**Tableof Contents**

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 10-Q**

** **

**[MARK ONE]**

 

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

** **

**For the quarterly period ended June 30, 2008**

** **

**OR**

** **

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

** **

**For the transition periodfrom                   to**

 

**Commission File No. 000-30123**

 

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**SCIELE PHARMA, INC.**

(Exact name of registrant as specified in its charter)

 

| **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 area code):

 

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Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x    No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer  x                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

As of July 28,2008, there were 31,640,148 shares of the Registrant’s Common Stockoutstanding.

 

 

 

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**SCIELE PHARMA, INC. AND SUBISIDIARIES**

**FORM 10-Q**

**INDEX**

 
| PART I.  | FINANCIAL INFORMATION                                                                                  | 1      |
|---------------|--------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                   |   |
| Item 1.       | Consolidated Balance Sheets at  June 30, 2008 and December 31, 2007                          | 1      |
|          |                                                                                                   |   |
|          | Consolidated  Statements of Operations for the three and six months ended June 30,  2008 and 2007 | 2      |
|          |                                                                                                   |   |
|          | Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007            | 3      |
|          |                                                                                                   |   |
|          | Notes  to Consolidated Financial Statements                                                            | 4      |
|          |                                                                                                   |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            | 14     |
|          |                                                                                                   |   |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                            | 21     |
|          |                                                                                                   |   |
| Item 4.       | Controls and  Procedures                                                                               | 22     |
|          |                                                                                                   |   |
| PART II. | OTHER INFORMATION                                                                                      | 22     |
|          |                                                                                                   |   |
| Item 1.       | Legal Proceedings                                                                                      | 22     |
|          |                                                                                                   |   |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                           | 23     |
|          |                                                                                                   |   |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                   | 23     |
|          |                                                                                                   |   |
| Item 6.  | Exhibits                                                                                               | 23     |

 

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**PART 1 - FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**SCIELE PHARMA, INC. AND SUBISIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share and pershare data)**

** **
| ** **                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                         |       |              |       |                  |       |
| Current assets:                                                                                                                                                    |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                         |       | $                 | 88,675     |                  | $          | 154,628 |   |
| Marketable  securities                                                                                                                                             |       | 12,910            |       | 33,660                |       |
| Accounts  receivable, net of allowances of $2,956 and $2,582 at June 30, 2008 and  December 31, 2007, respectively                                       |       | 98,046            |       | 71,709                |       |
| Inventories                                                                                                                                                        |       | 29,019            |       | 26,270                |       |
| Income taxes  receivable                                                                                                                                           |       | 5,959             |       | 13,608                |       |
| Deferred taxes                                                                                                                                                     |       | 8,282             |       | 4,121                 |       |
| Other                                                                                                                                                              |       | 39,403            |       | 42,652                |       |
| Total current  assets                                                                                                                                              |       | 282,294           |       | 346,648               |       |
| Property and  equipment, net                                                                                                                                       |       | 36,202            |       | 29,676                |       |
| Other assets:                                                                                                                                                      |       |              |       |                  |       |
| Intangibles, net                                                                                                                                                   |       | 372,701           |       | 345,556               |       |
| Goodwill                                                                                                                                                           |       | 78,213            |       | 70,809                |       |
| Deferred taxes                                                                                                                                                     |       | —            |       | 4                     |       |
| Other                                                                                                                                                              |       | 16,588            |       | 23,975                |       |
| Total other  assets                                                                                                                                                |       | 467,502           |       | 440,344               |       |
| Total assets                                                                                                                                                       |       | $                 | 785,998    |                  | $          | 816,668 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                     |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                              |       |              |       |                  |       |
| Accounts payable                                                                                                                                                   |       | $                 | 32,398     |                  | $          | 34,031 |   |
| Accrued expenses                                                                                                                                                   |       | 39,464            |       | 26,490                |       |
| Total current  liabilities                                                                                                                                         |       | 71,862            |       | 60,521                |       |
| Long-term  liabilities:                                                                                                                                            |       |              |       |                  |       |
| Convertible debt                                                                                                                                                   |       | 325,000           |       | 325,000               |       |
| Deferred taxes                                                                                                                                                     |       | 10,010            |       | 4,408                 |       |
| Other                                                                                                                                                              |       | 1,614             |       | 1,742                 |       |
| Total  liabilities                                                                                                                                                 |       | 408,486           |       | 391,671               |       |
| Stockholders’  equity:                                                                                                                                        |       |              |       |                  |       |
| Preferred stock,  no shares authorized or outstanding at June 30, 2008; 1,000,000 shares  authorized and none outstanding at December 31, 2007 (Note 12) |       | —            |       | —                |       |
| Common stock,  $0.001 par value, 100,000,000 shares authorized; 32,357,924 and 36,032,299  issued at June 30, 2008 and December 31, 2007, respectively   |       | 32                |       | 36                    |       |
| Additional  paid-in capital                                                                                                                                        |       | 197,328           |       | 272,334               |       |
| Retained  earnings (Note 12)                                                                                                                                       |       | 196,482           |       | 172,966               |       |
| Accumulated  other comprehensive income (loss)                                                                                                                     |       | 415               |       | (2,832                | )          |
| Less: Treasury  stock at cost, common stock, 722,089 and 754,919 shares at June 30, 2008  and December 31, 2007, respectively                            |       | (16,745           | )          | (17,507               | )          |
| Total  stockholders’ equity                                                                                                                                   |       | 377,512           |       | 424,997               |       |
| Total  liabilities and stockholders’ equity                                                                                                                   |       | $                 | 785,998    |                  | $          | 816,668 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SCIELE PHARMA, INC. AND SUBISIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited, in thousands, except pershare data)**

** **
| ** **                                                                                   | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                                                                                   | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                                                                                 |       | $                                                  | 103,238    |                                             | $          | 95,351 |   | $ | 203,036 |   | $ | 177,481 |   |
| Operating costs  and expenses:                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Cost of revenues                                                                             |       | 14,882                                             |       | 12,791                                           |       | 25,189 |   | 23,829 |   |
| Selling, general  and administrative                                                         |       | 57,203                                             |       | 48,503                                           |       | 110,509 |   | 88,190 |   |
| Depreciation and  amortization                                                               |       | 8,853                                              |       | 6,352                                            |       | 16,884 |   | 13,023 |   |
| Research and  development                                                                    |       | 8,848                                              |       | 8,063                                            |       | 17,628 |   | 14,044 |   |
| Total operating  costs and expenses                                                          |       | 89,786                                             |       | 75,709                                           |       | 170,210 |   | 139,086 |   |
| Operating income                                                                             |       | 13,452                                             |       | 19,642                                           |       | 32,826 |   | 38,395 |   |
| Other expense,  net:                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Interest expense                                                                             |       | (2,871                                             | )          | (1,926                                           | )          | (5,736 | ) | (2,859 | ) |
| Interest income                                                                              |       | 765                                                |       | 3,400                                            |       | 2,436 |   | 5,160 |   |
| Loss on  extinguishment of debt                                                              |       | —                                             |       | (5,256                                           | )          | — |   | (5,256 | ) |
| Loss on equity  investment                                                                   |       | (245                                               | )          | —                                           |       | (662 | ) | — |   |
| Impairment on  equity investment                                                             |       | —                                             |       | —                                           |       | (1,199 | ) | — |   |
| Total other  expense, net                                                                    |       | (2,351                                             | )          | (3,782                                           | )          | (5,161 | ) | (2,955 | ) |
| Income before  provision for income taxes and discontinued operations                        |       | 11,101                                             |       | 15,860                                           |       | 27,665 |   | 35,440 |   |
| Provision for  income taxes                                                                  |       | 3,094                                              |       | 5,392                                            |       | 8,465 |   | 12,043 |   |
| Income from  continuing operations                                                           |       | 8,007                                              |       | 10,468                                           |       | 19,200 |   | 23,397 |   |
| Discontinued  operations:                                                                    |       |                                               |       |                                             |       |   |   |   |   |
| Income from  discontinued operations, net of taxes of $158, $88, $330 and $123,  repectively |       | 411                                                |       | 170                                              |       | 764 |   | 239 |   |
| Gain on disposal  of discontinued operations, net of taxes of $1,381                         |       | 3,587                                              |       | —                                           |       | 3,587 |   | — |   |
| Income from  discontinued operations                                                         |       | 3,998                                              |       | 170                                              |       | 4,351 |   | 239 |   |
| Net income                                                                                   |       | $                                                  | 12,005     |                                             | $          | 10,638 |   | $ | 23,551 |   | $ | 23,636 |   |
| Other  comprehensive (loss) income                                                           |       | (133                                               | )          | (628                                             | )          | 3,247 |   | (645 | ) |
| Comprehensive  income                                                                        |       | $                                                  | 11,872     |                                             | $          | 10,010 |   | $ | 26,798 |   | $ | 22,991 |   |
|                                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Net income per  common share:                                                                |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| Income from  continuing operations                                                           |       | $                                                  | 0.24       |                                             | $          | 0.30 |   | $ | 0.56 |   | $ | 0.66 |   |
| Income from  discontinued operations                                                         |       | 0.12                                               |       | —                                           |       | 0.12 |   | 0.01 |   |
| Net income                                                                                   |       | $                                                  | 0.36       |                                             | $          | 0.30 |   | $ | 0.68 |   | $ | 0.67 |   |
|                                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Diluted                                                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Income from  continuing operations                                                           |       | $                                                  | 0.24       |                                             | $          | 0.29 |   | $ | 0.55 |   | $ | 0.64 |   |
| Income from  discontinued operations                                                         |       | 0.11                                               |       | —                                           |       | 0.12 |   | 0.01 |   |
| Net income                                                                                   |       | $                                                  | 0.35       |                                             | $          | 0.29 |   | $ | 0.67 |   | $ | 0.65 |   |
|                                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average  common shares outstanding:                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                                                        |       | 33,565                                             |       | 35,411                                           |       | 34,459 |   | 35,292 |   |
| Diluted                                                                                      |       | 33,944                                             |       | 36,761                                           |       | 34,915 |   | 36,557 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SCIELE PHARMA, INC. AND SUBISIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited, in thousands)**

** **
| ** **                                                                         | ** ** | **For The Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**                                | ** ** |
| ** **                                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                             |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 23,551     |   | $ | 23,636 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation  expense                                                              |       | 2,616                                            |       | 1,557 |   |
| Amortization  expense                                                              |       | 14,651                                           |       | 11,466 |   |
| Stock-based  compensation expense                                                  |       | 5,505                                            |       | 5,181 |   |
| Gain on disposal  of discontinued operations                                       |       | (4,968                                           | )          | — |   |
| Loss on disposal  of property and equipment                                        |       | 309                                              |       | — |   |
| Excess tax  benefit on stock-based awards                                          |       | (1,163                                           | )          | (352 | ) |
| Non-cash  interest expense                                                         |       | 1,113                                            |       | 379 |   |
| Deferred income  tax expense                                                       |       | 1,526                                            |       | (3,052 | ) |
| Loss on  extinguishment of debt                                                    |       | —                                           |       | 5,256 |   |
| Changes in  assets and liabilities, net of acquired assets and liabilities:        |       |                                             |       |   |   |
| Accounts  receivable                                                               |       | (25,131                                          | )          | (11,680 | ) |
| Inventories                                                                        |       | (358                                             | )          | 4,706 |   |
| Other current  assets and other assets                                             |       | 1,364                                            |       | (6,214 | ) |
| Income taxes  receivable                                                           |       | 7,572                                            |       | 2,644 |   |
| Accrued expenses  and other long-term liabilities                                  |       | 14,769                                           |       | (4,166 | ) |
| Accounts payable                                                                   |       | (2,218                                           | )          | 7,536 |   |
| Net cash  provided by operating activities                                         |       | 39,138                                           |       | 36,897 |   |
| Cash flows from  investing activities:                                             |       |                                             |       |   |   |
| Purchases of  property and equipment                                               |       | (5,385                                           | )          | (7,767 | ) |
| Purchases of  products and licenses                                                |       | (41,564                                          | )          | (818 | ) |
| Advanced payment  for product licenses                                             |       | —                                           |       | (9,114 | ) |
| Proceeds from discontinued  operations                                             |       | 1,500                                            |       | — |   |
| Acquisition of  business, net of cash acquired                                     |       | —                                           |       | (113,638 | ) |
| Proceeds from sale  of marketable securities                                       |       | 22,621                                           |       | 219,801 |   |
| Purchases of  marketable securities                                                |       | (1,985                                           | )          | (252,387 | ) |
| Net cash used in  investing activities                                             |       | (24,813                                          | )          | (163,923 | ) |
| Cash flows from  financing activities:                                             |       |                                             |       |   |   |
| Repurchases of  common stock                                                       |       | (85,000                                          | )          | (14,412 | ) |
| Debt financing  costs                                                              |       | —                                           |       | (9,173 | ) |
| Excess tax  benefit on stock-based awards                                          |       | 1,163                                            |       | 352 |   |
| Preferred stock  rights redemption                                                 |       | (35                                              | )          | — |   |
| Stock options  exercised                                                           |       | 3,300                                            |       | 2,083 |   |
| Proceeds from  issuance of long-term debt                                          |       | —                                           |       | 325,000 |   |
| Payments on  retirement of long-term debt                                          |       | —                                           |       | (150,000 | ) |
| Net cash (used  in) provided by financing activities                               |       | (80,572                                          | )          | 153,850 |   |
| Effect of  foreign exchange rates on cash                                          |       | 294                                              |       | (917 | ) |
| Net (decrease)  increase in cash and cash equivalents                              |       | (65,953                                          | )          | 25,907 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 154,628                                          |       | 45,261 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                | 88,675     |   | $ | 71,168 |   |
|                                                                               |       |                                             |       |   |   |
| Supplemental  cash flow information:                                               |       |                                             |       |   |   |
| Cash paid for  income taxes                                                        |       | $                                                | 1,069      |   | $ | 11,828 |   |
| Cash paid for  interest                                                            |       | $                                                | 4,266      |   | $ | 2,108 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SCIELE PHARMA, INC. AND SUBISIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**1.****                                     ****Basis of Presentation**

