##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
    Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30,
    2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File
    No. 001-15875
    King Pharmaceuticals,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Tennessee

54-1684963(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)501 Fifth Street, Bristol, TN

37620(Address of principal executive
    offices)

(Zip Code)   (423) 989-8000
 (Registrants telephone
    number, including area code)
  þ o
  Regulation S-T o o
  12b-2
  Large
    accelerated
    filer þ
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ




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##### 





TABLE OF
    CONTENTS
   
 PagePart I  Financial
    InformationItem 1.

Financial Statements


3Condensed Consolidated Balance Sheets


3Condensed Consolidated Statements of
    Operations


4Condensed Consolidated Statements of Changes in
    Shareholders Equity and Other Comprehensive Income


5Condensed Consolidated Statements of Cash
    Flows


6Notes to Condensed Consolidated Financial
    Statements


7Item 2.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


40Item 3.

Quantitative and Qualitative Disclosures about
    Market Risk


69Item 4.

Controls and Procedures


70Part II  Other
    InformationItem 1.

Legal Proceedings


70Item 1A.

Risk Factors


70Item 5.

Other Information


72Item 6.

Exhibits


72Signatures


73EX-31.1EX-31.2EX-32.1EX-32.2   2




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  KING
    PHARMACEUTICALS, INC.CONDENSED CONSOLIDATED BALANCE
    SHEETS
    (In thousands)
    (Unaudited)
   September 30,


December 31,2009


2008ASSETSCurrent assets:Cash and cash equivalents

$
479,968


$
940,212Investments in debt securities


39,624



6,441Marketable securities


1,930



511Accounts receivable, net of allowance of $3,966 and $4,713


227,030



245,070Inventories


207,650



258,303Deferred income tax assets


100,577



89,513Income taxes receivable


12,051



Prepaid expenses and other current assets


99,374



129,214Total current assets


1,168,204



1,669,264Property, plant and equipment, net


401,162



417,259Intangible assets, net


822,589



934,219Goodwill


453,008



450,548Deferred income tax assets


250,017



267,749Investments in debt securities


292,034



353,848Other assets (includes restricted cash of $16,649 and $16,580)


75,379



122,826Assets held for sale


7,900



11,500Total assets

$
3,470,293


$
4,227,213LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
87,111


$
140,908Accrued expenses


309,962



411,488Income taxes payable






10,448Short-term debt


4,101



5,230Current portion of long-term debt


122,449



439,047Total current liabilities


523,623



1,007,121Long-term debt


505,904



877,638Other liabilities


105,358



110,022Total liabilities


1,134,885



1,994,781Commitments and contingencies (Note 10)Shareholders equity


2,335,408



2,232,432Total liabilities and shareholders equity

$
3,470,293


$
4,227,213    3




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.CONDENSED CONSOLIDATED STATEMENTS
    OF OPERATIONS
    (In thousands, except per share data)
    (Unaudited)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Revenues:Net sales

$
451,417


$
369,989


$
1,295,995


$
1,156,072Royalty revenue


11,932



18,456



41,399



61,257Total revenues


463,349



388,445



1,337,394



1,217,329Operating costs and expenses:Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below


162,797



101,465



469,829



295,111Selling, general and administrative, exclusive of
    co-promotion
    fees


134,315



93,291



390,885



307,102Acquisition related costs










6,733



Co-promotion fees


1,427



5,987



4,022



34,007Total selling, general and administrative expense


135,742



99,278



401,640



341,109Research and development


22,640



33,855



71,098



111,025Research and
    development-in-process
    upon acquisition














5,500Total research and development


22,640



33,855



71,098



116,525Depreciation and amortization


53,349



29,894



159,560



121,749Asset impairments














39,429Restructuring charges (Note 14)


1,653



1,153



51,178



1,670Total operating costs and expenses


376,181



265,645



1,153,305



915,593Operating income


87,168



122,800



184,089



301,736Other income (expense):Interest income


1,027



8,110



5,321



31,000Interest expense


(22,218
)


(5,300
)


(72,913
)


(15,571
)Gain (loss) on investments


521







(826
)


Other, net


1,526



(1,024
)


2,859



(1,851
)Total other (expense) income


(19,144
)


1,786



(65,559
)


13,578Income before income taxes


68,024



124,586



118,530



315,314Income tax expense


25,536



42,114



48,829



106,525Net income

$
42,488


$
82,472


$
69,701


$
208,789Net income per common share:Basic net income per common share

$
0.17


$
0.34


$
0.29


$
0.86Diluted net income per common share

$
0.17


$
0.34


$
0.28


$
0.85    4




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.CONDENSED CONSOLIDATED STATEMENTS
    OF CHANGES IN
    SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
    (In thousands, except share data)
    (Unaudited)
  AccumulatedOtherCommon Stock


Retained


ComprehensiveShares


Amount


Earnings


Income (Loss)


TotalBalance at December 31, 2007


245,937,709


$
1,359,817


$
1,213,057


$
1,957


$
2,574,831Comprehensive income:Net income










208,789







208,789Net unrealized loss on investments in debt securities, net of
    taxes of $8,693














(13,897
)


(13,897
)Foreign currency translation














(1,018
)


(1,018
)Total comprehensive income


















193,874Stock-based award activity


531,630



21,617











21,617Balance at September 30, 2008


246,469,339


$
1,381,434


$
1,421,846


$
(12,958
)

$
2,790,322Balance at December 31, 2008


246,487,232


$
1,389,698


$
871,021


$
(28,287
)

$
2,232,432Adoption of FASB statement on other-than-temporary investments,
    net of taxes of $396










646



(646
)


Comprehensive income:Net income










69,701







69,701Reclassification of unrealized losses on investments in debt
    securities, net of taxes of $542














885



885Net unrealized gain on marketable securities, net of tax of $539














880



880Net unrealized gain on investments in debt securities, net of
    taxes of $3,354














5,472



5,472Foreign currency translation














3,227



3,227Total comprehensive income


















80,165Stock-based award activity


1,739,351



22,811











22,811Balance at September 30, 2009


248,226,583


$
1,412,509


$
941,368


$
(18,469
)

$
2,335,408    5




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    (In thousands)
    (Unaudited)
  Nine Months EndedSeptember 30,2009


2008Cash flows provided by operating activities

$
262,164


$
349,884Cash flows from investing activities:Transfers to restricted cash


(69
)


(6
)Purchases of investments in debt securities






(279,175
)Proceeds from maturities and sales of investments in debt
    securities


38,473



1,185,830Purchases of property, plant and equipment


(29,608
)


(45,523
)Proceeds from sale of property and equipment


337



10,390Proceeds from the sale of
    Kadian®


59,800



Acquisition of Alpharma


(70,230
)


