**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

**Forthe quarterly period ended March 31, 2007**

**OR**

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

**For thetransition period from                   to**

**Commission FileNo. 000-30123**

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**SCIELE PHARMA, INC.**

(Exact name of registrant as specified in itscharter)

| **Delaware**                                           |   | **58-2004779**                           |
|--------------------------------------------------------|--------|------------------------------------------|
| (State of  incorporation)                              |   | (I.R.S. Employer  Identification Number) |
| ** **                                             |   | ** **                               |
| **5  Concourse Parkway, Suite 1800, Atlanta, Georgia** |   | **30328**                                |
| (Address of  principal executive offices)              |   | (Zip code)                               |

 

**(770) 442-9707**

(Registrant’s telephone number, including areacode):

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Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x    No o

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated file, or anon-accelerated filer. See definition of “accelerated filer or largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer  x |   | Accelerated  filer  o |   | Non-accelerated  filer  o |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o    No x

As of April 23, 2007, there were 35,262,014 shares of the Registrant’sCommon Stock outstanding.

 

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**SCIELE PHARMA,INC.**

**FORM 10-Q**

**INDEX**
|              | ** ** | ** **                                                                                                    | ** ** | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------|------------|------------|
| PART I.      |       | FINANCIAL INFORMATION                                                                                         |       | 1          |
| Item 1. |       | Consolidated  Balance Sheets at March 31, 2007 and December 31, 2006                                          |       | 1          |
|         |       | Consolidated Statements of Operations for the three  months ended March 31, 2007 and March 31, 2006 |       | 2          |
|         |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2007 and March 31, 2006 |       | 3          |
|         |       | Notes to Consolidated Financial Statements                                                                    |       | 4          |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |       | 12         |
| Item 3.      |       | Quantitative  and Qualitative Disclosures about Market Risk                                                   |       | 19         |
| Item 4.      |       | Controls and  Procedures                                                                                      |       | 20         |
| PART II.     |       | OTHER INFORMATION                                                                                             |       | 20         |
| Item 1.      |       | Legal  Proceedings                                                                                            |       | 20         |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                  |       | 21         |
| Item  5.     |       | Other  Information                                                                                            |       | 21         |
| Item 6. |       | Exhibits                                                                                                      |       | 21         |
|         |       | Signatures                                                                                                    |       | 21         |
|         |       | Certifications                                                                                                |       |       |

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**SCIELE PHARMA,INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands,except share data)**
| ** **                                                                                                                                                   | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                   |       |                     |       |                        |       |
| Current assets:                                                                                                                                              |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                   |       | $                        | 48,192     |                        | $          | 45,261 |   |
| Marketable  securities                                                                                                                                       |       | 127,107                  |       | 121,190                     |       |
| Accounts  receivable, net of allowances of $2,030 and $2,010 at March 31, 2007 and  December 31, 2006, respectively                                |       | 58,186                   |       | 47,551                      |       |
| Inventories                                                                                                                                                  |       | 22,277                   |       | 26,640                      |       |
| Income taxes  receivable                                                                                                                                     |       | 769                      |       | 4,869                       |       |
| Current deferred  tax assets                                                                                                                                 |       | 2,557                    |       | 2,465                       |       |
| Other current  assets                                                                                                                                        |       | 28,360                   |       | 21,091                      |       |
| Total current  assets                                                                                                                                        |       | 287,448                  |       | 269,067                     |       |
| Property and equipment,  net                                                                                                                                 |       | 9,250                    |       | 9,142                       |       |
| Other assets:                                                                                                                                                |       |                     |       |                        |       |
| Intangibles, net                                                                                                                                             |       | 299,234                  |       | 305,040                     |       |
| Long term  deferred tax assets                                                                                                                               |       | 93                       |       | 93                          |       |
| Other                                                                                                                                                        |       | 8,505                    |       | 6,663                       |       |
| Total other  assets                                                                                                                                          |       | 307,832                  |       | 311,796                     |       |
| Total assets                                                                                                                                                 |       | $                        | 604,530    |                        | $          | 590,005 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                               |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                         |       |                     |       |                        |       |
| Account payable                                                                                                                                              |       | $                        | 19,645     |                        | $          | 18,874 |   |
| Accrued expenses                                                                                                                                             |       | 14,476                   |       | 18,965                      |       |
| Total current  liabilities                                                                                                                                   |       | 34,121                   |       | 37,839                      |       |
| Long-term  liabilities:                                                                                                                                      |       |                     |       |                        |       |
| Convertible debt                                                                                                                                             |       | 150,000                  |       | 150,000                     |       |
| Deferred tax  liabilities                                                                                                                                    |       | 14,133                   |       | 12,368                      |       |
| Other long-term  liabilities                                                                                                                                 |       | 1,922                    |       | 1,975                       |       |
| Total  liabilities                                                                                                                                           |       | 200,176                  |       | 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; 36,011,617 and 35,873,121  issued at March 31, 2007 and December 31, 2006, respectively |       | 36                       |       | 36                          |       |
| Additional paid-in  capital                                                                                                                                  |       | 285,432                  |       | 282,718                     |       |
| Retained  earnings (See Note 12)                                                                                                                             |       | 140,557                  |       | 127,768                     |       |
| Accumulated  other comprehensive loss                                                                                                                        |       | (4,164                   | )          | (4,147                      | )          |
|                                                                                                                                                         |       | 421,861                  |       | 406,375                     |       |
| Less: Treasury stock at  cost, Common stock, 754,919 and 800,000 shares at March 31, 2007 and  December 31, 2006, respectively                     |       | (17,507                  | )          | (18,552                     | )          |
| Total  stockholders’ equity                                                                                                                             |       | 404,354                  |       | 387,823                     |       |
| Total liabilities and  stockholders’ equity                                                                                                             |       | $                        | 604,530    |                        | $          | 590,005 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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**SCIELE PHARMA,INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited, inthousands, except per share data)**
| ** **                                   | ** ** | **For The Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Net revenues                                 |       | $                                                                  | 82,257     |   | $ | 66,453 |   |
| Operating costs  and expenses:               |       |                                                               |       |   |   |
| Cost of revenues                             |       | 11,053                                                             |       | 9,352 |   |
| Selling, general and administrative expense  |       | 39,695                                                             |       | 34,516 |   |
| Depreciation and amortization                |       | 6,671                                                              |       | 6,514 |   |
| Research and development expense             |       | 5,981                                                              |       | 2,860 |   |
| Total operating costs and expenses           |       | 63,400                                                             |       | 53,242 |   |
| Operating income                             |       | 18,857                                                             |       | 13,211 |   |
| Other (expense)  income:                     |       |                                                               |       |   |   |
| Interest expense                             |       | (933                                                               | )          | (765 | ) |
| Interest income                              |       | 1,760                                                              |       | 912 |   |
| Total other income                           |       | 827                                                                |       | 147 |   |
| Income before  provision for income taxes    |       | 19,684                                                             |       | 13,358 |   |
| Provision for  income taxes                  |       | 6,686                                                              |       | 4,232 |   |
| Net income                                   |       | $                                                                  | 12,998     |   | $ | 9,126 |   |
| Other  comprehensive gain (loss)             |       | (17                                                                | )          | 138 |   |
| Comprehensive  income                        |       | $                                                                  | 12,981     |   | $ | 9,264 |   |
| Net income per  common share:                |       |                                                               |       |   |   |
| Basic earnings per common share              |       | $                                                                  | 0.37       |   | $ | 0.26 |   |
| Diluted earnings per common share            |       | $                                                                  | 0.36       |   | $ | 0.23 |   |
| Weighted average  common shares outstanding: |       |                                                               |       |   |   |
| Basic                                        |       | 35,170                                                             |       | 35,054 |   |
| Diluted                                      |       | 36,288                                                             |       | 42,596 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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**SCIELE PHARMA, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited, inthousands)**
| ** **                                                                                   | ** ** | **For The Three Months** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                   | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                       |       |                                    |       |   |   |
| Net income                                                                                   |       | $                                       | 12,998     |   | $ | 9,126 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities: |       |                                    |       |   |   |
| Depreciation and amortization                                                                |       | 6,671                                   |       | 6,514 |   |
| Non-cash compensation expense                                                                |       | 3,055                                   |       | 2,033 |   |
| Non-cash interest expense                                                                    |       | 172                                     |       | 84 |   |
| Deferred income tax expense                                                                  |       | 1,555                                   |       | 1,187 |   |
| Changes in assets and liabilities, net of acquired  assets and liabilities:                  |       |                                    |       |   |   |
| Accounts receivable                                                                          |       | (10,635                                 | )          | 22,348 |   |
| Inventories                                                                                  |       | 4,363                                   |       | 1,502 |   |
| Other current assets and other assets                                                        |       | (7,269                                  | )          | (3,950 | ) |
| Income taxes receivable                                                                      |       | 3,891                                   |       | 379 |   |
| Accrued expenses and other long-term liabilities                                             |       | (3,819                                  | )          | (1,694 | ) |
| Accounts payable                                                                             |       | 771                                     |       | 262 |   |
| Net cash provided by operating activities                                                    |       | 11,753                                  |       | 37,791 |   |
| Cash flows from  investing activities:                                                       |       |                                    |       |   |   |
| Purchase of products and licenses                                                            |       | (2,832                                  | )          | (5,000 | ) |
| Purchase of property and equipment                                                           |       | (905                                    | )          | (608 | ) |
| Proceeds from sale of marketable securities                                                  |       | 74,803                                  |       | 13,148 |   |
| Purchase of marketable securities                                                            |       | (80,406                                 | )          | (37,554 | ) |
| Net cash used in investing activities                                                        |       | (9,340                                  | )          | (30,014 | ) |
| Cash flows from  financing activities:                                                       |       |                                    |       |   |   |
| Repurchase of common stock                                                                   |       | (448                                    | )          | — |   |
| Reduction in taxes payable—stock option exercises                                       |       | 464                                     |       | 797 |   |
| Net proceeds from issuance of common stock                                                   |       | 715                                     |       | 2,052 |   |
| Net cash provided by financing activities                                                    |       | 731                                     |       | 2,849 |   |
| Effect of  foreign exchange rates on cash                                                    |       | (213                                    | )          | 125 |   |
| Net change in  cash and cash equivalents                                                     |       | 2,931                                   |       | 10,751 |   |
| Cash and cash  equivalents, beginning of period                                              |       | 45,261                                  |       | 17,043 |   |
| Cash and cash  equivalents, end of period                                                    |       | $                                       | 48,192     |   | $ | 27,794 |   |
|                                                                                         |       |                                    |       |   |   |
| Supplemental cash  flow information:                                                         |       |                                    |       |   |   |
| Cash paid for  income taxes                                                                  |       | $                                       | 617        |   | $ | 1,781 |   |
| Cash paid for interest                                                                       |       | $                                       | 1,407      |   | $ | 1,325 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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**SCIELE PHARMA,INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.             Basisof Presentation**