 

The accompanyingunaudited interim consolidated financial statements reflect all adjustments(consisting solely of normal recurring adjustments) which are, in the opinionof management necessary to a fair presentation of the financial position,results of operations and cash flows of Sciele Pharma, Inc. andsubsidiaries (the “Company”) for the interim periods. Certain footnotedisclosures normally included in financial statements prepared according toaccounting principles generally accepted in the United States of America havebeen condensed or omitted from these interim financial statements as permittedby the rules and regulations of the Securities and Exchange Commission.Interim results are not necessarily indicative of results for the full year.Management of the Company has made a number of estimates and assumptionsrelating to the reporting of assets and liabilities and the disclosure ofcontingent liabilities at the dates of the consolidated balance sheets andrevenues and expenses during the reporting periods to prepare theseconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. Actual results could differfrom those estimates. All significant inter-company accounts and transactionshave been eliminated in consolidation. 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 31,2007 (File No. 000-30123).

 

**2.****                                     ****New AccountingPronouncements**

 

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB StaffPosition (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, *Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities*. ThisFSP states that unvested share-based payment awards that contain nonforfeitablerights to dividends or dividend equivalents (whether paid or unpaid) areparticipating securities and shall be included in the computation of earningsper share pursuant to the two-class method. The FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those years. Upon adoption, a company is required to retrospectivelyadjust its earnings per share data (including any amounts related to interimperiods, summaries of earnings and selected financial data) to conform with theprovisions in this FSP. However, early application of the provisions in thisFSP is prohibited. The Companyhas determined that its current stock-based compensation plans do not have “participatingsecurities” as defined by the FSP. Accordingly, adoption of this FSP on January 1,2009 is not expected to have an impact on the Company’s financial statements.

 

In May 2008,the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1,*****Accountingfor Convertible Debt Instruments That May Be Settled in Cash uponConversion (Including Partial Cash Settlement)*. FSP APB Opinion No. 14-1clarifies that convertible debt instruments that may be settled in cash uponconversion (including partial cash settlement) are not addressed by paragraph12 of APB Opinion No. 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants*.Additionally, this FSP specifies that issuers of such instruments shouldseparately account for the liability and equity components in a manner thatwill reflect the entity’s nonconvertible debt borrowing rate when interest costis recognized in subsequent periods. This FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. Early adoption is not permitted. TheCompany is in the process of determining the impact FSP APB Opinion No. 14-1will have on its future financial statements.

 

In May 2008,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162,*The Hierarchy of Generally AcceptedAccounting Principles.* SFAS No. 162 is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with Generally Accepted Accounting Principleswithin the United States (“U.S. GAAP”) for nongovernmental entities. Thisstatement is effective 60 days following the Securities and ExchangesCommission’s approval of the Public Company Accounting Oversight Board (“PCAOB”)auditing amendments to AU Section 411, *TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples*. The Company does not believe this statement will have amaterial impact on its future financial statements.

 

In April 2008,the FASB issued FSP SFAS No. 142-3, *Determination of theUseful Life of Intangible Assets.*This FSP amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS No. 142,*Goodwill and Other Intangible Assets*.The intent of this FSP is to improve the consistency between the useful life ofa recognized intangible asset under SFAS No. 142 and the period ofexpected cash flows used to measure the fair value of the asset under SFAS No. 141(revised 2007), *Business Combinations,*and other U.S. GAAP. This FSP shall be effective for financial statementsissued for fiscal years beginning after December 15, 2008, and interimperiods within those fiscal years. Early adoption is prohibited. The Companyhas not determined the impact, FSP SFAS No. 142-2 will have on its futurefinancial statements.

 

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In March 2008,the FASB issued FSP No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities.* This FSPrequires disclosure of the fair values of derivative instruments and theirgains and losses in a tabular format, disclosure of derivative features thatare credit risk—related and cross-referencing within footnotes to enablefinancial statement users to locate important information about derivativeinstruments. This statement is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008. TheCompany has not determined the impact SFAS No. 161 will have on its futurefinancial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations.* This Statement establishes principlesand requirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree; recognizes and measures the goodwillacquired in the business combination or a gain from a bargain purchase; and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination. ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after December 15, 2008. The Company has not determined theimpact SFAS No. 141(R) will have on its future financial statements.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements.* This Statementestablishes accounting and reporting standards that require the ownershipinterests in subsidiaries’ non-parent owners be clearly presented in the equitysection of the balance sheet; requires the amount of consolidated net incomeattributable to the parent and to the noncontrolling interest be clearlyidentified and presented on the face of the consolidated statement of income;requires that changes in a parent’s ownership interest while the parent retainsits controlling financial interest in its subsidiary be accounted forconsistently; requires that when a subsidiary is deconsolidated, any retainednoncontrolling equity investment in the former subsidiary be initially measuredat fair value and the gain or loss on the deconsolidation of the subsidiary bemeasured using the fair value of any noncontrolling equity; and requires thatentities provide disclosures that clearly identify the interests of the parentand the interests of the noncontrolling owners. This Statement is effective asof the beginning of an entity’s first fiscal year that begins after December 15,2008. The Company has not determined the impact SFAS No. 160 will have onits future financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue for Financial Assets and Financial Liabilities*. This Statementpermits entities to choose to measure financial assets and liabilities, withcertain exceptions, at fair value at specified election dates. A businessentity shall report unrealized gains and losses on items for which the fairvalue option has been elected in earnings at each subsequent reporting date.This Statement is effective as of the beginning of an entity’s first fiscalyear that begins after November 15, 2007. The adoption of SFAS No. 159did not have an impact on the Company’s financial statements.

 

In September,2006, the FASB issued SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans*.This Statement requires an employer to recognize the over funded or underfunded status of a defined benefit postretirement plan (other than amultiemployer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in which thechanges occur through comprehensive income. This statement also requires anemployer to measure the funded status of a plan as of the date of its year-endstatement of financial position, with limited exceptions. An employer withpublicly traded equity securities is required to initially recognize the fundedstatus of a defined benefit postretirement plan and to provide the requireddisclosures as of the end of the fiscal year ending after December 15,2006. The requirement to measure plan assets and benefit obligations as of thedate of the employer’s fiscal year-end statement of financial position iseffective for fiscal years ending after December 15, 2008. The adoption ofSFAS No. 158 did not have an impact on the Company’s financial statements.

 

On September 15,2006 the FASB issued SFAS No. 157, *Fair Value Measurements*.This Statement provides guidance for using fair value to measure assets andliabilities. This Statement references fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants in the market in which the reportingentity transacts. This Statement applies whenever other standards require (orpermit) assets or liabilities to be measured at fair value. This Statement doesnot expand the use of fair value in any new circumstances. It is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years, with an additional oneyear deferral for most non-financial assets and liabilities.

 

Effective January 1,2008, the Company determines the fair market values of its financialinstruments based on the fair value hierarchy established in SFAS No. 157,which requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value asfollows:

 

Level 1. Quoted prices in active markets foridentical assets or liabilities. Level 1 assets and liabilities include debtand equity securities and derivative contracts that are traded in an activeexchange market, as well as certain U.S. Treasury securities that are highlyliquid and are actively traded in over-the-counter markets.

 

Level 2. Observable inputs other than Level 1prices, such as quoted prices for similar assets or liabilities; quoted pricesin markets that are not active; or other inputs that are observable or can becorroborated by observable market data for substantially the full term of theassets or liabilities. Level 2 assets and liabilities include debt securitieswith quoted prices that are traded less frequently than exchange-tradedinstruments and derivative contracts whose value is determined using a pricingmodel with inputs that 

 

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are observable in themarket or can be derived principally from or corroborated by observable marketdata. This category generally includes U.S. Government and agencymortgage-backed debt securities, corporate debt securities, derivativecontracts and residential mortgage and loans held-for-sale.

 

Level 3. Unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities. Level 3 assets and liabilities include financialinstruments whose value is determined using pricing models, discounted cashflow methodologies, or similar techniques, as well as instruments for which thedetermination of fair value requires significant management judgment orestimation. This category generally includes certain private equityinvestments, retained residual interests in securitizations, residential mortgage-servicingrights (MSR’s), asset-backed securities (ABS), highly structured or long-termderivative contracts and certain collateralized debt obligations (CDO) whereindependent pricing information was not able to be obtained for a significantportion of the underlying assets.

 

As of June 30,2008, the Company’s marketablesecurities described in Note 4 are Level 1 assets as defined by SFAS No. 157.

 

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

 

Effective January 1,2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) (“SFAS123R”), “*Share-Based Payment*”, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the six months ended June 30, 2008 and2007 includes: (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123,and (b) compensation cost for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123R. Stock-based compensation isincluded in selling, general, and administrative expense and research anddevelopment expense as follows (in thousands):

 
| ** **                           | ** ** | **For the Six Months Ended June 30, 2008** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Restricted Stock**                                                     | ** ** | ** ** | ** ** | **Employee** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **and Restricted**                                                       | ** ** | **Stock** | ** ** | **Stock Ownership** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Stock Units**                                                          | ** ** | **Options** | ** ** | **Plan** | ** ** | **Total** | ** ** |
| Selling, general  and administrative |       | $                                                                             | 4,760      |   | $ | 365 |   | $ | 10 |   | $ | 5,135 |   |
| Research and  development            |       | 529                                                                           |       | 91 |   | — |   | 620 |   |
| Total  stock-based compensation      |       | $                                                                             | 5,289      |   | $ | 456 |   | $ | 10 |   | $ | 5,755 |   |

 
| ** **                           | ** ** | **For the Six Months Ended June 30, 2007** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Restricted Stock**                                                     | ** ** | ** ** | ** ** | **Employee** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **and Restricted**                                                       | ** ** | **Stock** | ** ** | **Stock Ownership** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Stock Units**                                                          | ** ** | **Options** | ** ** | **Plan** | ** ** | **Total** | ** ** |
| Selling, general  and administrative |       | $                                                                             | 2,778      |   | $ | 850 |   | $ | 979 |   | $ | 4,607 |   |
| Research and  development            |       | 309                                                                           |       | 213 |   | 52 |   | 574 |   |
| Total  stock-based compensation      |       | $                                                                             | 3,087      |   | $ | 1,063 |   | $ | 1,031 |   | $ | 5,181 |   |

 

AtJune 30, 2008, the Company had one stock-based compensation plan allowingfor the issuance of stock options, restricted stock and restricted stock units,and an employee stock ownership plan (“ESOP”). The following table summarizes restricted stock andrestricted stock units outstanding at June 30, 2008 and changes during thesix months ended (shares in thousands):

 
| ** **                             | ** ** | **Number of**  | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                             | ** ** | **Shares**          | ** ** | **Average**  | ** ** |
| ** **                             | ** ** | **Subject to** | ** ** | **Issue**    | ** ** |
| ** **                             | ** ** | **Issuance**        | ** ** | **Price**    | ** ** |
| Outstanding at  December 31, 2007 |       | 1,328               |       | $            | 20.60      |   |
| Granted                                |       | 222                 |       | 20.59        |       |
| Cancelled                              |       | (33                 | )          | 23.61        |       |
| Vested and  issued                     |       | (158                | )          | 19.04        |       |
| Outstanding at  June 30, 2008     |       | 1,359               |       | $            | 20.55      |   |

 

Vested and issuedrepresent the gross amount of restricted stock and restricted stock unitsvested in 2008. At issuance, the Company withholds the restricted stock unitsrequired to fulfill the tax obligation for the recipient. Accordingly, only thevested amount of restricted stock, net of taxes, are issued.