Acquisition of
    Avinza®


(8
)


(43
)Forward foreign exchange contracts


(8,906
)


Purchases of intellectual property and product rights


(2,178
)


(7,890
)Net cash (used in) provided by investing activities


(12,389
)


863,583Cash flows from financing activities:Proceeds from exercise of stock options


1,742



347Net payments related to stock-based award activity


(3,554
)


(2,372
)Payments on long-term debt


(710,429
)


Debt issuance costs


(1,313
)


Net cash used in financing activities


(713,554
)


(2,025
)Effect of exchange rate changes on cash


3,535



(Decrease) increase in cash and cash equivalents


(460,244
)


1,211,442Cash and cash equivalents, beginning of period


940,212



20,009Cash and cash equivalents, end of period

$
479,968


$
1,231,451    6




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2009 and 2008
 (In thousands, except share and per share data)
 (Unaudited)
  1.
    General  Form 10-Q Rule 10-01 Regulation S-X Form 10-K 1 4
      2.
    Earnings
    Per Share    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Basic net income per common share:Weighted average common shares


244,963,911



243,695,777



244,515,264



243,475,338Diluted net income per common share:Weighted average common shares


244,963,911



243,695,777



244,515,264



243,475,338Effect of stock options


115,844



84,090



47,087



52,631Effect of dilutive share awards


3,185,797



2,054,129



2,807,487



1,655,874Weighted average common shares


248,265,552



245,833,996



247,369,838



245,183,843    7




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    Skelaxin®  ® ® ® ® ® ® ®
  4.
    Fair
    Value Measurements  Cash and Cash Equivalents.
  Derivatives. non-U.S. cash
   8




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended September 30, 2009

Nine Months Ended September 30, 2009Gain or





Gain or(Loss)





(Loss)Reclassified





ReclassifiedGain or

from



Gain or

from(Loss) in

Accumulated



(Loss) in

AccumulatedOther

Other



Other

OtherComprehensive

Comprehensive

Gain or

Comprehensive

Comprehensive

Gain orIncome on

Income into

(Loss)

Income on

Income into

(Loss)Derivative

Income

Recorded

Derivative

Income

Recorded(Effective

(Effective

(Ineffective

(Effective

(Effective

(IneffectiveDerivatives in Cash Flow Hedging Relationships

Portion)

Portion)

Portion)

Portion)

Portion)

Portion)Interest rate swap

$



$
(232
)

$
(606
)

$



$
(232
)

$
(606
)   Three Months

Nine MonthsEnded September 30,

Ended September 30,2009

2009Gain or (Loss)

Gain or (Loss)Recognized in

Recognized inIncome on

Income onDerivatives not Designated as Hedging Instruments

Derivative Amount

Derivative AmountForeign currency contracts


Other income


$
(5,789
)

$
(5,360
)   Marketable Securities.
  Investments in Debt Securities. available-for-sale Other-than-temporary other-than-temporary
       9




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    other-than-temporary, other-than-temporary. net-of-tax) other-than-temporary
      available-for-sale
   10




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value Measurements at 9/30/2009 UsingQuoted Prices in


Significant Other


SignificantActive Markets for


Observable


UnobservableIdentical Assets


Inputs


InputsDescription

9/30/2009


(Level 1)


(Level 2)


(Level 3)Assets:Money market funds

$
463,942


$
463,942


$



$
U.S. government securities


4,893



4,893







Marketable securities


1,930



1,930







Investments in debt securities


331,658











331,658Right to sell debt securities


3,611











3,611Total assets

$
806,034


$
470,765


$



$
335,269   Fair Value Measurements at 12/31/2008 UsingQuoted Prices in


Significant Other


SignificantActive Markets for


Observable


UnobservableIdentical Assets


Inputs


InputsDescription

12/31/2008


(Level 1)


(Level 2)


(Level 3)Assets:Money market funds

$
833,653


$
833,653


$



$
Marketable securities


511



511







Investments in debt securities


360,289







2,400



357,889Right to sell debt securities


4,024











4,024Total assets

$
1,198,477


$
834,164


$
2,400


$
361,913Liabilities:Forward foreign exchange contracts

$
2,582


$



$
2,582


$
        11




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2009


2008Beginning balance, January 1

$
361,913


$
Total gains or losses (realized/unrealized)Included in earnings


(823
)


Included in other comprehensive income (loss)


(4,300
)


(28,418
)Settlements


(8,000
)


(154,950
)Transfers in and/or out of Level 3


1,700



724,725Ending balance, March 31

$
350,490


$
541,357Total gains or losses (realized/unrealized)Included in earnings


(524
)


Included in other comprehensive income (loss)


13,781



(5,648
)Settlements


(25,650
)


(151,425
)Transfers in and/or out of Level 3


700



31,675Ending balance, June 30

$
338,797


$
415,959Total gains or losses (realized/unrealized)Included in earnings


521



Included in other comprehensive income (loss)


2,201



11,476Settlements


(6,250
)


(11,700
)Transfers in and/or out of Level 3






Ending balance, September 30

$
335,269


$
415,735   5.
    Inventories    September 30,


December 31,2009


2008Raw materials

$
83,550


$
82,273Work-in-process


29,005



62,836Finished goods (including $6,187 and $7,385 of sample inventory,
    respectively)


150,982



176,582263,537



321,691Inventory valuation allowance


(55,887
)


(63,388
)Total inventories

$
207,650


$
258,303   6.
    Property,
    Plant and Equipment   12




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    7.
    Acquisitions,
    Dispositions, Co-Promotions and Alliances  ® tm ®
    nine-months
    ValuationCurrent assets

$
915,296Current deferred income taxes


31,589Property, plant and equipment


157,649Intangible assets, net


300,000Goodwill


323,858In-process research and development


590,000Other long-term assets


26,679Current liabilities


(268,636
)Convertible debentures


(385,227
)Long-term deferred income taxes


(22,005
)Other long-term liabilities


(50,299
)Total purchase price

$
1,618,904  13




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Weighted AverageValuation


Amortization PeriodFlector®

    Patch

$
130,000



11 yearsAnimal Health intangibles


170,000



19 yearsTotal

$
300,000     Branded prescription pharmaceuticals

$
235,561Animal Health


88,297Total

$
323,858       tm
  tm moderate-to-severe around-the-clock
   14




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended

Nine Months EndedSeptember 30, 2008

September 30, 2008Total revenues

$
513,001


$
1,581,042Income from continuing operations

$
58,521


$
62,442Net income

$
58,521


$
266,131Basic net income per common share

$
0.24


$
1.09Diluted net income per common share

$
0.24


$
1.09   ® ® ® ®
  ®
  MaximumPurchasePrice PaymentFirst Quarter 2009

$
30,000Second Quarter 2009

$
25,000Third Quarter 2009

$
25,000Fourth Quarter 2009

$
20,000First Quarter 2010

$
20,000Second Quarter 2010

$
7,500   ® ®
 15




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    Intangible
    Assets and Goodwill    September 30, 2009


