       | 121,190                     |       |
| Accounts  receivable, net of allowances of $2,853 and $2,010 at September 30, 2007 and  December 31, 2006, respectively                                |       | 73,872                  |       | 47,551                      |       |
| Inventories                                                                                                                                                 |       | 24,879                  |       | 26,640                      |       |
| Income taxes  receivable                                                                                                                                    |       | 9,932                   |       | 4,869                       |       |
| Current deferred  tax assets                                                                                                                                |       | 4,553                   |       | 2,465                       |       |
| Other current  assets                                                                                                                                       |       | 34,649                  |       | 21,091                      |       |
| Total current  assets                                                                                                                                       |       | 352,101                 |       | 269,067                     |       |
|                                                                                                                                                        |       |                    |       |                        |       |
| Property and  equipment, net                                                                                                                                |       | 19,235                  |       | 9,142                       |       |
| Other assets:                                                                                                                                               |       |                    |       |                        |       |
| Intangibles, net                                                                                                                                            |       | 423,082                 |       | 305,040                     |       |
| Long term  deferred tax assets                                                                                                                              |       | 150                     |       | 93                          |       |
| Other                                                                                                                                                       |       | 29,574                  |       | 6,663                       |       |
| Total other  assets                                                                                                                                         |       | 452,806                 |       | 311,796                     |       |
| Total assets                                                                                                                                                |       | $                       | 824,142    |                        | $          | 590,005 |   |
|                                                                                                                                                        |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                       |       |                    |       |                        |       |
| Account payable                                                                                                                                             |       | $                       | 39,355     |                        | $          | 18,874 |   |
| Accrued expenses                                                                                                                                            |       | 28,992                  |       | 18,965                      |       |
| Total current  liabilities                                                                                                                                  |       | 68,347                  |       | 37,839                      |       |
|                                                                                                                                                        |       |                    |       |                        |       |
| Long-term  liabilities:                                                                                                                                     |       |                    |       |                        |       |
| Convertible debt                                                                                                                                            |       | 325,000                 |       | 150,000                     |       |
| Deferred tax  liabilities                                                                                                                                   |       | 4,659                   |       | 12,368                      |       |
| Other long-term  liabilities                                                                                                                                |       | 1,804                   |       | 1,975                       |       |
| Total  liabilities                                                                                                                                          |       | 399,810                 |       | 202,182                     |       |
|                                                                                                                                                        |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                 |       |                    |       |                        |       |
| Preferred stock,  1,000,000 shares authorized and none outstanding                                                                                          |       | —                  |       | —                      |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized; 36,396,573 and 35,873,121  issued at September 30, 2007 and December 31, 2006, respectively |       | 36                      |       | 36                          |       |
| Additional  paid-in capital                                                                                                                                 |       | 281,190                 |       | 282,718                     |       |
| Retained  earnings (See Note 13)                                                                                                                            |       | 165,044                 |       | 127,768                     |       |
| Accumulated  other comprehensive loss                                                                                                                       |       | (4,431                  | )          | (4,147                      | )          |
|                                                                                                                                                        |       | 441,839                 |       | 406,375                     |       |
| Less: Treasury  stock at cost, Common stock, 754,919 and 800,000 shares at September 30, 2007  and December 31, 2006, respectively                     |       | (17,507                 | )          | (18,552                     | )          |
| Total  stockholders’ equity                                                                                                                            |       | 424,332                 |       | 387,823                     |       |
| Total  liabilities and stockholders’ equity                                                                                                            |       | $                       | 824,142    |                        | $          | 590,005 |   |
|                                                                                                                                                             |            |                         |            |                             |            |  |  |  |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

 

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**SCIELE PHARMA, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(unaudited, in thousands, except per share data)**
| ** **                                                  | ** ** | **For The Three Months Ended   September 30,** | ** ** | **For The Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                                     | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                                                |       | $                                                                            | 99,372     |                                                                  | $          | 74,784 |   | $ | 277,291 |   | $ | 213,636 |   |
| Operating costs  and expenses:                              |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Cost of revenues  (excluding depreciation and amortization) |       | 13,304                                                                       |       | 10,283                                                                |       | 37,182 |   | 30,181 |   |
| Selling, general  and administrative expense                |       | 47,061                                                                       |       | 35,912                                                                |       | 135,278 |   | 106,958 |   |
| Depreciation and  amortization                              |       | 7,587                                                                        |       | 6,752                                                                 |       | 20,610 |   | 19,787 |   |
| Research and  development expense                           |       | 9,262                                                                        |       | 4,502                                                                 |       | 23,306 |   | 11,323 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Total operating  costs and expenses                         |       | 77,214                                                                       |       | 57,449                                                                |       | 216,376 |   | 168,249 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Operating income                                            |       | 22,158                                                                       |       | 17,335                                                                |       | 60,915 |   | 45,387 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Other income  (expense):                                    |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Interest expense                                            |       | (2,964                                                                       | )          | (864                                                                  | )          | (5,823 | ) | (2,389 | ) |
| Interest income                                             |       | 2,321                                                                        |       | 1,399                                                                 |       | 7,481 |   | 3,374 |   |
| Other                                                       |       | —                                                                       |       | (44                                                                   | )          | (5,256 | ) | (44 | ) |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Total other  income (expense)                               |       | (643                                                                         | )          | 491                                                                   |       | (3,598 | ) | 941 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Income before  provision for income taxes                   |       | 21,515                                                                       |       | 17,826                                                                |       | 57,317 |   | 46,328 |   |
| Provision for  income taxes                                 |       | 7,666                                                                        |       | 5,525                                                                 |       | 19,832 |   | 14,728 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Net income                                                  |       | $                                                                            | 13,849     |                                                                  | $          | 12,301 |   | $ | 37,485 |   | $ | 31,600 |   |
| Other  comprehensive gain (loss)                            |       | 361                                                                          |       | 1,127                                                                 |       | (284 | ) | 1,694 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Comprehensive  income                                       |       | $                                                                            | 14,210     |                                                                  | $          | 13,428 |   | $ | 37,201 |   | $ | 33,294 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Net income per  common share:                               |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Basic earnings  per common share                            |       | $                                                                            | 0.39       |                                                                  | $          | 0.35 |   | $ | 1.06 |   | $ | 0.90 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Diluted earnings  per common share                          |       | $                                                                            | 0.38       |                                                                  | $          | 0.34 |   | $ | 1.03 |   | $ | 0.82 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Weighted average  common shares outstanding:                |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Basic                                                       |       | 35,752                                                                       |       | 35,043                                                                |       | 35,425 |   | 35,147 |   |
|                                                        |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Diluted                                                     |       | 36,466                                                                       |       | 36,014                                                                |       | 36,451 |   | 39,270 |   |
|                                                             |            |                                                                              |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

 

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**SCIELE PHARMA, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(unaudited, in thousands)**
| ** **                                                                         | ** ** | **For The Nine Months** | ** **   |
|------------------------------------------------------------------------------------|------------|----------------------------------------|--------------|
| ** **                                                                         | ** ** | **Ended September 30,**      | ** **   |
| ** **                                                                         | ** ** | **2007**                               | ** **   | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                   |         |   |   |
| Net income                                                                         |       | $                                      | 37,485       |   | $ | 31,600 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                   |         |   |   |
| Depreciation and  amortization                                                     |       | 20,610                                 |         | 19,787 |   |
| Loss on sale of  securities                                                        |       | —                                 |         | 43 |   |
| Loss on disposal  of property and equipment                                        |       | —                                 |         | 172 |   |
| Non-cash  compensation expense                                                     |       | 7,105                                  |         | 6,466 |   |
| Non-cash  interest expense                                                         |       | 1,149                                  |         | 282 |   |
| Deferred income  tax expense                                                       |       | (2,966                                 | )            | 3,668 |   |
| Loss on  extinguishment of debt                                                    |       | 5,256                                  |         | — |   |
| Changes in  assets and liabilities, net of acquired assets and liabilities:        |       |                                   |         |   |   |
| Accounts  receivable                                                               |       | (24,286                                | )            | 5,094 |   |
| Inventories                                                                        |       | 1,910                                  |         | 4,148 |   |
| Other current  assets and other assets                                             |       | (12,923                                | )            | 1,385 |   |
| Income taxes  receivable                                                           |       | (5,272                                 | )            | (4,609 | ) |
| Accrued expenses  and other                                                        |       | 205                                    |         | 4,413 |   |
| Accounts payable                                                                   |       | 13,995                                 |         | 1,845 |   |
| Net cash  provided by operating activities                                         |       | 42,268                                 |         | 74,294 |   |
| Cash flows from  investing activities:                                             |       |                                   |         |   |   |
| Purchases and  advanced payments for products and licenses                         |       | (16,819                                | )            | (5,600 | ) |
| Purchase of  property and equipment                                                |       | (12,542                                | )            | (3,175 | ) |
| Proceeds from  sale of property and equipment                                      |       | —                                 |         | 51 |   |
| Acquisition of  business, net of cash acquired                                     |       | (113,777                               | )            | — |   |
| Proceeds from  sale of marketable securities                                       |       | 320,768                                |         | 94,936 |   |
| Purchase of  equity investments                                                    |       | (12,221                                | )            | — |   |
| Purchase of  securities                                                            |       | (246,662                               | )            | (131,086 | ) |
| Net cash used in  investing activities                                             |       | (81,253                                | )            | (44,874 | ) |
| Cash flows from  financing activities:                                             |       |                                   |         |   |   |
| Repurchase of  common stock                                                        |       | (21,416                                | )            | (14,804 | ) |
| Financing debt  costs                                                              |       | (9,441                                 | )            | (3,758 | ) |
| Reduction in  taxes payable—stock option exercises                            |       | 1,963                                  |         | 2,149 |   |
| Net proceeds  from issuance of common stock                                        |       | 4,591                                  |         | 4,370 |   |
| Proceeds from  long-term debt                                                      |       | 325,000                                |         | — |   |
| Payments on  long-term debt                                                        |       | (150,000                               | )            | — |   |
| Net cash  provided by (used in) financing activities                               |       | 150,697                                |         | (12,043 | ) |
| Effect of  foreign exchange rates on cash                                          |       | (700                                   | )            | 1,214 |   |
| Net increase in  cash and cash equivalents                                         |       | 111,012                                |         | 18,591 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 45,261                                 |         | 17,043 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                      | 156,273      |   | $ | 35,634 |   |
| Non-cash  financing transactions:                                                  |       |                                   |         |   |   |
| Issuance of  restricted stock                                                      |       | $                                      | —— |   | $ | 5,879 |   |
| Supplemental  Cash Flow Information:                                               |       |                                   |         |   |   |
| Cash paid for  income taxes                                                        |       | $                                      | 25,931       |   | $ | 13,507 |   |
| Cash paid for  interest                                                            |       | $                                      | 2,108        |   | $ | 2,689 |   |
|                                                                                    |            |                                        |              |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 

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**SCIELEPHARMA, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS(unaudited)**

**1.             Basis of Presentation**

The accompanyingunaudited interim consolidated financial statements of Sciele Pharma, Inc. (the“Company”) reflect all adjustments which management considers necessary for thefair presentation of the financial position, results of operations and cashflows of the Company for the interim periods. Certain footnote disclosuresnormally included in financial statements prepared according to accountingprinciples generally accepted in the United States of America have beencondensed or omitted from these interim financial statements as permitted bythe rules and regulations of the Securities and Exchange Commission.Interim results are not necessarily indicative of results for the full year.The interim results should be read in conjunction with the financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2006 (File No. 000-30123).

