**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM10-Q**

 

**(MarkOne)**

 
| **ý** | **Quarterly  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**                                                                                      |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                              |
| ** ** | **for  the quarterly period ended March 31, 2005**                                                                                                                                 |
|       |                                                                                                                                                                                    |
| **o**      | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**                                                                                     |
| ** ** | ** **                                                                                                                                                                              |
| ** ** | **for  the transition period from              to            ** |
| ** ** | ** **                                                                                                                                                                              |

 

**CommissionFile Number:  0-24760**

 

**OrphanMedical, Inc.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **41-1784594**                                              |
|------------------------------------------------------------------|------------|-------------------------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.)                       |
|                                                             |       |                                                        |
| **13911  Ridgedale Drive, Suite 250, Minnetonka, MN 55305**      | ** ** | **(952)  513-6900**                                         |
| (Address of  principal executive offices,  including zip code)   |       | (Registrant’s  telephone number,  including area code) |

 

**NotApplicable**

(Former name,former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,and (2) has been subject to such filing requirements for the past 90 days.

 
|   | Yes  ý  | No  o  |   |
|--------|-----------------------------|-----------------------|--------|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 
|   | Yes  ý  | No  o  |   |
|--------|-----------------------------|-----------------------|--------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practical date.

 
| **Common  Stock, $.01 par value** | ** ** | **11,489,399**                        |
|-----------------------------------|------------|---------------------------------------|
| (Class)                           | ** ** | (Outstanding at April 27,  2005) |

 

 

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TABLE OF CONTENTS

 

**ORPHANMEDICAL, INC. ®**

 
| **PART I. FINANCIAL  INFORMATION**                                                               | **Page No.**                                                                                |
|--------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                                             |                                                                                        |
| **Item 1.**                                                                                      | Financial Statements  (Unaudited)                                                           |   |
|                                                                                             |                                                                                        |
| Balance  Sheets - March 31, 2005 and December 31, 2004.                                | 3                                                                                           |
|                                                                                             |                                                                                        |
| Statements of Operations –  Three months ended March 31, 2005 and March 31, 2004. | 4                                                                                           |
|                                                                                             |                                                                                        |
| Statements of Cash Flows -  Three months ended March 31, 2005 and March 31, 2004.      | 5                                                                                           |
|                                                                                             |                                                                                        |
| Notes to Financial  Statements                                                                   | 6                                                                                           |
|                                                                                             |                                                                                        |
| **Item  2.**                                                                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10 |
|                                                                                             |                                                                                        |   |
| **Item  3.**                                                                                     | Quantitative  and Qualitative Disclosures about Market Risk                                 | 22 |
|                                                                                             |                                                                                        |   |
| **Item 4.**                                                                                      | Controls and  Procedures                                                                    | 22 |
|                                                                                             |                                                                                        |   |
| **PART II. OTHER  INFORMATION**                                                                  |                                                                                        |
|                                                                                             |                                                                                        |   |
| **Item 1.**                                                                                      | Legal Proceedings                                                                           | 23 |
|                                                                                             |                                                                                        |   |
| **Item  2.**                                                                                     | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 23 |
|                                                                                             |                                                                                        |   |
| **Item 3.**                                                                                      | Defaults  Upon Senior Securities                                                            | 23 |
|                                                                                             |                                                                                        |   |
| **Item  4.**                                                                                     | Submission  of Matters to a Vote of Security Holders                                        | 23 |
|                                                                                             |                                                                                        |   |
| **Item 5.**                                                                                      | Other Information                                                                           | 23 |
|                                                                                             |                                                                                        |   |
| **Item 6.**                                                                                      | Exhibits                                                                                    | 23 |

 

Antizol**®**,Antizol-Vet**®**,Cystadane**®**,Xyrem**®**,MedExpandTM “The” Orphan Drug CompanyTM Orphan Medical**®**, Inc. andDedicated to Patients with Uncommon Diseases**®** are trademarks of the Company.

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.  ****Financial Statements**

 

**ORPHANMEDICAL, INC.**

**BALANCESHEETS**

*($ in thousands, except share and per share amounts)*

 
| ** **                                                                                                                                                                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Assets                                                                                                                                                                     |       |                     |       |                        |       |
| Current  assets:                                                                                                                                                           |       |                     |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                 |       | $                        | 9,542      |                        | $          | 12,709 |   |
| Restricted  cash                                                                                                                                                           |       | 125                      |       | 125                         |       |
| Accounts  receivable, less allowance for doubtful accounts of $25 and $25, respectively                                                                                    |       | 3,044                    |       | 2,303                       |       |
| Inventories                                                                                                                                                                |       | 2,642                    |       | 2,482                       |       |
| Prepaid  expenses                                                                                                                                                          |       | 1,842                    |       | 372                         |       |
| Other                                                                                                                                                                      |       | 35                       |       | 177                         |       |
| Total  current assets                                                                                                                                                      |       | 17,230                   |       | 18,168                      |       |
| Office  equipment and software, net                                                                                                                                        |       | 356                      |       | 464                         |       |
| Total  assets                                                                                                                                                              |       | $                        | 17,586     |                        | $          | 18,632 |   |
| Liabilities  and shareholders’ equity                                                                                                                                 |       |                     |       |                        |       |
| Current  liabilities:                                                                                                                                                      |       |                     |       |                        |       |
| Accounts  payable                                                                                                                                                          |       | $                        | 1,926      |                        | $          | 2,014 |   |
| Accrued  compensation                                                                                                                                                      |       | 780                      |       | 1,091                       |       |
| Deferred  revenue                                                                                                                                                          |       | 833                      |       | 1,250                       |       |
| Accrued  expenses and other                                                                                                                                                |       | 4,380                    |       | 3,444                       |       |
| Total  current liabilities                                                                                                                                                 |       | 7,919                    |       | 7,799                       |       |
| Capital  lease obligation-less current maturities                                                                                                                          |       | 38                       |       | 43                          |       |
| Commitments                                                                                                                                                                |       |                     |       |                        |       |
| Shareholders’  equity:                                                                                                                                                |       |                     |       |                        |       |
| Senior  Convertible Preferred Stock, $.01 par value; 14,000 shares authorized; 8,706  shares issued and outstanding; liquidation preference of $8,706                      |       | —                   |       | —                      |       |
| Series  B Convertible Preferred Stock, $.01 par value; 5,000 shares authorized; 4,420  and 4,259 shares issued and outstanding; liquidity preference of $4,420 and  $4,259 |       | —                   |       | —                      |       |
| Series  C Convertible Preferred Stock, $.01 par value; 4 ,000 shares authorized; 0  shares issued and outstanding                                                          |       | —                   |       | —                      |       |
| Series  D Convertible Preferred Stock, $.01 par value; 1,500,000 shares authorized; 0  shares issued and outstanding                                                       |       | —                   |       | —                      |       |
| Common  stock, $.01 par value; 23,477,000 shares authorized; 11,488,024 and  11,430,066 issued and outstanding                                                             |       | 115                      |       | 114                         |       |
| Additional  paid-in capital                                                                                                                                                |       | 81,610                   |       | 81,006                      |       |
| Accumulated  deficit                                                                                                                                                       |       | (72,096                  | )          | (70,330                     | )          |
| Total  shareholders’ equity                                                                                                                                           |       | 9,629                    |       | 10,790                      |       |
| Total  liabilities and shareholders’ equity                                                                                                                           |       | $                        | 17,586     |                        | $          | 18,632 |   |

 

*SeeAccompanying Notes.*

 

3

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**OrphanMedical, Inc.**

**Statementsof Operations**

*($ in thousands, except per share amounts)*

*(Unaudited)*

 
| ** **                                        | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| Product  revenues, net                            |       | $                                              | 6,692      |   | $ | 4,403 |   |
| Licensing  and royalty revenue                    |       | 1,453                                          |       | 1,000 |   |
| Total  revenue                                    |       | 8,145                                          |       | 5,403 |   |
|                                              |       |                                           |       |   |   |
| Operating  expenses:                              |       |                                           |       |   |   |
| Cost  of product revenues                         |       | 985                                            |       | 631 |   |
| Product  development                              |       | 2,564                                          |       | 4,222 |   |
| Sales  and marketing                              |       | 4,297                                          |       | 3,398 |   |
| General  and administrative                       |       | 1,627                                          |       | 1,207 |   |
| Total  operating expenses                         |       | 9,473                                          |       | 9,458 |   |
| Loss  from operations                             |       | (1,328                                         | )          | (4,055 | ) |
|                                              |       |                                           |       |   |   |
| Interest  income                                  |       | 60                                             |       | 52 |   |
| Interest  expense                                 |       | (7                                             | )          | (22 | ) |
|                                              |       |                                           |       |   |   |
| Net  loss before taxes                            |       | (1,275                                         | )          | (4,025 | ) |
| Income  tax expense                               |       | —                                         |       | — |   |
| Net  loss                                         |       | (1,275                                         | )          | (4,025 | ) |
| Less:  Preferred stock dividends                  |       | 242                                            |       | 239 |   |
|                                              |       |                                           |       |   |   |
| Net  loss applicable to common shareholders       |       | $                                              | (1,517     | ) | $ | (4,264 | ) |
|                                              |       |                                           |       |   |   |
| Loss  per share applicable to common shareholders |       |                                           |       |   |   |
| Basic  and diluted                                |       | $                                              | (0.13      | ) | $ | (0.40 | ) |
|                                              |       |                                           |       |   |   |
| Weighted  average number of shares outstanding    |       |                                           |       |   |   |
| Basic  and diluted                                |       | 11,458                                         |       | 10,775 |   |