The accompanying unauditedinterim consolidated financial statements reflect all adjustments (consistingsolely of normal recurring adjustments) which management considers necessaryfor fair presentation of the financial position, results of operations and cashflows of Sciele Pharma, Inc. (the “Company”) for the interim periods. Certain footnote disclosures normally includedin financial statements prepared according to accounting principles generallyaccepted in the United States of America have been condensed or omitted fromthese interim financial statements as permitted by the rules and regulations ofthe Securities and Exchange Commission. Interim results are not necessarilyindicative of results for the full year. The interim results should be read inconjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2006 (File No. 000-30123).

**2.             NewAccounting Pronouncements**

*InFebruarty 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 159,*TheFair Value for Financial Assets and Financial Liabilities.  ThisStatement permits entities to choose to measure financial assets andliabilities, with certain exceptions, at fair value at specified electiondates.  A business entity shall reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date.  This Statement is effective as of thebeginning 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.

*OnSeptember 29, 2006, the FASB issued SFAS No. 158,*Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans.  ThisStatement requires an employer to recognize the overfunded or underfundedstatus 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.  This statementalso requires an employer to measure the funded status of a plan as of the dateof its year-end statement of financial position, with limited exceptions.  An employer with publicly traded equitysecurities is required to initially recognize the funded status of a definedbenefit postretirement plan and to provide the required disclosures as of theend of the fiscal year ending after December 15, 2006.  The requirement to measure plan assets andbenefit obligations as of the date of the employer’s fiscal year-end statementof financial position is effective for fiscal years ending after December 15,2008.  The adoption of SFAS No. 158 isnot expected to have a material impact on the Company’s financial statements.

OnSeptember 15, 2006 the FASB issued SFAS No. 157, *Fair ValueMeasurements.*  The Statementprovides guidance for using fair value to measure assets and liabilities.  This Statement references fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants in the market in whichthe reporting entity transacts. The Statement applies whenever other standardsrequire (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 adoption of SFAS No. 157 is not expectedto have a material impact on the Company’s financial statements.

InMarch 2006, the FASB issued SFAS No. 156, *Accountingfor Servicing of Financial Assets,*which amends FAS 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities.*In a significant change to currentguidance, SFAS No. 156 permits an entity to choose either of the followingsubsequent measurement methods for each class of separately recognizedservicing assets 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 financial instruments that contain an embeddedderivative requiring bifurcation; clarifies that concentrations of credit riskin the form of subordination are not embedded derivatives; and amendedSFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities,*toeliminate the prohibition on a qualifying special-purpose entity from holding aderivative financial instrument that pertains

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to a beneficialinterest other than another derivative financial instrument. SFAS No. 155is effective for all financial instruments acquired, issued, or subject to aremeasurement (new basis) event occurring after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006.  The adoption of SFAS No. 155 did not have amaterial impact on the Company’s financial statements.

InJuly 2006, the FASB issued FASB Interpretation Number 48,*Accounting for Uncertainty in Income Taxes*(“FIN No. 48”). FIN No. 48 clarifies the accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements. FIN No. 48 alsoprovides guidance on derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition. Inaddition, FIN No. 48 scopes out income taxes from SFAS No. 5, *Accounting for Contingencies*.  FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006.   As a result of the implementation, the Company recognized an increase ofapproximately $209,000 to reserves for uncertain tax positions.  This increase was accounted for as anadjustment to the beginning balance of retained earnings on the BalanceSheet.  See Note 12, “Income Taxes,” foradditional information.

In May2005, the FASB issued 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 casethe the change is accounted for as a change in accounting estimate that isaffected by a change in accounting principle. The Statement is effective for accounting changes and corrections oferrors made occurring 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**

At March 31, 2007, the Companyhad two stock-based compensation plans allowing for the issuance of stockoptions and restricted shares and an employee stock ownership plan (“ESOP”).  Effective January 1, 2006, the Companyadopted the fair value recognition provisions of SFAS No. 123(R) (“SFAS 123R”),“*Share-Based Payment*”, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three months ended March 31, 2007 includes:(a) compensation cost for all share-based payments granted prior to, but notyet vested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS No. 123, and (b)compensation cost for all share-based payments granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123R.  The Company did not grant any stock options in thethree months ended March 31, 2007.  TheCompany recognized $0.5 million and $0.7 million in stock-based compensationrelating to stock options for the three months ended March 31, 2007 and March31, 2006, respectively.

In2005, 2006 and through March 31, 2007, the Company issued restricted stock andrestricted units to executives and employees. The following table summarizesrestricted stock and restricted units outstanding at March  31, 2007 and changes during the three monthsended (shares in thousands):

|                                        | ** ** | **Number of**  | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                             | ** ** | **Shares**          | ** ** | **Average**  | ** ** |
| ** **                             | ** ** | **Subject to** | ** ** | **Share**    | ** ** |
| ** **                             | ** ** | **Issuance**        | ** ** | **Price**    | ** ** |
| Outstanding at  December 31, 2006 |       | 1,083               |       | $            | 18.16      |   |
| Granted                                |       | 46                  |       | 24.33        |       |
| Cancelled                              |       | (7                  | )          | 15.79        |       |
| Issued                                 |       | (80                 | )          | 15.97        |       |
| Outstanding at March  31, 2007         |       | 1,042               |       | $            | 18.32      |   |

The restrictions on therestricted stock and restricted units lapse according to one of twoschedules.  Under one schedule, therestrictions will lapse when specific key performance objectives have beenreached or 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 March 31, 2007 andMarch 31, 2006, the Company recognized $1.5 million and $0.7 million,respectively, in deferred compensation expense related to the restrictedshares.

The Company’s ESOPprovides benefits to substantially all employees.  The annual contribution, if any, to the ESOPis at the discretion of the Board of Directors of the Company.  The Company distributed 45,081 shares and200,000

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shares to the ESOP in the three months ended March 31,2007 and March 31, 2006, respectively. In the three months ended March 31, 2007 and March 31, 2006, the Companyrecognized $1.0 million and $0.6 million, respectively, in compensation expensefor the ESOP.