**2.             New Accounting Pronouncements**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, *The Fair Value forFinancial Assets and Financial Liabilities*.  This Statement permits entities to choose tomeasure financial assets and liabilities, with certain exceptions, at fairvalue at specified election dates.  Abusiness entity shall report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate.  This Statement is effective as ofthe beginning of an entity’s first fiscal year that begins after November 15,2007.  The Company has not determined theimpact, if any, SFAS No. 159 will have on its financial statements.

*On September29, 2006, the FASB issued SFAS No. 158,*Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans.  ThisStatement requires an employer to recognize the over funded or under fundedstatus of a defined benefit postretirement plan (other than a multiemployerplan) as an asset or liability in its statement of financial position and torecognize changes in that funded status in the year in which the changes occurthrough comprehensive income.  Thisstatement also requires an employer to measure the funded status of a plan asof the date of its year-end statement of financial position, with limitedexceptions.  An employer with publiclytraded equity securities is required to initially recognize the funded statusof a defined benefit postretirement plan and to provide the requireddisclosures as of the end of the fiscal year ending after December 15,2006.  The requirement to measure planassets and benefit obligations as of the date of the employer’s fiscal year-endstatement of financial position is effective for fiscal years ending afterDecember 15, 2008.  The adoption of SFASNo. 158 is not expected to have a material impact on the Company’s financialstatements.

On September 15, 2006 theFASB issued SFAS No. 157, *Fair Value Measurements.*  The Statement provides guidance for usingfair value to measure assets and liabilities. This Statement references fair value as the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transactionbetween market participants in the market in which the reporting entitytransacts. The Statement applies whenever other standards require (or permit)assets or liabilities to be measured at fair value.  The Statement does not expand the use of fairvalue in any new circumstances.  It iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  The Company has not determined the impact, ifany, SFAS No. 157 will have on its financial statements.

In July 2006, theFASB issued FASB Interpretation Number 48,*Accounting for Uncertainty in Income Taxes* (“FIN No. 48”). FINNo. 48 clarifies the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN No. 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. In addition, FIN No. 48 scopesout income taxes from SFAS No. 5, *Accountingfor Contingencies*.  FIN No. 48is effective for fiscal years beginning after December 15, 2006.    As a result of the implementation, theCompany recognized an increase of approximately $209,000 to reserve foruncertain tax positions.  This increasewas accounted for as an adjustment to the beginning balance of retainedearnings on the Balance Sheet as of January 1, 2007.  See Note 13, “Income Taxes,” for additionalinformation.

In June 2006, theEmerging Issues Task Force (“EITF”) ratified the consensus on EITF 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement”**(“EITF06-3”). EITF 06-3 provides that taxes imposed by a governmental authority on arevenue producing transaction between a seller and 

 

 

6

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a customer should beshown in the income statement on either a gross or a net basis, based on theentity’s accounting policy, which should be disclosed pursuant to AccountingPrinciples Board Opinion No. 22, “Disclosure of Accounting Policies.” Amountsthat are allowed to be charged to customers as an offset to taxes owed by acompany are not considered taxes collected and remitted. If government-imposedtaxes are significant, and are presented on a gross basis, the amounts of thosetaxes should be disclosed. EITF 06-3 will be effective for interim and annualreporting periods beginning after December 15, 2006. Our policy is to accountfor taxes collected from customers on a net basis. The adoption EITF 06-3 didnot have a material impact on the Company’s financial statements.

In March 2006, theFASB issued SFAS No. 156, *Accounting for Servicingof Financial Assets,*which amends FAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities.*In a significant change to current guidance, SFASNo. 156 permits an entity to choose either of the following subsequentmeasurement methods for each class of separately recognized servicingassets and servicing liabilities: (1) Amortization Method or (2) Fair Value Measurement Method.SFAS No. 156 is effective as of the beginning of an entity’s first fiscalyear that begins after September 15, 2006.   The adoption of SFAS No. 156 did not have amaterial impact on the Company’s financial statements.

In February 2006,the FASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and140.*This Statement permits fair value of remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation; clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities,*establishes a requirement to evaluate interests insecuritized financial assets to identify interests that are freestandingderivatives or that are hybrid  financialinstruments that contain an embedded derivative requiring bifurcation;clarifies that concentrations of credit risk in the form of subordinationare not embedded derivatives; and amended SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,*to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS No. 155 is effective for all financialinstruments acquired issued, or subject to a remeasurement (new basis) eventoccurring after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006.  Theadoption of SFAS No. 155 did not have a material impact on the Company’sfinancial statements.

In May 2005, the FASBissued Statement 154, *Accounting Changes andError Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.3. *The Statement requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is deemed impracticable, unless thechange in accounting relates to the principle method of depreciation,amortization, or depletion for long-lived, non-financial assets in which case thechange is accounted for as a change in accounting estimate that is affected bya change in accounting principle.  TheStatement is effective for accounting changes and corrections of errors madeoccurring in fiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 did not have amaterial impact on the Company’s financial position or results of operations.

**3.****                                     ****Stock Based Compensation**

As of September 30, 2007, the Company had onestock-based compensation plan allowing for the issuance of stock options andrestricted shares and an employee stock ownership plan (“ESOP”).  Effective January 1, 2006, the Company adopted thefair value recognition provisions of SFAS No. 123(R) (“SFAS 123R”), “*Share-Based Payment*”, using the modified-prospective-transitionmethod. Under that transition method, compensation cost recognized in the ninemonths ended September 30, 2007 includes: (a) compensation cost for allshare-based payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, and (b) compensation cost for allshare-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of SFAS No.123R.  TheCompany did not grant any stock options in the nine months ended September 30,2007.  The Company recognized $0.4million and $1.5 million of stock-based compensation expense for stock optionsin the three and nine months ended September 30, 2007, respectively.  The Company recognized $0.6 million and $2.1million of stock-based compensation expense for stock options in the three andnine months ended September 30, 2006, respectively.

In  2006 and through September 30, 2007, theCompany issued restricted stock and restricted units to board members,executives, and employees. The following table summarizes restricted stock andrestricted units outstanding at September 30, 2007 and changes during the ninemonths ended (shares in thousands):

 

 

7

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| ** **                             | ** ** | **Number of  Shares  Subject to  Issuance** | ** ** | **Weighted  Average  Share  Price** |
|----------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|
| Outstanding at  December 31, 2006 |       | 1,083                                                 |       | $                                   | 18.16 |
| Granted                                |       | 243                                                   |       | 24.69                               |
| Cancelled                              |       | (60                                                   | )          | 21.37                               |
| Issued                                 |       | (119                                                  | )          | 18.01                               |
| Outstanding at  September 30, 2007     |       | 1,147                                                 |       | $                                   | 19.36 |
|                                        |            |                                                       |            |                                     |  |  |

The restrictions on the restricted stock andrestricted units lapse according to one of two schedules. Under one schedule,the restrictions will lapse when specific key performance objectives have been reachedor on the fifth anniversary date of the issuance.  Under the second schedule, the restrictionswill lapse 25% annually over four years.  The fair value of the restricted stock and restricted units are expensedover the period during which the restrictions lapse.  For the three months ended September 30, 2007and September 30, 2006, the Company recognized $1.5 million and $0.8million, respectively, in deferred compensation expenses related to restrictedshares. For the nine months ended September 30, 2007 and September 30, 2006,the Company recognized $4.6 million and $2.4 million, respectively, in deferredcompensation expense related to the restricted shares.

The Company’s ESOP provides benefits to substantiallyall employees.  The annual contribution,if any, to the ESOP is at the discretion of the Board of Directors of theCompany.  The Company distributed 45,081shares and 200,000 shares to the ESOP during the nine-month periods endingSeptember 30, 2007 and September 30, 2006, respectively.  The Company did not recognize any expenserelated to the ESOP for the three months ended September 30, 2007, compared to$0.6 million for the three months ended September 30, 2006. In the nine monthsended September 30, 2007 and September 30, 2006, the Company recognized $1.0million and $2.1 million, respectively, in compensation expense for the ESOP.

**4.             Marketable Securities**

The Company classifiesits existing marketable securities as available-for-sale. Allavailable-for-sale securities are classified as current as the Company has theability to use them for current operating and investing purposes.

The Company had norealized losses in the three and nine months ended September 30, 2007 and lessthan $0.1 million in realized losses for the three and nine months endedSeptember 30, 2006.  The Company had atotal of $0.3 million in net unrealized losses at September 30, 2007. AtDecember 31, 2006, the Company had net unrealized losses from marketablesecurities of $0.9 million.  The carryingamount of available-for-sale securities and their approximate fair values atSeptember 30, 2007 were as follows (in thousands):
| ** **                                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|
| U.S. Government  and Federal agency obligations |       | $                   | 21,146     |                         | $          | 1                             |       | $                          | (167 | ) | $ | 20,980 |
| All other  corporate bonds                      |       | 27,054              |       | 2                            |       | (93                           | )          | 26,963                     |
| Total marketable  securities                    |       | $                   | 48,200     |                         | $          | 3                             |       | $                          | (260 | ) | $ | 47,943 |

The following table presents the age of grossunrealized losses and fair value by investment category for all securities in aloss position as of September 30, 2007 (in thousands):
| ** **                                      | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**                  | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Estimated  Fair  Value**             | ** ** | **Estimated  Unrealized  Losses**    | ** ** | **Estimated  Fair  Value** | ** ** | **Estimated  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** | **Estimated  Unrealized  Losses** | ** ** |
| U.S. Government  and Federal agency obligations |       | $                                      | 13,080     |                                 | $          | (99                        | )          | $ | 6,957 |   | $ | (68 | ) | $ | 20,037 |   | $ | (167 | ) |
| Corporate bonds                                 |       | 14,660                                 |       | (19                                  | )          | 8,951                      |       | (74 | ) | 23,611 |   | (93 | ) |
| Total marketable  securities                    |       | $                                      | 27,740     |                                 | $          | (118                       | )          | $ | 15,908 |   | $ | (142 | ) | $ | 43,648 |   | $ | (260 | ) |
|                                                 |            |                                        |            |                                      |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The Company has determined that its unrealized lossesare temporary based on the minor amount of the losses compared to amortizedcost and the short duration of the losses, as well as the credit worthiness ofthe investments. The Company expects that all losses will be recovered, andintends to hold securities to recovery. If market, industry and/or investeeconditions deteriorate, we may incur future impairments.