 

*SeeAccompanying Notes.*

 

4

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**Orphan Medical, Inc.**

**Statements of Cash Flows**

*($ in thousands)*

*(Unaudited)*

 
| ** **                                                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| Operating  activities                                                        |       |                                           |       |   |   |
| Net  loss                                                                    |       | $                                              | (1,275     | ) | $ | (4,025 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                           |       |   |   |
| Depreciation  and amortization                                               |       | 108                                            |       | 111 |   |
| Changes  in operating assets and liabilities:                                |       |                                           |       |   |   |
| Accounts  receivable and other current assets                                |       | (2,069                                         | )          | 653 |   |
| Inventories                                                                  |       | (160                                           | )          | 138 |   |
| Accounts  payable and accrued expenses                                       |       | 839                                            |       | (2,226 | ) |
| Deferred  revenue                                                            |       | (417                                           | )          | — |   |
| Net  cash used in operating activities                                       |       | (2,974                                         | )          | (5,349 | ) |
|                                                                         |       |                                           |       |   |   |
| Investing  activities                                                        |       |                                           |       |   |   |
| Purchase  of office equipment                                                |       | —                                         |       | (34 | ) |
| Net  cash used in investing activities                                       |       | —                                         |       | (34 | ) |
|                                                                         |       |                                           |       |   |   |
| Financing  activities                                                        |       |                                           |       |   |   |
| Employee  stock purchase plan                                                |       | 16                                             |       | 16 |   |
| Stock  option exercise proceeds                                              |       | 98                                             |       | 150 |   |
| Principal  payments on capital lease                                         |       | (6                                             | )          | (4 | ) |
| Payments  on premium finance note                                            |       | (302                                           | )          | — |   |
| Cash  dividends                                                              |       | 1                                              |       | — |   |
| Net  cash (used in) provided by financing activities                         |       | (193                                           | )          | 162 |   |
|                                                                         |       |                                           |       |   |   |
| Decrease  in cash and cash equivalents                                       |       | (3,167                                         | )          | (5,221 | ) |
| Cash  and cash equivalents at beginning of period                            |       | 12,709                                         |       | 23,285 |   |
| Cash  and cash equivalents at end of period                                  |       | $                                              | 9,542      |   | $ | 18,064 |   |
|                                                                         |       |                                           |       |   |   |
| **Schedule of non-cash financing activities**                                |       |                                           |       |   |   |
| Premium  finance note for corporate insurance                                |       | $                                              | 885        |   | $ | — |   |

 

5

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**OrphanMedical, Inc**.

**Notesto Financial Statements**

*($ in thousands, except per share amounts)*

*(Unaudited)*

 

**1. Basisof Presentation**

 

***Business***

 

Orphan Medical, Inc. (the“Company) acquires, develops, and markets products of high medical valueintended to treat sleep disorders, pain and other central nervous disorders(CNS) that are addressed by physician specialists. A drug has high medicalvalue if it offers a major improvement in the safety or efficacy of patienttreatment and has no substantially equivalent substitute. The Company hashad six pharmaceutical products approved for marketing by the United StatesFood and Drug Administration (FDA).  Three products have been divested, andthe Company is focusing its resources on Xyrem® (sodium oxybate) oral solution,a medication approved for cataplexy, a significant and debilitating symptom ofnarcolepsy. The Company recently submitted a Supplemental New DrugApplication for the expansion of the labeled indications for Xyrem includingexcessive daytime sleepiness and fragmented nighttime sleep. The Company isconducting a clinical trial to assess Xyrem in treating fibromyalgia.Enrollment in the trial is complete and data is expected to be available in midsummer 2005. A new compound, butamben (butyl-p-aminobenzoate) suspension forinjection, has been licensed as a treatment of pain. The Company is in theprocess of determining a commercial scale manufacturing process for butamben. TheCompany is seeking other approved or development-stage products in thespecialty CNS areas it serves. The Company also markets Antizol® (fomepizole)Injection, as a treatment for suspected or confirmed ethylene glycol ormethanol poisonings and Cystadane® (betaine anhydrous for oral solution) forthe treatment of homocystimuria, an inherited metabolic disease.

 

***Basis of Presentation***

 

The accompanyingunaudited financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,these financial statements do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments (consisting ofnormal, recurring accruals) considered necessary for fair presentation havebeen included. Operating results for the three month period ended March 31,2005 are not necessarily indicative of the results that may be expected for theyear ended December 31, 2005. For further information, refer to theaudited financial statements and accompanying notes contained in the Company’sAnnual Report filed on Form 10-K as amended for the year ended December 31,2004.

 

**2. Useof Estimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

6

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**3.Stock-Based Compensation**

 

At March 31, 2005the Company has a stock-based employee compensation plan.  The Companyaccounts for its plan under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related interpretations. No stock-based compensation cost isreflected in the net loss for the three month periods ended March 31, 2005or 2004, as all options granted under this plan had an exercise price equal tomarket value of the underlying common stock on the date of grant.

 

The following table illustratesthe effect on net loss and net loss per share if the Company had applied thefair value recognition provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation”, to stock-basedemployee compensation.

 
| ** **                                                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                                                                             |       |                                   |       |   |   |
| Net  loss applicable to common shareholders, as reported                                                         |       | $                                      | (1,517     | ) | $ | (4,264 | ) |
|                                                                                                             |       |                                   |       |   |   |
| Deduct  total stock-based employee compensation expense determined under fair  value-based method for all awards |       | (686                                   | )          | (743 | ) |
| Pro  forma net loss                                                                                              |       | $                                      | (2,203     | ) | $ | (5,007 | ) |
|                                                                                                             |       |                                   |       |   |   |
| Loss  per share                                                                                                  |       |                                   |       |   |   |
| Basic  and diluted - as reported                                                                                 |       | $                                      | (0.13      | ) | $ | (0.40 | ) |
| Basic  and diluted - as pro forma                                                                                |       | $                                      | (0.19      | ) | $ | (0.46 | ) |

 

**4.Revenue Recognition**

 

Sales for all products,except Xyrem, are recognized at the time a product is shipped to the Company’scustomers and are recorded net of reserves for discounts for prompt payment.Sales of Xyrem are recognized at the time product is shipped from the specialtypharmacy to the patient and are recorded net of discounts for prompt payment.Except for Xyrem, the Company is obligated to accept, for exchange only, fromall domestic customers products that have reached their expiration date, whichrange from three to five years depending on the product. The Company is notobligated to accept exchange of outdated product from its internationaldistribution partners. The Company establishes a reserve for the estimated costof the exchanges. Management bases this reserve on historical experience andthese estimates are subject to change.

 

Deferred revenuerepresents the initial payment received by the Company per the terms of theCompany’s license agreement for Xyrem with UCB Pharma (formerly CelltechPharmaceuticals). The Company is recognizing this payment over the expectedregulatory approval period, which is 18 months.

 

The Company received $1.0million during the quarter ended March 31, 2005 as payment for theachievement of a milestone per the terms of the UCB Pharma license agreement.This payment is included in “Licensing and royalty revenue” in the Company’sStatement of Operations. Future milestone payments are expected to berecognized as earned based on the achievement of the milestone as indicated inthe license agreement.

 

7

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**5.Inventories**

 

Inventories are valued atthe lower of cost or market determined using the first-in, first-out (FIFO)method. The Company’s policy is to establish an excess and obsolete reserve forits products in excess of the expected demand for such products. Inventory usedin clinical trials is expensed at the time of production and included in thereserve until used.