**4.             MarketableSecurities**

The Company classifies itsexisting marketable securities as available-for-sale. All available-for-salesecurities are classified as current as the Company has the ability to use themfor current operating and investing purposes. There were no realized losses orgains from marketable securities in the three months ended March 31, 2007or March 31, 2006. At March 31, 2007, the Company had total net unrealizedlosses from marketable securities of $0.6 million.  At December 31, 2006, the Company had netunrealized losses from marketable securities of $0.9 million.

The carrying amount of available-for-salesecurities and their approximate fair values at March 31, 2007 were asfollows (in thousands):
| ** **                                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| U.S. Government  and Federal agency obligations |       | $                   | 40,438     |                         | $          | —                        |       | $               | (431       | ) | $ | 40,007 |   |
| Corporate bonds                                 |       | 87,286              |       | 4                            |       | (190                          | )          | 87,100          |       |
| Total                                           |       | $                   | 127,724    |                         | $          | 4                             |       | $               | (621       | ) | $ | 127,107 |   |

 

The following table presents theage of gross unrealized losses and fair value by investment category for allsecurities in a loss position as of March 31, 2007 (in thousands):
| ** **                                      | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**       | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**               | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Government  and Federal agency obligations |       | $                                      | 24,616     |                                 | $          | (117            | )          | $ | 15,390 |   | $ | (314 | ) | $ | 40,006 |   | $ | (431 | ) |
| Corporate bonds                                 |       | 43,917                                 |       | (80                                  | )          | 6,118           |       | (110 | ) | 50,035 |   | (190 | ) |
| Total                                           |       | $                                      | 68,533     |                                 | $          | (197            | )          | $ | 21,508 |   | $ | (424 | ) | $ | 90,041 |   | $ | (621 | ) |

 

The Company has determined thatits unrealized losses are temporary based on the minor amount of the lossescompared to amortized cost and the short duration of the losses, as well as thecredit worthiness of the investees. The Company expects that all losses will berecovered, and intends to hold securities to recovery. If market, industryand/or investee conditions deteriorate, we may incur future impairments.

The amortized cost and estimatedfair value of marketable securities at March 31, 2007 by contractualmaturity are shown below (in thousands):
| ** **                                | ** ** | **Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-------------------------------------------|------------|----------|------------|--------------------------------|------------|
| Due in one year  or less                  |       | $        | 100,875    |                           | $          | 100,707 |   |
| Due after one  year through three years   |       | 22,229   |       | 21,837                         |       |
| Due after three  years through five years |       | 3,826    |       | 3,776                          |       |
| Due after five  years                     |       | 794      |       | 787                            |       |
|                                      |       | $        | 127,724    |                           | $          | 127,107 |   |

 

The carryingamount of available-for-sale securities and their approximate fair values atDecember 31, 2006 were as follows (in thousands):
| ** **                                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| U.S. Government  and Federal agency obligations |       | $                   | 52,437     |                         | $          | —                        |       | $               | (663       | ) | $ | 51,774 |   |
| Corporate bonds                                 |       | 69,685              |       | 2                            |       | (271                          | )          | 69,416          |       |
| Total                                           |       | $                   | 122,122    |                         | $          | 2                             |       | $               | (934       | ) | $ | 121,190 |   |

 

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**5.             Inventories**

Inventories consist of purchasedpharmaceutical products and are stated at the lower of cost or market. Cost isdetermined using the first-in, first-out method, and market is considered to benet realizable value. Inventories consist of finished product and bulk productawaiting processing and packaging into finished product. Inventories, net ofreserves of $0.3 million and $0.3 million at March 31, 2007 andDecember 31, 2006, respectively, consisted of (in thousands):
| ** **        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
| Bulk product      |       | $                        | 8,508      |                        | $          | 8,559 |   |
| Finished product  |       | 13,769                   |       | 18,081                      |       |
| Total inventories |       | $                        | 22,277     |                        | $          | 26,640 |   |

 

**6.             IntangibleAssets**

Intangible assets which are notdeemed to have an indefinite life are amortized on a straight line basis overtheir respective useful lives.

The following table reflects thecomponents of intangible assets as of March 31, 2007 (in thousands):
| ** **                      | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Amount** | ** ** | **Expected Life** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|------------------------|------------|
| Licensing rights                |       | $                     | 368,742    |                          | $          | (84,920             | )          | $                      | 283,822    |   | 10 to 20 years |   |
| Trade names                     |       | 11,060                |       | (2,984                        | )          | 8,076               |       | 15 to 20 years         |       |
| Supply/Distribution  agreements |       | 10,350                |       | (5,245                        | )          | 5,105               |       | 10 years               |       |
| Other  intangibles              |       | 3,108                 |       | (877                          | )          | 2,231               |       | 20 years               |       |
| Total                           |       | $                     | 401,560    |                          | $          | (102,326            | )          | $                      | 299,234    |   |   |   |

 

The followingtable reflects 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 months endedMarch 31, 2007, amortization expense related to the intangible assets was$5.9 million. 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                                               |       | $          | 22,603     |   |
| 2008                                               |       | 22,352     |       |
| 2009                                               |       | 22,352     |       |
| 2010                                               |       | 22,352     |       |
| 2011                                               |       | 22,263     |       |
|                                                    |            |            |            |  |

 

**7.             OtherLong Term Assets**

Other long term assets atMarch 31, 2007 and December 31, 2006 consisted of the following (inthousands):

|                            | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Capitalized  finance costs |       | $                        | 6,461      |                        | $          | 6,634 |   |
| Deposits                   |       | 2,044                    |       | 29                          |       |
| Total other assets         |       | $                        | 8,505      |                        | $          | 6,663 |   |

 

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**8.             AccruedExpenses**

Accrued expenses atMarch 31, 2007 and December 31, 2006 consisted of the following (inthousands):

|                                     | ** ** | **March 31, 2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Employee  compensation and benefits |       | $                            | 3,393      |                        | $          | 3,706 |   |
| Product returns                     |       | 1,231                        |       | 1,568                       |       |
| Product rebates                     |       | 1,503                        |       | 1,763                       |       |
| Sales deductions                    |       | 2,997                        |       | 4,203                       |       |
| Accrued  royalties                  |       | 3,761                        |       | 4,960                       |       |
| Other                               |       | 1,591                        |       | 2,765                       |       |
| Total accrued expenses              |       | $                            | 14,476     |                        | $          | 18,965 |   |

 

**9.             Long-termDebt**

InMarch 2004, the Company issued a total of $150.0 million of its 1.75%senior subordinated contingent convertible notes due in 2024 (the “2004 Notes”)in transactions that were exempt from registration in reliance uponRule 144A and other available exemptions under the Securities Act. In May2006 and pursuant to a registered exchange offer, the Company exchanged eachoutstanding 2004 Note with new notes (the “New Notes”) that, among otherthings, require the Company to redeem the $150.0 million 2004 Notes with cashinstead of common stock. As an incentive to the 2004 Note holders to exchangethe 2004 Notes for New Notes, the Company paid each exchanging holder anexchange fee equal to 0.75% of the face value of each New Note exchanged.  The Company paid an aggregate exchange fee of$1,125,000. The New Notes are due March 8, 2024 and accrued interest ispayable semi-annually in arrears on March 8 and September 8 of eachyear, which commenced on September 8, 2004. In addition to the interest onthe New Notes, after March 8, 2007, the Company will also pay contingentinterest during specified six-month periods if the average trading price of theNew Notes per $1,000 principal amount for the five day trading period ending onthe third trading day immediately preceding the first day of the applicablesix-month period equals $1,200 or more. During any period when contingentinterest is payable, it will be payable at a rate equal to 0.5% per annum. Asthis contingent interest feature is based on the underlying trading price ofthe New Notes, the contingent interest qualifies as an embedded derivative. Asof March 31, 2007, management determined that the fair value of this contingentinterest embedded derivative was not material. The net proceeds from thisissuance, after deducting offering expenses, were approximately $145.4 million.Financing costs of $4.6 million were incurred with the original issuanceand $1,125,000 with the exchange, which are being amortized on a straight-linebasis over the life of the notes and are included in other assets in theconsolidated balance sheet.