December 31, 2008Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationBranded prescription pharmaceuticals

$
1,252,300


$
727,881


$
1,252,300


$
627,233Animal Health


170,000



7,167



170,000



Meridian Auto-Injector


182,587



47,480



179,879



41,281Royalties


3,731



3,501



3,731



3,177Total intangible assets

$
1,608,618


$
786,029


$
1,605,910


$
671,691     ® ® ® ® ® and/or ® ®
  ® ® ® and/or
  ® ® ® ® ® and/or ®
 16




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    AnimalBranded


Health


MeridianSegment


Segment


Segment


TotalGoodwill at December 31, 2008

$
258,092


$
84,046


$
108,410


$
450,548Adjustment to Alpharma acquisition


(1,791
)


4,251







2,460Goodwill at September 30, 2009

$
256,301


$
88,297


$
108,410


$
453,008       9.
    Long-Term
    Debt    September 30,


December 31,2009


2008Convertible senior notes

$
327,713


$
314,416Senior secured revolving credit facility


272,231



425,000Senior secured term facility


28,409



192,042Alpharma convertible senior notes






385,227Total long-term debt


628,353



1,316,685Less current portion


122,449



439,047Long-term portion

$
505,904


$
877,638   Convertible
    Senior Notes
     17




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Condensed
    Consolidated Statement of Operations
    Three months ended September 30, 2008
  As ReportedAs Currently


Prior to


Effect ofReported


Adoption


ChangeDepreciation and amortization

$
29,894


$
29,695


$
199Total operating costs and expenses


265,645



265,446



199Operating income


122,800



122,999



(199
)Interest expense


(5,300
)


(1,828
)


(3,472
)Total other income


1,786



5,258



(3,472
)Income before income taxes


124,586



128,257



(3,671
)Income tax expense


42,114



43,507



(1,393
)Net income

$
82,472


$
84,750


$
(2,278
)Income per common share:Basic net income per common share

$
0.34


$
0.35


$
(0.01
)Diluted net income per common share

$
0.34


$
0.34


$
(0.00
)Total comprehensive income

$
88,905


$
91,183


$
(2,278
)   Condensed
    Consolidated Statement of Operations
    Nine months ended September 30, 2008
  As ReportedAs Currently


Prior to


Effect ofReported


Adoption


ChangeDepreciation and amortization

$
121,749


$
121,198


$
551Total operating costs and expenses


915,593



915,042



551Operating income


301,736



302,287



(551
)Interest expense


(15,571
)


(5,470
)


(10,101
)Total other income


13,578



23,679



(10,101
)Income before income taxes


315,314



325,966



(10,652
)Income tax expense


106,525



110,562



(4,037
)Net income

$
208,789


$
215,404


$
(6,615
)Income per common share:Basic net income per common share

$
0.86


$
0.88


$
(0.02
)Diluted net income per common share

$
0.85


$
0.88


$
(0.03
)Total comprehensive income

$
193,874


$
200,489


$
(6,615
)  18




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Condensed
    Consolidated Balance Sheet
    As of December 31, 2008
  As ReportedAs Currently

Prior to

Effect ofReported

Adoption

ChangeProperty, plant and equipment, net

$
417,259


$
409,821


$
7,438Deferred income tax assets


267,749



303,722



(35,973
)Other assets


122,826



124,774



(1,948
)Total assets


4,227,213



4,257,696



(30,483
)Long-term debt


877,638



963,222



(85,584
)Total liabilities


1,994,781



2,080,365



(85,584
)Retained earnings


871,021



892,297



(21,276
)Shareholders equity


2,232,432



2,177,331



55,101Total liabilities and shareholders equity


4,227,213



4,257,696



(30,483
)       September 30, 2009


December 31, 2008Gross carrying amount

$
400,000


$
400,000Unamortized debt discount


72,287



85,584Net carrying amount

$
327,713


$
314,416       Senior
    Secured Revolving Credit Facility
          Senior
    Secured Term Facility
   19




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Alpharma
    Convertible Senior Notes
    10.
    Commitments
    and Contingencies  Intellectual
    Property Matters
  Altace®
  ® ® ®
  ® ® ®
  ®
 20




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Skelaxin®
  ® ® method-of-use ® ® ®
  30-month 30-month
 21




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    method-of-use ® ®
  ® ®
  ® ® ® ®
  ® ® ® ®
  Avinza®
  ® ®
 22




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      ® ® ®
  Adenoscan®
  ®
  Epi-Pen
   23




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Embedatm
  and/or tm
  Average
    Wholesale Price Litigation
  In re:
    Pharmaceutical Industry Average Wholesale Pricing Litigation
     24




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Governmental
    Pricing Investigation and Related Matters
      and/or
    Fen-Phen
    Litigation
  In re Fen-Phen Litigation. and/or
 25




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  ®
    Hormone
    Replacement Therapy
  In re: Prempro Products
    Liability Litigation
 26




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Alpharma
    Matters
  and/or
  Department
    of Justice Investigation
  ® ®
    Chicken
    Litter Litigation
    co-defendants
    AWP
    Litigation
   27




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
    Environmental
    Matters
    Other
    Contingencies
  ® ®
  11.
    Accounting
    Developments         28




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      other-than-temporary,
          12.
    Income
    Taxes     29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    13.
    Segment
    Information  ®
    ®
  30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Total revenues:Branded prescription pharmaceuticals

$
283,414


$
301,879


$
836,228


$
986,966Animal Health


95,843







258,502



Meridian Auto-Injector


71,841



67,515



200,539



165,687Royalties


11,932



18,456



41,399



61,257Contract manufacturing


122,753



109,874



440,655



363,210All other


(49
)


(63
)


(101
)


2,345Eliminations


(122,385
)


(109,216
)


(439,828
)


(362,136
)Consolidated total net revenues

$
463,349


$
388,445


$
1,337,394


$
1,217,329Segment profit:Branded prescription pharmaceuticals(1)

$
204,063


$
227,701


$
620,059


$
761,710Animal Health(1)


42,471







88,028



Meridian Auto-Injector


43,336



42,810



122,719



103,868Royalties


10,452



16,175



36,294



53,772Contract manufacturing


229



359



567



537All other


1



(65
)


(102
)