 

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The restrictions on therestricted stock and restricted stock units lapse according to one of twoschedules. Under one schedule, the restrictions will lapse on the earlier dateat which either specific key performance objectives have been reached or on thefifth anniversary date of the issuance. Under the second schedule, therestrictions will lapse 25% annually over four years for employees and annuallyon a pro rata basis over three or four years for directors. The fair value ofthe restricted stock and restricted stock units are expensed over the periodduring which the restrictions lapse.

 

The Company’s ESOPprovides benefits to substantially all employees. The contribution, if any, tothe ESOP is at the discretion of the Board of Directors of the Company. TheCompany distributed 32,830 shares and 45,081 shares to the ESOP in the sixmonths ended June 30, 2008 and June 30, 2007, respectively.

 

The following tablesummarizes options outstanding at June 30, 2008 and changes during the sixmonths ended (shares in thousands):

 
| ** **                             | ** ** | **Number of**  | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                             | ** ** | **Shares**          | ** ** | **Average**  | ** ** |
| ** **                             | ** ** | **Subject to** | ** ** | **Exercise** | ** ** |
| ** **                             | ** ** | **Issuance**        | ** ** | **Price**    | ** ** |
| Outstanding at  December 31, 2007 |       | 1,294               |       | $            | 16.35      |   |
| Granted                                |       | —              |       | —       |       |
| Cancelled                              |       | (64                 | )          | 22.38        |       |
| Exercised                              |       | (255                | )          | 12.95        |       |
| Outstanding at  June 30, 2008     |       | 975                 |       | $            | 19.31      |   |

 

**4.****                                     ****Marketable Securities**

 

The Companyclassifies its existing marketable securities as available-for-sale. Allavailable-for-sale securities are classified as current as the Company has theability to use them for current operating and investing purposes. There were norealized losses or gains from the sale of marketable securities in the sixmonths ended June 30, 2008 or June 30, 2007. The carrying amount of available-for-salesecurities and their approximate fair values are as follows (in thousands):

 
| ** **                  | ** ** | **As of June 30, 2008** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | ** **                                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| U.S. Government  bonds      |       | $                                           | 999        |   | $ | 5 |   | $ | — |   | $ | 1,004 |   |
| Federal agency  obligations |       | 3,502                                       |       | 4 |   | — |   | 3,506 |   |
| Corporate bonds             |       | 8,446                                       |       | 2 |   | (48 | ) | 8,400 |   |
| Total                       |       | $                                           | 12,947     |   | $ | 11 |   | $ | (48 | ) | $ | 12,910 |   |

 
| ** **                  | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | ** **                                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| U.S. Government  bonds      |       | $                                               | 14,677     |   | $ | 2 |   | $ | (51 | ) | $ | 14,628 |   |
| Federal agency  obligations |       | 4,354                                           |       | 1 |   | (15 | ) | 4,340 |   |
| Corporate bonds             |       | 14,779                                          |       | 2 |   | (89 | ) | 14,692 |   |
| Total                       |       | $                                               | 33,810     |   | $ | 5 |   | $ | (155 | ) | $ | 33,660 |   |

 

The age of grossunrealized losses and fair value by investment category for all securities in aloss position as of June 30, 2008 is as follows (in thousands):

 
| ** **      | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**  | ** ** |
|-----------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------|------------|
| ** **      | ** ** | ** **                             | ** ** | **Gross**                            | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **      | ** ** | **Fair**                               | ** ** | **Unrealized**                       | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **      | ** ** | **Value**                              | ** ** | **Losses**                           | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Corporate bonds |       | $                                      | 5,346      |                                 | $          | (15        | )          | $ | 2,769 |   | $ | (33 | ) | $ | 8,115 |   | $ | (48 | ) |
| Total           |       | $                                      | 5,346      |                                 | $          | (15        | )          | $ | 2,769 |   | $ | (33 | ) | $ | 8,115 |   | $ | (48 | ) |

 

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The Company hasdetermined that its unrealized losses are temporary based on the minor amountof the losses compared to amortized cost and the short duration of the losses,as well as the credit worthiness of the investees. The Company expects that alllosses will be recovered. If market, industry and/or investee conditionsdeteriorate, we may incur future impairments.

 

The amortized costand estimated fair value of marketable securities at June 30, 2008 bycontractual maturity are shown below (in thousands):

 
| ** **                              | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|---------------------|------------|
| Due in one year  or less                |       | $                       | 5,612      |                | $          | 5,613 |   |
| Due after one  year through three years |       | 7,335                   |       | 7,297               |       |
|                                    |       | $                       | 12,947     |                | $          | 12,910 |   |

 

**5.****                                     ****Inventories**

 

Inventoriesconsist of purchased pharmaceutical products and are stated at the lower ofcost or market. Cost is determined using the first-in, first-out method, andmarket is considered to be net realizable value. Inventories consist of finishedproduct and bulk product awaiting processing and packaging into finishedproduct. Inventories consisted of the following (in thousands):

 
| ** **                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Bulk product                    |       | $                 | 10,067     |                  | $          | 7,783 |   |
| Finished product                |       | 20,293            |       | 20,894                |       |
| Gross  inventories              |       | 30,360            |       | 28,677                |       |
| Inventory  obsolescence reserve |       | (1,341            | )          | (2,407                | )          |
| Net inventories                 |       | $                 | 29,019     |                  | $          | 26,270 |   |

 

**6.****                                     ****Property and Equipment**

 

Property and equipmentconsisted of the following (in thousands):

 
| ** **                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Office  equipment, furniture and fixtures |       | $                 | 3,782      |                  | $          | 3,451 |   |
| Computer  hardware and software           |       | 14,033            |       | 13,140                |       |
| Leasehold  improvements                   |       | 3,132             |       | 3,127                 |       |
| Production  equipment                     |       | 26,426            |       | —                |       |
| Construction in  progress                 |       | —            |       | 18,749                |       |
| Property and equipment,  gross            |       | 47,373            |       | 38,467                |       |
| Less:  accumulated depreciation           |       | (11,171           | )          | (8,791                | )          |
| Property and  equipment, net              |       | $                 | 36,202     |                  | $          | 29,676 |   |

 

In April 2008, theCompany transferred $23.8 million in costs from construction in progress toproduction equipment and placed the assets in service.  The assets related to a production line inLyon, France and a packaging line in Corby, United Kingdom, to produce andpackage the new version of Sular Geomatrix. These assets are being depreciated over their estimated useful lives.

 

Depreciation expense forthe six months ended June 30, 2008 totaled $2.6 million, of which $0.2million is included in cost of sales and $0.2 million was capitalized toinventory on hand at June 30 2008.

 

**7.****                                     ****Goodwill, ProductRights, and Other Intangibles**

 

In June 2007,the Company acquired Alliant Pharmaceuticals, Inc. (“Alliant”) in atransaction accounted for under SFAS No. 141, *Business Combinations*. Alliant was a specialtypharmaceutical company focused on acquiring, developing and commercializingproprietary products for the pediatric and pediatric specialty markets. TheCompany recorded $134.5 million in intangible assets and goodwill for theacquisition of Alliant, which included $114.6 million in purchase price, $1.2million in transaction costs and $18.7 million in assumed liabilities. As of June 30,2008 the Company had $78.2 million capitalized as goodwill related to theacquisition, an increase of $7.4 million compared to the December 31, 2007balance of $70.8 million. This increase was due to on going expendituresrelated to the acquisition, the outcome of a settlement contingency related toworking capital.

 

In January 2008, the Company obtained U.S. Food &Drug Administration (“FDA”) approval for four dosage strengths of a new Sularformulation, 8.5-milligram, 17-milligram, 25.5-milligram and 34-milligramdosages. The new Sular formulation, which

 

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utilizes SkyePharma’s patented GEOMATRIX technology, providesa lower dose of Sular for each of its current doses. The Company launched thenew Sular formulation during the first quarter of 2008. During the three monthsended March 31, 2008, a $2.0 million milestone payment was made inconjunction with obtaining approval from the FDA and capitalized to intangibleassets and is now being amortized over the remaining estimated useful life. Anadditional milestone payment of $9.2 million, resulting from the firstcommercial sale, was capitalized during the three months ended June 30,2008. It is also being amortized over the remaining estimated useful life.

 

In January, 2008, the Company launched Fosteum.Fosteum is a prescription medical food product for the dietary management ofthe metabolic processes of osteopenia and osteoporosis. The $5.0 millionintangible asset related to the acquired Fosteum licensing rights is beingamortized over the remaining estimated useful life.

 

In February, 2008, the Company launched Fenoglide inthe United States of America. Fenoglide, indicated for the treatment ofhyperlipidemia and hypertriglyceridemia, utilizes LifeCycle Pharma A/S’sMeltdose technology, which is designed to provide enhanced absorption andgreater bioavailability. The $9.0 million intangible asset recorded during 2007related to the licensing rights obtained is being amortized over the remainingestimated useful life.

 

In March 2008,the Company acquired from Verus Pharmaceuticals, Inc. (“Verus”) the Twinjectepinephrine auto-injector for the treatment of severe allergic reactions andanaphylaxis. Anaphylaxis is a sudden, severe, and potentially life-threateningallergic reaction triggered by exposure to one or more allergens, includingfoods, insect stings, drugs, and latex products. Under the agreement, Scieleacquired Twinject and certain other related Verus products under developmentfor $29.1 million. We may make additional payments to Verus upon theachievement of certain development milestones.

 

During the threemonths ended June 30, 2008, the Company had a valuation completed on theassets acquired in the Twinject purchase. As a result, the Company revaluedinventory at $2.0 million, having the effect of reducing intangible assets to$24.3 million from $25.2 million at March 31, 2008 and reducing propertyand equipment to $2.7 million. During the three months ended June 30, 2008, theCompany also increased other assets to $0.3 million and recognized accruedliabilities of $0.2 million.

 

In April 2008, theCompany launched NYDA pumpspray in Poland. NYDA pumpspray is a medical deviceused to treat head lice infestations and utilizes dimeticone as the mainingredient. A $1.3 million milestone payment related to the first commercial sale was capitalized during the threemonths ended June 30, 2008 and is being amortized over the estimated usefullife.

 

Intangible assets,which are not deemed to have an indefinite life, are amortized on a straightline basis over their respective useful lives. The following table reflects thecomponents of intangible assets (in thousands):

 
| ** **                      | ** ** | **As of June 30, 2008** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | ** **                                  | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Original Weighted** | ** ** |
| ** **                      | ** ** | **Gross Amount**                       | ** ** | **Amortization** | ** ** | **Net Amount** | ** ** | **Average Life** | ** ** |
| Licensing rights                |       | $                                           | 472,838    |   | $ | (115,637 | ) | $ | 357,201 |   | 17.2 years |   |
| Trade names                     |       | 11,960                                      |       | (3,872 | ) | 8,088 |   | 19.1 years |   |
| Supply/distribution  agreements |       | 11,678                                      |       | (6,543 | ) | 5,135 |   | 9.3 years |   |
| Other  intangibles              |       | 3,372                                       |       | (1,095 | ) | 2,277 |   | 19.4 years |   |
| Total                           |       | $                                           | 499,848    |   | $ | (127,147 | ) | $ | 372,701 |   |   |   |

 
| ** **                      | ** ** | **As of December 31, 2007** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                      | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Original Weighted** | ** ** |
| ** **                      | ** ** | **Gross Amount**                           | ** ** | **Amortization** | ** ** | **Net Amount** | ** ** | **Average Life** | ** ** |
| Licensing rights                |       | $                                               | 433,070    |   | $ | (102,432 | ) | $ | 330,638 |   | 17.5 years |   |
| Trade names                     |       | 11,960                                          |       | (3,539 | ) | 8,421 |   | 19.1 years |   |
| Supply/distribution  agreements |       | 10,350                                          |       | (6,021 | ) | 4,329 |   | 10.0 years |   |
| Other  intangibles              |       | 3,176                                           |       | (1,008 | ) | 2,168 |   | 19.7 years |   |
| Total                           |       | $                                               | 458,556    |   | $ | (113,000 | ) | $ | 345,556 |   |   |   |

 