Uponconversion, the Company will deliver, for each New Note, consideration (the “conversionvalue”) having a value equal to the product of the conversion rate (initially,approximately 45.1467, subject to adjustment) multiplied by the average of theclosing price of our common stock on the Nasdaq Global Select Market on each ofthe five consecutive trading days beginning on the third trading day followingthe conversion date of New Notes (the “applicable stock price”). Thisconsideration value will be paid in cash (the “required cash amount”) in anamount equal to the lesser of (a) the aggregate principal amount of NewNotes on the conversion date or (b) the conversion value, and theremainder will be paid in shares of our common stock. The number of shares tobe delivered will equal (a)(i) the conversion value minus (ii) therequired cash amount, divided by (b) the applicable stock price. Holdersmay convert the New Notes only under the following circumstances:(1) during any calendar quarter, if the closing sales price of the Company’scommon stock exceeds 120% of the conversion price for at least 20 trading daysin the 30 consecutive trading days ending on the last trading day of thepreceding calendar quarter; (2) if the New Notes have been called forredemption; (3) during the five trading day period immediately followingany nine consecutive trading day period in which the trading price of the NewNotes per $1,000 principal amount for each day of that period was less than 95%of the product of the closing price of the Company’s common stock and thenumber of shares of common stock issuable upon conversion of $1,000 principalamount of the New Notes; or (4) the occurrence of specified corporatetransactions.

Aholder that surrenders New Notes for conversion in connection with certainfundamental changes that occurred prior to March 13, 2007 may beentitled to an increase in the conversion rate. However, in lieu of increasingthe conversion rate applicable to those New Notes, the Company may incertain circumstances elect to change its conversion obligation so that, inlieu of delivering cash, and, if applicable, shares of our common stock inrespect of such conversion obligation, the

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Company willdeliver shares of the acquiring company’s common stock. In addition to theevents which would constitute a change of control (as defined in the indenturerelating to the New Notes), a fundamental change will also include theoccurrence of any transaction or event or any series of transactions orevents in connection with which all or substantially all of our common stock isexchanged for, converted into, acquired for or constitutes solely the right toreceive stock, other securities, other property, assets or cash, unless either:

(a)   thepersons that “beneficially owned,” the shares of our voting stock immediatelyprior to such transaction, “beneficially own,” shares of the surviving or continuingcorporation’s voting stock representing at least a majority of the total votingpower of all outstanding classes of voting stock of such corporation or

(b)   both of the followingconditions are satisfied:

(i)                                     at least 90% ofthe consideration (other than cash payments for fractional shares or pursuantto statutory appraisal rights) in such transaction consists of common stock,ordinary shares or American Depository Shares, and any associated rights,traded on a U.S. national securities exchange or quoted on the Nasdaq NationalMarket (or that will be so traded or quoted when issued or exchanged inconnection with such transaction) and

(ii)                                  as a result ofsuch transaction, the consideration due upon conversion of New Notes shall bepayable solely in shares of such securities, and any associated rights and cashfor fractional shares.

TheCompany has the option, which began March 13, 2007, to redeem the New Notes ata price equal to 100% of their aggregate principal amount, plus accrued andunpaid interest, including contingent interest, if any.

Theholders of the New Notes have the option to require the Company to repurchasethe New Notes on March 8 of 2009, 2014 and 2019, and upon a change incontrol, at a price equal to 100% of their aggregate principal amount, plusaccrued and unpaid interest, including contingent interest, if any.

The Company had no debt(including under its credit facility) other than the aforementioned notesoutstanding at March 31, 2007 or December 31, 2006.

**10.          CreditAgreement**

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 swingline 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.

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

**11.          ShareBuyback Program**

The Company adopted a new 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 replacesall prior share repurchase plans and will expire 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. These shares have beenretired.  As of March 31, 2007, $21.7million is available for repurchases under the program.

9

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| ** **                            | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                        | ** ** | **Approximate Dollar**        | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Total**          | ** ** | ** **         | ** ** | **Total Number of**     | ** ** | **Value of Shares**      | ** ** |
| ** **                            | ** ** | **Number of** | ** ** | **Average**        | ** ** | **Shares Purchased as** | ** ** | **that May Yet Be** | ** ** |
| ** **                            | ** ** | **Shares**         | ** ** | **Price**          | ** ** | **Part of Publicly**    | ** ** | **Purchased Under**           | ** ** |
| **Fiscal Period**                | ** ** | **Purchased**      | ** ** | **Per Share** | ** ** | **Announced Plans**          | ** ** | **the Plans**                 | ** ** |
|                                  |       |               |       |               |       |                              |       |                               |       |
| January 1 through  January 31, 2007   |       | 17,623             |       | $                  | 23.90      |                              | 17,623     |                               | $          | 22,697,773 |   |
| February 1 through  February 28, 2007 |       | 812                |       | $                  | 23.89      |                              | 812        |                               | $          | 21,678,374 |   |
| March 1 through March  31, 2007       |       | 387                |       | $                  | 22.53      |                              | 387        |                               | $          | 21,669,654 |   |
| Total                                 |       | 18,822             |       | $                  | 23.87      |                              | 18,822     |                               |       |   |

 

**12.          IncomeTaxes**

The Company adopted FASB Interpretation 48, *Accountingfor Uncertainty in Income Taxes*(“FIN 48”), on January 1, 2007.  As a result of the implementation, theCompany recognized an increase of approximately $209,000 to reserves for uncertaintax positions.  This increase in reserveswas accounted for as an adjustment to the beginning balance of retainedearnings on the Balance Sheet.  Includingthe cumulative effect increase, on January 1, 2007, the Company hadapproximately $684,000 of total gross unrecognized tax benefits, which includesinterest of approximately $140,000.  Ofthis total, approximately $445,000 (net of the federal benefit on state issues)represents the amount of unrecognized tax benefits that, if recognized, wouldfavorably affect the effective income tax rate in any future periods.  The Company recognized interest and/orpenalties related to income tax matters in income tax expense.

The Company and its subsidiaries are subject to U.S. federal income taxas well as income 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.

During 2007, the statute of limitations in certain state and localjurisdictions will expire.  However, theCompany does not expect the statute to have a material impact on their taxreserves.

**13.          EarningsPer Share**

Below is the calculation of basicand diluted net income per share (in thousands except per share data):

|                                                                    | ** ** | **For the three months  ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Net income                                                         |       | $                                                                  | 12,998     |   | $ | 9,126 |   |
| Add: Interest  expense on contingent convertible debt (net of tax) |       | —                                                             |       | 490 |   |
| Adjusted net  income                                               |       | $                                                                  | 12,998     |   | $ | 9,616 |   |
| Weighted average  common shares outstanding-basic                  |       | 35,170                                                             |       | 35,054 |   |
| Dilutive effect of  stock options and restricted stock             |       | 764                                                                |       | 770 |   |
| Dilutive effect  of contingent convertible debt                    |       | 354                                                                |       | 6,772 |   |
| Weighted average  common shares outstanding-diluted                |       | 36,288                                                             |       | 42,596 |   |
| Basic net income  per share:                                       |       | $                                                                  | 0.37       |   | $ | 0.26 |   |
| Diluted net income per  share:                                     |       | $                                                                  | 0.36       |   | $ | 0.23 |   |

 

For the three months endedMarch 31, 2007 and March 31, 2006, there were 82,225 and 609,055 potentialcommon shares outstanding, respectively, that were excluded from the dilutednet income per share calculation because their effect would have beenanti-dilutive.

**14.****                               Segment Reporting**

The Company is engaged solely inthe business of marketing and selling prescription pharmaceutical products.Accordingly, the Company’s business is classified in a single reportablesegment, the sale and marketing of prescription

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products. Prescription products include a variety ofbranded pharmaceuticals for the treatment of cardiovascular, obstetrical andgynecological, and gastroenterological conditions and disorders.

The following presents revenues for prescription productsby area of treatment:

|                         | ** ** | **For The Three  Months Ended  March 31,** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| Cardiovascular/Diabetes |       | $                                                              | 56,701     |   | $ | 46,810 |   |
| Women’s Health     |       | 16,568                                                         |       | 13,742 |   |
| Non promoted            |       | 8,988                                                          |       | 5,901 |   |
| Net revenues            |       | $                                                              | 82,257     |   | $ | 66,453 |   |

 

**15.          Commitmentsand Contingencies**

The Company, certainformer and current officers and directors are defendants in a consolidatedsecurities lawsuit filed on August 22, 2002 in the United States DistrictCourt for the Northern District of Georgia. Plaintiffs in the class actionalleged in general terms that we violated Sections 11 and 12(a)(a) of theSecurities Act of 1933 and that we violated Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder. In an amended complaint, Plaintiffs claim that weissued a series of materially false and misleading statements to themarket in connection with our public offering on April 24, 2002 andthereafter relating to alleged “channel stuffing” activities. The amendedcompliant also alleged controlling person liability on behalf of certain of ourofficers under Section 15 of the Securities Act of 1933 andSection 20 of the Securities Exchange Act of 1934. Plaintiffs seek anunspecified amount of compensatory damages.