 

| ** **                   | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Raw  materials and packaging |       | $                       | 733        |                       | $          | 795 |   |
| Finished  goods              |       | 1,909                   |       | 1,687                      |       |
|                         |       | $                       | 2,642      |                       | $          | 2,482 |   |

 

**6. Lossper Share**

 

Loss per share iscomputed in accordance with SFAS No. 128, “Earnings per Share”. Basic lossper share is computed based on the weighted average number of common sharesoutstanding during the period.  Diluted loss per share is computed basedon the weighted average shares outstanding and the dilutive impact of commonstock equivalents outstanding during the period.  The dilutive effect ofemployee stock options and warrants is measured using the treasury stockmethod.  The dilutive effect of both series of convertible preferred stockis computed using the “if-converted” method.  Common stock equivalents arenot included in periods where there is a loss, as they are antidilutive andtherefore basic and diluted loss per share are the same in loss periods. The following is a reconciliation of net loss and weighted average commonshares outstanding for purposes of calculating basic and diluted loss pershare:

 
| ** **                                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| *Numerator*                                                                                    |       |                                   |       |   |   |
|                                                                                           |       |                                   |       |   |   |
| Numerator  for basic loss per share – net loss applicable to common shareholders          |       | $                                      | (1,517     | ) | $ | (4,264 | ) |
| Add  back to effect assumed conversions:                                                       |       |                                   |       |   |   |
| Preferred  stock dividends                                                                     |       | —                                 |       | — |   |
| Numerator  for diluted loss per share                                                          |       | $                                      | (1,517     | ) | $ | (4,264 | ) |
|                                                                                           |       |                                   |       |   |   |
| *Denominator*                                                                                  |       |                                   |       |   |   |
| Denominator  for basic loss per share – weighted average shares                           |       | 11,458                                 |       | 10,775 |   |
|                                                                                           |       |                                   |       |   |   |
| Effect  of dilutive securities:                                                                |       |                                   |       |   |   |
| Convertible  preferred shares                                                                  |       | —                                 |       | — |   |
| Stock  options                                                                                 |       | —                                 |       | — |   |
| Warrants                                                                                       |       | —                                 |       | — |   |
| Denominator  for diluted loss per share – weighted average shares and assumed conversions |       | 11,458                                 |       | 10,775 |   |
|                                                                                           |       |                                   |       |   |   |
| Basic  and diluted loss per share                                                              |       | $                                      | (0.13      | ) | $ | (0.40 | ) |

 

8

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**7.Commitments**

 

The Company has variouscommitments under agreements with outside consultants, contract drug developersand manufacturers, technical service companies, drug distributors, along withcommitments for various marketing, advertising and promotional activities. Inaddition, the Company has commitments under license and researchagreements.  The Company does not haveany joint venture agreements nor does it have any arrangements to performproduct development or sales and marketing activities for other parties. At March 31,2005, the Company estimates that it could incur approximately $10.1 million ofadditional expenditures in subsequent periods for operating activities underexisting commitments. Commitments for these operating activities will likelyfluctuate from quarter to quarter and from year to year depending on, amongother factors, the timing of new marketed products or new product development,if any, and other clinical trial activity.

 

**8. Borrowings**

 

On February 4, 2005, the Company extended its line of creditand term loan facility with a commercial bank to January 1, 2006.  The line of credit facility includes aborrowing base equal to 80% of eligible accounts receivable up to a maximum amountof $4.5 million.  Certain other assetshave also been pledged as collateral for this facility.  Each draw of the term loan has a term ofone-year and is to be used specifically for equipment purchases not to exceed$1.0 million.  The term loan isnot available until the Company receives net proceeds of at least $7.5 millionin an equity financing transaction.  The interest rate for both loans isequal to two points over the bank’s prime rate, with a minimum rate of6.75%.  The Company is also subject tocertain other requirements during the term of the agreement, including (a) aminimum monthly net tangible equity requirement and (b) maximum monthlyoperating loss.  The minimum netequity amount for January 2005 through May 31, 2005 is $5.0 million plus50% of any additional equity securities or subordinated debt offering.  The minimum net equity amount from June 2005to January 1, 2006 is $4.5 million plus 50% of additional equitysecurities or subordinated debt offering. The maximum monthly operating loss is $1.25 million for January 2005,$1.75 million for February – March 2005, $1.25 million for April –June 2005, and $1.0 million for July – January 1, 2006.  The Company was in compliance with allcovenants as of March 31, 2005.

 

**9.Subsequent Event**

 

The Companyannounced on April 19, 2005 that it has entered into an agreement andplan of merger pursuant to which Jazz Pharmaceuticals, through a wholly ownedsubsidiary, will acquire Orphan Medical. Under the agreement, which was unanimously approved by the Company’sBoard of Directors, Orphan Medical common stockholders will receive $10.75 pershare in cash upon the close of the transaction.  Following the merger, which will beconsummated following the satisfaction or waiver of certain customary closingconditions, Orphan Medical will become a wholly owned subsidiary of JazzPharmaceuticals, a privately held company.

 

9

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**Item 2.** **Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**CautionaryStatement**

 

This Quarterly Report onForm 10-Q contains statements that are not descriptions of historical facts.The words or phrases “will likely result”, “look for”, “may result”, “willcontinue”, “is anticipated”, “expect”, “project”, or similar expressions areintended to identify “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995. Such statements may beforward-looking statements that are subject to risks and uncertainties. Actualresults could differ materially from those currently anticipated due to anumber of factors, including those identified in the “Risk Factors” section ofthis Quarterly Report on Form 10-Q.

 

**General**

 

Since its inception, theactivities of the Company have consisted primarily of obtaining the rights topharmaceutical products for developing and marketing, managing the developmentof these products and preparing for and initiating the commercial introductionof six products. Three of these products are currently marketed and three weredivested in 2003.  The Company operatesin a single business segment: pharmaceutical products. The Company hasexperienced recurring losses from operations and has generated an accumulateddeficit through March 31, 2005 of $72.1 million. In addition, the Companyexpects to incur additional losses from operations for at least the nextseveral fiscal quarters.

 

**Recent Developments**

 

On April 18, 2005,Orphan Medical, Inc. (the “Company”) entered into an Agreement and Plan ofMerger with Jazz Pharmaceuticals, Inc., a Delaware corporation, and TwistMerger Sub, Inc., a Delaware corporation and wholly owned subsidiary of JazzPharmaceuticals, Inc.  Under the mergeragreement, Jazz Pharmaceuticals would acquire the Company for $10.75 in cashper share of common stock of the Company.

 

The Company’s outstandingshares of preferred stock, consistent with the rights and preferences of theholders of such stock as set forth in the Company’s certificate ofincorporation, also will be converted into the right to receive cash in themerger.  Each outstanding share of SeniorConvertible Preferred Stock will be converted into the right to receive$1,320.6386 in cash, together with accrued but unpaid dividends, and eachoutstanding share of Series B Convertible Preferred Stock will be convertedinto the right to receive $1,653.8462 in cash, together with accrued but unpaiddividends.

 

Each outstanding optionand warrant to purchase shares of the Company’s common and/or preferred stock,to the extent vested as of the effective time of the merger, will also becancelled in exchange for a cash payment equal to the difference between $10.75and the exercise price per share of common or preferred stock subject to suchoption or warrant.

 

Pursuant to the mergeragreement, Jazz Pharmaceutical’s obligation to acquire the Company isconditioned upon, among other things, the receipt of the portion of the mergerconsideration being financed by Jazz Pharmaceuticals, the receipt of regulatoryapprovals and approval by the Company’s stockholders.  A copy of the merger agreement and jointpress release announcing the transaction was filed as an exhibit to a Form 8-Kfiled with the Securities and Exchange Commission on April 20, 2005.

 

On April 18, 2005,the Company, Jazz Pharmaceuticals, Inc. and Twist Merger Sub, Inc. also enteredinto a Voting Agreement with the following current stockholders of theCompany:  Alta BioPharma Partners II,L.P., Alta Embarcadero BioPharma Partners II, LLC, John Howell Bullion, OrbiMedAdvisors LLC and UBS Capital II LLC (the “Principal Stockholders”), whereby thePrincipal Stockholders agreed to vote in favor of the merger with JazzPharmaceuticals and against approval of any proposal made in opposition to, orin competition with, such merger transaction. A copy of the voting agreement was filed as an exhibit to a Form 8-Kfiled with the Securities and Exchange Commission on April 20, 2005.

 

**Resultsof Operations**

 

**ThreeMonths Ended March 31, 2005 vs. Three Months Ended March 31, 2004**

 

Net loss applicable tocommon shareholders was $1.5 million for the three months ended March 31,2005 compared to a net loss applicable to common shareholders of $4.3 millionfor the three months ended March 31, 2004. The decrease in the net lossapplicable to common shareholders was primarily due to an increase in productrevenue, specifically Xyrem, and licensing and royalty revenue while totaloperating expenses remained consistent with the first quarter in the prioryear.

 

**Product Revenue Summary**

 

The following is asummary of product revenue for the three months ended March 31, 2005compared to the three months ended March 31, 2004:

 

| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** | **Variance** | ** ** |
|----------------------------|------------|---------------------------------------|------------|--------------|------------|
| **($ in  thousands)** | ** ** | **2005**                              | ** ** | **2004**     | ** ** | **$** | ** ** | **%** | ** ** |
| Antizol                    |       | $                                     | 2,354      |         | $          | 2,237 |   | $ | 117 |   | 5 | % |
| Antizol-Vet                |       | 65                                    |       | 59           |       | 6 |   | 10 |   |
| Cystadane                  |       | 332                                   |       | 368          |       | (36 | ) | (10 | ) |
| Xyrem                      |       | 3,941                                 |       | 1,739        |       | 2,202 |   | 127 |   |
| **Total**                  |       | $                                     | 6,692      |         | $          | 4,403 |   | $ | 2,289 |   | 52 | % |

 

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Net product revenuesincreased 52% to $6.7 million for the three months ended March 31, 2005compared to $4.4 million for the same period in the prior year. The changewas driven by growth in Xyrem revenue. Revenue from Xyrem was $3.9 million forthe quarter ended March 31, 2005 compared to $1.7 million for the quarterended March 31, 2004. The increase is the result of a higher prescriptionvolume resulting from continued market penetration. Over 2,350 physicians hadwritten prescriptions for Xyrem as of March 31, 2005. The number of filledprescriptions in the first quarter of 2005 increased 94 percent over the samequarter the prior year and 10 percent over the previous quarter.