Amortization iscalculated on a straight-line basis over the estimated useful life of theintangible asset. Estimated annual amortization expense for each of the fivesucceeding fiscal years is as follows (in thousands):

 
| **Fiscal year ended  December 31:** | ** ** | **Amount** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| 2008                                               |       | $          | 29,669     |   |
| 2009                                               |       | 30,594     |       |
| 2010                                               |       | 30,594     |       |
| 2011                                               |       | 30,594     |       |
| 2012                                               |       | 28,724     |       |
|                                                    |            |            |            |  |

 

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**8.****                                      OtherLong-Term Assets**

 

Other long-termassets consisted of the following (in thousands):

 
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Deferred finance  costs                  |       | $                 | 6,426      |                  | $          | 7,551 |   |
| Refundable  payment for product licenses |       | 4,000             |       | 9,000                 |       |
| Deposits                                 |       | 49                |       | 49                    |       |
| Long-term  receivable on asset sale      |       | 605               |       | —                |       |
| Long-term  investments                   |       | 5,508             |       | 7,375                 |       |
| Total other long-term  assets            |       | $                 | 16,588     |                  | $          | 23,975 |   |

 

In the second quarterof 2007, the Company paid Plethora Solutions Holding plc $7.0 millionin conjunction with an exclusive licensing agreement to market Plethora’sproduct, PSD502, for premature ejaculation. $6.3**millionwas used to purchase an equity stake in Plethora equating to 1,772,505 newordinary shares. The remaining $0.7 million was allocated to the licenseitself and expensed as in process research and development in 2007.  The Company’s investment in Plethora amountsto approximately 5.6% of their ordinary shares outstanding. Plethora isheadquartered in the United Kingdom and is listed on the London Stock Exchange(AIM:PLE). Per the agreement with Plethora, the shares purchased will not besold until the earlier of FDA approval of PSD502 or June 2011.  In the first quarter of 2008, the Companyrecognized a $1.2 million impairment on the asset based on sustained declinesin stock value in excess of industry trends. The remaining $5.1 million investment in Plethora is accounted for underthe cost method and is classified as a long-term investment. Our investment inPlethora has a transfer restriction associated with it; therefore, we includethis investment in other long term assets rather than marketable securities.

 

In the thirdquarter of 2007, the Company signed an exclusive agreement with AddrenexPharmaceuticals, Inc. to market, upon FDA approval, a patented, extended-release formulation of clonidinehydrochloride for the treatment of hypertension and attention deficit andhyperactivity disorder in North America. Under the terms of the agreement, theCompany paid $6.0 million, of which $1.2 million was allocated to anequity stake in Addrenex, and $4.9 million was expensed as in-processresearch and development in the third quarter of 2007. In the six months ended June 30,2008, the Company recognized a loss on investment of $0.7 million as itsportion of Addrenex’s loss.  The Companywill have the right to increase its equity position in the future. The Companywill also make regulatory milestone payments of up to $11.0 million androyalty payments to Addrenex on future product sales. In accordance withAccounting Principles Board Opinion No. 18, *The Equity Method of Accounting for Investments in Common Stock*,the remaining $0.4 million Addrenex investment is being accounted for using theequity method and is classified as a long-term investment.

 

**9.****                                      AccruedExpenses**

 

Accrued expensesconsisted of the following (in thousands):

 
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Employee  compensation and benefits |       | $                 | 6,555      |                  | $          | 7,316 |   |
| Product returns                     |       | 11,701            |       | 1,299                 |       |
| Product rebates                     |       | 3,584             |       | 2,385                 |       |
| Sales deductions                    |       | 6,964             |       | 6,039                 |       |
| Accrued  royalties                  |       | 7,785             |       | 5,049                 |       |
| Accrued interest                    |       | 1,091             |       | 1,075                 |       |
| Other                               |       | 1,784             |       | 3,327                 |       |
| Total accrued  expenses             |       | $                 | 39,464     |                  | $          | 26,490 |   |

 

Product returns increasedprimarily as a result of an additional $8.1 million in returns recorded in thesecond quarter of 2008 resulting from the discontinuation of old Sular in the retailsector.

 

**10.****                               Long-termDebt**

 

On May 14, 2007, theCompany issued and sold $325.0 million aggregate principal amount of2.625% Contingent Convertible Senior Notes due 2027 (the “Notes”) in anunderwritten registered offering. The Notes are due May 15, 2027 andinterest is payable semi-annually in arrears on May 15 and November 15of each year, beginning November 15, 2007.

 

The Notes have severalfeatures related to contingent interest, conversion rights,redemption/repurchase and settlement. These features are highlighted below:

 

·                  *Contingent interest* is accrued semi-annually at an annualrate of 0.5%, if the average price of the Notes is 120% or more of theprincipal.  The average price will bedetermined as the average 5 trading days, 8 trading days from the first day ofthe applicable 6 month period (May 16 or November 16).

 

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·                  *Conversion rights* allow for the following:

 

·                  Convertibleduring any quarter in which the Company’s common stock price trades above $42during 20 of 30 consecutive trading days;

 

·                  Convertibleduring any 5 of 9 consecutive trading days in which the Notes trade for less than95% of the applicable conversion rate;

 

·                  Convertibleupon occurrence of specified corporate transactions;

 

·                  Convertibleif Company calls for redemption;

 

·                  Convertibleby holders on May 15, 2012, 2017, and 2022; or

 

·                  Convertiblefor any transaction that requires holders to surrender Notes for conversion. Holderswill be entitled to predetermined premium conversion rates in accordance withthe make-whole provisions of the indenture.

 

·                  *Redemption/repurchase* allow for the following:

 

·                  TheCompany may redeem the Notes at face value in whole or in part for 100% ofprincipal anytime on or after May 20, 2012;

 

·                  Noteholders may redeem all or a portion at face value in whole or in part for 100%of principal on May 15, 2012, 2017 or 2022;

 

·                  Noteholders may require the Company to purchase the Notes at face value upon theoccurrence of a fundamental change as detailed in the indenture.

 

·                  *Settlement*of the Notes requires par value to be settled incash and the excess conversion value over par be settled in net stock and cashfor any fractional shares.

 

The Notes are seniorunsecured obligations and rank equally in right of payment with each other andwith all other senior unsecured indebtedness. The Notes are subordinated inright of payment to all of existing and future secured indebtedness. The indenturedoes not contain any restriction on the payment of dividends, the incurrence ofindebtedness or the repurchase of securities, and does not contain anyfinancial covenants.

 

Holders may convert theNotes only under certain circumstances as described in our Report on Form 10-Kfor fiscal 2007.  The Notes will beconvertible into cash and, if applicable, shares of our common stock.

 

The Companycapitalized $9.5 million of financing costs in association with the issuance ofthe 2007 Notes, which are being amortized over 5 years, the date of first conversion.

 

In June 2007,the Company redeemed all of its 2006 Notes with the proceeds from the issuanceof the Notes, for $150.0 million, the face value of the bonds and 839,930shares of Company stock, pursuant to the terms of the exchange offer. Theremaining capitalized financing costs associated with the 2006 Notes exchangeof $5.3 million were expensed in the second quarter of 2007.

 

The Company had nodebt (including under its credit agreement) other than the aforementioned Notesoutstanding at June 30, 2008 or December 31, 2007.

 

**11.****                               CreditAgreement**

 

On September 18,2006, the Company entered into a senior secured credit agreement (the “CreditAgreement”) with UBS Securities LLC and LaSalle Bank National Association aslead arrangers, UBS AG, Stamford Branch, as issuing bank, administrative agentand collateral agent, Regents Bank, Fifth Third Bank and Bank of America, N.A.as co-documentation agents and UBS Loan Finance LLC, as swingline lender. TheCredit Agreement provides the Company and its Cayman subsidiary, Sciele PharmaCayman Ltd., with a five-year revolving credit facility of up to $100.0million, with an option to expand the facility credit line by up to anadditional $75.0 million.

 

Borrowings under theCredit Agreement bear interest at the lenders’ corporate base rate or LIBOR,plus a specified margin of between 1.75% and 2.5% depending on the Company’sratio of indebtedness to earnings.  TheCredit Agreement contains customary negative covenants and financialcovenants.  As of June 30, 2008, theCompany was not in compliance with certain negative covenants and financialcovenants of its Credit Agreement.  On July 18,2008, the Company amended the Credit Agreement and obtained a waiver for the periodof noncompliance.  Accordingly, theCompany is now in compliance with the negative covenants and financialcovenants contained in the Credit Agreement.

 

The Company’s obligationsunder the Credit Agreement are secured by a pledge of substantially all of itsassets and are guaranteed by substantially all of its subsidiaries that are notborrowers.

 

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The Company had noborrowings under this credit facility as of June 30, 2008.

 

**12.****                               Stockholder’sEquity**

 

**PreferredStock**

 

On April 25,2008, the Company’s Board of Directors approved the redemption of alloutstanding stock purchase rights granted pursuant to the ShareholderProtection Rights Agreement, dated as of July 12, 2002, between theCompany and LaSalle Bank National Association, as rights agent (the “RightsPlan”).  On May 20, 2008, theCompany paid $35,000, a redemption price equal to $0.001 per right in cash toshareholders of record at the close of business on May 9, 2008.  The redemption of the rights terminated theRights Plan effective May 9, 2008.

 

**ShareBuyback Program**

 

On April 25, 2008,the Company adopted a new share repurchase program, authorizing the repurchaseof up to $100.0 million of outstanding common stock. This plan replaces allprior share repurchase plans and is set to expire on April 24, 2009.

 

The repurchases underthis and the previous plan in 2007 and 2008 were as follows:

 
| ** **                                     | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                        | ** ** | **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**                 | ** **  |
| Common stock repurchases  authorized**(1)**    |       |               |       |               |       |                              |       | $                                  | 40,000,000  |   |
| August 3  through September 30, 2007 |       | 305,214            |       | $                  | 22.94      |                              | 305,214    |                               | $           | 32,997,703 |   |
| October 1  through December 31, 2007 |       | 620,640            |       | 20.83              |       | 620,640                           |       | $                                  | 20,071,908  |   |
| January 1  through March 31, 2008    |       | 528,598            |       | 18.88              |       | 528,598                           |       | $                                  | 10,090,896  |   |
| April 1  through April 24, 2008      |       | —             |       | —             |       | —                            |       | $                                  | 10,090,896  |   |
| Total                                          |       | 1,454,452          |       | $                  | 20.56      |                              | 1,454,452  |                               |        |   |
|                                           |       |               |       |               |       |                              |       |                               |        |
| Common stock  repurchases authorized **(2)**   |       |               |       |               |       |                              |       | $                                  | 100,000,000 |   |
| April 25  through April 30, 2008     |       | —             |       | $                  | —     |                              | —     |                               | $           | 100,000,000 |   |
| May 1  through May 31, 2008          |       | 3,161,900          |       | 21.05              |       | 3,161,900                         |       | $                                  | 33,454,463  |   |
| June 1  through June 30, 2008        |       | 384,078            |       | 22.01              |       | 384,078                           |       | $                                  | 25,000,015  |   |
| Total                                          |       | 3,545,978          |       | $                  | 21.15      |                              | 3,545,978  |                               |        |   |

 

----

**(1)****    **Refers to the Share Repurchase Plan effective August 3, 2007 through April 24,2008.  Effective with the adoption of theApril 25, 2008 Share Repurchase Plan, the August 3, 2007 ShareRepurchase Plan was terminated and remaining available funds were cancelled.

 

**(2)****    **Refers to the Share Repurchase Plan effective April 25, 2008 through April 24,2009.

 

All shares repurchased underboth plans have been retired.