The amortized cost andestimated fair value of marketable securities at September 30, 2007 bycontractual maturity are shown below (in thousands):

| ** **                                | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-------------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in one year  or less                  |       | $                   | 5,852      |                           | $          | 5,844 |   |
| Due after one  year through three years   |       | 29,657              |       | 29,425                         |       |
| Due after three  years through five years |       | 2,734               |       | 2,717                          |       |
| Due after five  years                     |       | 9,957               |       | 9,957                          |       |
|                                      |       | $                   | 48,200     |                           | $          | 47,943 |   |
|                                           |            |                     |            |                                |            |  |  |  |

The carrying amount of available-for-sale securitiesand their approximate fair values at December 31, 2006 were as follows (inthousands):

| ** **                                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| U.S. Government  and Federal agency obligations |       | $                   | 52,437     |                         | $          | —                        |       | $                          | (662       | ) | $ | 51,775 |   |
| Corporate bonds                                 |       | 69,685              |       | 2                            |       | (272                          | )          | 69,415                     |       |
| Total                                           |       | $                   | 122,122    |                         | $          | 2                             |       | $                          | (934       | ) | $ | 121,190 |   |

 

**5.             Inventories**

Inventoriesconsist of purchased pharmaceutical products, and are stated at the lower ofcost or market. Cost is determined using the first-in, first-out method, andmarket is considered to be net realizable value. Inventories consist of bothfinished product and bulk product awaiting processing and packaging intofinished product. Inventories, net of reserves of $0.2 million and $0.3 millionat September 30, 2007 and December 31, 2006, respectively, consisted of(in thousands):

| ** **         | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|------------------------------|------------|-----------------------------|------------|
| Bulk product       |       | $                            | 9,018      |                        | $          | 8,559 |   |
| Finished product   |       | 15,861                       |       | 18,081                      |       |
| Total  inventories |       | $                            | 24,879     |                        | $          | 26,640 |   |

**6.             Goodwill, Product Rights and OtherIntangibles**

In August 2007, the Company and LifeCycle Pharma received U.S. Food andDrug Administration (“FDA”) approval for LifeCycle Pharma’s novel formulationof fenofibrate in 120-milligram and 40-milligram dosage strengths for thetreatment of hyperlipidemia and hypertriglyceridemia. Under the terms of theagreement, the Company has made payments of $9.0 million to LifeCycle Pharma.These payments are classified as licensing rights and will be amortized overthe remaining useful life of the asset.

In June 2007, theCompany acquired Alliant Pharmaceuticals, Inc. (“Alliant”) in a transactionaccounted for under SFAS No. 141, *Business Combinations*.Alliant was a specialty pharmaceutical company focused on acquiring, developingand commercializing proprietary products for the pediatric and pediatricspecialty markets. The Company has recorded approximately $127 million inintangible assets and goodwill for the acquisition of Alliant, which included$114.6 million in purchase price, $1.0 million in transaction costs and $11.4million in assumed liabilities.

Intangible assets which are not deemed to have an indefinite life areamortized on a straight line basis over their respective useful lives.

 

 

9

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The following table reflects the components of intangible assets as ofSeptember 30, 2007 (in thousands):

 
| ** **                      | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Amount** | ** ** | **Expected Life** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|------------------------|------------|
| Licensing rights                |       | $                     | 433,070    |                          | $          | (96,209             | )          | $                      | 336,861    |   | 5 to 20 years |   |
| Trade names                     |       | 11,960                |       | (3,373                        | )          | 8,587               |       | 20 years               |       |
| Supply/Distribution  agreements |       | 10,350                |       | (5,762                        | )          | 4,588               |       | 10 years               |       |
| Other  intangibles              |       | 3,177                 |       | (965                          | )          | 2,212               |       | 20 years               |       |
| Goodwill                        |       | 70,834                |       | —                        |       | 70,834              |       |                   |       |
| Total                           |       | $                     | 529,391    |                          | $          | (106,309            | )          | $                      | 423,082    |   |   |   |

 

The following tablereflects the components of all intangible assets as of December 31, 2006(in thousands):
| ** **                      | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Amount** | ** ** | **Average Life** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|-----------------------|------------|
| Licensing rights                |       | $                     | 368,674    |                          | $          | (79,734             | )          | $                     | 288,940    |   | 10 to 20 years |   |
| Trade names                     |       | 11,060                |       | (2,845                        | )          | 8,215               |       | 15 to 20 years        |       |
| Contracts                       |       | 8,300                 |       | (8,049                        | )          | 251                 |       | 5 years               |       |
| Supply/Distribution  agreements |       | 10,350                |       | (4,986                        | )          | 5,364               |       | 10 years              |       |
| Other  intangibles              |       | 3,108                 |       | (838                          | )          | 2,270               |       | 20 years              |       |
| Total                           |       | $                     | 401,492    |                          | $          | (96,452             | )          | $                     | 305,040    |   |   |   |
|                                 |            |                       |            |                               |            |                     |            |                       |            |  |  |  |  |  |

 

For the three and nine months ended September 30, 2007, amortizationexpense related to the intangible assets was $6.7 million and $18.2 million,respectively. Amortization is calculated on a straight-line basis over theestimated useful life of the intangible asset. Estimated annual amortizationexpense for each of the five succeeding fiscal years is as follows (inthousands):

| **Fiscal year ended December 31:** | ** ** | **Amount** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| 2007                                                   |       | $          | 24,560     |   |
| 2008                                                   |       | 26,763     |       |
| 2009                                                   |       | 26,763     |       |
| 2010                                                   |       | 26,763     |       |
| 2011                                                   |       | 26,492     |       |
|                                                        |            |            |            |  |

 

**7.             Other Long-Term Assets**

Other long term assets at September 30, 2007 and December 31, 2006consisted of the following (in thousands):

| ** **                              | ** ** | **September, 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| Capitalized  finance costs              |       | $                             | 8,092      |                        | $          | 6,634 |   |
| Advanced payments  for product licenses |       | 9,000                         |       | —                      |       |
| Deposits                                |       | 49                            |       | 29                          |       |
| Long-term  investments                  |       | 12,433                        |       | —                      |       |
| Total other  assets                     |       | $                             | 29,574     |                        | $          | 6,663 |   |
|                                         |            |                               |            |                             |            |  |  |  |

 

In May 2007, the Companypurchased a $6.4 million equity stake in Plethora Solutions Holding plc (“Plethora”)in conjunction with the closing of the exclusive licensing agreement to marketPlethora’s product, PSD502, for premature ejaculation.  Sciele has purchased 1,772,505 new ordinaryshares in Plethora. The Company’s investment in Plethora amounts toapproximately 5.6% of the ordinary shares outstanding. Plethora is headquarteredin the United Kingdom and is listed on the London Stock Exchange(AIM:PLE).  Per the agreement withPlethora, the shares purchased will not be sold until June 2011.  The investment in Plethora is accounted forunder the cost method. The investment is classified as long term securitiesunder other long term assets on the balance sheet.

In July 2007, the Companysigned an exclusive agreement with Addrenex Pharmaceuticals, Inc. to market,upon approval by the U.S. Food & Drug Administration (FDA), Clonicel, apatented, extended-release formulation of clonidine hydrochloride for thetreatment of hypertension and attention deficit and hyperactivity disorder inNorth America. Under the terms of the agreement, Sciele has purchased a $6million equity stake in Addrenex and will have the right to increase its equityposition.  Sciele will also makeregulatory milestone payments of up to $11 million and royalty payments toAddrenex 

 

10

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on future productsales.  The investment in Addrenex isaccounted for under the cost method. The investment is classified as long termsecurities under other long term assets on the balance sheet.

**8.             Accrued Expenses**

Accrued expenses at September 30, 2007 and December 31, 2006consisted of the following below (in thousands). During the three months ended September 30, 2007, theCompany changed its method of accounting for product rebates and increased theestimated liability for product rebates by $1.6 million.

| ** **                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Employee  compensation and benefits |       | $                            | 8,593      |                        | $          | 3,706 |   |
| Product returns                     |       | 6,771                        |       | 1,568                       |       |
| Product rebates                     |       | 1,586                        |       | 1,763                       |       |
| Sales deductions                    |       | 5,384                        |       | 4,203                       |       |
| Accrued  royalties                  |       | 4,250                        |       | 4,960                       |       |
| Other                               |       | 2,408                        |       | 2,765                       |       |
| Total accrued  expenses             |       | $                            | 28,992     |                        | $          | 18,965 |   |
|                                     |            |                              |            |                             |            |  |  |  |

 

                

**9.             Long-term Debt**

On May 14, 2007, theCompany issued and sold $325 million aggregate principal amount of its 2.625%Contingent Convertible Senior Notes due 2027 (the “Notes”) in a registeredoffering under the Securities Act of 1933, as amended.  The Notes wereinitially sold pursuant to an underwriting agreement, dated May 9, 2007,between the Company and UBS Securities LLC, as representative of theunderwriters.  The Notes are due May 15,2027 and accrued interest is payable semi-annually in arrears on May 15 andNovember 15 of each year, beginning November 15, 2007.  In addition to theinterest on the Notes, after May 15, 2012, we are also required to paycontingent interest during specified six-month periods if the average tradingprice of the Notes per $1,000 principal amount for the five day trading periodending on the third trading day immediately preceding the first day of theapplicable six-month period equals $1,200 or more. During any period whencontingent interest is payable, it will be payable at a rate equal to 0.5% perannum.  In addition, if we default in our reporting obligations under theindenture, we can elect to pay special interest on the Notes at a rate equal to0.25% per annum as the sole remedy for a specified period of time.

The Notes are our seniorunsecured obligations and rank equally in right of payment with each other andwith all of our other senior unsecured indebtedness. The Notes will besubordinated in right of payment to all of our existing and future securedindebtedness (to the extent of the value of the collateral securing thesame).  The indenture does not contain any restriction on the payment ofdividends, the incurrence of indebtedness or the repurchase of our securities,and does not contain any financial covenants.

*ConversionRights*. Holders may convert the Notes only under the following circumstances:

·                  during any calendar quarter, if the closing salesprice of our common stock exceeds 120% of the conversion price for at least 20trading days in the 30 consecutive trading days ending on the last trading dayof the preceding calendar quarter;

·      ifthe Notes have been called for redemption;

·                  during the nine trading day period immediatelyfollowing any five consecutive trading day period in which the trading price ofthe Notes per $1,000 principal amount for each day of that period was less than95% of the product of the then applicable conversion rate per $1,000 principalamount of the Notes multiplied by the volume-weighted average price per shareof our common stock on that date;

·                  if we issue rights, warrants or options to holders ofour common stock that allows such holders to purchase shares of common stock ata price per share less than the average closing sale prices per share for theten trading days immediately preceding the date such issuance was publiclyannounced;

 

 

11

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·                  if we make a distribution to holders of our commonstock and the fair market value of such distribution exceeds 10% of the closingsale price per share on the trading day immediately preceding the date wedeclare such distribution;

·                  if a fundamental change (defined below) occurs or weare a party to any other consolidation, merger, share exchange, sale of assetsor other similar transaction pursuant to which our common stock is subject toconversion into stock, securities or other property (including cash); or

·                  at any time from and including March 15, 2012 to andincluding May 20, 2012, and any time on or after March 15, 2027.

The Notes will beconvertible into cash and, if applicable, shares of our common stock as follows:Upon conversion, holders will receive, per $1,000 principal amount beingconverted, a “settlement amount” that is equal to the sum of the “dailysettlement amounts” for each of the 30 trading days during the “cash settlementaveraging period.”  The “daily settlement amount” for each trading dayconsists of (i) cash equal to the lesser of $33.33 and the “daily conversionvalue”; and (ii) to the extent the daily conversion value exceeds $33.33, anumber of shares equal to the excess of the daily conversion value over $33.33,divided by the volume-weighted average price per share of our common stock onthat trading day. The “cash settlement averaging period” is the 30 consecutivetrading days beginning on, and including, the third trading day following theconversion date; provided that if a Note is surrendered for conversion withinthe period prior to maturity, the cash settlement averaging period is the 30consecutive trading days beginning on, and including, the 30th scheduledtrading day prior to the maturity date. The “daily conversion value” on a giventrading day generally means one-thirtieth of the product of the applicableconversion rate and the volume-weighted average price per share of our commonstock on that trading day.