 

Licensing and royaltyrevenue for the three months ended March 31, 2005 was $1.5 million. Thisincluded a $1.0 million milestone payment made by UCB Pharma in accordance withits licensing agreement with the Company, $0.4 million related to the amortizedportion of the upfront payment from UCB Pharma for European registration andmarketing of Xyrem for narcolepsy, and $0.1 million of Sucraid royalties, aproduct which was divested in June 2003.

 

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Cost of product revenuesincreased $0.4 million or 56% to $1.0 million for the three months ended March 31,2005 from $0.6 million for the same period in the prior year.  The increase is primarily attributable to theincrease in product revenues during the first quarter of 2005.  The gross margin was relatively consistent at85.3% and 85.7% for the three months ended March 31, 2005 and 2004, respectively.Cost of product revenues as a percentage of net product revenues will fluctuatefrom quarter to quarter and from year to year depending on, among otherfactors, demand for the Company’s products, new product introductions and themix of approved products shipped.

 

Product developmentexpense was $2.6 million and $4.2 million for the first quarters ended March 31,2005 and 2004, respectively, a decrease of $1.6 million or 39%. The decrease isa result of the completion of two Xyrem Phase III(b) trials during fiscal 2004.The majority of the spending in the current quarter was associated with theclinical trial designed to evaluate Xyrem in the treatment of FibromyalgiaSyndrome. The Company expects that initial data from this 150 patient placebocontrolled trial will be available in the second half of 2005. Trial sites arelocated throughout the United States and Canada with approximately twentyparticipating centers. Clinical spending for trials is dependent on a number offactors, including among others, the number of human subjects screened andenrolled in the trial, and the number of active clinical sites. Orphan Medicalis also assessing Xyrem as a potential treatment for other indications.

 

Sales and marketingexpense increased 26% to $4.3 million for the three months ended March 31,2005 from $3.4 million for the three months ended March 31, 2004. Thischange is due to increased spending on various Xyrem sales and marketingprograms.

 

General andadministrative expense increased 35% to $1.6 million for the first quarterended March 31, 2005 compared to $1.2 million for the first quarter ended March 31,2004. The increase is the result of merger transaction expenses and higheraudit fees primarily associated with the requirements of Section 404 ofthe Sarbanes-Oxley Act.

 

**Liquidityand Capital Resources**

 

Since July 2, 1994,the effective date the Company was spun-off from Chronimed, Inc., it hasfinanced its operations principally from net proceeds from several public andprivate financings, interest income and product sales. The various public andprivate placement transactions since inception resulted in aggregate netproceeds, after commissions and expenses, of $60.5 million. In addition, theCompany raised approximately $30.9 million net proceeds from the divestment of threeproducts in June 2003.

 

Net working capital(current assets less current liabilities) decreased to $9.3 million at March 31,2005 from $10.4 million at December 31, 2004. Cash and cash equivalentsdecreased to $9.5 million at March 31, 2005 from $12.7 million at December 31,2004. The Company invests excess cash in short-term, interest-bearing,investment grade securities.

 

The primary sources ofcapital for the three months ended March 31, 2005 were product revenues,licensing and royalty revenues, and existing cash balances.

 

In October 2003, theCompany announced that it had licensed European sales and marketing rights forXyrem (sodium oxybate) oral solution to UCB Pharma (formerly CelltechPharmaceuticals). Under the terms of the agreement, UCB Pharma will beresponsible for the registration, sales and marketing of Xyrem in Europe. UCBPharma has made an initial payment of $2.5 million to Orphan Medical. In thefirst quarter of 2005, the Company received an additional $1.0 millionmilestone payment as a result of the submission of the sNDA on January 15,2005.The Company also received a $1.0 million milestone payment in the firstquarter of 2004 as a result of the submission of the marketing application inEurope.  UCB Pharma will make further payments of up to $5 million tied toproduct development and registration milestones and up to $6 million tied tosales-related milestones. UCB Pharma will also pay Orphan Medical a royalty onsales of the product which is expected to begin at the earliest in late 2005.The licensing agreement includes the use of Xyrem in narcolepsy and providesUCB Pharma with rights to negotiate in regard to other potential futureindications including fibromyalgia syndrome. The term of this agreement is for10 years from the date of approval in Europe with automatic extension until UCBPharma provides 12 month notice to Orphan Medical. The agreement may beterminated under certain conditions including material breach of contractprovisions prior to the ten year initial term.

 

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The Company used morecapital than its operations generated for the three months ended March 31,2005. The Company expects to incur a loss from operations in 2005, which will continueto decrease its capital reserves. The Company continues to invest its capitalin product development activities that may provide opportunities to enhance thecommercial opportunities for Xyrem. The Company has committed $10.1 million tofuture product development and marketing activities. In addition, the Companyalso continues to use capital to develop and enhance the commercial programsfor Xyrem. The Company expects that these efforts may result in increased Xyremrevenues. The Company expects that its current cash balances, cash flow fromproduct revenues and any milestone payments received in accordance with theterms of the UCB Pharma agreement will be sufficient to fund operations wellinto 2006. The Company may consider additional sources of capital should itdecide to expand its product development programs or acquire additionalproducts.

 

On April 14, 2004,the Company filed a “shelf” registration statement with the Securities andExchange Commission (SEC) for the registration of 4,000,000 shares of commonstock. Although we believe we have sufficient cash available for currentlyanticipated clinical trials and our sales and marketing activities, proceeds mightbe used for trials or sales and marketing activities related to products thatwe may acquire or develop in the future or for trials or sales and marketing relatedto new indications of existing products.  This statement was declaredeffective by the SEC on September 7, 2004, however, there can be noassurance of a successful offering.

 

On February 4, 2005, the Company extended its line of creditand term loan facility with a commercial bank to January 1, 2006.  The line of credit facility includes aborrowing base equal to 80% of eligible accounts receivable up to a maximumamount of $4.5 million.  Certain otherassets have also been pledged as collateral for this facility.  Each draw of the term loan has a term ofone-year and is to be used specifically for equipment purchases not to exceed$1.0 million.  The term loan isnot available until the Company receives net proceeds of at least $7.5 millionin an equity financing transaction.  The interest rate for both loans isequal to two points over the bank’s prime rate, with a minimum rate of6.75%.  The Company is also subject tocertain other requirements during the term of the agreement, including (a) aminimum monthly net tangible equity requirement and (b) maximum monthlyoperating loss.  The minimum netequity amount for January 2005 through May 31, 2005 is $5.0 million plus50% of any additional equity securities or subordinated debt offering.  The minimum net equity amount from June 2005to January 1, 2006 is $4.5 million plus 50% of additional equitysecurities or subordinated debt offering. The maximum monthly operating loss is $1.25 million for January 2005,$1.75 million for February – March 2005, $1.25 million for April –June 2005, and $1.0 million for July – January 1, 2006.

 

The Company’s commitmentsfor outside operating expenses decreased to approximately $10.1 million atMarch 31, 2005 from $12.0 million at December 31, 2004. Thesecommitments are generally for less than one year.  The decrease isprincipally attributable to the completion of the Phase III(b) clinical trialsassessing Xyrem for the treatment of EDS in narcolepsy.  This is offset bycosts and commitments associated with the initiation of the Fibromyalgia trialalong with continued spending for other development programs, including theongoing Xyrem extended release formulation activities and the continued evaluationof Butamben as a treatment for chronic malignant pain. In addition, the Companycontinues to assess opportunities relating to current products and to newproduct opportunities, which, if pursued, will increase developmentspending.  Due to the dependence of this estimate on the results of thestudies and other variable components, actual results may be different than theCompany’s estimates.

 

For continued listing onthe NASDAQ National Market, a company must satisfy a number of requirements,which in the Company’s case include either: (1) net equity in excess of $10.0million or (2) a market capitalization of at least $50.0 million. The Companymet both the thresholds at March 31, 2005. The Company’s marketcapitalization was approximately $104.7 million as of March 31, 2005(based on the last sale price of $9.11 and 11,488,024 million sharesoutstanding). Although the Company does not expect to be profitable in 2005,the Company nevertheless expects to continue to meet the listing requirementsfor listing on the NASDAQ National Market. However, there can be no assurancethat the Company will continue to meet these requirements in the future.

 

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In connection with the1998 and 1999 private placements of convertible preferred stock, the Companyagreed to certain restrictions and covenants, which could limit its ability toobtain additional financing. The most important of the restrictions are: (1)the Company cannot incur additional indebtedness, except for indebtednesssecured solely by the Company’s trade receivables, until it has profitableoperations, subject to certain limitations and (2) the Company cannot, withoutthe approval of a majority of the preferred stockholders, issue additionalequity securities unless the selling price per share exceeds the thenconversion price of the outstanding convertible preferred stock or the sale ofequity is accomplished in a public offering. The present conversion price is$8.14 for the Senior Convertible Preferred Stock and $6.50 for the Series BConvertible Preferred Stock. Even without these restrictions, the Company canmake no assurances that additional financing opportunities will be availableor, if available, on acceptable terms.