 

**Changesin Stockholders’ Equity**

 

Thefollowing represent the changes in stockholders’ equity for the six monthsended June 30, 2008 (in thousands, excluding share data):

 
| ** **                                            | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income (Loss)**  | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total**  | ** ** |
|                                                  |       |                  |       |        |       |           |       |              |       |                    |       |       |       |       |       |       |       |
| BALANCE,  December 31, 2007                      |       | 36,032,299            |       | $           | 36         |           | $          | 272,334           |       | $                       | 172,966    |       | $          | (2,832     | )          | (754,919   | )          | $ | (17,507 | ) | $ | 424,997 |   |
| Net income                                            |       | —                |       | —      |       | —         |       | 23,551            |       | —                  |       | —     |       | —     |       | 23,551     |       |
| Other  comprehensive income                           |       | —                |       | —      |       | —         |       | —            |       | 3,247                   |       | —     |       | —     |       | 3,247      |       |
| Stock options  exercised                              |       | 400,201               |       | —      |       | 3,300          |       | —            |       | —                  |       | —     |       | —     |       | 3,300      |       |
| Shares  contributed to employee stock ownership plan  |       | —                |       | —      |       | 22             |       | —            |       | —                  |       | 32,830     |       | 762        |       | 784        |       |
| Shares  repurchased and retired                       |       | (4,074,576            | )          | (4          | )          | (84,996        | )          | —            |       | —                  |       | —     |       | —     |       | (85,000    | )          |
| Tax benefit from  nonqualified stock option exercises |       | —                |       | —      |       | 1,163          |       | —            |       | —                  |       | —     |       | —     |       | 1,163      |       |
| Preferred stock  rights redemption                    |       | —                |       | —      |       | —         |       | (35               | )          | —                  |       | —     |       | —     |       | (35        | )          |
| Stock-based  compensation expense                     |       | —                |       | —      |       | 5,505          |       | —            |       | —                  |       | —     |       | —     |       | 5,505      |       |
| BALANCE,  June 30, 2008                          |       | 32,357,924            |       | $           | 32         |           | $          | 197,328           |       | $                       | 196,482    |       | $          | 415        |       | (722,089   | )          | $ | (16,745 | ) | $ | 377,512 |   |

 

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**13.****                               IncomeTaxes**

 

At June 30, 2008, theCompany had approximately $619,000 of total gross unrecognized taxbenefits.  Included in the totalunrecognized tax benefits was approximately $353,000 (net of federal benefit onstate issues) of tax benefits that, if recognized, would favorably affect theeffective income tax rate in any future periods.

 

The Company recognizesinterest and penalties related to income tax matters as income taxexpense.  As of June 30, 2008, we hadaccrued approximately $508,000 (net of federal benefit on state issues) for thepayment of interest.

 

The Company is currentlyunder IRS examination for the 2005 and 2006 tax years.  This audit is expected to be concluded within12 months and it is reasonably possible that the IRS will resolve some of thematters presently under consideration, which may increase or decreaseunrecognized tax benefits for these years. At this time, we estimate a range ofthe outcome of the examination to be approximately $300,000 to $400,000 ofinterest primarily on timing items related to inventory.  We accrued additional interest ofapproximately $63,000 for this item in the current period.

 

The Company should not besubject to state and local examinations for tax periods before 2001 or foreigntax examinations before 2002.

 

**14.****                               EarningsPer Share**

 

Below is thecalculation of basic and diluted net income per common share (in thousands,except per share data):

 
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                                             | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income from  continuing operations                     |       | $                                                  | 8,007      |                                             | $          | 10,468 |   | $ | 19,200 |   | $ | 23,397 |   |
| Income from  discontinued operations                   |       | 3,998                                              |       | 170                                              |       | 4,351 |   | 239 |   |
| Net income                                             |       | $                                                  | 12,005     |                                             | $          | 10,638 |   | $ | 23,551 |   | $ | 23,636 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average  common shares outstanding-basic      |       | 33,565                                             |       | 35,411                                           |       | 34,459 |   | 35,292 |   |
| Dilutive effect  of stock options and restricted stock |       | 379                                                |       | 808                                              |       | 456 |   | 813 |   |
| Dilutive effect  of contingent convertible debt        |       | —                                             |       | 542                                              |       | — |   | 452 |   |
| Weighted average  common shares outstanding-diluted    |       | 33,944                                             |       | 36,761                                           |       | 34,915 |   | 36,557 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Net income per  common share:                          |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                  |       |                                               |       |                                             |       |   |   |   |   |
| Income from  continuing operations                     |       | $                                                  | 0.24       |                                             | $          | 0.30 |   | $ | 0.56 |   | $ | 0.66 |   |
| Income from  discontinued operations                   |       | 0.12                                               |       | —                                           |       | 0.12 |   | 0.01 |   |
| Net income                                             |       | $                                                  | 0.36       |                                             | $          | 0.30 |   | $ | 0.68 |   | $ | 0.67 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Diluted                                                |       |                                               |       |                                             |       |   |   |   |   |
| Income from  continuing operations                     |       | $                                                  | 0.24       |                                             | $          | 0.29 |   | $ | 0.55 |   | $ | 0.64 |   |
| Income from  discontinued operations                   |       | 0.11                                               |       | —                                           |       | 0.12 |   | 0.01 |   |
| Net income                                             |       | $                                                  | 0.35       |                                             | $          | 0.29 |   | $ | 0.67 |   | $ | 0.65 |   |

 

For the three and six months ended June 30, 2008,there were 434,725 and 421,725 potential common shares outstanding related toequity awards, respectively, that were excluded from the diluted net income pershare calculation because their effect would have been anti-dilutive. For thethree and six months ended June 30, 2007, there were 14,750 and 81,475potential common shares outstanding related to equity awards, respectively,that were excluded from the diluted net income per share calculation becausetheir effect would have been anti-dilutive.

 

For the three and sixmonths ended June 30, 2008 potential common shares outstanding were notincluded in diluted shares outstanding because the conversion stock priceexceeded the closing market price as of June 30 2008.

 

**15.****                               SegmentReporting**

 

The Company isengaged solely in the business of marketing and selling prescriptionpharmaceutical products. Accordingly, the Company’s business is classified in asingle reportable segment, the sale and marketing of prescription products.Prescription products include a variety of branded pharmaceuticals in theCardiovascular, Diabetes, Women’s Health, and Pediatric markets.

 

The followingpresents revenues for prescription products by area of treatment:

 

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| ** **              | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **              | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cardiovascular/Diabetes |       | $                                                  | 59,448     |                                             | $          | 70,265 |   | $ | 129,646 |   | $ | 126,966 |   |
| Women’s Health     |       | 23,873                                             |       | 19,825                                           |       | 47,398 |   | 36,393 |   |
| Pediatrics/Other        |       | 19,917                                             |       | 5,261                                            |       | 25,992 |   | 14,122 |   |
| Net Revenues            |       | $                                                  | 103,238    |                                             | $          | 95,351 |   | $ | 203,036 |   | $ | 177,481 |   |

 

**16.****                               Commitmentsand Contingencies**

 

The Company,certain former and current officers and directors are defendants in aconsolidated securities lawsuit filed on August 22, 2002 in the UnitedStates District Court for the Northern District of Georgia. Plaintiffs in theclass action alleged in general terms that we violated Sections 11 and 12(a) ofthe Securities Act of 1933 and that we violated Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.In an amended complaint, Plaintiffs claim that we issued a series ofmaterially false and misleading statements to the market in connection with ourpublic offering on April 24, 2002 and thereafter relating to alleged “channelstuffing” activities. The amended complaint also alleged controlling personliability on behalf of certain of our officers under Section 15 of theSecurities Act of 1933 and Section 20 of the Securities Exchange Act of1934. Plaintiffs seek an unspecified amount of compensatory damages.

 

The parties recentlyengaged in a mediation that led to an agreement in principle to settle all ofthe claims in the class action lawsuit for an amount up to $4.7 million. Thesettlement is to be entirely funded by the Company’s insurance carriers.Accordingly, ****no accrual is recorded in the Company’s financial statements related tothis case as the Company believes that its risk of loss is remote.****The parties have entered into a Memorandum of Understanding regarding certainterms of the settlement.  The settlementis subject to preliminary and final approval by the U.S. District Court.  The Company expects to receive this approvalduring fiscal year 2008.

 

On September 10,2007, the Company received a Paragraph 4 certification in connection with Sular40mg indicating that Mylan Laboratories, Inc. wished to introduce ageneric version of this product. On November 9, 2007, the Company receiveda Paragraph 4 certification in connection with Sular 20mg and 30mg indicatingthat Mylan Laboratories, Inc. wishes to introduce a generic version ofeach of these products. These certifications relate to U.S. Patent No. 4,892,741which expired June 8, 2008. As a result, the Company initiated patentlitigation in the United States District Court for the District of Delaware.However, since the relevant patent expired on June 8, 2008, the case wasdismissed.

 

The Company is alsoinvolved with other various legal proceedings incident to the course ofbusiness.  None of these proceedings areexpected to have a material adverse effect on the consolidated financialstatements.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

The followingshould be read with the consolidated financial statements and related footnotesand Management’s Discussion and Analysis of Results of Operations and FinancialCondition included in our Annual Report on Form 10-K for the year ended December 31,2007 (File No. 000-30123). The results discussed below are not necessarilyindicative of the results to be expected in any future periods. The followingdiscussion contains forward-looking statements that are subject to risks anduncertainties, which could cause actual results to differ from the statementsmade.

 

**Overview**

 

Sciele Pharma, Inc.  (the “Company”) is a pharmaceutical company specializingin sales, marketing and development of branded prescription products focused onthe therapeutic areas of Cardiovascular, Diabetes, Women’s Health, andPediatrics. The Company’s Cardiovascular and Diabetes products treat patientswith high cholesterol, hypertension, high triglycerides, unstable angina andType 2 diabetes; its Women’s Health products are designed to improve thehealth and well-being of women and mothers and their babies; and its Pediatricsproducts treat children’s allergies, asthma, coughs and colds, and attentiondeficit and hyperactivity disorder (ADHD). The Company was founded in 1992 andis headquartered in Atlanta, Georgia. The Company employs more than 950people.  The Company’s success is basedon placing the needs of patients first, improving health and quality of life,and implementing its business platform – an Entrepreneurial Spirit, Innovation,Execution Excellence, Simplicity, and Teamwork. As of June 30, 2008, our promotedproducts include:

 
| **Cardiovascular and Diabetes** | ** ** | **Women’s Health** | ** ** | **Pediatric**               |
|---------------------------------|------------|-------------------------|------------|-----------------------------|
| Fenoglide                       |       | Fosteum                 |       | Allegra                     |
| Fortamet                        |       | Prenate DHA             |       | Methylin                    |
| Nitrolingual                    |       | Prenate Elite           |       | Orapred                     |
| Prandin                         |       | Zovirax                 |       | Twinject (promotion started |
| Sular                           |       |                    |       | during Q2 2008)             |
| Triglide                        |       |                    |       |                        |

 

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Our current operatingplan focuses on maximizing 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, development products, andother businesses. We plan to focus on products which complement ourCardiovascular, Diabetes, Women’s Health and Pediatric categories that allow usto leverage our sales force infrastructure.

 

We currently market andsell 24 products, 14 of which are actively promoted. We promote our productsthrough our nationwide sales and marketing force, targeting high-prescribingprimary care physicians, endocrinologists, cardiologists, obstetricians andgynecologists, and pediatricians.

 

**Results of Operations**

 

*Cardiovascular/DiabetesNet Revenues.* Net revenues from our Cardiovascular/Diabetesproducts were $59.4 million and $129.6 million for the three and six months endedJune 30, 2008, compared to $70.3 million and $127.0 million for the threeand six months ended June 30, 2007, respectively. The decrease reflectsreturns for Sular of $8.1 million, related to discontinuing sales through theretail sector during the six months ended June 30, 2008, partially offsetby growth in Triglide prescriptions, the launch of Fenoglide, the marketing ofPrandin during the first quarter of 2008, and price increases implementedduring 2007.

 
| ** **             | ** ** | **Change in total dispensed prescriptions** | ** ** | **Change in new dispensed prescriptions** | ** ** |
|------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **             | ** ** | **for the three months ended**                   | ** ** | **for the three months ended**                 | ** ** |
| ** **             | ** ** | **June 30, 2008 compared**                       | ** ** | **June 30, 2008 compared**                     | ** ** |
| ** **             | ** ** | **to the three months ended**                    | ** ** | **to the three months ended**                  | ** ** |
| ** **             | ** ** | **June 30, 2007(a)**                                  | ** ** | **June 30, 2007(a)**                                | ** ** |
| Cardio/Diabetes:       |       |                                                            |       |                                                          |       |
| Sular                  |       | -7                                                              | %          | 4                                                             | %          |
| Nitrolingual(b)        |       | -12                                                             | %          | -14                                                           | %          |
| Fenofibrate family (c) |       | 10                                                              | %          | -4                                                            | %          |
| Fortamet               |       | -13                                                             | %          | -16                                                           | %          |
| Prandin (d)            |       | -1                                                              | %          | -1                                                            | %          |

 

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(a)           Source:IMS’s Next Generation Prescription Services data.

(b)           Webelieve that IMS data does not capture prescriptions of Nitrolingual from someof the non-retail channels and prescription trends in the non-retail channelwhich may have a significant impact on the reported change.

(c)           Fenoglidewas launched in February 2008.

(d)           Prandinwas launched by the Sciele in January 2008.