2,331Other operating costs and expenses


(213,384
)


(164,180
)


(683,476
)


(620,482
)Other income


(19,144
)


1,786



(65,559
)


13,578Income before tax

$
68,024


$
124,586


$
118,530


$
315,314     (1)
    
    The segment profit for branded prescription pharmaceuticals for
    the three months ended September 30, 2009 includes a charge
    of $2,566 related to the mark up of inventory upon acquisition
    of Alpharma. The segment profit for branded prescription
    pharmaceuticals and Animal Health for the nine months ended
    September 30, 2009 includes charges of $6,022 and $34,128,
    respectively. For additional information, please see Note 7.    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Total revenues:Neuroscience

$
185,908


$
150,084


$
513,862


$
466,377Hospital


46,350



70,084



151,007



207,987Legacy:Cardiovascular/metabolic


35,507



63,441



113,293



251,623Other


15,649



18,270



58,066



60,979Consolidated branded pharmaceutical revenues

$
283,414


$
301,879


$
836,228


$
986,966  31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   14.
    Restructuring
    Activities  First
    Quarter of 2009 Action
  ® ® ® ®
  ®
      Fourth
    Quarter of 2008 Action
     32




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accrued














AccruedBalance at


Income











Balance atDecember 31,


Statement


Alpharma


Cash


Non-Cash


September 30,2008


Impact


Acquisition


Payments


Costs


2009Third quarter of 2009 actionEmployee separation payments

$



$
1,026


$



$



$



$
1,026First quarter of 2009 actionEmployee separation payments






48,563







44,557



3,187



819Contract termination






575







575







Other






459







459







Accelerated depreciation(1)






485











485



Fourth quarter of 2008 actionEmployee separation payments


49,437



1,000



4,015



34,612



(793
)


20,633Contract termination


16,801



(3
)


(2,471
)


6,472



(635
)


8,490Other


182



(1
)






(1
)






182Accelerated depreciation(1)






196











196



Third quarter of 2008 actionEmployee separation payments


9











9







Third quarter of 2007 actionEmployee separation payments


103



(103
)














Contract termination






4







4







Third quarter of 2006 actionEmployee separation payments


2,462



(342
)






843



30



1,247Accelerated depreciation(1)






582











582



Fourth quarter of 2005 actionEmployee separation payments


8











8







$
69,002


$
52,441


$
1,544


$
87,538


$
3,052


$
32,397     (1)
    
    Included in depreciation and amortization on the Consolidated
    Statements of Operations.    15.
    Stock-Based
    Compensation           33




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        16.
    Pension
    Plans and Postretirement Benefits        Three Months EndedSeptember 30, 2009


Nine Months Ended September 30, 2009Pension


Postretirement


Pension


PostretirementBenefits


Benefits


Benefits


BenefitsService Cost

$



$
21


$



$
63Interest Cost


758



101



2,274



303Expected return on plan assets


(707
)






(2,121
)


Recognized net actuarial loss


24



53



72



159Net periodic benefit cost

$
75


$
175


$
225


$
525   17.
    Change in
    Estimate   34




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® ® ®
  18.
    Guarantor
    Financial Statements     35




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING BALANCE SHEETS
    (Unaudited)
    (In thousands)
  September 30, 2009


December 31, 2008Non-














Non-Guarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
193,412


$
46,752


$
239,804


$



$
479,968


$
401,657


$
52


$
538,503


$



$
940,212Investments in debt securities


39,624















39,624



6,441















6,441Marketable securities


1,930















1,930



511















511Accounts receivable, net


2,975



187,862



36,193







227,030



61



140,502



104,507







245,070Inventories


83,627



94,037



31,393



(1,407
)


207,650



59,279



26,406



172,618







258,303Deferred income tax assets


36,744



63,352



481







100,577



36,041



26,146



27,326







89,513Income taxes receivable


15,008



(2,431
)


(526
)






12,051



















Prepaid expenses and other current assets


20,411



77,270



1,693







99,374



14,090



8,283



106,841







129,214Total current assets


393,731



466,842



309,038



(1,407
)


1,168,204



518,080



201,389



949,795







1,669,264Property, plant and equipment, net


148,344



243,205



9,613







401,162



140,314



115,996



160,949







417,259Intangible assets, net






787,512



35,077







822,589







633,300



300,919







934,219Goodwill






453,008











453,008







129,150



321,398







450,548Deferred income tax assets


(29,147
)


281,306



(2,142
)






250,017



(18,117
)


340,764



(54,898
)






267,749Investments in debt securities


292,034















292,034



353,848















353,848Other assets


50,144



24,916



319







75,379



72,442



23,704



26,680







122,826Assets held for sale






7,900











7,900







11,500











11,500Investments in subsidiaries


3,019,105



941,129



(68
)


(3,960,166
)






2,896,242











(2,896,242
)


Total assets

$
3,874,211


$
3,205,818


$
351,837


$
(3,961,573
)

$
3,470,293


$
3,962,809


$
1,455,803


$
1,704,843


$
(2,896,242
)

$
4,227,213LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
30,133


$
54,805


$
2,173






$
87,111


$
61,255


$
20,107


$
59,546


$



$
140,908Accrued expenses


27,355



271,967



10,640







309,962



32,456



165,460



213,572







411,488Income taxes payable






















1,288



169



8,991







10,448Short-term debt










4,101







4,101











5,230







5,230Current portion of long-term debt


122,449















122,449



53,820







385,227







439,047Total current liabilities


179,937



326,772



16,914







523,623



148,819



185,736



672,566







1,007,121Long-term debt


505,904















505,904



877,638















877,638Other liabilities


51,281



37,618



16,459







105,358



54,355



4,595



51,072







110,022Intercompany payable (receivable)


801,681



(812,804
)


11,123











649,565



(655,145
)


5,580







Total liabilities


1,538,803



(448,414
)


44,496







1,134,885



1,730,377



(464,814
)


729,218







1,994,781Shareholders equity


2,335,408



3,654,232



307,341



(3,961,573
)


2,335,408



2,232,432



1,920,617



975,625



(2,896,242
)


2,232,432Total liabilities and shareholders equity

$
3,874,211


$
3,205,818


$
351,837


$
(3,961,573
)

$
3,470,293


$
3,962,809


$
1,455,803


$
1,704,843


$
(2,896,242
)

$
4,227,213  36




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
    (Unaudited)
    (In thousands)
  Three Months Ended September 30, 2009


Three Months Ended September 30, 2008Non-














Non-Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
82,122


$
417,659


$
44,393


$
(92,757
)

$
451,417


$
96,526


$
372,073


$
1,141


$
(99,751
)