The Company willadjust the conversion rate applicable to the Notes in the event we make anycash distributions to holders of our common stock.  The Notes are subjectto additional anti-dilution protection that covers stock dividends,subdivisions, combinations and reclassifications of common stock, distributionsof certain rights and warrants, distributions in kind and certain issuer tenderand exchange offers.  The Companycapitalized $9.4 million in association with the issuance of the 2007 Notes.  It will be amortized over the estimated lifeof the loan.

In March 2004,the Company issued a total of $150.0 million of its 1.75% seniorsubordinated contingent convertible notes due in 2024 (the “2004 Notes”) intransactions that were exempt from registration in reliance upon Rule 144Aand other available exemptions under the Securities Act. In May 2006 andpursuant to a registered exchange offer, the Company exchanged each outstanding2004 Note with new notes (the “2006 Notes”) that, among other things, requiredthe Company to redeem the $150.0 million 2004 Notes with cash instead of commonstock.

In June 2007, the Company redeemed all of its 2006Notes with the proceeds from the issuance of the Notes, in accordance with theindenture dated May 3, 2006.  In addition to the $150 million face valueof the bonds, bondholders received a total of 839,930 shares of Company stock,pursuant to the terms of the exchange offer. The remaining capitalized financing costs associated with the 2006 Notesexchange of $5.3 million were expensed in the second quarter of 2007.

**10.          Credit Agreement**

On September 18, 2006, weentered into a senior secured credit agreement (the “Credit Agreement”) withUBS Securities LLC and LaSalle Bank National Association as lead arrangers, UBSAG, Stamford Branch, as issuing bank, administrative agent and collateralagent, Regents Bank, Fifth Third Bank and Bank of America, N.A. asco-documentation agents and UBS Loan Finance LLC, as swing line lender. TheCredit Agreement provides us and our Cayman subsidiary, Sciele Pharma CaymanLtd., with a five-year revolving credit facility of up to $100 million, with anoption to expand the facility credit line by up to an additional $75 million.

Amountsoutstanding under the new credit facility generally bear interest at thelenders’ corporate base rate or LIBOR, plus a specified margin of between 1.75%and 2.5% depending on our ratio of indebtedness to earnings. The CreditAgreement contains customary negative covenants and financial covenants.

Our obligationsunder the Credit Agreement are secured by a pledge of substantially all of ourassets and are guaranteed by substantially all of our subsidiaries that are notborrowers.

 

12

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We terminated ourprevious credit agreement with LaSalle Bank National Association, datedFebruary 11, 2003, as subsequently amended, upon entering into the new CreditAgreement.

The Company had no debtoutstanding under the credit facility as of September 30, 2007.

**11.          Share Buyback Program**

The Company adopted a share repurchase programeffective August 3, 2006, that authorizes the repurchase of up to $30.0million of its outstanding shares of common stock over the next twelve monthswith no periodic sub-limits on the amount of repurchases. This plan replacedall prior share repurchase plans and expired on August 2, 2007.  In the third quarter of 2006, the Companyrepurchased 409,973 shares of common stock at an average cost of $19.19 pershare, or $7.9 million.  In the firstquarter of 2007, the Company repurchased 18,822 shares of common stock at anaverage cost of $23.87 per share, or $0.4 million. In the second quarter of2007, the Company repurchased 567,870 shares of common stock at an average costof $24.59 per share, or $14.0 million. In the third quarter of 2007, under theold plan, the Company did not repurchase any shares of common stock. Allrepurchased shares have been retired.

On August 3, 2007, theCompany adopted a new share repurchase program authorizing the repurchase of upto $40.0 million of outstanding common stock. This plan replaces all prior share repurchase plans and will expire onAugust 2, 2008.  In the third quarter of2007, the Company repurchased 305,214 shares of common stock at an average costof  $22.94, or $7.0 million.  These shares have been retired.  As of September 30, 2007, $33.0 million isavailable for repurchases under the program.

 
| ** **                              | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                             | ** ** | ** ** | ** ** | **Approximate Dollar**        | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------------|------------|------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **Total**          | ** ** | ** **         | ** ** | **Total Number of**          | ** ** | ** ** | ** ** | **Value of Shares**      | ** ** |
| ** **                              | ** ** | **Number of** | ** ** | **Average**        | ** ** | **Shares Purchased**              | ** ** | ** ** | ** ** | **that May Yet Be** | ** ** |
| ** **                              | ** ** | **Shares**         | ** ** | **Price**          | ** ** | **as Part of Publicly** | ** ** | ** ** | ** ** | **Purchased Under**           | ** ** |
| **Fiscal Period**                  | ** ** | **Purchased**      | ** ** | **Per Share** | ** ** | **Announced Plans**               | ** ** | **Plan**   | ** ** | **the Plans**                 | ** ** |
|                                    |       |               |       |               |       |                                   |       |       |       |                               |       |
| January 1  through March 31, 2007       |       | 18,822             |       | $                  | 23.87      |                                   | 18,822     |       | 1          |                               | $          | 21,669,654 |   |
| April 1 through  June 30, 2007          |       | 567,870            |       | $                  | 24.59      |                                   | 567,870    |       | 1          |                               | $          | 7,707,576 |   |
| July 1 through  August 2, 2007          |       | —             |       | $                  | —     |                                   | —     |       | 1          |                               | $          | 7,707,576 |   |
| August 3 through  August 31, 2007       |       | 209,915            |       | $                  | 23.03      |                                   | 209,915    |       | 2          |                               | $          | 35,164,707 |   |
| September 1  through September 30, 2007 |       | 95,299             |       | $                  | 22.74      |                                   | 95,299     |       | 2          |                               | $          | 32,997,703 |   |
| Total                                   |       | 891,906            |       | $                  | 24.02      |                                   | 891,906    |       |       |                               |       |   |

 

*Plan 1refers to the Share Repurchase Plan effective August 3, 2006 through August 2,2007.  Plan 2 refers to the ShareRepurchase Plan effective August 3, 2007 through August 2, 2008.*

**12.          Earnings Per Share**

Below is the calculationof basic and diluted net income per share (in thousands except per share data):

 

13

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| ** **                                                                 | ** ** | **For The Three Months  Ended September 30,** | ** ** | **For The Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                 |       | $                                                                      | 13,849     |                                                                  | $          | 12,301 |   | $ | 37,485 |   | $ | 31,600 |   |
| Add: Interest  expense on the old contingent convertible notes, net of tax |       | —                                                                 |       | —                                                                |       | — |   | 653 |   |
|                                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Adjusted net  income                                                       |       | $                                                                      | 13,849     |                                                                  | $          | 12,301 |   | $ | 37,485 |   | $ | 32,253 |   |
|                                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted average  common shares outstanding—basic                     |       | 35,752                                                                 |       | 35,043                                                                |       | 35,425 |   | 35,147 |   |
| Diluted effect  of stock options restricted shares and convertible debt    |       | 714                                                                    |       | 971                                                                   |       | 1,026 |   | 4,123 |   |
|                                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted average  common shares outstanding—diluted                   |       | 36,466                                                                 |       | 36,014                                                                |       | 36,451 |   | 39,270 |   |
|                                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic earnings  per common share:                                          |       | $                                                                      | 0.39       |                                                                  | $          | 0.35 |   | $ | 1.06 |   | $ | 0.90 |   |
|                                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted earnings  per common share:                                        |       | $                                                                      | 0.38       |                                                                  | $          | 0.34 |   | $ | 1.03 |   | $ | 0.82 |   |

For the three monthsended September 30, 2007, there were 81,475 potential common shares outstandingthat were excluded from the diluted net income per share calculation becausetheir effect would have been anti-dilutive. For the nine months ended September 30, 2007, there were 81,475 potentialcommon shares outstanding that were excluded from the diluted net income pershare calculation because their effect would have been anti-dilutive.   There were no shares of unvested restrictedstock that were anti-dilutive for the three or nine months ended September 30,2007.  For the three and nine monthsended September 30, 2006, there were 819,429 and 800,681 potential commonshares outstanding and 53,500 and 37,000 shares of unvested restricted stock,respectively,  that were excluded fromthe diluted net income per share calculation because their effect would havebeen anti-dilutive.

**13.          Income Taxes**

TheCompany adopted FASB Interpretation 48, *Accounting for Uncertaintyin Income Taxes*(“FIN 48”), on January 1, 2007.  As a result of the implementation, theCompany recognized an increase of approximately $209,000 to reserves foruncertain tax positions.  This increasein reserves was accounted for as an adjustment to the beginning balance ofretained earnings on the Balance Sheet. Including the cumulative effect increase, on January 1, 2007, theCompany had approximately $684,000 of total gross unrecognized tax benefits,which includes interest of approximately $140,000.  Of this total, approximately $445,000 (net ofthe federal benefit on state issues) represents the amount of unrecognized taxbenefits that, if recognized, would favorably affect the effective income taxrate in any future periods.  The Companyrecognized interest and/or penalties related to income tax matters in incometax expense.

TheCompany and its subsidiaries are subject to U.S. federal income tax as well asincome tax in multiple state and foreign jurisdictions.  The Company should not be subject to U.S.federal income tax examinations for tax years before 2003.  Furthermore, the Company should not besubject to state and local examinations before 2001 or foreign tax examinationsbefore 2002.

During2007, the statute of limitations in certain state and local jurisdictions willexpire.  However, the Company does notexpect the statute to have a material impact on their tax reserves.

**14.          Segment Reporting**

TheCompany is engaged solely in the business of developing, marketing and sellingprescription pharmaceutical products. Accordingly, the Company’s business isclassified in a single reportable segment: the development, sale and marketingof prescription pharmaceutical products. Prescription products include avariety of branded pharmaceuticals for the treatment of cardiovascular andmetabolic diseases, women’s health and pediatric health conditions.

Thefollowing presents revenues for prescription products by area of treatment:

| ** **              | ** ** | **For The Three Months  Ended September 30,** | ** ** | **For The Nine Months  Ended September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cardiovascular/Diabetes |       | $                                                                      | 65,349     |                                                                  | $          | 59,594 |   | $ | 192,315 |   | $ | 164,640 |   |
| Women’s Health     |       | 21,316                                                                 |       | 12,743                                                                |       | 57,709 |   | 37,882 |   |
| Pediatrics/other        |       | 12,707                                                                 |       | 2,447                                                                 |       | 27,267 |   | 11,114 |   |
|                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net revenues            |       | $                                                                      | 99,372     |                                                                  | $          | 74,784 |   | $ | 277,291 |   | $ | 213,636 |   |

 

**15.          Commitments and Contingencies**

The Company,certain former and current officers and directors are defendants in aconsolidated securities lawsuit filed on August 22, 2002 in the UnitedStates District Court for the Northern District of Georgia. Plaintiffs in theclass action alleged in general terms that we violated Sections 11 and12(a) (a) of the Securities Act of 1933 and that we violatedSections 10(b) and 20(a) of the Securities Exchange Act of 1934and Rule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffsclaim that we issued a series of materially false and misleadingstatements to the market in connection with our public offering onApril 24, 2002 and thereafter relating to alleged “channel stuffing”activities. The amended complaint also alleged controlling person liability onbehalf of certain of our officers under Section 15 of the Securities Actof 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffsseek an unspecified amount of compensatory damages.