 

*Women’sHealth Net Revenues.*****Net revenuesfrom our promoted Women’s Health products were $23.9 million and $47.4 millionfor the three and six months ended June 30, 2008, compared to $19.8million and $36.4 million for the three and six months ended June 30,2007, respectively. This increase is primarily related to prescription growthassociated with the successful launch of Prenate DHA in the second quarter of2007 and price increases implemented during 2007 and 2008.

 
| ** **           | ** ** | **Change in total dispensed prescriptions** | ** ** | **Change in new dispensed prescriptions** | ** ** |
|----------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **           | ** ** | **for the three months ended**                   | ** ** | **for the three months ended**                 | ** ** |
| ** **           | ** ** | **June 30, 2008 compared**                       | ** ** | **June 30, 2008 compared**                     | ** ** |
| ** **           | ** ** | **to the three  months ended**                   | ** ** | **to the three  months ended**                 | ** ** |
| ** **           | ** ** | **June 30, 2007(a)**                                  | ** ** | **June 30, 2007(a)**                                | ** ** |
| Women’s Health: |       |                                                            |       |                                                          |       |
| Prenate family       |       | 11                                                              | %          | 4                                                             | %          |
| Zovirax              |       | -3                                                              | %          | -2                                                            | %          |
| Fosteum (c)          |       | N/A                                                             |       | N/A                                                           |       |

 

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(a)                                  Source:IMS’s Next Generation Prescription Services data.

(b)                                 PrenateDHA was launched in June 2007.

(c)                                  Fosteumwas launched by Sciele in January 2008.

 

*Pediatricand Other Net Revenues.* Net revenues from our Pediatric andother products were $19.9 million and $26.0 million for the three and sixmonths ended June 30, 2008 compared to $5.3 million and $14.1 million forthe three and six months ended June 30, 2007, respectively. This increaseis primarily due to the addition of our pediatric products at the end of thesecond quarter of 2007 from the acquisition of Alliant and the addition ofTwinject at the end of the first quarter of 2008, partially offset by decreasedFuradantin sales.

 

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| ** **               | ** ** | **Change in total dispensed prescriptions** | ** ** | **Change in new dispensed prescriptions** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **               | ** ** | **for the three months ended**                   | ** ** | **for the three months ended**                 | ** ** |
| ** **               | ** ** | **June 30, 2008 compared**                       | ** ** | **June 30, 2008 compared**                     | ** ** |
| ** **               | ** ** | **to the three months ended**                    | ** ** | **to the three months ended**                  | ** ** |
| ** **               | ** ** | **June 30, 2007(a)**                                  | ** ** | **June 30, 2007(a)**                                | ** ** |
| Pediatrics:              |       |                                                            |       |                                                          |       |
|  Orapred ODT        |       | 29                                                              | %          | 29                                                            | %          |
|  Methlyin  Chewable |       | 18                                                              | %          | 19                                                            | %          |
|  Allegra family     |       | 92                                                              | %          | 53                                                            | %          |
|  Twinject (b)       |       | -29                                                             | %          | -32                                                           | %          |

 

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(a)                                  Source:IMS’s Next Generation Prescription Services data.

(b)                                 Twinjectwas acquired by Sciele in March 2008 and promotion by Sciele began duringthe second quarter of 2008.

 

*Costof Revenues.*  Cost ofrevenues for the three and six months ended June 30, 2008 were$14.9 million and $25.2 million compared to $12.8 million and $23.8million for the three and six months ended June 30, 2007,respectively.  The increase is primarilydue to an increase in unit sales, sular validation costs, higher freight costs,and higher per unit costs of Twinject units acquired through the acquisition ofVerus Pharmaceuticals.

 

*GrossMargin.*  Gross marginfor the three and six months ended June 30, 2008 was 86% and 88% comparedto 87% and 87% for the three and six months ended June 30, 2007,respectively. The decrease in margins for the three months ended June 30,2008 is related to returns for old Sular of $8.1 million, Sular validationcosts, higher freight costs and higher per unit costs of Twinject unitsacquired through the acquisition of Verus Pharmaceuticals, partially offset byprice increases and a change in the product mix.  The increase for the six months ended June 30,2008 is the result of a change in product mix, lower Sular production costs, Sularvalidation costs, and the effect of price increases implemented during 2007 and2008, partially offset by increases in freight costs and the higher per unitcosts of Twinject units acquired through the acquisition of VerusPharmaceuticals.

 

*Selling,General and Administrative Expenses.*  Selling, general and administrative expensesincreased $8.7 million, or 18%, to $57.2 million for the three monthsended June 30, 2008 compared to $48.5 million for the three months ended June 30,2007. Selling, general and administrative expense increased $22.3 million,or 25%, to $110.5 million for the six months ended June 30, 2008compared to $88.2 million for the six months ended June 30, 2007. Theseincreases were primarily due to creation of the Company’s Pediatric sales forcein June 2007 and subsequent expansion during the second quarter of 2008, highercommissions and royalties resulting from increased sales, and costs associatedwith the launches of the new Sular formulation, Prandin and Fenoglide.

 

*Depreciationand Amortization Expenses.* Depreciation and amortizationexpense increased $2.5 million, or 39%, to $8.9 million for the threemonths ended June 30, 2008 compared to $6.4 million for the three monthsended June 30, 2007.  Depreciationand amortization expense increased $3.9 million, or 30%, to$16.9 million for the six months ended June 30, 2008 compared to$13.0 million for the three months ended June 30, 2007.  These increases were primarily a result ofthe acquisition of Alliant Pharmaceuticals in the second quarter of 2007, a$9.2 million Sular milestone payment and the acquisition of Twinject, both in2008.  The Company believes there are nointangible asset or depreciable long lived asset impairments as of June 30,2008.

 

*Researchand Development Expenses.* Research and development expenseincreased $0.7 million, or 10%, to $8.8 million for the three months endedJune 30, 2008 compared to $8.1 million for the three months ended June 30,2007, respectively.  Research anddevelopment expense increased $3.6 million, or 26%, to $17.6 million for thesix months ended June 30, 2008 compared to $14.0 million for the sameperiod in 2007.  These increases wereprimarily related to the pivotal clinical trials of the pravastatin/fenofibratecombination for the treatment of mixed dyslipidemia and glycopyrrolate for thetreatment of chronic moderate-to-severe drooling in pediatric patients.

 

*InterestExpense.*  Interestexpense was $2.9 million and $5.7 million for the three and sixmonths ended June 30, 2008 compared to $1.9 million and $2.9 million forthe three and six months ended June 30, 2007.  The increase is a result of an increase inoutstanding notes to $325.0 million from $150.0 million, as well as a higherinterest rate paid on the new notes.

 

*InterestIncome.*  Interest income was $0.8 million and$2.4 million for the three and six months ended June 30, 2008compared to $3.4 million and $5.2 million for the three and six months ended June 30,2007, respectively.  The decreaseprimarily relates to lower average cash and marketable securities balances dueto share repurchases of  $85.0 million inthe first half of 2008, the acquisition of Twinject for $29.1 million in thefirst quarter of 2008, and lower average interest rates.

 

*Loss onExtinguishment of Debt.*Loss on extinguishment of debt was$5.3 million for the three and six months ended June 30, 2007. This non-cashcharge was related to the retirement of $150.0 million contingent convertiblenotes and write-off of the related capitalized finance costs. There were nocomparable expenses in 2008.

 

*Loss onEquity Investments*. Loss on equity investments was $0.2million and $0.7 million for the three and six months ended June 30, 2008,respectively, related to the investment in Addrenex Pharmaceuticals, Inc.The investment is accounted for under the equity method. There were no comparableexpenses  in 2007.

 

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*Impairmenton Equity Investments*. Impairment on equity investments was $1.2 million for the six monthsended June 30, 2008. The impairment is related to the Company’s investmentin Plethora Solutions Holdings plc taken in the first quarter of 2008. Therewere no comparable expenses for the same period of 2007.

 

*Incomefrom Discontinued Operations.*Income from discontinued operations related to the disposal of Zebutalwere $4.0 million and $4.4 million for the three and six months ended June 30,2008, net of taxes, compared to $0.2 million in the three and six months ended June 30,2007, net of taxes.

 

*Provisionfor Income Taxes.* Income taxes were provided for at a rate of 28% and 31% for the threeand six months ended June 30, 2008, respectively, compared to 34% and 34%for the three and six months ended June 30, 2007, respectively. Thisdecrease in the effective tax rate is due to the change in the mix of taxjurisdictions, both domestic and international, where our income was earned.

 

**Liquidity and Capital Resources**

 

Our liquidityrequirements arise from working capital requirements, product developmentactivities, funding of acquisitions and product licenses and debt service. Weexpect to need additional funds to acquire or obtain licenses for new products,develop and test new products and potentially to acquire other businesses,which may increase our cost of capital. We may seek funding through public andprivate financing and may seek to incur debt, issue and sell shares of ourstock, or both, either to finance a transaction or as consideration for atransaction. Adequate funds for these purposes, whether through the financialmarkets or from other sources, may not be available when we need them or onterms acceptable to us. Insufficient funds could cause us to delay, scale backor abandon some or all of our product acquisitions, licensing opportunities,marketing programs, product development programs, potential businessacquisitions and manufacturing opportunities. We have historically met thesecash requirements through cash from operations, borrowings and the issuance andsale of common stock and publicly-traded debt.

 

*OperatingActivities*

 

Our cash and cashequivalents were $88.7 million at June 30, 2008.  Net cash provided by operating activities forthe six months ended June 30, 2008 was $39.1 million.  Cash inflows primarily reflect net income of$23.6 million (adjusted for non-cash items for depreciation, amortization,stock-based compensation, gain on disposal of discontinued operations, deferredtaxes, and interest expense totaling $19.6 million), an increase in accruedexpenses and other long-term liabilities of $14.8 million (inclusive of$8.1 million of old Sular returns), primarily related to increased commissionsand royalties as a result of increased sales, a decrease in income taxesreceivable of $7.6 million, and a decrease in other current assets and otherassets of $1.4 million.  These cashinflows were partially offset by cash outflows from higher accounts receivableof $25.1 million, as a result of increases in sales, a decrease inaccounts payable of $2.2 million, and an increase in inventory of $0.4million.

 

Our cash and cashequivalents were $71.2 million on June 30, 2007. Net cash provided byoperating activities for the six months ended June 30, 2007 was $36.9million.  Cash inflows primarily reflectnet income of $23.6 million (adjusted for non-cash items depreciation,amortization, stock-based compensation, interest expense, deferred taxes andloss on extinguishment of debt totaling $20.4 million), an increase in accountspayable of $7.5 million primarily related to increased business volume, adecrease in inventory of $4.7 million primarily related to increased sales andan decrease of $2.6 million in income taxes receivable related primarily to theestimated tax payments for the year.  Thecash inflows were partially offset by cash outflows from higher accountsreceivable of $11.7 million as a result of an increase in overall sales, and anincrease in other current assets of $6.2 million as a result of the increase insamples on hand and an increase in prepaid expenses and a $4.2 million increasein accrued expenses and other liabilities.

 

*InvestingActivities*

 

Net cash uses andin investing activities for the six months ended June 30, 2008 was $24.8 million.Cash outflows relate to the purchases of products and licenses of $41.6million, related to the acquisition of Twinject and the Sular milestone payment, capital spending of $5.4 million,primarily for development of a manufacturing line related to Sular Geomatrix,and purchases of marketable securities of $2.0 million.  These cash outflows were partially offset byproceeds from sales of marketable securities of $22.6 million and proceedsfrom the disposal of the Zebutal product license of $1.5 million.

 

Net cash used ininvesting activities for the six months ended June 30, 2007 was$163.9 million.  Cash ouflowsprimarily relate to the $113.6 million acquisition of Alliant,$0.8 million for the purchase of products and product licenses, thepurchase of securities of $252.4 million, advance payments for productlicenses of $9.1 million and the acquisition of property plant and equipment of$7.8 million, primarily for the construction of a manufacturing line for Sularand new computer and audio-visual systems for the home office.  These cash outflows were partially offset byproceeds from the sale of publicly-traded debt of $219.8 million.

 

*FinancingActivities*

 

Net cash used infinancing activities was $80.6 million for the six months ended June 30,2008, reflecting repurchases of our common stock of $85.0 million andpreferred stock rights redemption of less than $0.1 million, partially offsetby net proceeds from the issuance of common stock under our equity incentiveplans of $3.3 million and excess tax benefit on stock based awards of $1.2million.