$
369,989Royalty revenue






11,932











11,932







18,456











18,456Total revenues


82,122



429,591



44,393



(92,757
)


463,349



96,526



390,529



1,141



(99,751
)


388,445Operating costs and expenses:Cost of revenues


18,865



210,844



26,561



(93,473
)


162,797



27,727



172,779



755



(99,796
)


101,465Selling, general and administrative


51,790



76,525



7,427







135,742



51,926



47,297



55







99,278Research and development


1,270



22,613



(1,243
)






22,640



1,764



32,091











33,855Depreciation and amortization


4,622



47,873



854







53,349



4,799



25,035



60







29,894Asset impairments






































Restructuring charges


732



921











1,653



26



1,127











1,153Total operating costs and expenses


77,279



358,776



33,599



(93,473
)


376,181



86,242



278,329



870



(99,796
)


265,645Operating income


4,843



70,815



10,794



716



87,168



10,284



112,200



271



45



122,800Other income (expense):Interest income


704



24



299







1,027



8,092



14



4







8,110Interest expense


(21,407
)


(749
)


(62
)






(22,218
)


(5,295
)


(5
)










(5,300
)Gain (loss) on investments


521















521



















Other, net


503



(939
)


1,962







1,526



(1,084
)


776



(716
)






(1,024
)Equity in earnings (loss) of subsidiaries


52,625



5,798



(100
)


(58,323
)






93,677











(93,677
)


Intercompany interest (expense) income


(3,306
)


12,791



(9,485
)










(2,704
)


2,710



(6
)






Total other income (expense)


29,640



16,925



(7,386
)


(58,323
)


(19,144
)


92,686



3,495



(718
)


(93,677
)


1,786Income (loss) before income taxes


34,483



87,740



3,408



(57,607
)


68,024



102,970



115,695



(447
)


(93,632
)


124,586Income tax expense (benefit)


(8,005
)


30,788



2,753







25,536



20,498



21,601



15







42,114Net income (loss)

$
42,488


$
56,952


$
655


$
(57,607
)

$
42,488


$
82,472


$
94,094


$
(462
)

$
(93,632
)

$
82,472  37




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF
    OPERATIONS  (Continued)
    (Unaudited)
    (In thousands)
  Nine Months Ended September 30, 2009


Nine Months Ended September 30, 2008Non-














Non-Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
260,844


$
1,219,337


$
114,232


$
(298,418
)

$
1,295,995


$
326,231


$
1,157,558


$
1,420


$
(329,137
)

$
1,156,072Royalty revenue






41,399











41,399







61,257











61,257Total revenues


260,844



1,260,736



114,232



(298,418
)


1,337,394



326,231



1,218,815



1,420



(329,137
)


1,217,329Operating costs and expenses:Cost of revenues


76,958



616,718



76,127



(299,974
)


469,829



94,076



529,399



1,076



(329,440
)


295,111Selling, general and administrative


157,662



222,845



21,133







401,640



186,684



154,349



76







341,109Research and development


3,864



64,775



2,459







71,098



4,068



112,457











116,525Depreciation and amortization


14,272



142,582



2,706







159,560



14,941



106,628



180







121,749Asset impairments






















114



39,315











39,429Restructuring charges


15,039



36,139











51,178



(330
)


2,000











1,670Total operating costs and expenses


267,795



1,083,059



102,425



(299,974
)


1,153,305



299,553



944,148



1,332



(329,440
)


915,593Operating income (loss)


(6,951
)


177,677



11,807



1,556



184,089



26,678



274,667



88



303



301,736Other income (expense):Interest income


3,132



301



1,888







5,321



30,910



81



9







31,000Interest expense


(69,875
)


(2,826
)


(212
)






(72,913
)


(15,544
)


(27
)










(15,571
)Gain (loss) on investments


(826
)














(826
)


















Other, net


544



1,008



1,307







2,859



(1,613
)


7



(245
)






(1,851
)Equity in earnings of subsidiaries


124,175



17,846



(60
)


(141,961
)






204,349











(204,349
)


Intercompany interest (expense) income


(5,993
)


22,264



(16,271
)










(9,424
)


9,443



(19
)






Total other income (expenses)


51,157



38,593



(13,348
)


(141,961
)


(65,559
)


208,678



9,504



(255
)


(204,349
)


13,578Income (loss) before income taxes


44,206



216,270



(1,541
)


(140,405
)


118,530



235,356



284,171



(167
)


(204,046
)


315,314Income tax expense (benefit)


(25,495
)


72,624



1,700







48,829



26,567



79,917



41







106,525Net income (loss)

$
69,701


$
143,646


$
(3,241
)

$
(140,405
)

$
69,701


$
208,789


$
204,254


$
(208
)

$
(204,046
)

$
208,789  38




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
    (Unaudited)
    (In thousands)
  Nine Months Ended September 30, 2009


Nine Months Ended September 30, 2008Non-











Non-Guarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


ConsolidatedCash flows provided by operating activities

$
(43,719
)

$
285,141


$
20,742


$
262,164


$
69,823


$
279,846


$
215


$
349,884Cash flows from investing activities:Transfers from (to) restricted cash


(42
)


(27
)






(69
)


(6
)










(6
)Purchases of investments in debt securities


















(279,175
)










(279,175
)Proceeds from maturities and sales of investments in debt
    securities


38,473











38,473



1,185,830











1,185,830Purchases of property, plant and equipment


(22,506
)


(6,892
)


(210
)


(29,608
)


(34,901
)


(10,622
)






(45,523
)Proceeds from sale of property and equipment


10



327







337



10,350



40







10,390Proceeds from sale of
    Kadian®






59,800







59,800















Acquisition of Alpharma


(13,533
)


(56,697
)






(70,230
)














Acquisition of
    Avinza®


(8
)










(8
)


(43
)










(43
)Forward foreign exchange contracts










(8,906
)


(8,906
)














Purchases of intellectual property and product rights






(2,178
)






(2,178
)






(7,890
)






(7,890
)Net cash provided by (used in) investing activities


2,394



(5,667
)


(9,116
)


(12,389
)


882,055



(18,472
)






863,583Cash flows from financing activities:Proceeds from exercise of stock options


1,742











1,742



347











347Net payments related to stock-based award activity


(3,554
)










(3,554
)


(2,372
)










(2,372
)Payments on long-term debt


(324,073
)


(385,227
)


(1,129
)


(710,429
)














Debt issuance costs


(1,313
)










(1,313
)














Intercompany


160,278



(137,491
)


(22,787
)






263,120



(263,125
)


5



Net cash provided by (used in) financing activities


(166,920
)


(522,718
)


(23,916
)


(713,554
)


261,095



(263,125
)