OnSeptember 29, 2004, the U.S. District Court for the Northern District ofGeorgia dismissed, without prejudice, the class action lawsuit. Althoughthe lawsuit was dismissed, the court granted the plaintiffs the right to refileprovided that the plaintiffs pay all of the defendant’s fees and costsassociated with filing the motion to dismiss the lawsuit. Plaintiffs did notfile a second amended complaint as permitted, but instead filed a motion askingthe District Court to reconsider its September 29, 2004 order and lift thecondition that they must pay defendants’ fees and costs before furtheramendment. On June 22, 2005, the District Court denied plaintiffs’ motionand gave them another opportunity to amend if they pay defendants’ fees andcosts. Once again, plaintiffs chose not to file a second amended complaint.Instead, plaintiffs filed an appeal to the United States Court of Appeals forthe 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” which did notsatisfy the pleading requirements under the federal rules.  The Court ofAppeals, 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, the plaintiffsrepled their complaint. No accrual is recorded in the Company’s financialstatements related to this case as the Company believes that its risk of lossis remote.

The Company shallcontinue to vigourously defend this action.

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.

**16.          Subsequent Event**

On April 25, 2007, the Company entered into amerger agreement to acquire Alliant Pharmaceuticals, Inc., a privately held pediatricspecialty pharmaceutical company headquartered in Alpharetta, Georgia.  The Company will pay $122 million in cash forAlliant, which includes approximately $12 million in indebtedness to be paid atclosing. The agreement also includes potential payments of up to $55 millionbased on meeting certain profit targets and product development targets forAlliant’s products.  The agreement wasunanimously approved by each company’s Board of Directors.  This transaction is subject to approval underthe Hart-Scott-Rodino Antitrust Improvements Act as well as other customaryclosing conditions. The transaction is expected to

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close during thesecond quarter of 2007.

Alliant’spediatric product portfolio under promotion includes: Orapred and Orapred ODTfor asthma; Allegra Oral Suspension for allergies; Methylin Oral Solution andMethylin Chewable Tablets for attention deficit hyperactivity disorder (ADHD);Lindane for head lice and scabies; and Rondec Syrup and Rondec DM Oral Dropsfor allergies, coughs and colds.

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

The following should be read withthe consolidated financial statements and related footnotes and Management’sDiscussion and Analysis of Results of Operations and Financial Conditionincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 (File No. 000-30123). The results discussed beloware not necessarily indicative of the results to be expected in any futureperiods. 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 on Cardiavascular/Diabetesand Women’s Health.  The Company’sCardiovascular/Diabetes products treat patients with high cholesterol,hypertension, high tryglycerides, 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. Headquartered in Atlanta, Georgia, and founded in 1992, Sciele Pharmaemploys approximately 800 people.  TheCompany’s success is based on placing the needs of patients first, improvinghealth and quality of life, and implementing its business platform — anEntrepreneurial Spririt, Innovation, Speed of Execution, Simplicity andTeamwork.  Our key promoted productsinclude:
| **Cardiology/Diabetes** | ** ** | **Women’s Health** |
|-------------------------|------------|-------------------------|
| Altoprev                |       | OptiNate                |
| Fortamet                |       | Ostiva                  |
| Nitrolingual            |       | Ponstel                 |
| Triglide                |       | Prenate Elite           |
| Sular                   |       | Zovirax                 |

 

Our current operatingplan focuses on maximizing the sales of our existing product portfolio. We alsoplan to accelerate growth by launching line extensions to our current productsand by acquiring or licensing approved products or late stage developmentproducts and other businesses. We plan to focus on products that complement ourCardiovascular/Diabetes and Women’s Health categories that will allow us toleverage our existing sales force infrastructure as well as additionaltherapeutic areas which compliment our existing sales structure.

We currently market andsell 16 products, 10 of which are actively promoted and accounted forapproximately 89% of our total sales for the three months ended March 31, 2007.We promote our products through our nationwide sales and marketing force,targeting high-prescribing primary care physicians, endocrinologists,cardiologists, obstetricians and gynecologists.

**Results ofOperations**

*Net Revenue.*  Netrevenue for the quarter ended March 31, 2007 increased $15.8 millionor 23.8% to $82.3 million, as compared to $66.5 million for the threemonths ended March 31, 2006. This increase was primarily the resultof increased revenues for promotional products of $12.7 million, resulting fromthe successful integration of Zovirax, the continued growth of Sular scriptswhich is attributed to the successful leveraging of our improved managed careposition by our sales force, as well as price increases.

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**Product Overview**
| ** **      | ** ** | **Change in total dispensed prescriptions for  the year ended March 31, 2007 compared  to the year ended March 31, 2006(a)** | ** ** | **Change in new dispensed prescriptions for  the year ended March 31, 2007 compared  to the year ended March 31, 2006(a)** | ** ** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Sular           |       | 14.0%                                                                                                                                                                                                             |       | 8.5%                                                                                                                                                                                                            |       |
| Fortamet        |       | 6.7%                                                                                                                                                                                                              |       | (9.0)%                                                                                                                                                                                                          |       |
| Altoprev        |       | (38.3)%                                                                                                                                                                                                           |       | (46.1)%                                                                                                                                                                                                         |       |
| Triglide(b)     |       | 88.5%                                                                                                                                                                                                             |       | 62.7%                                                                                                                                                                                                           |       |
| Nitrolingual(c) |       | (3.3)%                                                                                                                                                                                                            |       | (4.1)%                                                                                                                                                                                                          |       |
| Prenate Elite   |       | (12.0)%                                                                                                                                                                                                           |       | (5.2)%                                                                                                                                                                                                          |       |
| OptiNate(d)     |       | 8.0%                                                                                                                                                                                                              |       | 5.5%                                                                                                                                                                                                            |       |
| Ponstel         |       | (17.0)%                                                                                                                                                                                                           |       | (17.1)%                                                                                                                                                                                                         |       |
| Ostiva(e)       |       | N/A                                                                                                                                                                                                               |       | N/A                                                                                                                                                                                                             |       |
| Zovirax (f)     |       | N/A                                                                                                                                                                                                               |       | N/A                                                                                                                                                                                                             |       |

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*(a)**         *Source: IMS’s Next Generation PrescriptionServices data.

*(b)         *Triglidewas launched in July 2005.

*(c)          *We believe that IMS data does not captureprescriptions of Nitrolingual from some of the non-retail channels andprescription trends in the non-retail channel which may have a significantimpact on the reported change.

*(d)         *OptiNatewas launched in March 2005.

*(e)*           Ostiva was launched in September2006.

*(f)           *We acquired Zovirax marketing rights inDecember 2006 and launched our promotion in January 2007.

Net revenues from our Cardiovascular/Diabetesproducts (namely Sular, Fortamet, Altoprev, Triglide and Nitrolingual)increased $9.9 million, to $56.7 million for the three months ended March 31,2007, compared to $46.8 million for the three months ended March 31, 2006. The increase was primarily due to thecontinued growth of Sular and Triglide scripts, was attributed to thesuccessful leveraging of our improved managed care position by our sales force,and price increases implemented during 2006 and 2007.

Net revenues fromour promoted Women’s Health products (namely Prenate Elite, OptiNate, Ponstel,Ostiva and Zovirax) increased $2.8 million, to $16.6 million for the threemonths ended March 31, 2007, compared to $13.7 million for the three monthsended March 31, 2006, respectively. This increase is primarily related to the successful launch of our women’shealth sales force in the first quarter of 2006, continued growth of our marketshare for OptiNate, the launch of Ostiva and Zovirax in 2006, and priceincreases.

Net revenues from our non-promoted products increased $3.1 million, to $9.0 million for thethree months ended March 31, 2007 compared to $5.9 million for the three monthsended March 31, 2006. The higher other revenues were the result of largershipments of Furadantin as we experienced delays in product delivery due tomanufacturing issues, which were resolved in the first quarter.

                *Cost of Revenues.*  Cost of revenues for the three months endedMarch 31, 2007 were $11.1 million compared to $9.4 million forthe three months ended March 31, 2006. The increase in cost of revenues isdirectly related to the increase in units sold and a change in product mix forthe three months ended March 31, 2007 as compared to the three monthsended March 31, 2006.