 

**GeographicSales Information**

 

The Company tracks salesin two geographic regions, domestic and international. The Company has noassets outside of the United States. The following is a summary of net productrevenues by geographic region for the three month periods ended March 31, 2005and 2004, respectively.

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| **($ in  thousands)** | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                       |       |                                   |       |   |   |
| Domestic                   |       | $                                      | 6,306      |   | $ | 4,067 |   |
| International              |       | 386                                    |       | 336 |   |
| Total                      |       | $                                      | 6,692      |   | $ | 4,403 |   |

 

**Off-BalanceSheet Arrangements**

 

We do not participate intransactions or have relationships or other arrangement with an unconsolidatedentity, which include special purpose and similar entities or other off-balancesheet arrangements.

 

**RISKFACTORS**

 

An investment in ourcommon stock involves a number of risks, including among others, risksassociated with companies that operate in the pharmaceutical industry. Theserisks are substantial and inherent in our operations and industry. Any investoror potential investor should carefully consider the following information aboutthese risks before buying shares of common stock.

 

**We havea history of losses, which we expect to continue.**

 

We have been unprofitablesince our inception in January 1993, with the exception of 2003 due to thedivestment of three products. We expect operating losses at least through 2005because anticipated gross profits from product revenues and anticipatedlicensing and royalty revenues will not offset our operating expenses. Theamount of these losses may vary significantly from year-to-year and quarter-to-quarter.Our actual losses will depend on, among other factors, the timing of productdevelopment, regulatory approval, and market demand for our Food and DrugAdministration approved products. We cannot assure you that we will evergenerate sufficient product revenues to achieve profitability.

 

**Wecannot be sure that future capital will be available to meet our expectedcapital requirements.**

 

Although we believe thatwe have sufficient capital to meet our current business objectives at March 31,2005, we may need additional capital if we expand our business, if businessconditions change or results of operations are not as expected. Adequate fundsfor our operations, continued development, and expansion of our business plans,whether from financial markets or from other sources, may not be available whenneeded on acceptable terms, or at all. If we issue additional securities yourownership may be diluted.

 

In addition there arerestrictions on our ability to raise additional capital that are part of theterms of the sales of our preferred stock. On July 23, 1998, we completedthe private sale to UBS Capital of $7.5 million of Senior Convertible PreferredStock. On August 2,

 

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1999, we completed anotherprivate sale to UBS Capital of $2.95 million of Series B Convertible PreferredStock. In conjunction with the issuance of the preferred shares, we agreed toseveral restrictions and covenants, and granted certain voting and other rightsto the holders of the preferred shares. One of the most important of theserestrictions is that we cannot incur additional indebtedness, except forindebtedness secured solely by our trade receivables, until we have profitableoperations, subject to certain limitations. Another important restriction isthat, without the approval of a majority of the preferred stockholders, wecannot issue additional equity securities unless the selling price per shareexceeds the then conversion price of the outstanding convertible preferredstock or the sale of equity is accomplished in a public offering. The presentconversion price is $8.14 per share for the Senior Convertible Preferred Stockand $6.50 for the Series B Convertible Preferred Stock. These restrictionscould make it more difficult and more costly for us to obtain additionalcapital. We cannot assure you that additional sources of capital will beavailable to us or, if available, on terms acceptable to us.

 

**PossiblePrice Volatility and Limited Liquidity of Common Stock.**

 

There is generallysignificant volatility in the market prices and limited liquidity of securitiesof early stage companies, and particularly of early stage pharmaceuticalcompanies. Contributing to this volatility are various factors and events thatcan affect our stock price in a positive or negative manner. These factors andevents include, but are not limited to:

 

•                                          generalnational and international economic and political developments;

•           governmental approvals,refusals to approve, regulations or actions;

•           developments or disputes relating to patentsor proprietary rights;

•           public concern over thesafety of therapies;

•           financial performance;

•           fluctuations infinancial performance from period to period; and

•           small float or numberof shares of our stock available for sale and trade.

 

There is also a risk thatthe market value and the liquidity of the public float for our common stockcould be adversely affected in the event we no longer meet the NASDAQ’srequirements for continued listing on the National Market. For continuedlisting on the NASDAQ National Market, a company must satisfy a number ofrequirements, which in our case includes either: (1) minimum net equity inexcess of $10.0 million as reported on Form 10-Q or Form 10-K or (2) a marketcapitalization of at least $50.0 million. Market capitalization is defined astotal outstanding shares multiplied by the last sales price quoted by NASDAQ.We met both criteria as of March 31, 2005, however, we cannot assure youthat the market capitalization threshold will continue to be met or that wewill be able to generate adequate capital to meet the net tangible assetrequirement.

 

These and other factorsand events may have a significant impact on our business and on the marketprice of the common stock.

 

**There isa limited market for our products.**

 

Most orphan drugs have apotential United States market of less than $25 million annually and manyaddress annual markets of less than $1 million. The combined revenue from thesales of Antizol, Cystadane, and Antizol-Vet in 2004 was approximately $10.7million. We believe that the total market opportunity for these three productsis not likely to exceed the $10.0 - $11.0 million range in the foreseeablefuture.

 

Revenue from Xyrem in2004 was approximately $10.6 million. Xyrem is indicated for the treatment ofcataplexy in narcolepsy, and, if our clinical trials in our product developmentprograms that are underway produce positive data, this data may result inincreased market opportunity for Xyrem. We cannot assure you, however, thatsales of our products will be adequate to make us profitable even if theproducts are accepted by medical specialists and used by patients.

 

**Wecurrently rely on the limited protection of the Orphan Drug Act for certainproducts.**

 

Since our inception, allof our products, with the exception of Antizol-Vet, have been granted orphandrug status by the FDA. Medicines developed or acquired in the future may holdorphan drug status, although we may develop or acquire products that do not holdsuch status if we can obtain appropriate proprietary protection through patentsor otherwise. Currently two of our products have orphan drug status: Xyrem withan expiration date of July 17, 2009 and Antizol, with an expiration dateof December 8, 2007 for the methanol indication.

 

We are not aware of anycompany intending to market a competitive product when the orphan drugprotection for these products expires.

 

**UnitedStates**

 

Under the Orphan DrugAct, the FDA may grant orphan drug designation to drugs intended to treat a “raredisease or condition.” The Orphan Drug Act generally defines “rare disease orcondition” as one that affects populations of fewer than 200,000 people in theUnited States. The Orphan Drug Act provides us with certain limited protectionsfor our products.

 

The first step inobtaining the limited protection under the Orphan Drug Act is acquiring the FDA’sapproval of “orphan drug designation,” which must be requested beforesubmitting a New Drug Application (“NDA”). After the FDA grants orphan drugdesignation, it publishes the generic identity of the therapeutic agent and thepotential orphan use specified in the request. Orphan drug

 

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designation does notconstitute FDA approval. In addition, orphan drug designation does not conveyany advantage in, or shorten the duration of, the regulatory approval process.

 

The second step inobtaining the limited protection under the Orphan Drug Act is acquiring the FDA’srecognition of “orphan drug status.” The Orphan Drug Act confers orphan drugstatus upon the first company to receive FDA approval to market a drug with “orphandrug designation” for a specific designated indication. Orphan drug status doesnot protect against another formulation or drug of materially differentcomposition from being approved, with or without orphan drug status, for thesame indication. FDA approval also results in United States marketingexclusivity for a period of seven years, subject to certain limitations.Although obtaining FDA approval to market a product with orphan drug status canbe advantageous, we cannot assure you that the scope of protection or the levelof marketing exclusivity will remain in effect in the future. In addition,United States orphan drug status does not provide any marketing exclusivity inforeign markets. Although certain foreign countries provide development andmarketing benefits to orphan drugs, we cannot assure you that such benefits canbe obtained or, if obtained, will be of material value to us. The FDA hasgranted us orphan drug status for Xyrem, Antizol, and Cystadane. Uponexpiration of orphan drug status, our products might be subject to competitionfrom other pharmaceutical companies, with the exception of Xyrem which haspatent protection.

 

Even if the FDA approvesan NDA for a drug with orphan drug designation, the FDA may still approve thesame drug for a different indication, or a molecular variation of the same drugfor the same indication. In addition, the FDA does not restrict doctors fromprescribing an approved drug for uses not approved by the FDA for that drug.Thus, a doctor could prescribe another company’s drug for indications for whichour product has received FDA approval and orphan drug status. Significant “offlabel” use, that is, prescribing approved drugs for unapproved uses, couldadversely affect the marketing potential of any of our products that havereceived orphan drug status and NDA approval by the FDA.

 

The possible amendment ofthe Orphan Drug Act by Congress has been the subject of congressionaldiscussion from time to time over the last ten years. Although Congress hasmade no significant changes to the Orphan Drug Act for a number of years,members of Congress have from time to time proposed legislation that wouldlimit the application of the Orphan Drug Act. We cannot assure you that theOrphan Drug Act will remain in effect or that it will remain in effect in itscurrent form. The precise scope of protection that orphan drug designation and marketingapproval may afford in the future is unknown. We cannot assure you that thecurrent level of exclusivity will remain in effect.