5



(2,025
)Net cash flows from exchange rate changes










3,535



3,535















Increase (decrease) in cash and cash equivalents


(208,245
)


(243,244
)


(8,755
)


(460,244
)


1,212,973



(1,751
)


220



1,211,442Cash and cash equivalents, beginning of period


401,657



289,996



248,559



940,212


$
9,718


$
4,645


$
5,646


$
20,009Cash and cash equivalents, end of period

$
193,412


$
46,752


$
239,804


$
479,968


$
1,222,691


$
2,894


$
5,866


$
1,231,451  39




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion contains certain forward-looking
    statements that reflect managements current views of
    future events and operations. This discussion should be read in
    conjunction with the following: (a) Risk
    Factors in our Annual Report on
    Form 10-K
    for the year ended December 31, 2008, which are
    supplemented by the discussion under Risk Factors in
    this report; (b) our audited consolidated financial
    statements and related notes which are included in our Annual
    Report on
    Form 10-K
    for the year ended December 31, 2008; and (c) our
    unaudited consolidated financial statements and related notes
    which are included in this report on
    Form 10-Q.
    Please see the sections entitled Risk Factors and
    A Warning About Forward-Looking Statements in this
    report for a discussion of the uncertainties, risks and
    assumptions associated with these statements.
  I.
    OVERVIEW  Our
    Business
       research and development

   distribution   manufacturing

   sales and marketing   packaging

   business development   quality control and assurance

   regulatory management         
    securing from the U.S. Food and Drug Administration
    (FDA) additional approved uses
    (indications) for our products;
    developing and producing different strengths;
    producing different package sizes;
    developing new dosage forms; and
    developing new product formulations.   40




---



##### Table of Contents



Recent
    Developments
  Embedatm
  tm around-the-clock tm tm FDA-approved tm tm tm
  tm tm tm
  Remoxy®
  ® ®
  ® around-the-clock, tm
 41




---



##### Table of Contents



Acurox®

    Tablets
  ® ® ® ®
  ® ® ® ® ® ®
  CorVuetm(binodenoson) for Injection
  tm tm tm
  Ketoprofen
    in
    Transfersome®

    Gel
  ® ®
    Department
    of Justice Investigation
  ® ®
   42




---



##### Table of Contents



II.
    RESULTS
    OF OPERATIONS  Three
    and Nine Months Ended September 30, 2009 and
    2008
    Three Months


Nine MonthsEnded September 30,


Ended September 30,2009


2008


2009


2008(In thousands)


(In thousands)Total RevenuesBranded prescription pharmaceuticals

$
283,414


$
301,879


$
836,228


$
986,966Animal Health


95,843







258,502



Meridian Auto-Injector


71,841



67,515



200,539



165,687Royalties


11,932



18,456



41,399



61,257Contract manufacturing


368



658



827



1,074Other


(49
)


(63
)


(101
)


2,345Total revenues

$
463,349


$
388,445


$
1,337,394


$
1,217,329Cost of Revenues, exclusive of depreciation, amortization and
    impairmentsBranded prescription pharmaceuticals

$
79,351


$
74,178


$
216,169


$
225,256Animal Health


53,372







170,474



Meridian Auto-Injector


28,505



24,705



77,820



61,819Royalties


1,480



2,281



5,105



7,485Contract manufacturing


139



299



260



537Other


(50
)


2



1



14Total cost of revenues

$
162,797


$
101,465


$
469,829


$
295,111     Three Months


Nine MonthsEnded September 30,


Ended September 30,2009


2008


2009


2008(In thousands)Gross Sales

$
548,854


$
458,171


$
1,578,731


$
1,482,548Commercial Rebates


18,484



15,390



48,329



72,398Medicare Part D Rebates


3,243



3,830



8,881



25,460Medicaid Rebates


8,113



8,045



31,136



29,351Chargebacks


28,155



21,283



83,035



67,069Returns


5,926



2,927



14,154



11,352Trade discounts/other


21,584



18,251



55,802



59,589Net sales

$
463,349


$
388,445


$
1,337,394


$
1,217,329     ® ® ® ® ®
 43




---



##### Table of Contents



Accrual
    for Rebates, including Administrative Fees (in
    thousands):
  2009


2008Balance at January 1, net of prepaid amounts

$
58,129


$
65,301Current provision related to sales made in current period


28,512



67,155Current provision related to sales made in prior periods


1,109



2,982Alpharma acquisition


1,772



Rebates paid


(34,482
)


(83,660
)Balance at March 31, net of prepaid amounts

$
55,040


$
51,778Current provision related to sales made in current period

$
31,219


$
36,297Current provision related to sales made in prior periods


(2,334
)


(6,490
)Alpharma acquisition


885



Rebates paid


(35,474
)


(55,692
)Balance at June 30, net of prepaid amounts

$
49,336


$
25,893Current provision related to sales made in current period

$
30,200


$
27,225Current provision related to sales made in prior periods


(360
)


40Alpharma acquisition


886



Rebates paid


(41,124
)


(34,028
)Balance at September 30, net of prepaid amounts

$
38,938


$
19,130     ® ® ® ® ® ®
  ® ® ® ®
 44




---



##### Table of Contents



Accrual
    for Returns (in thousands):
  2009


2008Balance at January 1

$
33,471


$
32,860Current provision


2,883



4,450Actual returns


(4,646
)


(4,135
)Ending balance at March 31

$
31,708


$
33,175Current provision

$
5,345


$
3,975Actual returns


(6,062
)


(6,845
)Ending balance at June 30

$
30,991


$
30,305Current provision

$
5,926


$
2,927Actual returns


(7,743
)


(5,832
)Ending balance at September 30

$
29,174


$
27,400   Accrual
    for Chargebacks (in thousands):
  2009


2008Balance at January 1

$
9,965


$
11,120Current provision


28,176



20,212Actual chargebacks


(27,244
)


(21,080
)Ending balance at March 31

$
10,897


$
10,252Current provision

$
26,704


$
25,574Actual chargebacks


(27,958
)


(25,286
)Ending balance at June 30

$
9,643


$
10,540Current provision

$
28,155


$
21,283Actual chargebacks


(28,041
)


(22,918
)Ending balance at September 30

$
9,757


$
8,905   Branded
    Prescription Pharmaceuticals Segment
  Three Months


Change


Nine Months


ChangeEnded September 30,


2009 vs. 2008


Ended September 30,


2009 vs. 20082009


2008


$


%


2009


2008


$


%(In thousands)








(In thousands)Branded Prescription Pharmaceutical Revenue:Skelaxin®

$
102,080


$
109,990


$
(7,910
)


(7.2
)%

$
304,857


$
333,095


$
(28,238
)