                *Gross Margin.*  Gross margin for the three months endedMarch 31, 2007 was 86.6% compared to 85.9% for the three months endedMarch 31, 2006.  This increase ingrowth margin for the three months ended March 31, 2007 is the result of achange in product mix and price increases.

                *Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased $5.2 million, or 15.1%, to $39.7 million for the threemonths ended March 31, 2007, compared to $34.5 million for the threemonths ended March 31, 2006. The increase in selling, general andadministrative expenses is due primarily to selling expenses which included theZovirax launch, salesforce expansion, the national sales meeting and the increase in royalty andcommission expenses related to higher revenues. Also affecting selling, general and administrative expense was increasein stock compensation

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expense in the first three months of 2007 related tothe acceleration of vesting  forrestricted shares.  This acceleration isthe result of the achievement of defined goals by the Company.

*Depreciation and Amortization Expense.* Depreciation and amortization expense increased $0.2 million to$6.7 million for the three months ended March 31, 2007, compared to$6.5 million for the three months ended March 31, 2006.   Thisincrease is primarily related to the increase in amortizable intangible assetsrelated to the launch Ostiva and Zovirax, as well as the final $5.0 million inSular milestones incurred in the third quarter of 2006.

The Companybelieves there are no intangible asset impairments and there were no otherasset write-downs as of March 31, 2007.

*Research and Development Expense.*  Researchand development expense increased $3.1 million to $6.0 million for thethree months ended March 31, 2007, compared to $2.9 million for the threemonths ended March 31, 2006. Theseincreases were primarily related to greater activity in the development programfor lifecycle management initiatives for our products, which includes the newSular formulation and the glycopyrrolate formulation for chronic moderate tosevere drooling in pediatric patients, as well as management’s increasedemphasis on development.

*Interest Expense.*  Interestexpense was $0.9 million for the three months ended March 31, 2007,compared to $0.8 million for the three months ended March 31, 2006. The increase is due to the entry into the new$100 million secured credit facility in September 2006 discussed in note 2 tothe consolidated financial statements.

*Interest Income.*  Interestincome was $1.8 million for the three months ended March 31, 2007,compared to $0.9 million for the three months ended March 31, 2006. The increase is primarily due to a higheraverage cash and marketable securities balance as a result of cash generationfrom sales and higher returns on current investments.

*Provision for Income Taxes.*  Incometaxes were provided for at a rate of 34.0% for the three months endedMarch 31, 2007, compared to 31.7% for the three months endedMarch 31, 2006. This increase in the effective tax rate is due to thechange in the mix of tax jurisdictions, both domestic and international, as aresult of our implementation of international operations where our income wasearned, as well as a change in the ratio of non-deductible expenses to pre-taxincome.

**Liquidity andCapital Resources**

Our liquidity requirements ariseprimarily from debt service, working capital requirements, product developmentactivities and funding of acquisitions. We have met these cash requirementsthrough cash from operations, borrowings for product acquisitions and theissuance of common stock.

Our cash and cash equivalentswere $48.2 million on March 31, 2007. Net cash provided by operatingactivities for the three months ended March 31, 2007 was$11.8 million. This increase of cash was primarily the result of netincome for the quarter of $13.0 million (adjusted for non-cash items ofdepreciation and amortization of $6.7 million, compensation expense of $3.1million, deferred income tax expense of $1.6 million and interest expense of$0.2 million), a decrease in inventory of $4.4 million, resultingprimarily from the sales of promoted products; a decrease in the income taxreceivable of  $3.9 million, resultingprimarily from increased pre-tax income and an increase in the effective taxrate; and an increase of accounts payable of $0.8 million, resulting primarilyfrom increased operations. These providers of cash were partially offset by anincrease of accounts receivable of $10.6 million, relating to increasednet revenues; an increase of other current assets and other assets of $7.3million and the decrease of accrued expenses and other long-term liabilities of$3.8 million.

Our cash and cash equivalentswere $27.8 million on March 31, 2006. Net cash provided by operatingactivities for the three months ended March 31, 2006 was$37.8 million. This increase of cash was primarily the result of netincome for the quarter of $9.1 million (adjusted for non-cash items ofdepreciation and amortization of $6.5 million, compensation expense of $2.0million, deferred income tax expense of $1.2 million and interest expense of$0.1 million), a decrease of accounts receivable of $22.4 million,resulting from the receipt of outstanding receivables from the prior year; adecrease in inventory of $1.5 million, resulting from the increase insales of promoted products; a decrease in the income tax receivable of  $0.4 million, resulting from theincrease in pre-tax income; and an increase of accounts payable of $0.3million, resulting from the increase in operations. These providers of cashwere partially offset by an increase of other current assets and other assetsof $4.0 million, resulting from an increase in product samples relating to theCompany’s new products, and the decrease of accrued expenses and otherlong-term liabilities of $1.7 million.

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We maintain supply agreementswith third party suppliers for most of our products. Some of these supplyagreements contain minimum purchase requirements. For most of these supplyagreements, we believe that our inventory requirements and related purchases ofinventory will exceed the minimum purchase requirement in 2007. In those casesin which we do not believe our purchases will exceed the minimum purchaserequirements, we are seeking to negotiate waivers or modifications of theminimum purchase requirements.

Net cash used in investingactivities for the three months ended March 31, 2007 was$9.3 million. The primary uses of cash the purchases of products andlicenses of $2.8 million, purchases of marketable securities of $80.4 millionand the purchases of property and equipment of $0.9 million. Partiallyoffsetting these uses of cash were the sales of marketable securities of $74.8million.

Net cash used in investingactivities for the three months ended March 31, 2006 was$30.0 million. The primary uses of cash were related to a Sular milestoneof $5.0 million, purchase of marketable securities of $37.5 millionand the purchases of property and equipment of $0.6 million. Partiallyoffsetting these uses of cash were the sales of marketable securities of $13.1 million.

Net cash provided by financingactivities was $0.7 million for the quarter ended March 31, 2007resulting from the issuance of common stock under our equity incentive plansfor $0.7 million and a reduction in taxes payable related to stock optionexercises of $0.4 million.  This providerof cash was partially offset by a repurchase of common stock amounting to $0.4million.

Net cash provided by financingactivities was $2.9 million for the quarter ended March 31, 2006primarily resulting from the issuance of common stock under our equityincentive plans of $2.1 million and the reduction in taxes payable related tostock option exercises of $0.8 million.

During the three months endedMarch 31, 2007, there were no borrowings or repayments under our$100 million senior secured credit facility.

We believe that our cash on hand, cash we expect togenerate from our operations and availability under our revolving creditfacility will be sufficient to fund these working capital requirements, atleast for the next twelve months. However, in the event that we makesignificant acquisitions, we may need to raise additional funds throughadditional borrowings or the issuance of debt or equity securities, or both.Some of our supply agreements contain minimum purchase requirements. We do notexpect that meeting those requirements will result in the acquisition ofexcessive inventory. We expect we will also experience growth in our accountsreceivable as our sales increase.

InMarch 2004, the Company issued a total of $150.0 million of its 1.75%senior subordinated contingent convertible notes due in 2024 (the “2004 Notes”)in transactions that were exempt from registration in reliance uponRule 144A and other available exemptions under the Securities Act. In May 2006and pursuant to a registered exchange offer, the Company exchanged eachoutstanding 2004 Note with new notes (the “New Notes”), all as more thoroughlydescribed in Note 9 to our financial statements.

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 swingline 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 Companyadopted a new share repurchase program effective August 3, 2005, thatauthorized the repurchase of up to $20.0 million of its outstanding shares ofcommon stock over the next twelve months with no periodic sub-limits on theamount of repurchases.  In the first quarterof 2005, the Company repurchased 127,169 shares of common stock at an averagecost of $16.44 per share, or $2.1 million. In the fourth quarter of 2005,the Company repurchased 300,000 shares of common stock at an average cost of$14.79 per share, or $4.4 million. In the second quarter of 2006, the Companyrepurchased 334,100 shares of common stock at an average cost of $20.71 pershare, or $6.9 million.  These shareshave been retired.  This plan expired onAugust 2, 2006.

The Company adopted a newshare repurchase program effective August 3, 2006, that authorized therepurchase of up to $30.0 million of its outstanding shares of common stockover the next twelve months with no periodic sub-limits on the amount ofrepurchases. This plan replaces all prior share repurchase plans and willexpire on August 2, 2007.  In thethird quarter of 2006, the Company repurchased 409,973 shares of common stockat an average cost of $19.19 per share, or $7.9 million.  In the first quarter of 2007, the Companyrepurchased 18,822 shares of common stock at an average cost of $23.87, or $0.4million.  These shares have been retired.