 

**Europe**

 

An orphan drug act wasenacted in the European Union that provides up to ten years of marketexclusivity for a drug that meets the requirements of the act. For apharmaceutical product to qualify for the benefits of the act, the prevalenceor incidence (whichever is greater) must not exceed five patients per 10,000 inthe population. Our European partners have obtained orphan drug designation forCystadane in Europe. The Company has obtained orphan drug designation for Xyremand Antizol, for use in methanol poisonings, in Europe. European orphan drugdesignation of Antizol was withdrawn by the Company in 2003. We cannot provideassurance that any of our pharmaceutical products will qualify for orphan drugprotection in the European Union or that another company will not obtain anapproval that would block us from marketing our product in the European Union.

 

**Patents andother proprietary rights are important factors in our business.**

 

The pharmaceuticalindustry and the investment community place considerable importance and valueon obtaining patent, proprietary, and trade secret protection for newtechnologies, products and processes. The patent position of pharmaceuticalfirms is often highly uncertain and generally involves complex legal, technicaland factual questions. Our success depends on several issues, including, butnot limited to our ability:

 

•           to obtain, and enforceproprietary protection for our products under United States and foreign patentlaws and other intellectual property laws;

•           to preserve theconfidentiality of our trade secrets; and

•           to operate withoutinfringing the proprietary rights of third parties.

 

We evaluate thedesirability of seeking patent or other forms of protection for our products inforeign markets based on the expected costs and relative benefits of attainingsuch protection. We cannot assure you that any patents will be issued from anyapplications or that any issued patents will afford us adequate protection orcompetitive advantage. Also, we cannot assure you that any issued patents willnot be challenged, invalidated, infringed or circumvented. Parties notaffiliated with us have obtained or may obtain United States or foreign patentsor possess or may possess proprietary rights relating to our products. Wecannot assure you that patents now in existence or later issued to others willnot adversely affect the development or commercialization of our products.

 

We believe that theactive ingredients or compounds in our FDA-approved products, Cystadane,Antizol, Antizol-Vet, and Xyrem, are in the public domain and presently are notsubject to composition of matter patent protection in the United States. Wehave a patent with respect to our formulation of Xyrem oral solution and otherpatents pending or issued.

 

We have orphan drugprotection for Antizol and Xyrem, which provides proprietary protection againstpotential competition. We could, however, incur substantial costs asserting anyinfringement claims that we may have against others. Upon expiration of orphandrug status our products might be subject to competition from otherpharmaceutical companies.

 

We seek to protect our proprietaryinformation and technology, in part, through confidentiality agreements andinventors’ rights

 

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agreements with ouremployees. We cannot assure you that these agreements will not be breached, thatwe will have adequate remedies for any breach, or that our trade secrets willnot otherwise be disclosed to or discovered by our competitors. We also cannotassure you that our planned activities will not infringe patents owned byothers. We could incur substantial costs in defending infringement suitsbrought against us. We also could incur substantial costs in connection withany suits relating to matters for which we have agreed to indemnify ourlicensors or distributors. An adverse outcome in any such litigation could havea material adverse effect on our business and prospects. In addition, we oftenmust obtain licenses under patents or other proprietary rights of thirdparties. We cannot assure you that we can obtain any such licenses on acceptableterms, if at all. If we cannot obtain required licenses on acceptable terms, wecould encounter substantial difficulties in developing, manufacturing ormarketing one or more of our products.

 

**The FDAmust agree with investigational new drug applications, including any suchapplications with respect to butamben, prior to the initiation of clinicaldevelopment programs.**

 

Prior to the initiationof a clinical development program, companies submit an investigational new drugapplication (IND) to the FDA. If the FDA notifies the submitting sponsor thatthe IND requires additional information or is not approvable, the potentialdevelopment program may be significantly delayed or terminated. We cannotassure you that IND applications submitted by us to the FDA, including withrespect to butamben, will proceed in a timely manner. Further, it is possiblethat FDA action may result in the termination of the potential developmentprogram. Although we do not expect to derive any revenues from butamben priorto 2009, we cannot assure you that a termination of any potential developmentprogram will not adversely affect the prospects of our business.

 

The Company is in theprocess of determining a production and manufacturing process for butamben for preclinicaland clinical trial activities that can be validated and then support commercialactivities post approval. This manufacturing process is different from theprocess used to manufacture butamben injection which was on file with FDA forthe previous IND. Because the manufacturing process for the product in OrphanMedical’s development program is different from the original manufacturingprocess in the IND, the Company will file this data in an IND application withthe FDA prior to the initiation of the clinical development program. The FDAmay require additional information, studies, or data due to the revisedmanufacturing process.

 

**Approvalfrom the FDA and foreign regulatory authorities must occur before any newproducts or a new indication for an existing product we may develop can becommercially sold, including butamben.**

 

Government regulation inthe United States and abroad is a significant factor in the testing, productionand marketing of our current and future products. Each product must undergo anextensive regulatory review process conducted by the United States Food andDrug Administration and by comparable agencies in other countries. Appropriateapprovals must be obtained before we are able to market or promote a product.We must also receive regulatory approval for each new indication for a productprior to marketing for that indication. We cannot market any medicine we maydevelop or license as a prescription product in any jurisdiction, includingforeign countries, in which the product does not receive regulatory approval.The approval process can take many years and requires the expenditure ofadditional resources.

 

We depend on externallaboratories and medical institutions to conduct our pre-clinical and clinicalanalytical testing in compliance with good clinical and laboratory practicesestablished by the FDA. The data obtained from pre-clinical and clinicaltesting is subject to varying interpretations that could delay, limit orprevent regulatory approval. In addition, changes in FDA policy for drug approvalduring the period of development and in the requirements for regulatory reviewof each submitted NDA could result in additional delays or outright rejection.

 

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In January 2005, wesubmitted an sNDA to expand the Xyrem label to encompass improvement in theother primary symptoms of narcolepsy, specifically the reduction of excessivedaytime sleepiness (EDS) and the improvement in fragmented nighttime sleep, inaddition to the established efficacy of Xyrem in treating cataplexy. We expectthat the FDA will take action on this sNDA in late 2005. If approved, this sNDAmay provide an expanded indication which could increase the total available marketopportunity for the product in excess of $250 million, however, there can be noassurance that such application will be approved by the FDA.

 

We cannot assure you thatthe FDA or any foreign regulatory authority will approve a regulatory marketingapplication in a timely manner, if at all, with respect to any products wedevelop. Generally, the FDA and foreign regulatory authorities approve only avery small percentage of newly discovered pharmaceutical compounds that enterpre-clinical development. Moreover, even if the FDA approves a product, it mayplace commercially unacceptable limitations on the uses, or “indications,” forwhich a product may be marketed. This would result in additional cost and delayto the extent that further studies are required to provide additional data onsafety or effectiveness.

 

**FDAapproval does not guarantee financial success.**

 

Four of our currentlymarketed products have been approved for marketing by regulatory authorities inthe United States and elsewhere. We cannot assure you that any of our productswill be commercially successful or achieve the expected financial results as aresult of limited markets for our products as discussed in the risk factorentitled, “There is a limited market for our products”. We may encounterunanticipated problems relating to the development, manufacturing, distributionand marketing of our products. Some of these problems may be beyond ourfinancial and technical capacity to solve. The failure to adequately addressany such problems could have a material adverse effect on our business and ourprospects. In addition, the efforts of government entities and third partypayors to contain or reduce the costs of health care may adversely affect oursales and limit the commercial success of our products.

 

We cannot completelyinsulate our drug development portfolio from the possibility of clinical orcommercial failures or generic competition. Some products that we have selectedfor development may not produce the results expected during clinical trials orreceive FDA approval. Drugs approved by the FDA may not generate product salesof an acceptable level. We have discontinued the development of eleven productsfrom our portfolio since inception.

 

In addition we continueto invest in the development of additional indications for Xyrem. Thisspending, along with costs associated with the on-going marketing and sellingof Xyrem, resulted in a loss from operations in fiscal 2004. We expect that wewill incur a loss from operations in 2005.

 

**Significantgovernment regulation continues once a product is approved for sale.**

 

After a reviewingdivision of the FDA approves a drug, the FDA’s Division of Drug Marketing,Advertising and Communication must accept such drug’s marketing claims, whichare the basis for the drug’s labeling, advertising and promotion. We cannot besure that the Division of Drug Marketing, Advertising and Communication willaccept marketing claims we propose to the agency. The failure of the Divisionof Drug Marketing, Advertising and Communication to accept our proposedmarketing claims could have a material adverse effect on our business andprospects.

 

The FDA can require thata company conduct “post-marketing adverse event surveillance programs” tomonitor any side effects that occur after the company’s drug is approved formarketing. If the surveillance program indicates unsafe side effects, the FDAmay recall the product, and suspend or terminate a company’s authorization tomarket the product. The FDA also regulates the manufacturing process for anapproved drug. The FDA may impose restrictions or sanctions upon the subsequentdiscovery of previously unknown problems with a product or manufacturer. Onepossible sanction is requiring the recall of such product from the market. TheFDA must approve any change in manufacturer as well as most changes in themanufacturing process prior to implementation. Obtaining the FDA’s approval fora change in manufacturing procedures or change in manufacturers is a lengthyprocess and could cause production delays and loss of sales, which would have amaterial adverse effect on our business and our prospects.