(8.5
)%Thrombin-JMI®


43,409



66,813



(23,404
)


(35.0
)


139,310



197,585



(58,275
)


(29.5
)Flector®Patch


40,397







40,397







95,794







95,794



Avinza®


30,774



35,928



(5,154
)


(14.3
)


98,646



102,941



(4,295
)


(4.2
)Levoxyl®


16,995



17,608



(613
)


(3.5
)


51,847



53,462



(1,615
)


(3.0
)Altace®


10,119



29,950



(19,831
)


(66.2
)


27,989



154,485



(126,496
)


(81.9
)Embedatm


11,230







11,230







11,230







11,230



Other


28,410



41,590



(13,180
)


(31.7
)


106,555



145,398



(38,843
)


(26.7
)Total revenue

$
283,414


$
301,879


$
(18,465
)


(6.1
)%

$
836,228


$
986,966


$
(150,738
)


(15.3
)%Cost of revenues, exclusive of depreciation, amortization and
    impairments

$
79,351


$
74,178


$
5,173



7.0
%

$
216,169


$
225,256


$
(9,087
)


(4.0
)%  45




---



##### Table of Contents



Sales
    of Key Products
  Skelaxin®
  ® ® ®
  ® ® ®
  ®
  ® ®
  Thrombin-JMI®
  ® ®
  Flector®

    Patch
  ® ® ® ® ® ®
  Avinza®
  ® ®
  ® ®
 46




---



##### Table of Contents



®
  ®
  ®
  Embedatm
  tm around-the-clock tm
  Levoxyl®
  ® ® ®
  Altace®
  ® ® ®
  ®
  Other
  ® ® ®
 47




---



##### Table of Contents



® ® ®
  ® ® ®
  ® ®
  Cost
    of Revenues
  ®
  ®
  ®
    Animal
    Health
  Three

NineMonths Ended

Months EndedSeptember 30,

September 30,2009

2008

2009

2008(In thousands)

(In thousands)Animal Health revenue

$
95,843


$



$
258,502


$
Cost of revenues, exclusive of depreciation, amortization and
    impairments


53,372







170,474



      48




---



##### Table of Contents



Meridian
    Auto-Injector
  Three



NineMonths Ended

Change

Months Ended

ChangeSeptember 30,

2009 vs. 2008

September 30,

2009 vs. 20082009

2008

$

%

2009

2008

$

%(In thousands)





(In thousands)Meridian Auto-Injector revenue

$
71,841


$
67,515


$
4,326



6.4
%

$
200,539


$
165,687


$
34,852



21.0
%Cost of revenues, exclusive of depreciation, amortization and
    impairments


28,505



24,705



3,800



15.4



77,820



61,819



16,001



25.9     ® ® ®
  ®
  Royalties
  Three



NineMonths Ended

Change

Months Ended

ChangeSeptember 30,

2009 vs. 2009

September 30,

2009 vs. 20082009

2008

$

%

2009

2008

$

%(In thousands)





(In thousands)Royalty revenue

$
11,932


$
18,456


$
(6,524
)


(35.3
)%

$
41,399


$
61,257


$
(19,858
)


(32.4
)%Cost of revenues, exclusive of depreciation, amortization and
    impairments


1,480



2,281



(801
)


(35.1
)


5,105



7,485



(2,380
)


(31.8
)   ®
  ® ® ®
 49




---



##### Table of Contents



®
  ®
  Operating
    Costs and Expenses
  Three





NineMonths Ended


Change


Months Ended


ChangeSeptember 30,


2009 vs. 2008


September 30,


2009 vs. 20082009


2008


$


%


2009


2008


$


%(In thousands)








(In thousands)Cost of revenues, exclusive of depreciation, amortization and
    impairments as shown below

$
162,797


$
101,465


$
61,332



60.4
%

$
469,829


$
295,111


$
174,718



59.2
%Selling, general and administrative


135,742



99,278



36,464



36.7



401,640



341,109



60,531



17.7Research and development


22,640



33,855



(11,215
)


(33.1
)


71,098



116,525



(45,427
)


(39.0
)Depreciation and amortization


53,349



29,894



23,455



78.5



159,560



121,749



37,811



31.1Asset impairments






















39,429



(39,429
)


(100.0
)Restructuring charges


1,653



1,153



500



43.4



51,178



1,670



49,508



>100.0Total operating costs and expenses

$
376,181


$
265,645


$
110,536



41.6
%

$
1,153,305


$
915,593


$
237,712



26.0
%   Selling,
    General and Administrative Expenses
  Three





NineMonths Ended


Change


Months Ended


ChangeSeptember 30,


2009 vs. 2008


September 30,


2009 vs. 20082009


2008


$


%


2009


2008


$


%(In thousands)








(In thousands)Selling, general and administrative, exclusive of co-promotion
    fees

$
134,315


$
93,291


$
41,024



44.0
%

$
390,885


$
307,102


$
83,783



27.3
%Acquisition related costs


















6,733







6,733



Co-promotion fees


1,427



5,987



(4,560
)


(76.2
)


4,022



34,007



(29,985
)


(88.2
)Total selling, general and administrative

$
135,742


$
99,278


$
36,464



36.7
%

$
401,640


$
341,109


$
60,531



17.7
%     ® ®
 50




---



##### Table of Contents



® ®
      Research
    and Development Expense
  Three





NineMonths Ended


Change


Months Ended


ChangeSeptember 30,


2009 vs. 2008


September 30,


2009 vs. 20082009


2008


$


%


2009


2008


$


%(In thousands)








(In thousands)Research and development

$
22,640


$
33,855


$
(11,215
)


(33.1
)%

$
71,098


$
111,025


$
(39,927
)


(36.0
)%Research and development  in-process upon acquisition






















5,500



(5,500
)


(100.0
)Total research and development

$
22,640


$
33,855


$
(11,215
)


(33.1
)%

$
71,098


$
116,525


$
(45,427
)


(39.0
)%   ® tm
    
    A charge of $3.0 million in the first nine months of 2008
    for our acquisition of in-process research and development
    related to the exercise of our portion for a third
    immediate-release opioid product under a License, Development
    and Commercialization Agreement with Acura to develop and
    commercialize certain opioid analgesic products utilizing
    Acuras
    Aversion®

    Technology in the United States, Canada and Mexico. We believe
    there is a reasonable probability of completing the project
    successfully; however, the success of the project depends on the
    successful outcome of the clinical development program and
    approval of the product by the FDA. The estimated cost to
    complete the project at the time of the execution of the
    agreement was approximately $16.0 million.
    A charge of $2.5 million in the first nine months of 2008
    for our acquisition of in-process research and development
    associated with our Product Development Agreement with
    CorePharma to develop new formulations of
    Skelaxin®.