OnSeptember 29, 2004, the U.S. District Court for the Northern District ofGeorgia held that the amended complaint was a “shotgun” pleading becauseit failed to properly link the allegations with the causes ofaction.  The court indicated that 

 

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it would dismiss, without prejudice, the class actionlawsuit  unless Plaintiffs amended their complaint to correct the pleadingdeficiencies and pay all of the  Defendants’  fees andcosts associated with filing the motion to dismiss the lawsuit. Plaintiffs didnot file a second amended complaint as permitted, but instead filed a motionasking the District Court to lift the condition in itsSeptember 29, 2004 order that they must pay Defendants’ fees andcosts before further amendment. On June 22, 2005, the District Courtdenied Plaintiffs’ motion and gave them another opportunity to amend ifthey paid Defendants’ fees and costs. Once again, Plaintiffs chosenot to file a second amended complaint. Instead, Plaintiffs filed anappeal to the United States Court of Appeals for the Eleventh Circuit.

 

On September 18, 2006,the Eleventh Circuit Court of Appeals affirmed the District Court’sdetermination that the Amended Complaint was a “shotgun pleading” that didnot satisfy the pleading requirements under the federal rules.  The Courtof Appeals, however, disagreed with the remedy ordered by the DistrictCourt.  Instead of dismissing the Amended Complaint with a right tofurther amend if Plaintiffs paid Defendants’ fees and costs, the Court ofAppeals held that the District Court should have ordered Plaintiffsto replead under Federal Rule of Civil Procedure 12(e).  The Court ofAppeals also held that Plaintiffs’ claims under the Securities Act of1933 must meet the heightened pleading standards of Federal Rule ofCivil Procedure 9(b) because those claims sound in fraud.  Accordingly,the Court of Appeals vacated the District Court’s orders and remanded withinstructions to order a repleading. On April 20,2007, Plaintiffs filed a second amended complaint. On June29, 2007, the Company filed a motion to dismiss the secondamended complaint, which currently is pending.  ****No accrual is recorded inthe Company’s financial statements related to this case as the Company believesthat its risk of loss is remote.****

 

The Company shallcontinue to vigorously defend this action.

 

On September 10, 2007,the Company received a Paragraph 4 certification in connection with Sular 40mgindicating that Mylan Laboratories, Inc. wishes to introduce a generic versionof this product. The certification relates to U.S. Patent No. 4,892,741 for theproduct which expires June 8, 2008. As a result, the Company has initiatedpatent litigation in the United States District Court for the District ofDelaware.

 

The Company isalso involved with other various legal proceedings incident to the course ofbusiness. None of these proceedings are expected to have a material adverseeffect on the consolidated financial statements.

**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following should beread with the consolidated financial statements and related footnotes andManagement’s Discussion and Analysis of Results of Operations and FinancialCondition included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006 (File No. 000-30123). The results discussedbelow are not necessarily indicative of the results to be expected in anyfuture periods. The following discussion contains forward-looking statementsthat are subject to risks and uncertainties, which could cause actual resultsto differ from the statements made.

**Overview**

ScielePharma, Inc. is a pharmaceutical company specializing in sales, marketing anddevelopment of branded prescription products focused onCardiovascular/Diabetes, Women’s Health, and Pediatric treatment.  The Company’s Cardiovascular/Diabetesproducts treat patients with high cholesterol, hypertension, hightriglycerides, unstable angina, and Type 2 Diabetes.  Its Women’s Health products are designed toimprove the health and well-being of women of all ages, as well as expectantand nursing mothers and their babies. Its Pediatric product focus includes the sub-specialties of allergy andimmunology, psychiatry, neurology, urology and infectious diseases.   Headquartered in Atlanta, Georgia, and founded in 1992, ScielePharma employs more than 900 people.  Ourkey promoted products include:

| **Cardiology/Diabetes** | ** ** | **Women’s Health** | ** ** | **Pediatric** |
|-------------------------|------------|-------------------------|------------|---------------|
| Altoprev                |       | Prenate  DHA            |       | Allegra       |
| Fortamet                |       | Prenate  Elite          |       | Methylin      |
| Nitrolingual            |       | Zovirax                 |       | Orapred       |
| Sular                   |       |                    |       |          |
| Triglide                |       |                    |       |          |

 

Our current operating plan focuses on maximizing thesales of our existing product portfolio. We also plan to accelerate growth bylaunching line extensions to our current products and by acquiring or licensingapproved products or 

 

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late stage developmentproducts and other businesses. We plan to focus on products that complement ourCardiovascular/Diabetes, Women’s Health and Pediatric categories that will allowus to leverage our existing sales force infrastructure as well as additionaltherapeutic areas which compliment our existing sales structure.

We currently market andsell 21 products, 11 of which are actively promoted and which accounted forapproximately 87.5% of our total sales for the nine months ended September 30,2007. We promote our products through our nationwide sales and marketing force,targeting high-prescribing primary care physicians, endocrinologists,cardiologists, obstetricians and gynecologists, and pediatrics.

**Resultsof Operations**

*Net Revenue.*    Netrevenues for the three months ended September 30, 2007 increased $24.6 millionor 33% to $99.4 million, as compared to $74.8 million for the threemonths ended September 30, 2006. Net revenues for the nine months endedSeptember 30, 2007 increased $63.7 million or 30% to $277.3 million, ascompared to $213.6 million for the nine months ended September 30, 2006.Net revenues from our promoted products increased by $21.2 million and $54.9million for the three and nine months ended September 30, 2007, respectively,as a result of the addition of our new Pediatric products, growth fromincreased promotion of our pre-existing products, as well as continued successin the execution of our marketing strategy. In addition wehave seen the continued growth of Zovirax and Sular scripts which is attributedto the successful leveraging of our improved managed care position by our salesforce, as well as price increases.  Net revenuesfrom our non-promoted product revenues increased by $3.4 million and $8.8million for the three and nine months ended September 30, 2007, respectively.  The fluctuation for the nine month periodended September 30, 2007 was primarily related to larger Furadantin shipments in the first quarterof 2007, due to manufacturing issues resolved in the first quarter of 2007.

**ProductOverview**

*** ***
| ** **      | ** ** | **Change in total dispensed prescriptions  for the three months ended  September 30, 2007 compared  to the three months ended  September 30, 2006(a)** | ** ** | **Change in new dispensed prescriptions  for the three months ended  September 30, 2007 compared  to the three months ended   September 30, 2006(a)** | ** ** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Altoprev        |       | (37.5)%                                                                                                                                                                                                                                     |       | (44.1)%                                                                                                                                                                                                                                         |       |
| Fortamet        |       | (13.4)%                                                                                                                                                                                                                                     |       | (23.5)%                                                                                                                                                                                                                                         |       |
| Nitrolingual(b) |       | 0.7%                                                                                                                                                                                                                                        |       | 0.5%                                                                                                                                                                                                                                            |       |
| Sular           |       | 5.2%                                                                                                                                                                                                                                        |       | 2.5%                                                                                                                                                                                                                                            |       |
| Triglide        |       | 31.2%                                                                                                                                                                                                                                       |       | 25.7%                                                                                                                                                                                                                                           |       |
| Prenate DHA(c)  |       | N/A                                                                                                                                                                                                                                         |       | N/A                                                                                                                                                                                                                                             |       |
| Prenate Elite   |       | (7.9)%                                                                                                                                                                                                                                      |       | (7.6)%                                                                                                                                                                                                                                          |       |
| Zovirax(d)      |       | N/A                                                                                                                                                                                                                                         |       | N/A                                                                                                                                                                                                                                             |       |
| Allegra         |       | N/A                                                                                                                                                                                                                                         |       | N/A                                                                                                                                                                                                                                             |       |
| Methylin        |       | 39.5%                                                                                                                                                                                                                                       |       | 39.3%                                                                                                                                                                                                                                           |       |
| Orapred         |       | 151.3%                                                                                                                                                                                                                                      |       | 156.2%                                                                                                                                                                                                                                          |       |

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*(a)          *Source: IMS’s Next Generation Prescription Servicesdata.

*(b)          *We believe that IMS data does not capture prescriptions of Nitrolingualfrom some of the non-retail channels and prescription trends in the non-retailchannel which may have a significant impact on the reported change.

*(c)          *Prenate DHA was launched in June 2007.

*(d)          *We acquired Zovirax marketing rights in December 2006 and launched ourpromotion in January 2007.

Netrevenues from our Cardiolovascular and Metabolic products (namely Sular,Fortamet, Triglide, Altoprev and Nitrolingual) were $65.4 million and $192.3million for the three and nine months ended September 30, 2007, compared to$59.6 million and $164.6 million for the three and nine months ended September30, 2006, respectively.  The increase was primarily due to thecontinued growth of Sular, Nitrolingual Pumpspray, and Triglide, as well asprice increases implemented in the first quarter of 2007.  Cardiovascular/diabetes products represented66.0% of the Company’s total sales in the third quarter of 2007.

 

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Netrevenues from our Women’s Health products (namely Prenate DHA, Prenate Elite,OptiNate, Zovirax, Ponstel and Ostiva), were $21.3 million and $57.7 millionfor the three and nine months ended September 30, 2007 compared to $12.7million and $37.9 million for the three and nine months ended September30, 2006. Thisincrease is primarily related to the expansion of our women’s health salesforce in the first quarter of 2007, which resulted in an increase in PrenateElite’s market share. In June 2007, the Company launched Prenate DHA, the firstand only prescription prenatal vitamin with 300 milligrams of DHA (from a total365 mg of omega-3 fatty acids) which is the highest amount available in aprescription prenatal vitamin.

Netrevenues for our Pediatrics and other products were $12.7 million and $27.3million for the three and nine months ended September 30, 2007 compared to $2.4million and $11.1 million for the three and nine months ended September 30,2006.  The increase in revenues for pediatric and non-promoted products were the result of the Alliant acquisition, largershipments of Furadantin in the first quarter of 2007, due to manufacturingissues resolved in the first quarter of 2007.

*Cost of Revenues.*    Costof revenues for the three and nine months ended September 30, 2007 were $13.3million and $37.2 million, compared to $10.3 million and $30.2 million for thethree and nine months ended September 30, 2006. The increase in cost of revenues is related to thechange in product mix, increases in freight costs and the increase in sales forthe three and nine months ended September 30, 2007 as compared to theequivalent periods ending September 30, 2006.

*Gross Margin.*    Grossmargin for the three and nine months ended September 30, 2007 were 86.6% and86.6%, respectively, compared to 86.2% and 85.8% for the three and nine monthsended September 30, 2006, respectively. This increase in gross margin for the three and nine months endedSeptember 30, 2007 is the result of a change in product mix and priceincreases.