 

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Net cash provided byfinancing activities was $153.9 million for the six months ended June 30,2007 primarily resulting from the issuance of $325.0 million of contingentconvertible senior notes, $2.1 million from the issuances of common stockin connection with the retirement of the $150.0 million convertible notes andexecutive and employee stock options and restricted shares, and $0.4 millionfor a non-cash reduction in taxes payable relating to stock options.  These cash inflows were partially offset bythe retirement of the $150.0 million senior subordinated contingent convertiblenotes, the repurchase of our common stock for $14.4 million and $9.2 millionsin capitalized debt issue costs related to the issuance of the $325.0 millionNotes costs associated with the exchange of the contingent convertible debt.

 

We believe thatour cash on hand and cash we expect to generate from our operations will besufficient to fund our working capital requirements, at least for the nexttwelve months. However, in the event that we make significant acquisitions, wemay need to raise additional funds through additional borrowings or theissuance of debt or equity securities, or both. We expect we will alsoexperience growth in our accounts receivable as our sales increase.

 

We maintain supplyagreements with third party suppliers for all of our products. Some of thesesupply agreements contain minimum purchase requirements. For most of thesesupply agreements, we believe that our inventory requirements and relatedpurchases of inventory will exceed the minimum purchase requirement in 2008. Inthose cases in which we do not believe our purchases will exceed the minimumpurchase requirements, we are seeking or have sought to negotiate waivers ormodifications of the minimum purchase requirements.

 

On May 14, 2007, theCompany issued and sold $325.0 million aggregate principal amount of its2.625% Contingent Convertible Senior Notes due 2027 (the “2007 Notes”) in anunderwritten registered offering under the Securities Act of 1933, asamended.  In June 2007, followingthe issuance of the 2007 Notes and with the proceeds therefrom, the Companyredeemed all of its 1.75% Contingent Convertible Senior Subordinated Notes Due2024. In addition to the $150.0 million face value of the redeemed notes,the noteholders received a total of 839,930 shares of Company common stock.

 

On September 18,2006, we entered into a senior secured credit agreement (the “Credit Agreement”)with UBS Securities LLC and LaSalle Bank National Association among others. TheCredit Agreement provides us and our Cayman subsidiary with a five-yearrevolving credit facility of up to $100 million, with an option to expandthe facility credit line by up to an additional $75.0 million.

 

Borrowings under theCredit Agreement bear interest at the lenders’ corporate base rate or LIBOR,plus a specified margin of between 1.75% and 2.5% depending on the Company’sratio of indebtedness to earnings.  TheCredit Agreement contains customary negative covenants and financialcovenants.  As of June 30, 2008, theCompany was not in compliance with certain negative covenants and financialcovenants of its Credit Agreement.  On July 18,2008, the Company amended the Credit Agreement and obtained a waiver for theperiod of noncompliance.  Accordingly,the Company is now in compliance with the negative covenants and financialcovenants contained in the Credit Agreement.

 

On April 25, 2008,the Company adopted a new share repurchase program, authorizing the repurchaseof up to $100.0 million of outstanding common stock. This plan replaces allprior share repurchase plans and is set to expire on April 24, 2009.

 

The repurchases underthis and the previous plan in 2007 and 2008 were as follows:

 
| ** **                                     | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                        | ** ** | **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**                 | ** **  |
| Common stock repurchases  authorized**(1)**    |       |               |       |               |       |                              |       | $                                  | 40,000,000  |   |
| August 3  through September 30, 2007 |       | 305,214            |       | $                  | 22.94      |                              | 305,214    |                               | $           | 32,997,703 |   |
| October 1  through December 31, 2007 |       | 620,640            |       | 20.83              |       | 620,640                           |       | $                                  | 20,071,908  |   |
| January 1  through March 31, 2008    |       | 528,598            |       | 18.88              |       | 528,598                           |       | $                                  | 10,090,896  |   |
| April 1  through April 24, 2008      |       | —             |       | —             |       | —                            |       | $                                  | 10,090,896  |   |
| Total                                          |       | 1,454,452          |       | $                  | 20.56      |                              | 1,454,452  |                               |        |   |
|                                           |       |               |       |               |       |                              |       |                               |        |
| Common stock  repurchases authorized **(2)**   |       |               |       |               |       |                              |       | $                                  | 100,000,000 |   |
| April 25  through April 30, 2008     |       | —             |       | $                  | —     |                              | —     |                               | $           | 100,000,000 |   |
| May 1  through May 31, 2008          |       | 3,161,900          |       | 21.05              |       | 3,161,900                         |       | $                                  | 33,454,463  |   |
| June 1  through June 30, 2008        |       | 384,078            |       | 22.01              |       | 384,078                           |       | $                                  | 25,000,015  |   |
| Total                                          |       | 3,545,978          |       | $                  | 21.15      |                              | 3,545,978  | ** **                         | ** **  | ** ** |

 

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**(1)****        **Refers to the Share Repurchase Plan effective August 3, 2007 through April 24,2008.  Effective with the adoption of theApril 25, 2008 Share Repurchase Plan, the August 3, 2007 ShareRepurchase Plan was terminated and remaining available funds were cancelled.

 

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**(2)****        **Refers to the Share Repurchase Plan effective April 25, 2008 through April 24,2009.

 

All shares repurchased underboth plans have been retired.

 

We expect that our existingsources of working capital or liquidity will be sufficient to enable us toexecute our main operational goals of maximizing the sales of our existingproducts and acquiring companies having such products, accelerating growth bylaunching line extensions to our current products and acquiring or licensingapproved products or late stage development products, as well as any capitalrequirements necessary to meet these operational goals.

 

**Critical Accounting Policies**

 

We rely on the use of estimates and make assumptions that impact our financial condition and results.  These estimates and assumptions are based on historical results and trends as well as our forecasts as to how these might change in the future.  While we believe that the estimates we use are reasonable, actual results could differ from those estimates.  The most critical accounting policies that may materially impact our results of operations include:

 

·*                  Revenue Recognition.*    Revenue isrecognized when products are delivered and the customer takes ownership andassumes risk of loss, collection of the relevant receivable is probable,persuasive evidence of an arrangement exists and the sales price is fixed ordeterminable, and are shown net of sales adjustments for discounts, rebates to customers,returns and other adjustments, which are provided in the same period that therelated sales are recorded.

 

·                  *Allowance for doubtfulaccounts.    *We are required to estimate thelevel of accounts receivable recorded on our balance sheet which will ultimatelynot be paid. Among other things, this assessment requires analysis of thefinancial strength of our customers, which can be highly subjective,particularly in the recent difficult general economic environment. Our policyis to estimate bad debt expense based on prior experience supplemented by aperiodic customer specific review when needed. If we over or under estimate thelevel of accounts receivable that will not be paid, there may be a materialimpact to our financial statements.

 

·                  *Sales deductions.    *Weprovide volume rebates, contractual price reductions with drug wholesalers andinsurance companies, and certain other sales related deductions on a regularbasis. The exact level of these deductions is not always immediately known andthus we must 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.    *Inthe pharmaceutical 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 three 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 estimate future returnsover the revised time period at the time of sale. Management is required toestimate the level of sales which will ultimately be returned pursuant to ourreturn policy, and record a related reserve at the time of sale. These amountsare deducted from our gross sales to determine our net revenues. Our estimatestake into consideration historical returns of a given product, product specificinformation provided by our customers and information obtained regarding thelevels of inventory being held by our customers, as well as overall purchasingpatterns by our customers. Management periodically reviews the reservesestablished for returns and adjusts them based on actual experience. If we overor under estimate the level of sales which will ultimately be returned, theremay be a material impact to our financial statements.

 

·                  *Liabilities assumed with the acquisition of productrights.    *In connection with the acquisition ofproduct rights, we assume certain liabilities for returns of product shipped bythe seller prior to the acquisition date. At the acquisition date, we estimatethe amount of the assumed liabilities based on actual sales return data fromthe seller and include that amount in the allocation of the total purchaseprice. We review the estimated liability on an annual basis. If we over orunder estimate liabilities assumed, there may be a material impact to ourfinancial statements.

 

·                  *Intangible assets andGoodwill.    *When we acquire the rights tomanufacture and sell a product, we record the aggregate purchase price, alongwith the value of the product related liabilities that we assume, as intangibleassets. We use the assistance of valuation experts to help us allocate thepurchase price to the fair value of the various intangible assets that we haveacquired. Then, we must estimate the economic useful life of each of theseintangible assets in order to amortize their cost as an expense in ourstatement of operations over the estimated economic useful life of the relatedasset. The factors that drive the actual economic useful life of apharmaceutical product are inherently uncertain, and include patent protection,physician loyalty and prescribing patterns, competition by products prescribedfor similar indications, future introductions of competing products not yet FDAapproved, the impact of promotional efforts and many other issues. We use allof these factors in initially estimating the economic useful lives of ourproducts, and we also continuously monitor these factors for indications ofappropriate revisions.

 

In assessing therecoverability of our intangible assets, we must make assumptions regardingestimated future cash flows and other factors. If the estimated undiscountedfuture cash flows do not exceed the carrying value of the intangible assets, wemust determine the fair value of the intangible assets. If the fair value ofthe intangible assets is less than its carrying value, an impairment loss willbe recognized in an amount equal to the difference. We review intangible assetsfor

 

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impairment at leastannually and whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. The Company tests itsgoodwill asset by comparing the fair value of the Company’s reporting unit tothe carrying value. The carrying value is determined by assigning the assetsand liabilities, including the existing goodwill and intangible assets, to thereporting unit. Goodwill is considered impaired if the carrying amount exceedsthe fair value of the asset. Such events or circumstances that may lead toimpairment include but are not limited to, lack of promotional sensitivity, theintroduction of competitive products and changes in government regulations. Ifwe determine that an intangible asset is impaired, a non-cash impairment chargewould be recognized. If we should incur an impairment loss, there may be amaterial impact to the financial statements.

 

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

 

Developing the provisionfor income taxes requires significant judgment and expertise in international,federal and state income tax laws, regulations and strategies, including thedetermination of deferred tax assets and liabilities and, if necessary, anyvaluation allowances that may be required for deferred tax assets. Ourjudgments and tax strategies are subject to audit by various taxingauthorities. While we believe we have provided adequately for our income taxliabilities in our consolidated financial statements, adverse determinations bythese taxing authorities could have a material adverse effect on ourconsolidated financial condition and results of operations.

 

·                  *Inventory obsolescence.    *Ourproducts have shelf lives ranging from 18 to 48 months. We must estimatethe amount of inventory recorded on our balance sheet that will not be soldprior to expiration. This estimate requires analysis of forecasted demand forour products, our promotional focus, amounts of our products currently held byour customers and the impact on our products of competing products. If we overor under estimate the amount of inventory that will not be sold prior toexpiration, there may be a material impact to our financial statements.

 

**ForwardLooking Statements**

 

This Report on Form 10-Qcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements involve a number ofrisks and uncertainties. Although our forward-looking statements reflect thegood faith judgment of our management, these statements can only be based onfacts and factors currently known by us. Consequently, forward-lookingstatements are inherently subject to risks and uncertainties, and actualresults and outcomes may differ materially from results and outcomes discussedin the forward-looking statements.

 

Forward-lookingstatements can be identified by the use of forward-looking words such as “believes,”“expects,” “hopes,” “may,” “plan,” “intends,” “estimates,” “could,” “should,” “would,”“continue,” “seeks,” “pro forma,” “reasonably likely” or “anticipates,” orother similar words (including their use in the negative), or by discussions offuture matters such as the development of new products, technologyenhancements, possible changes in legislation and other statements that are nothistorical. These statements include but are not limited to statements underthe “Management’s Discussion and Analysis of Financial Conditions and Resultsof Operations” caption as well as all other sections in this Report on Form 10-Q.