 

In addition we haveadditional regulatory requirements with respect to certain DEA regulations andamendments.  While we believe that we are compliant with appropriateregulations and amendments, there can be no assurance that we will maintaincompliance with such regulations.

 

Certain foreign countriesregulate the sales price of a product after marketing approval is granted. Wecannot be sure that we can sell our products at satisfactory prices in foreignmarkets even if foreign regulatory authorities grant marketing approval.

 

**We relyon others for product development opportunities.**

 

We engage only in limitedresearch to identify new pharmaceutical compounds. To build our productportfolio, we have adopted a license and acquisition strategy. This strategyfor growth requires us to identify and acquire pharmaceutical products targetedat niche markets within our selected therapeutic markets. These productsusually require further development and approval by regulatory bodies beforethey can be marketed. We cannot assure you that any such products can besuccessfully acquired, developed, approved or marketed. We must rely upon thewillingness of others to sell or license pharmaceutical product opportunitiesto us. Other companies, including those with substantially greater resources,compete with us to acquire such products. We cannot assure you that

 

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we will be able toacquire rights to additional products on acceptable terms, if at all. Ourfailure to acquire or license any new pharmaceutical products, or our failureto promote and market any products successfully within an existing therapeuticarea, could have a material adverse effect on our business and our prospects.

 

We have contractualdevelopment rights to certain compounds through various license agreements.Generally, the licensor can unilaterally terminate these agreements for severalreasons, including, but not limited to the following reasons:

 

•           for cause if we breachthe contract;

•           if we become insolventor bankrupt;

•           if we do not applyspecified minimum resources and efforts to develop the compound under license;or

•           if we do not achievecertain minimum royalty payments, or in some cases, minimum sales levels.

 

We cannot assure you thatwe can meet all specified requirements and avoid termination of any licenseagreements. We cannot assure you that if any agreement is terminated, we willbe able to enter into similar agreements on terms as favorable as thosecontained in our existing license agreements.

 

We have invested most ofour capital in the development of products already licensed to or under thecontrol of the Company, therefore this risk has not had a material impact onour business in the past. As we look for additional opportunities to expand ourproduct portfolio, this risk factor may have an adverse effect on our business.

 

**Afailure by our manufacturers or suppliers to deliver product timely couldadversely affect sales revenue.**

 

We do not have and do notcurrently intend to establish any manufacturing capability for drug products.Instead, we engage third parties to manufacture our products. Failure byparties with whom we contract to adequately perform their responsibilities maydelay the submission of products for regulatory approval, impair our ability todeliver our products on a timely basis or otherwise adversely affect ourbusiness and our prospects.

 

The loss of either a bulkdrug supplier or drug product manufacturer would require us to obtainregulatory clearance in the form of a “pre-approval submission” and incurvalidation and other costs associated with the transfer of the bulk drug ordrug product manufacturing process. We believe that it could take as long astwo years for the FDA to approve such a submission. Because our products aretargeted to relatively small markets and our manufacturing production runs aresmall by industry standards, we have not incurred the added costs to certifyand maintain secondary sources of supply for bulk drug substance or backup drugproduct manufacturers for some products. Should we lose either a bulk drugsupplier or a drug product manufacturer, we could run out of marketable productto meet market demands or investigational product for use in clinical trials,while we wait for the FDA approval of a new bulk drug supplier or drug productmanufacturer.

 

During the course ofnegotiations in the ordinary course of business to renew or extend an agreementwith a manufacturing vendor, on occasion, the Company’s vendors have indicatedthat if price increases cannot be successfully negotiated, their agreement mayneed to be terminated. If this were to occur, we believe that there arealternate manufacturing and supply sources that would be available both onacceptable terms and on a timely basis for our products. In addition, ouragreements generally require the manufacturer or supplier to continue toperform their obligations under these agreements for at least one year, and insome cases, two years, following formal notice of termination, during whichperiod we would seek to implement new manufacturing and supply relationships.However, we cannot assure you that the change of a bulk drug supplier or drugproduct manufacturer and the transfer of the processes to another third partywill be approved by the FDA, and if approved, in a timely manner. Therefore, wemay experience additional costs and delay with switching providers, which inturn could adversely affect sales revenue.

 

***Bulk Drug Supply***

 

Bulk drug substance isthe active chemical compound used in the manufacture of our drug products. Wecurrently have a single supplier for the supply of bulk drug substance used inCystadane, Antizol and Antizol-Vet. If we were to lose a company as a supplier,we would be required to identify a new supplier for the bulk drug substance. Wealso currently use a single supplier for the supply of bulk drug substance usedin Xyrem, which is expected to exceed 60% of our revenue in 2005. If we were tolose this company as a supplier, we would be required to identify a newsupplier.  The contract with the manufacturer of the bulk drug substancefor Antizol and Antizol-Vet was terminated in 2004, although the supplier willcontinue to provide bulk drug substance until May 2006. We have contracted witha new manufacturing source for this product and have begun the transfer of themanufacturing process. While we believe that this transfer will be completed ina timely manner and that there will be no interruption in the supply of ourAntizol and Antizol-Vet, there can be no assurance that this process will becompleted in the appropriate time period to ensure supply of inventory.

 

***Drug Product Manufacture***

 

From bulk drug substance,drug product manufacturers formulate a finished drug product and package theproduct for sale or for use in clinical trials. We also use a single supplierfor drug product manufacturing of Antizol, Antizol-Vet and a different supplierhas been authorized to manufacture Xyrem. If we were to lose either of thesecompanies as a manufacturer, we would be required to identify a newmanufacturer. We cannot assure you that our drug product manufacturingarrangements with either or both of these suppliers will not change. We havealso decided to change the relationship with the manufacturer of finished drugproduct for Xyrem.  The supply agreement with the Xyrem finished drugproduct manufacturer has been extended to 2008.  The current manufacturer

 

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will continue tomanufacturer the product; however, final packaging will be completed by anadditional vendor.  We have identified a new source for this packaging andhave executed an agreement for this service. There can be no assurance that anynecessary manufacturing operations or regulatory supplements will be completedin the appropriate time period to ensure supply of inventory.

 

**Wecannot control our contractors’ compliance with applicable regulations.**

 

The FDA defines andregulates good manufacturing practices to which bulk drug suppliers and drugproduct manufacturers are subject. The Drug Enforcement Agency (DEA) definesand regulates the handling and reporting requirements for certain drugs whichhave abuse potential, known as “scheduled drugs.” Foreign regulatoryauthorities prescribe similar rules and regulations. Our supply andmanufacturing contractors must comply with these regulatory requirements.Failure by our contractors to comply with FDA or DEA requirements or applicableforeign requirements could result in significant time delays or in ourinability to commercialize or continue to market a product. Either result couldhave a material adverse effect on our business and prospects. Failure to complywith good manufacturing practices or other applicable legal requirements canlead to federal seizure of violative products, injunctive actions brought bythe federal government, or potential criminal and civil liability for OrphanMedical, our officers, or our employees. This risk has not impacted us in thepast and we are not aware of any instances of noncompliance with applicableregulations that may materially impact our business. We cannot assure you thatwe will be able to maintain relationships either domestically or abroad withcontractors whose facilities and procedures comply or will continue to complywith FDA or DEA requirements or applicable foreign requirements.

 

**We havea single distributor for three of our products: Antizol, Antizol-Vet andCystadane.**

 

We have an agreement witha single distribution contractor to provide integrated distribution andoperations services to support transactions between us and our wholesalers,specialty distributors, and direct customers. The contractor currentlydistributes Antizol, Antizol-Vet and Cystadane. The contractor may alsodistribute future products should those products receive marketing clearancefrom the FDA. A failure by this distributor to fulfill its responsibilitiesmight have an adverse affect on our ability to meet customer demand in a timelymanner.

 

We cannot assure you thatour distribution arrangements with this entity or other third parties would beavailable, or continue to be available to us on commercially acceptable terms.The loss of a distributor or failure to renew agreements with an existingdistributor could have a material adverse effect on our business and prospects.

 

**Xyrem isclassified as a Schedule III controlled substance.**

 

We have an agreement witha specialty pharmacy to distribute Xyrem. Xyrem is classified as a Schedule IIIcontrolled substance and approved under Subpart H of the FDA’s marketingauthorization process, and distribution is strictly controlled. The specialtypharmacy is the only source through which Xyrem can be obtained. Distributionis governed by the FDA’s Subpart H regulations and complies with therisk-management controls jointly developed by Orphan Medical, the FDA, the DrugEnforcement Agency and law enforcement agencies. Every shipment of Xyrem issubject to stringent safeguards to ensure it reaches only individuals for whomit has been legitimately prescribed. Our contractor for this product alsoprovides reimbursement management, patient assistance and information hotlineservices and specialty distribution and marketing services to physicianpractices with respect to Xyrem. The Company is in the process of extendingthis distribution agreement to July 31, 2007. We cannot assure you thatthe agreement will be extended on terms acceptable to the Company.