*Selling, General and AdministrativeExpenses.*    Selling, general and administrative(“SG&A”) expenses increased $11.2 million, or 31%, to $47.1 millionfor the three months ended September 30, 2007, compared to $35.9 million forthe three months ended September 30, 2006. SG&A expenses increased $28.3 million,or 26%, to $135.3 million for the nine months ended September 30,2007, compared to $107.0 million for the nine months ended September 30,2006.  The increase in SG&A expense in the third quarterof 2007 is primarily due to costs associated with the launch of Prenate DHA,the cost of the new Alliant sales force, higher royalties and commissions,  and new marketing programs associated withcertain products.  Also affecting SG&A expenses was anincrease in stock compensation expense in the first three months of 2007related to the acceleration of vesting for restricted shares.  The acceleration is the result of theachievement of defined goals by the Company.

*Depreciation and Amortization Expense.*    Depreciationand amortization expense increased $0.8 million, or 12%, to $7.6 millionfor the quarter ended September 30, 2007 compared to $6.8 million for thequarter ended September 30, 2006. Depreciation and amortization expenseincreased $0.8 million, or 4%, to $20.6 million for the nine months endedSeptember 30, 2007 compared to $19.8 million for the nine months endedSeptember 30, 2006.  The increase in amortization expense isprimarily related to the addition of our intangibles related to Zovirax, andthe final Sular milestone paid in 2006 and the new Pediatric productsacquired  in the second quarter of 2007.  The increase was offset by the decrease inamortization expense related to completing the amortization of a portion ofSular intangible assets in the first quarter of 2007.

*                Research and DevelopmentExpense.*    Researchand development (“R&D”) expense increased $4.8 million to $9.3 millionfor the three months ended September 30, 2007 compared to $4.5 million for thethree months ended September 30, 2006. R&D expense increased $12.0 millionto $23.3 million for the nine months ended September 30, 2007 compared to $11.3million for the same period in 2006. This increase in the third quarter of2007, was primarily related to $2.2 million of in-process R&D charges forrecently licensed products, completion of Phase III patient enrollments forboth Glycopyrrolate and the Pravastatin/Fenofibrate combination, and theexpansion of the Company’s clinical and regulatory group. The Company alsoincurred development expenses related to new Sular formulation in the first sixmonths of 2007.

 

*Interest Expense.*    Interestexpense was $3.0 million and $5.8 million for the three and ninemonths ended September 30, 2007 compared to $0.9 million and $2.4 millionfor the three and nine months ended September 30, 2006.  The increase is due to the issuance of the $325million convertible bonds (see Note 9) as well as the entry into the new $100million secured credit facility in September 2006 (see Note 10).  The increase was partially offset by theelimination of the interest expense related to our retired $150 millioncontingent convertible note.

 

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*Interest Income.*    Interestincome was $2.3 million and $7.5 million for the three and ninemonths ended September 30, 2007, compared to $1.4 million and $3.4 million forthe three and nine months ended September 30, 2006. The increase is primarily due to higher average cashbalance, due to timing of the new $325 million contingent convertible notesbeing issued in May 2007 offset by the extinguishment of the $150 millioncontingent convertible notes in June 2007 and the closing of the acquisition ofAlliant in June 2007. In addition, we have benefited from larger cashgeneration from sales and higher returns on current investments.

*OtherExpense.*    Other expense was $5.3 million for the nine monthsended September 30, 2007.  This wasrelated to the retirement of $150 million contingent convertible debt and thewrite-off of the related capitalized finance costs in the second quarter of2007.  There were no comparative expensesfor the same period in 2006.

*Provision for Income Taxes.*    Incometaxes were provided for at a rate of 35.6% and 34.6% for the three and ninemonths ended September 30, 2007, respectively, compared to 31.0% and 31.8% forthe three and nine months ended September 30, 2006. This increase in the effectivetax rate is due to the change in the mix of tax jurisdictions, both domesticand international, as a result of our implementation of internationaloperations where our income was earned, adjustments recorded into our 2006 taxfilings, as well as a change in the ratio of non-deductible expenses to pre-taxincome.

**Liquidityand Capital Resources**

Ourcash and cash equivalents were $156.3 million on September 30, 2007 compared to$45.3 million at December 31, 2006. Net cash provided by operatingactivities for the nine months ended September 30, 2007 was $42.3 million. This source of cash was primarily theresult of net income of $37.5 million, resulting primarily from the sales ofour promoted products, an increase in accounts payable of $14.0 million,primarily related to increased business volume, a decrease in inventory of $1.9million, primarily related to increased sales, and an increase in accruedexpenses and other long-term liabilities of $0.2 million, primarily related toincreased commissions and royalties as a result of increased sales. Additionalproviders of cash include non-cash items of depreciation and amortization of$20.6 million, stock based compensation expenses of $7.1 million, interestexpense of $1.2 million and the loss on the extinguishment of debt of $5.3million. Partially offsetting these cash providers were cash uses related to anincrease in income tax receivable of $5.3 million related primarily toestimated tax payments made during the year, an increase in accounts receivableof $24.3 million, as a result of increase sales, deferred income tax expense of$3.0 million, and an increase in other current assets of $12.9 million.

We maintain supply agreements with third party suppliers for most of ourproducts. Some of these supply agreements contain minimum purchaserequirements. For most of these supply agreements, we believe that ourinventory requirements and related purchases of inventory will exceed theminimum purchase requirement in 2007. In those cases in which we do not believeour purchases will exceed the minimum purchase requirements, we are seeking tonegotiate waivers or modifications of the minimum purchase requirements.

Ourcash and cash equivalents were $35.6 million on September 30, 2006 compared to$17.0 million at December 31, 2005. Net cash provided by operatingactivities for the nine months ended September 30, 2006 was $74.3 million. Thissource of cash was primarily the result of net income of $31.6 million,resulting primarily from the sales of our promoted products, a decrease inaccounts receivable of $5.1 million, as a result of an overall reduction in ourdays sales outstanding, an increase in accounts payable of $1.8 million,primarily related to increased business volume, a decrease in inventory of $4.1million, primarily related to improved inventory management, an increase of$1.4 million for other current assets and other assets and an increase of $4.4million in accrued expenses and other long-term liabilities, primarily relatedto the $5.0 million milestone payment for Sular which was paid in October2006 and partially offset by decreases in general accruals.   Additional cash providers include adjustmentfor non-cash expense items of depreciation and amortization of $19.8 million,stock based compensation expenses of $6.5 million, interest expense of $0.3million, deferred income tax expenses of $3.7 million, recognized losses on thedisposal of property and equipment of $0.2 million and less than$0.1 million for the loss on sale of securities. Partially offsettingthese cash providers was an increase in income tax receivable of $4.6 million relatedprimarily to estimated tax payments made during the year.

Net cash used in investingactivities for the nine months ended September 30, 2007 was $81.3 million.The primary uses ofthis cash were related to the $113.8 million purchase of Alliant, net of thecash acquired, the $16.8 million for the purchases and advanced payments forproducts and licenses, primarily related to the purchase of fenofibrate of $9.0million, the purchase of securities of $246.7 million, purchase of equity investments of $12.3 million and theacquisition of property plant and equipment of $12.5 million, primarily for thedevelopment of a manufacturing line and new computer and audio-visual systemsfor the home office.  The uses of cashwere offset by proceeds from the sale of securities of $320.7 million.

 

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Netcash used in investing activities for the nine months ended September 30, 2006was $44.9 million. The principal uses of this cash were for the purchaseof marketable securities of $131.1 million, of which $94.9 million werereinvestment from maturing securities, $3.2 million for the purchase ofproperty and equipment, primarily for new office furniture and computer systemsfor the new home office, $5.0 million for a milestone payment to BayerHealthcare AG in January 2006, and a $0.6 million payment for the launch ofOstiva in September 2006. Partially offsetting these uses was $0.1 millionof proceeds from the sale of property and equipment.

Netcash provided by financing activities was $150.7 million for the nine monthsended September 30, 2007 primarily resulting from the issuance of $325.0 million contingentconvertible senior notes, $4.6 million from the issuances of common stockrelated to shares issued in connection with the retirement of the $150 millionconvertible notes and executive and employee stock options and restrictedshares, and $2.0  million for a non-cashreduction in taxes payable relating to stock options.  Partially offsetting the cash proceeds was  the retirement of the $150.0 million seniorsubordinated contingent convertible notes, the repurchase of our common stockfor $21.4 million and $9.4 million in capitalizable debt cost related to theissuance of the $325 million notes costs associated with the exchange of thecontingent convertible debt, discussed in footnote 10 of our financialstatements.

Netcash used in financing activities was $12.0 million for the nine months endedSeptember 30, 2006 primarily resulting from the common stock repurchase of$14.8 million and the incurrence of $3.8 million in debt financing costsrelating to the exchange of the contingent convertible debt, discussed infootnote 10 of our financial statements, of $1.8 million and the secured debtagreement, discussed in footnote 11 of our financial statements, of $1.9million. Partially offsetting this net cash used was $4.4 million for theissuances of common stock related to executive and employee stock options and$2.1 million for a non-cash reduction in taxes payable relating to stockoptions.

We believe that our cash on hand, cash we expect to generate from ouroperations and cash available under our revolving credit facility will besufficient to fund our working capital requirements, at least for the nexttwelve months. However, in the event that we make significant acquisitions, wemay need to raise additional funds through additional borrowings or theissuance of debt or equity securities, or both. Some of our supply agreementscontain minimum purchase requirements. We expect we will also experience growthin our accounts receivable as our sales increase.

On May 14, 2007, theCompany issued and sold $325 million aggregate principal amount of its 2.625%Contingent Convertible Senior Notes due 2027 (the “2007 Notes”) in a registeredoffering under the Securities Act of 1933, as amended.  The Notes wereinitially sold pursuant to an underwriting agreement, dated May 9, 2007,between the Company and UBS Securities LLC, as Representative of theunderwriters named therein, all as more thoroughly described in Note 10 to ourfinancial statements.

In June 2007, followingthe issuance of the 2007 Notes and with the proceeds therefrom, the Companyredeemed all of its 1.75% Contingent Convertible Senior Subordinated Notes Due2024, in accordance with the indenture dated May 3, 2006.  In addition tothe $150 million face value of the redeemed notes, the noteholders received atotal of 839,930 shares of Company stock, pursuant to the terms of the exchangeoffer.

On September 18,2006, we entered into a senior secured credit agreement (the “Credit Agreement”)with UBS Securities LLC and LaSalle Bank National Association as leadarrangers, UBS AG, Stamford Branch, as issuing bank, administrative agent andcollateral agent, Regents Bank, Fifth Third Bank and Bank of America, N.A. asco-documentation agents and UBS Loan Finance LLC, as swing line lender. TheCredit Agreement provides us and our Cayman subsidiary, Sciele Pharma CaymanLtd., with a five-year revolving credit facility of up to $100 million, with anoption to expand the facility credit line by up to an additional $75 million.

Amountsoutstanding under the new credit facility generally bear interest at thelenders’ corporate base rate or the LIBOR, plus a specified margin of between1.75% and 2.5% depending on our ratio of indebtedness to earnings. The CreditAgreement contains customary negative covenants and financial covenants.

Our obligationsunder the Credit Agreement are secured by a pledge of substantially all of ourassets and are guaranteed by substantially all of our subsidiaries that are notborrowers.

We terminated ourprevious credit agreement with LaSalle Bank National Association, datedFebruary 11, 2003, as subsequently amended, upon entering into the new CreditAgreement.