 

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

 

·                  Wemay not attain expected revenues and earnings;

 

·                  Wemay not realize anticipated sales if our products or our licensors’ products donot receive regulatory approval;

 

·                  Ifwe are unsuccessful in obtaining or renewing third party payor contracts forour products, we may experience reductions in sales levels and may fail toreach anticipated sales levels;

 

·                  Ifdemand for our products exceeds our initial expectations or the ability of oursuppliers to provide demand-meeting quantities of product and samples, ourfuture ability to sell these products could be adversely impacted;

 

·                  Thepotential growth rate for our promoted products may be limited by slower growthfor the class of drugs to which our promoted products belong and by unfavorableclinical studies about such class of drugs;

 

·                  Wemay encounter problems in the manufacture or supply of our products, for whichwe depend entirely on third parties;

 

·                  Strongcompetition exists in the sale of our promoted products, which could adverselyaffect expected growth of our promoted products’ sales or increase our costs tosell our promoted products;

 

·                  Wemay not be able to protect our competitive position for our promoted productsfrom patent infringers;

 

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·                  Certainof our products have experienced manufacturing issues. If the issues recur andcannot be resolved, our ability to acquire the product for sale and samplingwill be adversely affected;

 

·                  Wemay incur unexpected costs in integrating new products into our operations;

 

·                  Wemay be unable to develop or market line extensions for our products, or, evenif developed, obtain patent protection for our line extensions; further,introductions by us of line extensions of our existing products may require usto make unexpected changes in our estimates for future product returns andreserves for obsolete inventory. If these risks occur, our operating resultswould be adversely affected;

 

·                  Ifwe have difficulties acquiring new products or rights to market new productsfrom third parties, our financial results could be adversely affected;

 

·                  Ourlicensor/supplier can terminate our rights to commercialize Nitrolingual andthe sale of the 60 mg dose size of this product has not yet met ourexpectation;

 

·                  Wedepend on a small senior management group, the departure of any member of whichwould likely adversely affect our business if a suitable replacement membercould not be found;

 

·                  Anadverse interpretation or ruling by one of the taxing jurisdictions in which weoperate could adversely affected our operating results;

 

·                  Asmall number of customers accounts for a large portion of our sales and theloss of one of them, or changes in their purchasing patterns, could result insubstantially reduced sales, substantially and adversely affecting ourfinancial results;

 

·                  Ifthird-party payors do not adequately reimburse patients for our products,doctors may not prescribe them;

 

·                  Ourbusiness is subject to increasing government price controls and otherhealthcare cost containment measures;

 

·                  Sideeffects of, or marketing or manufacturing problems with our products couldresult in product liability claims which could be costly to defend and could resultin the withdrawal or recall of products from the market;

 

·                  Werely on operational data obtained from IMS, an industry accepted data source.IMS data may not accurately reflect actual prescriptions (for instance, webelieve IMS data does not capture all product prescriptions from somenon-retail channels);

 

·                  Anadverse judgment in the securities class action litigation in which we andcertain current and former directors and executive officers are defendantscould have a material adverse effect on our results of operations andliquidity;

 

·                  Ifwe fail to obtain, or encounter difficulties in obtaining, regulatory approvalfor new products or new uses of existing products, or if our developmentagreements are terminated, we will have expended significant resources for noreturn;

 

·                  Ourbusiness and products are highly regulated; the regulatory status of some ofour products makes these products subject to increased competition and otherrisks; and we run the risk that we, or third parties on whom we rely, couldviolate the governing regulations;

 

·                  Wemay be found noncompliant with applicable federal, state or international laws,rules or regulations which could result in fines and/or product recalls orotherwise cause us to expand significant resources to correct suchnoncompliance;

 

·                  Ifgeneric competitors that compete with any of our products or pipeline productsare introduced, our revenues may be adversely affected. In particular, our revenuesfrom Sular could be adversely affected by the launch of Mylan’s generic 20mg,30mg and 40mg nisoldipine products; and

 

·                  Someunforeseen difficulties may occur.

 

The risk factorsdescribed above as well as in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” section is not exhaustive. Wemay not have correctly identified and appropriately assessed all factorsaffecting our business and the publicly available and other information withrespect to these matters may not be complete and correct. Additional risks anduncertainties not presently known to us or that we currently believe to beimmaterial also may adversely impact us. Should any risks and uncertaintiesdevelop into actual events, these developments could have material adverseeffects on our business, financial condition, and results of operations. Forthese reasons, we caution you not to place undue reliance on ourforward-looking statements.

 

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

 

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

 

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**Foreign Currency Exchange Risk**

 

Our purchases ofSular, Triglide, Prenate DHA, and Nitrolingual are made in Euros and PoundsSterling. Although we did not enter into any forward contracts in the secondquarter of 2008, we may eliminate risks from foreign currency fluctuationsafter the time of shipment of product by entering into forward contracts forthese purchases of inventory at the time of product shipments. The Company’searnings and cash flows could be adversely affected in the future by therelationship of the U.S. dollar with foreign currencies.

 

**Market Risk on Investments**

 

The fair value ofour investment portfolio would be negatively affected by an increase ininterest rates. Since the majority of the Company’s investments are fixed rateinterest-bearing securities and therefore subject to the risk of loss in marketvalue from an increase in rates or a change in the underlying risk of theissuers of the notes, the Company’s future earnings and cash flows could beaffected adversely if the Company were to sell the securities prior to theirmaturity date. There were no realized losses from the sale of investments forthe six months ended June 30, 2008. At June 30, 2008, the Company hadtotal net unrealized losses from marketable securities of less than $0.1 million.

 

**Market Risk on Variable Rate Debt**

 

In connection withborrowings incurred under the senior secured revolving credit facility arrangedby UBS Securities LLC, we could experience market risk with respect to changesin the general level of the interest rates and its effect upon our interestexpense. Borrowings under this facility bear interest at variable rates.Because such rates are variable, an increase in interest rates will result inadditional interest expense and a reduction in interest rates will result inreduced interest expense. Accordingly, our present exposure to interest ratefluctuations is primarily dependent on rate changes that may occur whileborrowings under this credit facility are outstanding. At June 30, 2008 therewas no debt outstanding under this facility.

 

**Market Risk on Fixed Rate Debt**

 

The Company’s long-termfixed interest rate senior subordinated contingent convertible notes are alsosubject to market risk. Fixed rate debt outstanding at June 30, 2008 was$325.0 million with an interest rate of 2.625%. All other things beingequal, the fair market value of the Company’s fixed rate debt will increase asrates decline and will decrease as rates rise. The fixed rate notes outstandingtotaling $325.0 million at June 30, 2008 had a fair value of $299.0million based on quoted market rates.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

We maintain a set ofdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that we file under the SecuritiesExchange Act of 1934, as amended (“Exchange Act”). These reports are recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.  We carried out anevaluation under the supervision and with the participation of management,including our Chief Executive Officer and our Chief Finanical Officer, of theeffectiveness of the design and operation of our disclosure controls and procedurespursuant to Rule 13a-15(e) of the Exchange Act as of the end of theperiod covered by this report.  Our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of June 30, 2008.

 

**Changesin Internal Control over Financial Reporting**

 

There have been nomaterial changes in our primary internal controls over financial reportingduring the quarter ended June 30, 2008 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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) ofthe Securities Act of 1933 and that we violated Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.In an amended complaint, Plaintiffs claim that we issued a series ofmaterially false and misleading statements to the market in connection with ourpublic offering on April 24, 2002 and thereafter relating to alleged “channelstuffing” activities. The amended complaint also alleged controlling personliability on behalf of certain of our officers under Section 15 of theSecurities Act of 1933 and Section 20 of the Securities Exchange Act of1934. Plaintiffs seek an unspecified amount of compensatory damages.

 

The parties recentlyengaged in a mediation that led to an agreement in principle to settle all ofthe claims in the class action lawsuit for an amount up to $4.7 million. Thesettlement is to be entirely funded by the Company’s insurance carriers.Accordingly, ****no accrual is recorded in the Company’s financial statements related tothis case as the Company believes that its risk of loss is remote.****The parties have entered into a Memorandum of Understanding regarding certainterms of the settlement.  The settlementis subject to preliminary and final approval by the U.S. District Court.  The Company expects to receive theseapprovals during 2008.

 

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On September 10,2007, the Company received a Paragraph 4 certification in connection with Sular40mg indicating that Mylan Laboratories, Inc. wished to introduce ageneric version of this product. On November 9, 2007, the Company receiveda Paragraph 4 certification in connection with Sular 20mg and 30mg indicatingthat Mylan Laboratories, Inc. wishes to introduce a generic version ofeach of these products. These certifications relate to U.S. Patent No. 4,892,741which expired June 8, 2008. As a result, the Company initiated patentlitigation in the United States District Court for the District ofDelaware.  However, since the relevantpatent expired June 8, 2008, the case was dismissed.

 

The Company is alsoinvolved with other various legal proceedings incident to the course ofbusiness.  None of these proceedings areexpected to have a material adverse effect on the consolidated financialstatements.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On April 25, 2008,the Company adopted a new share repurchase program, authorizing the repurchaseof up to $100.0 million of outstanding common stock. This plan replaces allprior share repurchase plans and is set to expire on April 24, 2009.

 

The repurchases underthis and the previous plan in 2007 and 2008 were as follows:

 
| ** **                                     | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                        | ** ** | **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**                 | ** **  |
| Common stock  repurchases authorized**(1)**    |       |               |       |               |       |                              |       | $                                  | 40,000,000  |   |
| August 3  through September 30, 2007 |       | 305,214            |       | $                  | 22.94      |                              | 305,214    |                               | $           | 32,997,703 |   |
| October 1  through December 31, 2007 |       | 620,640            |       | 20.83              |       | 620,640                           |       | $                                  | 20,071,908  |   |
| January 1  through March 31, 2008    |       | 528,598            |       | 18.88              |       | 528,598                           |       | $                                  | 10,090,896  |   |
| April 1  through April 24, 2008      |       | —             |       | —             |       | —                            |       | $                                  | 10,090,896  |   |
| Total                                          |       | 1,454,452          |       | $                  | 20.56      |                              | 1,454,452  |                               |        |   |
|                                           |       |               |       |               |       |                              |       |                               |        |
| Common stock  repurchases authorized **(2)**   |       |               |       |               |       |                              |       | $                                  | 100,000,000 |   |
| April 25  through April 30, 2008     |       | —             |       | $                  | —     |                              | —     |                               | $           | 100,000,000 |   |
| May 1  through May 31, 2008          |       | 3,161,900          |       | 21.05              |       | 3,161,900                         |       | $                                  | 33,454,463  |   |
| June 1  through June 30, 2008        |       | 384,078            |       | 22.01              |       | 384,078                           |       | $                                  | 25,000,015  |   |
| Total                                          |       | 3,545,978          |       | $                  | 21.15      |                              | 3,545,978  |                               |        |   |

 

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**(1)****        **Refers to the Share Repurchase Plan effective August 3, 2007 through April 24,2008.  Effective with the adoption of theApril 25, 2008 Share Repurchase Plan, the August 3, 2007 ShareRepurchase Plan was terminated and remaining available funds were cancelled.

 

**(2)****        **Refers to the Share Repurchase Plan effective April 25, 2008 through April 24,2009.

 

All shares repurchased underboth plans have been retired.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITYHOLDERS**

 

The Company held its 2007annual meeting of shareholders on April 25, 2008.  The stockholders considered two proposals: (1) theelection of Class C Directors of the Company’s board of directors for athree year term and (2) the ratification and appointment of KPMG LLP asthe Company’s independent registered public accounting firm for the year endingDecember 31, 2008.  Both proposalswere approved by the stockholders.  Thefollowing is certain information with respect to each proposal.

 

Proposal 1.  The election of Class C directors.

 
| **Nominee**         | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|---------------------|------------|--------------------|------------|-------------------------|------------|
| Pierre Lapalme      |       | 27,129,730         |       | 3,689,004               |       |
| William J. Robinson |       | 28,206,253         |       | 2,612,481               |       |
| Patrick J. Zenner   |       | 16,934,173         |       | 13,884,561              |       |

 

The Class Cdirectors will serve a three year term. The term of office of the following directors continued after themeeting:

 
| **Class A Directors** | ** ** | **Class B Directors** |
|----------------------------|------------|----------------------------|
| Jerry N. Ellis             |       | Jon S. Saxe                |
| Patrick P. Fourteau        |       | Jerry C. Griffin           |

 

Proposal 2.  The ratification of the appointment of KPMGLLP.

 
| Votes for:  29,452,010 |   | Votes Against:  200,902 |   | Non Votes:  1,147,268 |   | Abstentions:  18,554 |
|------------------------|--------|-------------------------|--------|-----------------------|--------|----------------------|

 

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**ITEM 6. EXHIBITS**

 

 
| 31.1   |   | Certifications of 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 Executive  Vice President, Chief Financial Officer, Secretary and Treasurer pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                                                                         |
| 32.1   |   | Certification of Chief  Executive Officer 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 Executive  Vice President, Chief Financial Officer, Secretary and Treasurer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                      |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          | **SCIELE PHARMA, INC.** |
|--------------------------|-------------------------|
|                     | (Registrant)            |
|                     |                    |   |
| Date: July 31, 2008 | By:                     | /s/ PATRICK P. FOURTEAU |
|                     |                    | Patrick P. Fourteau*Chief Executive Officer  (principal executive officer)* |
| * *                 | * *                | * * |
| Date: July 31, 2008 | By:                     | /s/ DARRELL BORNE |
|                     |                    | Darrell Borne |
| * *                 | * *                | *Executive Vice President, Chief Financial  Officer,* |
| * *                 | * *                | *Secretary and Treasurer  (principal accounting and financial officer)* |

 

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