 

Our purchases of sodiumoxybate, a schedule I DEA controlled substance, the active ingredient in Xyrem,for use in the production of Xyrem are subject to quotas that are published andapproved by the U.S. Drug Enforcement Administration. Supply disruption couldresult from delays in obtaining DEA approvals or the receipt of approvals forquantities of sodium oxybate that are insufficient to meet current or projectedproduct demand. The quota system also limits our ability to build inventoriesas a method of insuring against possible supply disruptions.

 

**We relyon foreign marketing alliances and have no assurance of foreign licensees.**

 

Our strategy to sell ourproducts in foreign markets is to license foreign marketing and distributionrights to a foreign company after a new drug application is submitted orapproved in the United States. We consider Europe, Asia, and Canada our mostattractive foreign markets. Our current foreign arrangements are:

 

•     *Europe.* We have licensed the marketing and distributionrights for Xyrem and Cystadane in Europe. If our licensees are unsuccessful intheir registration and distribution efforts, we may find it difficult tocontract with other distributors for these products within Europe. Distributionof all products except Antizol is limited to “named patient” or “emergency use”basis until full regulatory approval is obtained. Antizol has been approved foruse in the United Kingdom but is limited to “named patient” basis in otherparts of Europe. This distribution of the Company’s products is expected toresult in a limited contribution to the Company’s revenues.

 

•     *Australia and New Zealand.* We have licensed marketingand distribution rights for Cystadane in Australia and New Zealand, but salesof these products have not been material. We do not expect sales to increase inthe near future to the point that they become material.

 

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•     *Israel.* We have licensed marketing and distributionrights for Antizol and Cystadane in Israel. Full regulatory approval forCystadane was obtained in Israel in February 2000. We do not expect suchdistribution to result in material revenues.

 

•     *Canada.* We have licensed marketing and distributionrights for Antizol in Canada. For Cystadane we have only licensed thedistribution rights in Canada. We do not expect such distribution to result inmaterial revenues.

 

We depend on our foreignlicensees for the regulatory registration of our products in foreign countries.We cannot be sure that our licensees can obtain such registration. In addition,we cannot be sure that we will be able to negotiate commercially acceptablelicense agreements for our other products or in additional foreign countries.Furthermore, we cannot assure you that these companies will be successful innegotiating acceptable pricing or in marketing and selling our products intheir respective territories.

 

**Ourproducts might be recalled.**

 

A product can be recalledat our discretion or at the discretion of the FDA, the U.S. Federal TradeCommission, or other government agencies having regulatory authority formarketed products. A recall may occur due to disputed labeling claims,manufacturing issues, quality defects, safety issues, or other reasons. Wecannot assure you that a product recall will not occur. We do not carry anyinsurance to cover the risk of a potential product recall. Any product recallcould have a material adverse effect on our business and prospects. To date, norecall of products marketed by the Company has occurred.

 

**We facelimits on price flexibility and third-party reimbursement.**

 

The flexibility of pricesthat we can charge for our products depends on government regulation, both inthe United States and abroad, and on other third parties. One important factoris the extent to which reimbursement for our products will be available topatients from government health administration authorities, private healthinsurers and other third-party payors. Government officials and private healthinsurers are increasingly challenging the price of medical products andservices. We are uncertain as to the pricing flexibility we will have withrespect to, and if we will be reimbursed for, newly approved health careproducts.

 

In the United States, weexpect continuing federal and state proposals to implement greater governmentcontrol of the pricing and profitability of prescription pharmaceuticals. Costcontrols, if mandated by a government agency, could decrease, or limit, theprice we receive for our products or products we may develop in the future. Wemay not be able to recover our development costs, which could be substantial.We may not be able to realize an appropriate profit margin. This could have amaterial adverse effect on our business. Furthermore, federal and stateregulations govern or influence reimbursement of health care providers formedical treatment of certain patients. We cannot assure you that action takenby federal and/or state governments, if any, with regard to health care reformwill not have a material adverse effect on our business and prospects.

 

Certain private healthinsurers and third-party payors may attempt to control costs further byselecting exclusive providers of pharmaceuticals. If such arrangements are madewith our competitors, these insurers and third-party payors would not reimbursepatients who purchase our competing products. This would diminish the marketfor our products and could have a material adverse effect on our business andprospects.

 

**We faceintense competition in our industry.**

 

Competition in thepharmaceutical industry is intense. Potential competitors in the United Statesare numerous and include pharmaceutical, chemical and biotechnology companies.Many of these companies have substantially greater capital resources, marketingexperience, research and development staffs and facilities than we do. We seekto limit potential sources of competition by developing products that areeligible for orphan drug status upon NDA approval or other forms of protection.We cannot assure you, however, that our competitors will not succeed indeveloping similar technologies and products more rapidly than we can.Similarly, we cannot assure you that these competing technologies and productswill not be more effective than any of those that we have developed or arecurrently developing.

 

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**Weexpect rapid technological and other change to be constant in our industry.**

 

The pharmaceuticalindustry has experienced rapid and significant technological change as well asstructural changes, such as those brought about by changes in heath caredelivery or in product distribution. We expect that pharmaceutical technologywill continue to develop and change rapidly, and our future success willdepend, in large part, on our ability to develop and maintain a competitiveposition. Technological development by others may result in our productsbecoming obsolete before they are marketed or before we recover a significantportion of the development and commercialization expenses incurred with respectto such products. In addition, alternative therapies, new medical treatments,or changes in the manner in which health care is delivered or products providedcould alter existing treatment regimes or health care practices, and therebyreduce the need for one or more of our products, which would adversely affectour business and our prospects.

 

**We facesubstantial product liability and insurance risks.**

 

Testing and sellinghealth care products entails the inherent risk of product liability claims. Thecost of product liability insurance coverage has increased and is likely tocontinue to increase in the future. Substantial increases in insurance premiumcosts in many cases have rendered coverage economically impractical. Wecurrently carry product liability coverage in the aggregate amount of $30million for all claims made in any policy year. Although to date we have notbeen the subject of any product liability or other claims, we cannot assure youthat we will be able to maintain product liability insurance on acceptableterms or that our insurance will provide adequate coverage against potentialclaims. A successful uninsured product liability or other claim against uscould have a material adverse effect on our business and prospects.

 

**Item 3. ****Quantitative and Qualitative Disclosures aboutMarket Risk**

 

There have been nomaterial changes to the Company’s market risk since the filing of the Company’sAnnual Report on Form 10-K as amended.

 

**Item 4. ****Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures. * Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we evaluated the effectivenessof the design and operation of our disclosure controls and procedures (as definedin Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based uponthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective.

 

*Changesin Internal Control over Financial Reporting*.  Duringour first fiscal quarter, there were no changes made in our internal controlover financial reporting (as defined in Rule 13(a)-15(f) under the ExchangeAct) that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.**  **Legal Proceedings**

 

None

 

**Item 2.** **Unregistered Sales of Equity Securities and Use ofProceeds**

 

None

 

**Item 3.** **Defaults Upon Senior Securities**

 

None

 

**Item 4.****  Submission of Matters to a Vote of Security Holders**

 

None

 

**Item 5.**  **Other Information**

 

None

 

**Item 6.**  **Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                          |
| 2.1                 |       | Agreement and Plan of  Merger, dated as of April 18, 2004, by and among the Company, Jazz  Pharmaceuticals, Inc. and Twist Merger Sub, Inc. (incorporated by reference  to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 20,  2005). |
|                |       |                                                                                                                                                                                                                                                          |
| 10.1                |       | Voting Agreement, dated  as of April 18, 2005, by and among the Company, Jazz Pharmaceuticals, Inc.  and Twist Merger Sub, Inc. (incorporated by reference to Exhibit 10.1 to the  Company's Current Report on Form 8-K filed on April 20, 2005).             |
|                |       |                                                                                                                                                                                                                                                          |
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                          |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                          |
| 32.1                |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                          |
| 32.2                |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|        |         | Orphan Medical,  Inc.                   |   |
|-------------|--------------|-----------------------------------------|--------|
|        |         | Registrant                              |   |
|        |         |                                    |   |
| Date   | May 10, 2005 |                                    | By     | /s/ Timothy G.  McGrath |   |
|        |         | Timothy G  McGrath                      |   |
|        |         | Chief Financial  Officer                |   |
|        |         | (duly authorized  officer and principal |   |
|        |         | financial  officer)                     |   |
|             |              |                                         |        |  |  |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                    |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                          |
| 2.1         |       | Agreement and Plan of  Merger, dated as of April 18, 2004, by and among the Company, Jazz  Pharmaceuticals, Inc. and Twist Merger Sub, Inc. (incorporated by reference  to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 20,  2005). |
|        |       |                                                                                                                                                                                                                                                          |
| 10.1        |       | Voting Agreement, dated  as of April 18, 2005, by and among the Company, Jazz Pharmaceuticals, Inc.  and Twist Merger Sub, Inc. (incorporated by reference to Exhibit 10.1 to the  Company's Current Report on Form 8-K filed on April 20, 2005).             |
|        |       |                                                                                                                                                                                                                                                          |
| 31.1        |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                          |
| 31.2        |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                          |
| 32.1        |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                          |
| 32.2        |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                     |

 

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