 

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The Company adopted a share repurchase programeffective August 3, 2006, that authorizes the repurchase of up to $30.0million of its outstanding shares of common stock over the next twelve monthswith no periodic sub-limits on the amount of repurchases. This plan replacedall prior share repurchase plans and expired on August 2, 2007.  In the third quarter of 2006, the Companyrepurchased 409,973 shares of common stock at an average cost of $19.19 pershare, or $7.9 million.  In the firstquarter of 2007, the Company repurchased 18,822 shares of common stock at anaverage cost of $23.87 per share, or $0.4 million. In the second quarter of2007, the Company repurchased 567,870 shares of common stock at an average costof $24.59 per share, or $14.0 million. In the third quarter of 2007, under theold plan, the Company did not repurchase any shares of common stock. Allrepurchased shares have been retired.

On August 3, 2007, theCompany adopted a new share repurchase program authorizing the repurchase of upto $40.0 million of outstanding common stock. This plan replaces all prior share repurchase plans and will expire onAugust 2, 2008.  In the third quarter of2007, the Company repurchased 305,214 shares of common stock at an average costof  $22.94, or $7.0 million.  These shares have been retired.  As of September 30, 2007, $33.0 million isavailable for repurchases under the program.

We expect that ourexisting sources of working capital or liquidity will be sufficient to enableus to execute our main operational goals of maximizing the sales of ourexisting products and acquiring companies having such products, acceleratinggrowth by launching line extensions to our current products and acquiring orlicensing approved products or late stage development products, as well as anycapital requirements necessary to meet these operational goals.

**CriticalAccounting Policies**

We view our criticalaccounting policies to be those policies which are very important to theportrayal of our financial condition and results of operations, and requiremanagement’s most difficult, complex or subjective judgments. The circumstancesthat make these judgments difficult or complex relate to the need formanagement to make estimates about the effect of matters that are inherentlyuncertain. We believe our critical accounting policies are as follows:

·              *Allowance for doubtful accounts.*   We are required to estimate the levelof accounts receivable recorded on our balance sheet which we assess willultimately not be paid. Among other things, this assessment requires analysisof the financial strength of our customers, which can be highly subjective. Ourpolicy is to estimate bad debt expense based on prior experience supplementedby a periodic customer specific review when needed. If we over or underestimate the level of accounts receivable that will not be paid, there may be amaterial impact to our financial statements.

·              *Sales deductions.*   We provide volume rebates, contractualprice reductions with drug wholesalers and insurance companies, and certainother sales related deductions on a regular basis. The exact level of thesedeductions is not always immediately known and thus we must record an estimateat the time of sale. Our estimates are based on historical experience withsimilar programs, and since we have a relatively small customer base, customerspecific historical experience is often useful in determining the estimatedlevel of deductions expected to be refunded to our customers when salesincentives are offered. During the three months ended September 30, 2007, the Companychanged its method of accounting for product rebates and increased theestimated liability for product rebates by $1.6 million. If we over or underestimate the level of sales deductions, there may be a material impact to ourfinancial statements.

·              *Product returns.*   In the pharmaceutical industry,customers are normally granted the right to return product for a refund if theproduct has not been used prior to its expiration date which is typically twoto four years from the date of manufacture. Our return policy allows productreturns for products within an eighteen-month window from six monthsprior to the expiration date and up to twelve months after the expiration date.Our return policy conforms to industry standard practices. We believe that wehave sufficient data to accurately estimate future returns over the return timeperiod at the time of sale. We are required to estimate the level of saleswhich will ultimately be returned pursuant to our return policy and record arelated reserve at the time of sale. These amounts are deducted from our grosssales to determine our net revenues. Our estimates take into considerationhistorical returns of a given product, product specific information provided byour customers and information obtained regarding the levels of inventory beingheld by our customers, as well as overall purchasing patterns by our customers.Management periodically reviews the reserves established for returns andadjusts them based on actual experience. If we over or under estimate the levelof sales which will ultimately be returned, there may be a material impact toour financial statements.

 

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·              *Liabilities assumed with the acquisition of productrights.*   In connection withthe acquisition of product rights, we assume certain liabilities for returns ofproduct shipped by the seller prior to the acquisition date. At the acquisitiondate, we estimate the amount of the assumed liabilities based on actual salesreturn data from the seller and include that amount in the allocation of thetotal purchase price. We review the estimated liability on an annual basis. Ifwe over or under estimate liabilities assumed, there may be a material impactto our financial statements.

·              *Intangible assets*.   When we acquire the rights tomanufacture and sell a product, we record the aggregate purchase price, alongwith the value of the product related liabilities that we assume, as intangibleassets. We use the assistance of valuation experts to help us allocate thepurchase price to the fair value of the various intangible assets and relatedliabilities that we have acquired. Then, we must estimate the economic usefullife of each of these intangible assets in order to amortize their cost as anexpense in our statement of operations over the estimated economic useful lifeof the related asset. The factors that drive the actual economic useful life ofa pharmaceutical product are inherently uncertain, and include patentprotection, physician loyalty and prescribing patterns, competition by productsprescribed for similar indications, future introductions of competing productsnot yet FDA approved, the impact of promotional efforts and many other issues.We use all of these factors in initially estimating the economic useful livesof our products, and we also continuously monitor these factors for indicationsof appropriate revisions.

Inassessing the recoverability of our intangible assets, we must make assumptionsregarding estimated future cash flows and other factors. If the estimatedundiscounted future cash flows do not exceed the carrying value of theintangible assets, we must determine the fair value of the intangible assets.If the fair value of the intangible assets is less than its carrying value, an impairmentloss will be recognized in an amount equal to the difference. We reviewintangible assets for impairment at least annually and whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Such events or circumstances may include but are not limitedto, lack of promotional sensitivity, the introduction of competitive productsand changes in government regulations. If we determine that an intangible assetis impaired, a non-cash impairment charge would be recognized. If we shouldincur an impairment loss, there may be a material impact to the financialstatements.

·              *Income taxes*.   Incometaxes are provided for under the liability method. This approach requires therecognition of deferred tax assets and liabilities for the expected future taxconsequences of differences between the tax basis of assets or liabilities andtheir carrying amounts in the consolidated financial statements. A valuationallowance is provided for deferred tax assets if it is more likely than notthat these items will either expire before we are able to realize their benefitor if future deductibility is uncertain.

Developingthe provision for income taxes requires significant judgment and expertise ininternational, federal and state income tax laws, regulations and strategies,including the determination of deferred tax assets and liabilities and, ifnecessary, any valuation allowances that may be required for deferred taxassets. Our judgments and tax strategies are subject to audit by various taxingauthorities. While we believe we have provided adequately for our income taxliabilities in our consolidated financial statements, adverse determinations bythese taxing authorities could have a material adverse effect on our financialstatements.

·              *Inventory obsolescence.*   Our products have shelf lives rangingfrom 24 to 48 months. We must estimate the amount of inventory recorded onour balance sheet that will not be sold prior to expiration. This estimaterequires analysis of forecasted demand for our products, our promotional focus,amounts of our products currently held by our customers and the impact on ourproducts of competing products. If we over or under estimate the amount ofinventory that will not be sold prior to expiration, there may be a materialimpact to our financial statements.

**ForwardLooking Statements**

This Quarterly Report contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. These statements involve a number of risks and uncertainties. Althoughour forward-looking statements reflect the good faith judgment of ourmanagement, these statements can only be based on facts and factors currentlyknown by us. Consequently, forward-looking statements are inherentlysubject to risks and uncertainties.  Actualresults and outcomes may differ materially from results and outcomes discussedin the forward-looking statements.

 

 

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Risks and uncertaintiesthat could cause our forward-looking statements to fail to occur include, butare not limited to, the following:

•              We may not attain expected revenues and earnings;

•              If we are unsuccessful in obtaining or renewing thirdparty payor contracts for our products, we may experience reductions insales levels and may fail to reach anticipated sales levels;

•              If demand for our products exceeds ourinitial expectations or the ability of our suppliers to provide demand-meetingquantities of product and samples, our future ability to sell these productscould be adversely impacted;

•              The potential growth rate for ourpromoted products may be limited by slower growth for the class ofdrugs to which our promoted products belong and unfavorable clinical studiesabout such class of drugs;

•              We may encounter problems in themanufacture or supply of our products, for which we depend entirely on thirdparties;

•              Strong competition exists in the sale ofour promoted products, which could adversely affect expected growth of ourpromoted products’ sales or increase our costs to sell our promoted products;

•              We may not be able to protect ourcompetitive position for our promoted products from patent infringers;

•              Certain of our products have experiencedmanufacturing issues. If the issues recur and cannot be resolved, our abilityto acquire product for sale and sampling will be adversely affected;

•              We may incur unexpected costs inintegrating new products into our operations;

•              We may be unable to develop ormarket line extensions for our products, or, even if developed, obtain patentprotection for our line extensions; further, introductions by us of lineextensions of our existing products may require that we make unexpectedchanges in our estimates for future product returns and reserves for obsoleteinventory. If these risks occur, our financial results could be adverselyaffected;

•              If we have difficulties acquiring newproducts or rights to market new products from third parties, our financialresults could be adversely impacted;

•              Our licensor/supplier can terminate ourrights to commercialize Nitrolingual and sale of the 60mg dose size of thisproduct has not yet met our expectation;

•              We depend on a small senior managementgroup, the departure of any member of which would likely adversely affect ourbusiness if a suitable replacement member could not be retained;

•              An adverse interpretation or ruling byone of the taxing jurisdictions in which we operate could adversely impact ouroperating results;

•              A small number of customers account for alarge portion of our sales and the loss of one of them, or changes in theirpurchasing patterns, could result in substantially reduced sales, therebyadversely impacting our financial results;

•              If third-party payors do not adequatelyreimburse patients for our products, doctors may not prescribe them;

•              Our business is subject to increasinggovernment price controls and other healthcare cost containment measures;

•              Side effects of, or marketing ormanufacturing problems with, our products could result in product liabilityclaims which could be costly to defend and could result in the withdrawal orrecall of products from the market which would adversely affect our business;

 

 

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•              We rely on operational data obtained fromIMS, an industry accepted data source. IMS data may not accurately reflectactual prescriptions (for instance, we believe IMS data does not capture allproduct prescriptions from some non-retail channels);

•              An adverse judgment in the securitiesclass action litigation in which we and certain current and formerdirectors and executive officers are defendants could have a material adverseeffect on our financial results and liquidity;

•              An adverse judgment in the patentlitigation against Mylan Laboratories could have a material adverse effect onour financial results and liquidity;

•              If we fail to obtain, or encounterdifficulties in obtaining, regulatory approval for new products or new uses ofexisting products, or if our development agreements are terminated, we willhave expended significant resources for no return;

•              Our business and products are highlyregulated; the regulatory status of some of our products makes these productssubject to increased competition and other risks; and we run the risk that we,or third parties on whom we rely, could violate the governing regulations;

•              We may be found noncompliant withapplicable federal, state or international laws, rules or regulationswhich could result in fines and/or product recalls or otherwise cause us toexpend significant resources to correct such non-compliance;

•              We may not experience the beneficialresults of our acquisitions which we expect to receive and the acquired productsmay not meet our sales expectations;

•              If generic competitors that compete withany of our products are introduced, our revenues may be adverselyaffected; and

•              Some unforeseen difficultiesmay occur.