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**

Weview our critical accounting policies to be those policies which are veryimportant to the portrayal of our financial condition and results ofoperations, and require management’s most difficult, complex or subjectivejudgments. The circumstances that make these judgments difficult or complexrelate to the need for management to make estimates about the effect of mattersthat are inherently uncertain. We believe our critical accounting policies areas follows:

·              *Allowance for doubtful accounts.*   Weare required to estimate the level of accounts receivable recorded on ourbalance sheet which we assess will ultimately not be paid. Among other things,this assessment requires analysis of the financial strength of our customers,which can be highly subjective. Our policy is to estimate bad debt expensebased on prior experience supplemented by a periodic customer specific reviewwhen needed. If we over or under estimate the level of accounts receivable thatwill not be paid, there may be a material impact to our financial statements.

·              *Sales deductions.*   We provide volumerebates, contractual price reductions with drug wholesalers and insurancecompanies, and certain other sales related deductions on a regular basis. Theexact level of these deductions is not always immediately known and thus wemust record an estimate at the time of sale. Our estimates are based onhistorical experience with similar programs, and since we have a relativelysmall customer base, customer specific historical experience is often useful indetermining the estimated level of deductions expected to be refunded to ourcustomers when sales incentives are offered. If we over or under estimate thelevel of sales deductions, there may be a material impact to our financialstatements.

·              *Product returns.*   In thepharmaceutical industry, customers are normally granted the right to returnproduct for a refund if the product has not been used prior to its expirationdate, which is typically two to four years from the date of manufacture. Ourreturn policy allows product returns for products within an eighteen-monthwindow from six months prior to the expiration date and up to twelve monthsafter the expiration date. Our return policy conforms to industry standardpractices. We believe that we have sufficient data to accurately estimatefuture returns over the return time period at the time of sale. We are requiredto estimate the level of sales which will ultimately be returned pursuant toour return policy, and record a related reserve at the time of sale. Theseamounts are deducted from our gross sales to determine our net revenues. Ourestimates take into consideration historical returns of a given product,product specific information provided by our customers and information obtainedregarding the levels of inventory being held by our customers, as well asoverall purchasing patterns by our customers. Management periodically reviewsthe reserves established for returns and adjusts them based on actualexperience. If we over or under estimate the level of sales which willultimately be returned, there may be a material impact to our financialstatements.

·              *Liabilities assumed with the acquisition of productrights.*   In connection with the acquisition of product rights,we assume certain liabilities for returns of product shipped by the sellerprior to the acquisition date. At the acquisition date, we estimate the amountof the assumed liabilities based on actual sales return data from the

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                    sellerand include that amount in the allocation of the total purchase price. Wereview the estimated liability on an annual basis. If we over or under estimateliabilities assumed, there may be a material impact to our financialstatements.

·              *Intangible assets*.   When we acquirethe rights to manufacture and sell a product, we record the aggregate purchaseprice, along with the value of the product related liabilities that we assume,as intangible assets. We use the assistance of valuation experts to help usallocate the purchase price to the fair value of the various intangible assetsand related liabilities that we have acquired. Then, we must estimate theeconomic useful life of each of these intangible assets in order to amortizetheir cost as an expense in our statement of operations over the estimatedeconomic useful life of the related asset. The factors that drive the actualeconomic useful life of a pharmaceutical product are inherently uncertain, andinclude patent protection, physician loyalty and prescribing patterns,competition by products prescribed for similar indications, futureintroductions of competing products not yet FDA approved, the impact ofpromotional efforts and many other issues. We use all of these factors ininitially estimating the economic useful lives of our products, and we alsocontinuously monitor these factors for indications of appropriate revisions.

In assessing the recoverability of our intangibleassets, we must make assumptions regarding estimated future cash flows andother factors. If the estimated undiscounted future cash flows do not exceedthe carrying value of the intangible assets, we must determine the fair valueof the intangible assets. If the fair value of the intangible assets is lessthan its carrying value, an impairment loss will be recognized in an amountequal to the difference. We review intangible assets for impairment at leastannually and whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Such events orcircumstances may include but are not limited to, lack of promotionalsensitivity, the introduction of competitive products and changes in governmentregulations. If we determine that an intangible asset is impaired, a non-cashimpairment charge would be recognized. If we should incur an impairment loss,there may be a material impact to the financial statements.

·              *Income Taxes*.   Income taxes areprovided for under the liability method. This approach requires the recognitionof deferred tax assets and liabilities for the expected future tax consequencesof differences between the tax basis of assets or liabilities and their carryingamounts in the consolidated financial statements. A valuation allowance isprovided for deferred tax assets if it is more likely than not that these itemswill either expire before we are able to realize their benefit or if futuredeductibility is uncertain.

Developing the provision for income taxes requiressignificant judgment and expertise in international, federal and state incometax laws, regulations and strategies, including the determination of deferredtax assets and liabilities and, if necessary, any valuation allowances that maybe required for deferred tax assets. Our judgments and tax strategies aresubject to audit by various taxing authorities. While we believe we haveprovided adequately for our income tax liabilities in our consolidated financialstatements, adverse determinations by these taxing authorities could have amaterial adverse effect on our financial statements.

·              *Inventory obsolescence.*   Our productshave shelf lives ranging from 24 to 48 months. We must estimate the amountof inventory recorded on our balance sheet that will not be sold prior toexpiration. This estimate requires analysis of forecasted demand for ourproducts, our promotional focus, amounts of our products currently held by ourcustomers and the impact on our products of competing products. If we over orunder estimate the amount of inventory that will not be sold prior toexpiration, there may be a material impact to our financial statements.

**Forward LookingStatements**

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, and actual results and outcomes may differmaterially from results and outcomes discussed in the forward-lookingstatements.

Risksand uncertainties that could cause our forward-looking statements to fail tooccur include, but are not limited to, the following:

·              We may not attain expected revenues and earnings;

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·              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 our initialexpectations 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 our promoted productsmay be limited by slower growth for the class of drugs to which ourpromoted products belong and unfavorable clinical studies about suchclass of drugs;

·              We may encounter problems in the manufacture orsupply of our products, for which we depend entirely on third parties;

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

·              We may not be able to protect our competitiveposition for our promoted products from patent infringers;

·              Certain of our products have experienced manufacturingissues. If the issues recur and cannot be resolved, our ability to acquireproduct for sale and sampling will be adversely affected;

·              We may incur unexpected costs in integrating newproducts into our operations;

·              We may be unable to develop or market lineextensions for our products including Prenate, Sular, Triglide, Nitrolingual,Altoprev and Fortamet, or, even if developed, obtain patent protection for ourline extensions; further, introductions by us of line extensions of ourexisting products may require that we make unexpected changes in ourestimates for future product returns and reserves for obsolete inventory. Ifthese risks occur, our financial results could be adversely affected;

·              If we have difficulties acquiring new products orrights to market new products from third parties, our financial results couldbe adversely impacted;

·              Our licensor/supplier can terminate our rights tocommercialize Nitrolingual and the 60 dose size of this product has not yet metour expectation;

·              We depend on a small senior management group, thedeparture of any member of which would likely adversely affect our business ifa suitable replacement member could not be retained;

·              An adverse interpretation or ruling by one of thetaxing jurisdictions in which we operate could adversely impact our operatingresults;

·              A small number of customers accounts for a largeportion of our sales and the loss of one of them, or changes in theirpurchasing patterns, could result in substantially reduced sales, substantiallyand adversely impacting our financial results;

·              If third-party payors do not adequately reimburse patientsfor our products, doctors may not prescribe them;

·              Our business is subject to increasing government pricecontrols and other healthcare cost containment measures;

·              Side effects or marketing or manufacturing problemswith our products could result in product liability claims which could becostly to defend and could result in the withdrawal or recall of products fromthe market which would adversely effect our business;

·              We rely on operational data obtained from IMS, anindustry accepted data source. IMS data may not accurately reflect actualprescriptions (for instance, we believe IMS data does not capture all productprescriptions from some non-retail channels);

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·              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;

·              If we fail to obtain, or encounter difficulties inobtaining, regulatory approval for new products or new uses of existingproducts, or if our development agreements are terminated, we will haveexpended significant resources for no return;

·              Our business and products are highly regulated; theregulatory status of some of our products makes these products subject toincreased competition and other risks; and we run the risk that we, or thirdparties on whom we rely, could violate the governing regulations;

·              We may be found noncompliant with applicablefederal, state or international laws, rules or regulations which couldresult in fines and/or product recalls or otherwise cause us to expendsignificant resources to correct such non-compliance;

·              Our acquisition of Alliant Pharmaceuticals is subjectto certain pre-closing conditions. As such, there is no guaranty that thistransaction shall close and if it does not close we will not experience thebeneficial results of the acquisition which we expect to receive. If thetransaction does close, we cannot assure you that the Alliant products willmeet our sales expectations;

·              If generic competitors that compete with any of ourproducts are introduced, our revenues may be adversely affected; and

·              Some unforeseen difficulties may occur.

These risk factors are not exhaustive. We may not havecorrectly identified and appropriately assessed all factors affecting ourbusiness and the publicly available and other information with respect to thesematters may not be complete and correct. Additional risks and uncertainties notpresently known to us or that we currently believe to be immaterial also mayadversely impact us. Should any risks and uncertainties develop into actualevents, these developments could have material adverse effects on our business,financial condition, and results of operations. For these reasons, we cautionyou not to place undue reliance on our forward-looking statements.

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company is exposed to certainmarket risks that arise in the ordinary course of business. A discussion of theCompany’s primary market risk exposure is presented below.

**Foreign CurrencyExchange Risk**

Our purchases of Sular, Triglideand Nitrolingual are made in Euros. Although we did not enter into any forwardcontracts in the first quarter of 2007, we may eliminate risks from foreigncurrency fluctuations after the time of shipment of product by entering intoforward contracts for these purchases of inventory at the time of productshipments. The Company’s earnings and cash flows could be adverselyaffected in the future by the relationship of the U.S. dollar with foreigncurrencies.

**Market Risk onInvestments**

The fair value of our investmentportfolio would be negatively affected by an increase in interest rates. Sincethe majority of the Company’s investments are fixed rate interest-bearingsecurities and therefore subject to the risk of loss in market value from anincrease in rates or a change in the underlying risk of the issuers of thenotes, the Company’s future earnings and cash flows could be affected adverselyif the Company were to sell the securities prior to their maturity date. Therewere no realized losses from the sale of investments for the quarter endedMarch 31, 2007. At March 31, 2007, the Company had total netunrealized losses from marketable securities of $0.6 million.

**Market Risk onVariable Rate Debt**

Inconnection with borrowings incurred under the senior secured revolving creditfacility arranged by UBS Securities LLC, we could experience market risk withrespect to changes in the general level of the interest rates and its effectupon our interest expense. Borrowings under this facility bear interest atvariable rates. Because such rates are variable, an increase in interest rateswill result in additional interest expense and a reduction in interest rateswill result in reduced interest expense. Accordingly, our present exposure tointerest rate fluctuations is primarily dependent on rate changes thatmay occur while borrowings under this credit facility are outstanding. OnMarch 31, 2007 there was no debt outstanding under this facility.

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**Market Risk onFixed Rate Debt**

TheCompany’s long-term fixed interest rate senior subordinated contingentconvertible notes are also subject to market risk. Fixed rate debt outstandingat March 31, 2007 was $150.0 million with an interest rate of 1.75%. Allother things being equal, the fair market value of the Company’s fixed ratedebt will increase as rates decline and will decrease as rates rise. The fixedrate notes outstanding totaling $150.0 million at March 31, 2007 had afair value of $166.9 million based on quoted market rates.

**ITEM 4. CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controls and 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 March 31, 2007.

**Changes in Internal Control overFinancial Reporting**

There has been no change in ourprimary internal controls over financial reporting during the first fiscalquarter of 2007, that has materially affected, or is reasonably likely tomaterially affects our internal controls over financial reporting.

**PART II—OTHERINFORMATION**

**ITEM 1:LEGAL PROCEEDINGS**

The Company, certain former and current officers anddirectors are defendants in a consolidated securities lawsuit filed onAugust 22, 2002 in the United States District Court for the NorthernDistrict of Georgia. Plaintiffs in the class action alleged in generalterms that we violated Sections 11 and 12(a)(a) of the Securities Act of1933 and that we violated Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 and Rule 10b-5 promulgated thereunder. In an amendedcomplaint, Plaintiffs claim that we issued a series of materially falseand misleading statements to the market in connection with our public offeringon April 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.

On September 29, 2004, the U.S. District Courtfor the Northern District of Georgia dismissed, without prejudice, theclass action lawsuit. Although the lawsuit was dismissed, the courtgranted the plaintiffs the right to refile provided that the plaintiffs pay allof the defendant’s fees and costs associated with filing the motion to dismissthe lawsuit. Plaintiffs did not file a second amended complaint as permitted,but instead filed a motion asking the District Court to reconsider itsSeptember 29, 2004 order and lift the condition that they must paydefendants’ fees and costs before further amendment. On June 22, 2005, theDistrict Court denied plaintiffs’ motion and gave them another opportunity toamend if they pay defendants’ fees and costs. Once again, plaintiffs chose notto file a second amended complaint. Instead, plaintiffs filed an appeal to theUnited States Court of Appeals for the Eleventh Circuit.

On September 18, 2006, the Eleventh Circuit Court ofAppeals affirmed the District Court’s determination that the Amended Complaintwas a “shotgun pleading” which did not satisfy the pleading requirements underthe federal rules.  The Court of Appeals, however, disagreed with theremedy ordered by the District Court.  Instead of dismissing the AmendedComplaint with a right to further amend if Plaintiffs paid Defendants’fees and costs, the Court of Appeals held that the District Court should haveordered Plaintiffs to replead under Federal Rule of Civil Procedure12(e).  The Court of Appeals also held that Plaintiffs’ claimsunder the Securities Act of 1933 must meet the heightened pleadingstandards of Federal Rule of Civil Procedure 9(b) because those claimssound in fraud.  Accordingly, the Court of Appeals vacated the DistrictCourt’s orders and remanded with instructions to order a repleading. OnApril 20, 2007, the plaintiffs repled their complaint.

The Company shall continue to vigorously defend thisaction.  No accrual is recorded in theCompany’s financial statements related to this case as the Company believesthat its risk of loss is remote.

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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 OFEQUITY SECURITIES AND USE OF PROCEEDS**

The Company adopted a new 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 replacesall prior share repurchase plans and will expire 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. These shares have beenretired.  As of March 31, 2007, $21.7million is available for repurchases under the program.  
| ** **                            | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                        | ** ** | **Approximate Dollar**        | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Total**          | ** ** | ** **         | ** ** | **Total Number of**     | ** ** | **Value of Shares**      | ** ** |
| ** **                            | ** ** | **Number of** | ** ** | **Average**        | ** ** | **Shares Purchased as** | ** ** | **that May Yet Be** | ** ** |
| ** **                            | ** ** | **Shares**         | ** ** | **Price**          | ** ** | **Part of Publicly**    | ** ** | **Purchased Under**           | ** ** |
| **Fiscal Period**                | ** ** | **Purchased**      | ** ** | **Per Share** | ** ** | **Announced Plans**          | ** ** | **the Plans**                 | ** ** |
|                                  |       |               |       |               |       |                              |       |                               |       |
| January 1  through January 31, 2007   |       | 17,623             |       | $                  | 23.90      |                              | 17,623     |                               | $          | 22,697,773 |   |
| February 1  through February 28, 2007 |       | 812                |       | $                  | 23.89      |                              | 812        |                               | $          | 21,678,374 |   |
| March 1 through  March 31, 2007       |       | 387                |       | $                  | 22.53      |                              | 387        |                               | $          | 21,669,654 |   |
| Total                                 |       | 18,822             |       | $                  | 23.87      |                              | 18,822     |                               |       |   |

 

**ITEM 5: OTHER INFORMATION**

None.

**ITEM 6: EXHIBITS**
| 31.1  |   | Certifications of President and Chief Executive Officer 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 President and Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                  |
| 32.2  |   | Certification of Chief Financial Officer, Secretary and Treasurer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                       |

 

**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                       | ** ** |   | ** ** | **SCIELE  PHARMA, INC.**(Registrant)                                                      |
|-----------------------|------------|--------|------------|-------------------------------------------------------------------------------------------|
|                  |       |   |       |                                                                                      |
| Date: April 27,  2007 |       | By:    |       | /s/ PATRICK P. FOURTEAU                                                                   |
|                  |       |   |       | Patrick P. Fourteau*President and Chief Executive Officer  (principal executive officer)* |
|                  |       |   | * *   | * *                                                                                  |
| Date: April 27,  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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