These risk factorsare not exhaustive. We may not have correctly identified and appropriatelyassessed all factors affecting our business and the publicly available andother information with respect to these matters may not be complete andcorrect. Additional risks and uncertainties not presently known to us or thatwe currently believe to be immaterial also may adversely impact us. Should anyrisks and uncertainties develop into actual events, these developments couldhave material adverse effects on our business, financial condition, and resultsof operations. For these reasons, we caution you not to place undue reliance onour forward-looking statements.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

The Company is exposed tocertain market risks that arise in the ordinary course of business. A discussionof the Company’s primary market risk exposure is presented below.

**ForeignCurrency Exchange Risk**

Our purchases of Sular, Triglide and Nitrolingual are made in Euros.Although we did not enter into any forward contracts in the third quarter of 2007,we may eliminate risks from foreign currency fluctuations after the time ofshipment of product by entering into forward contracts for these purchases ofinventory at the time of product shipments. The Company’s earnings and cash flows could be adverselyaffected in the future by the relationship of the U.S. dollar with foreigncurrencies.

**MarketRisk on Investments**

The fair value of our investment portfolio would be negatively affectedby an increase in interest rates. Since the majority of the Company’sinvestments are fixed rate interest-bearing securities and thereforesubject to the risk of loss in market value from an increase in rates or achange in the underlying risk of the issuers of the notes, the Company’s futureearnings and cash flows could be affected adversely if the Company were to sellthe securities prior to their maturity date. There 

 

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wereno realized losses from the sale of investments for the quarter ended September30, 2007. At September 30, 2007, the Company had total net unrealized lossesfrom marketable securities of $0.3 million.

**MarketRisk on Variable Rate Debt**

In connection withborrowings we may make under the senior secured revolving credit facilityarranged by UBS Securities LLC, we could experience market risk with respect tochanges in the general level of the interest rates and its effect upon ourinterest expense. Borrowings under this facility bear interest at variablerates. Because such rates are variable, an increase in interest rates willresult in additional interest expense and a reduction in interest rates willresult in reduced interest expense. Accordingly, our present exposure tointerest rate fluctuations is primarily dependent on rate changes that may occurwhile borrowings under this credit facility are outstanding. On September 30,2007, there was no debt outstanding under this facility.

**MarketRisk on Fixed Rate Debt**

The Company’slong-term fixed interest rate senior subordinated contingent convertible notesare also subject to market risk. Fixed rate debt outstanding at September 30,2007 was $325.0 million with an interest rate of 2.625%. All other thingsbeing equal, the fair market value of the Company’s fixed rate debt willincrease as rates decline and will decrease as rates rise. The fixed rate notesoutstanding totaling $325.0 million at September 30, 2007 had a fair valueof $348.7 million based on quoted market rates.

**ITEM 4. CONTROLS ANDPROCEDURES**

**Evaluation of Disclosure Controlsand Procedures**

We maintain a set ofdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that we file under the SecuritiesExchange Act of 1934, as amended (“Exchange Act”).  These reports are recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms. We carried out an evaluation under the supervision andwith the participation of management, including our President and ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toRule 13a-15(e) of the Exchange Act as of the end of the periodcovered by this report. Our President and Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of September 30, 2007.

**Changesin Internal Control over Financial Reporting**

There have been nomaterial changes in Sciele Pharma’s primary internal controls over financialreporting during the third fiscal quarter of 2007 that have materiallyaffected, or are reasonably likely to materially affect, Sciele Pharma’sinternal controls over financial reporting.

**PART II—OTHERINFORMATION**

**ITEM 1: LEGAL PROCEEDINGS**

The Company,certain former and current officers and directors are defendants in aconsolidated securities lawsuit filed on August 22, 2002 in the UnitedStates District Court for the Northern District of Georgia. Plaintiffs in theclass action alleged in general terms that we violated Sections 11 and12(a) (a) of the Securities Act of 1933 and that we violated Sections10(b) and 20(a) of the Securities Exchange Act of 1934 andRule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffsclaim that we issued a series of materially false and misleadingstatements to the market in connection with our public offering onApril 24, 2002 and thereafter relating to alleged “channel stuffing”activities. The amended compliant also alleged controlling person liability onbehalf of certain of our officers under Section 15 of the Securities Actof 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffsseek an unspecified amount of compensatory damages.

OnSeptember 29, 2004, the U.S. District Court for the Northern District ofGeorgia held that the amended complaint was a “shotgun” pleading becauseit failed to properly link the allegations with the causes ofaction.  The court indicated that it would dismiss, withoutprejudice, the class action lawsuit  unless Plaintiffs amended theircomplaint to correct the pleading deficiencies and pay all ofthe  Defendants’  fees and costs associated with filing themotion to dismiss the lawsuit. Plaintiffs 

 

 

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did not file a secondamended complaint as permitted, but instead filed a motion asking the DistrictCourt to lift the condition in its September 29, 2004 order thatthey must pay Defendants’ fees and costs before further amendment. OnJune 22, 2005, the District Court denied Plaintiffs’ motion and gavethem another opportunity to amend if they paid Defendants’ fees and costs.Once again, Plaintiffs chose not to file a second amended complaint.Instead, Plaintiffs filed an appeal to the United States Court of Appealsfor the Eleventh Circuit.

On September 18,2006, the Eleventh Circuit Court of Appeals affirmed the District Court’sdetermination that the Amended Complaint was a “shotgun pleading” that didnot satisfy the pleading requirements under the federal rules.  The Courtof Appeals, however, disagreed with the remedy ordered by the DistrictCourt.  Instead of dismissing the Amended Complaint with a right tofurther amend if Plaintiffs paid Defendants’ fees and costs, the Court ofAppeals held that the District Court should have ordered Plaintiffsto replead under Federal Rule of Civil Procedure 12(e).  The Court ofAppeals also held that Plaintiffs’ claims under the Securities Act of1933 must meet the heightened pleading standards of Federal Rule ofCivil Procedure 9(b) because those claims sound in fraud.  Accordingly,the Court of Appeals vacated the District Court’s orders and remanded withinstructions to order a repleading. On April 20,2007, Plaintiffs filed a second amended complaint. On June 29,2007, the Company filed a motion to dismiss  the secondamended complaint, which currently is pending.  ****No accrual is recorded inthe Company’s financial statements related to this case as the Company believesthat its risk of loss is remote.****

The Company shallcontinue to vigorously defend this action.

No accrual is recorded in the Company’s financialstatements related to this case as the Company believes that its risk of lossis remote.

On September 10, 2007,the Company received a Paragraph 4 certification in connection with Sular 40mgindicating that Mylan Laboratories, Inc. wishes to introduce a generic versionof this product. The certification relates to U.S. Patent No. 4,892,741 for theproduct which expires June 8, 2008. As a result, the Company has initiatedpatent litigation in the United States District Court for the District ofDelaware.

 

The Company is also involved with other various legalproceedings incident to the course of business. None of these proceedings areexpected to have a material adverse effect on the consolidated financialstatements.

**ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

The Company adopted a share repurchase programeffective August 3, 2006, that authorizes the repurchase of up to $30.0million of its outstanding shares of common stock over the next twelve monthswith no periodic sub-limits on the amount of repurchases. This plan replacedall prior share repurchase plans and expired on August 2, 2007.  In the third quarter of 2006, the Company repurchased409,973 shares of common stock at an average cost of $19.19 per share, or $7.9million.  In the first quarter of 2007,the Company repurchased 18,822 shares of common stock at an average cost of$23.87 per share, or $0.4 million. In the second quarter of 2007, the Companyrepurchased 567,870 shares of common stock at an average cost of $24.59 pershare, or $14.0 million. In the third quarter of 2007, under the old plan, theCompany did not repurchase any shares of common stock. All repurchased shareshave been retired.

On August 3, 2007, theCompany adopted a new share repurchase program authorizing the repurchase of upto $40.0 million of outstanding common stock. This plan replaces all prior share repurchase plans and will expire onAugust 2, 2008.  In the third quarter of2007, the Company repurchased 305,214 shares of common stock at an average costof  $22.94, or $7.0 million.  These shares have been retired.  As of September 30, 2007, $33.0 million isavailable for repurchases under the program.

 

 

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| **Fiscal Period**                  | ** ** | **Total   Number of   Shares  Purchased** | ** ** | **Average   Price   Per Share** | ** ** | **Total Number of  Shares Purchased as Part of Publicly Announced Plans** | ** ** | **Plan**   | ** ** | **Approximate Dollar  Value of Shares that May Yet Be Purchased Under  the Plans** | ** ** |
|-----------------------------------------|------------|------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** **                                     | ** ** | ** **                           | ** ** | ** **                                                                                                   | ** ** | ** ** | ** ** | ** **                                                                                                                 | ** ** |
| January 1  through March 31, 2007       |       | 18,822                                         |       | $                                    | 23.87      |                                                                                                         | 18,822     |       | 1          |                                                                                                                       | $          | 21,669,654 |   |
| April 1 through  June 30, 2007          |       | 567,870                                        |       | $                                    | 24.59      |                                                                                                         | 567,870    |       | 1          |                                                                                                                       | $          | 7,707,576 |   |
| July 1 through  August 2, 2007          |       | —                                         |       | $                                    | —     |                                                                                                         | —     |       | 1          |                                                                                                                       | $          | 7,707,576 |   |
| August 3 through  August 31, 2007       |       | 209,915                                        |       | $                                    | 23.03      |                                                                                                         | 209,915    |       | 2          |                                                                                                                       | $          | 35,164,707 |   |
| September 1  through September 30, 2007 |       | 95,299                                         |       | $                                    | 22.24      |                                                                                                         | 95,299     |       | 2          |                                                                                                                       | $          | 32,997,703 |   |
| Total                                   |       | 891,906                                        |       | $                                    | 24.02      |                                                                                                         | 891,906    |       |       |                                                                                                                       |       |   |

 

*Plan 1refers to the Share Repurchase Plan effective August 3, 2006 through August 2,2007.  Plan 2 refers to the ShareRepurchase Plan effective August 3, 2007 through August 2, 2008.*

**ITEM 3:DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4:SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS**

None.

**ITEM 5:OTHER INFORMATION**

None.

**ITEM 6:EXHIBITS**
| 31.1 |   | Certifications of Chief Executive Officer and  President pursuant to Securities Exchange Act Rules 13a-14 and 15d-14,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certifications of Chief Financial Officer, Secretary  and Treasurer pursuant to Securities Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
| 32.1 |   | Certification of Chief Executive Officer and  President 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, Secretary  and Treasurer 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**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                   |   | **SCIELE  PHARMA, INC.**                       |
|------------------------|--------|------------------------------------------------|
|                   |   | (Registrant)                                   |
|                   |   |                                           |
|                   |   |                                           |
| Date: October 31, 2007 | By:    | /s/ Patrick P. Fourteau                        |
|                   |   | Patrick P. Fourteau                            |
|                   |   | *Chief Executive Officer and President*        |
|                   |   | *(principal executive officer)*                |
|                   |   |                                           |
| Date: October 31, 2007 | By:    | /s/ Darrell Borne                              |
|                   |   | Darrell Borne                                  |
|                   |   | *Executive Vice President, Chief Financial*    |
|                   |   | *Officer, Secretary and Treasurer*             |
|                   |   | *(principal accounting and financial officer)* |

 

 

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