    Any intellectual property created as a result of the agreement
    will belong to us and we will grant CorePharma a non-exclusive,
    royalty-free license to use this newly created intellectual
    property with any product not containing metaxalone. The success
    of the project depends on additional 51




---



##### Table of Contents



development activities and FDA approval. The estimated cost to
    complete the development activities at the time of the execution
    of the agreement was approximately $2.5 million.    Depreciation
    and Amortization Expense
  ® ® ®
  ® ® ® ® and/or ®
  ® ® ® ®
  ® ® and/or ®
  ® ® and/or
  ® ®
   52




---



##### Table of Contents



Other
    Operating Expenses
    
    Asset impairment charges of $39.4 million in the second
    quarter of 2008, primarily associated with a decline in end-user
    demand for
    Synercid®.
    Restructuring charges of $1.7 million and
    $51.2 million in the third quarter and first nine months of
    2009, respectively, primarily due to our restructuring
    initiative designed to partially offset the potential decline in
    Skelaxin®

    net sales in the event a generic competitor enters the market.
    For additional information on the first quarter 2009
    restructuring event, please see Note 14,
    Restructuring Activities. in Part I,
    Item 1, Financial Statements.  Non-Operating
    Items
  Three Months


Nine MonthsEnded September 30,


Ended September 30,2009


2008


2009


2008(In thousands)


(In thousands)Interest income

$
1,027


$
8,110


$
5,321


$
31,000Interest expense


(22,218
)


(5,300
)


(72,913
)


(15,571
)Gain (loss) on investment


521







(826
)


Other, net


1,526



(1,024
)


2,859



(1,851
)Total other (expense) income

$
(19,144
)

$
1,786


$
(65,559
)

$
13,578Income tax expense


25,536



42,114



48,829



106,525   Gain
    (loss) on Investment
    Interest
    Income
    Interest
    Expense
    1 4
 53




---



##### Table of Contents



Income
    Tax Expense
      Liquidity
    and Capital Resources
  General
    Investments
    in Debt Securities
           54




---



##### Table of Contents



available-for-sale
  other-than-temporary.
      Skelaxin®
  ® ® ® ®
   55




---



##### Table of Contents



Alpharma
  ® tm
    ® ® ® ®
  ®
  MaximumPurchasePrice PaymentFirst Quarter 2009

$
30.0 millionSecond Quarter 2009


25.0 millionThird Quarter 2009


25.0 millionFourth Quarter 2009


20.0 millionFirst Quarter 2010


20.0 millionSecond Quarter 2010


7.5 million   ® ®
 56




---



##### Table of Contents



Senior
    Secured Revolving Credit Facility
          December 31, 2009

$
403.8 millionDecember 31, 2010


308.8 millionDecember 31, 2011


213.8 millionMarch 31, 2012


190.0 million       Senior
    Secured Term Facility
  four-year
 57




---



##### Table of Contents



CorePharma
  ®
  Acura
  ® ® ® ®
  ® ® ®
  Altace®
  ® ® ® ® ®
 58




---



##### Table of Contents



®
  Avinza®
  ® ®
  ® ®
  
    If calendar year net sales are less than $200.0 million,
    the royalty payment will be 5% of all net sales.
    If calendar year net sales are greater than $200.0 million,
    then the royalty payment will be 10% of all net sales up to
    $250.0 million, plus 15% of net sales greater than
    $250.0 million.  Other
  ® ® ® ®
  
    For 2006, 15% of
    Altace®

    net sales up to $165.0 million, 42.5% of
    Altace®

    net sales in excess of $165.0 million and less than or
    equal to $465.0 million, and 52.5% of
    Altace®

    net sales that are in excess of $465.0 million and less
    than or equal to $585.0 million.
    For 2007, 30% of
    Altace®

    net sales, with the fee not to exceed $178.5 million.
    For 2008, 22.5% of
    Altace®

    net sales, with the fee not to exceed $134.0 million.
    For 2009, 14.2% of
    Altace®

    net sales, with the fee not to exceed $84.5 million.
    For 2010, 25% of
    Altace®

    net sales, with the fee not to exceed $5.0 million.  ® ®
  ® ®
 59




---



##### Table of Contents



®
  ® ® ® ® ® ® ® ®
  Governmental
    Pricing Investigation and Related Matters
    Patent
    Challenges
  ® ® ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  Nine MonthsEnded September 30,2009

2008(In thousands)Net cash provided by operating activities

$
262,164


$
349,884    60




---



##### Table of Contents



®
    Nine MonthsEnded September 30,2009


2008(In thousands)Accounts receivable, net of allowance

$
17,672


$
14,563Inventories


11,495



17,917Prepaid expenses and other current assets


(11,908
)


(16,151
)Accounts payable


(53,472
)


(2,294
)Accrued expenses and other liabilities


(81,352
)


(152,662
)Income taxes payable


(18,141
)


46,411Deferred revenue


(3,510
)


(3,510
)Other assets


9,835



23,177Deferred taxes


41,460



12,957Total changes in operating assets and liabilities and deferred
    taxes

$
(87,921
)

$
(59,592
)   Investing
    Activities
  Nine MonthsEnded September 30,2009

2008(In thousands)Net cash (used in) provided by investing activities

$
(12,389
)

$
863,583   ®
    Financing
    Activities
  Nine MonthsEnded September 30,2009

2008(In thousands)Net cash used in financing activities

$
(713,554
)

$
(2,025
)      61




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##### Table of Contents



Certain
    Indebtedness and Other Matters
  Convertible
    Senior Notes
  1 4
    Senior
    Secured Revolving Credit Facility
        
    a base rate generally defined as the sum of (i) the greater
    of (a) the prime rate of Credit Suisse and (b) the
    federal funds effective rate plus 0.5% and
    (ii) 4.0%; or
    an adjusted rate generally defined as the sum of (i) the
    product of (a) LIBOR (by reference to the British Banking
    Association Interest Settlement Rates) and (b) a fraction,
    the numerator of which is one and the denominator of which is
    the number one minus certain maximum statutory reserves for
    Eurocurrency liabilities and (ii) 5.0%.   62




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
    maintenance of maximum funded debt to consolidated EBITDA ratios
    that range from 1.50:1 to 3.25:1 (depending on dates and the
    occurrence of certain events relating to certain
    patents); and
    maintenance of minimum consolidated EBITDA to interest expense
    ratios that range from 3.75:1 to 4.00:1 (depending on dates and
    the occurrence of certain events relating to certain patents).      long-term long-term
    Senior
    Secured Term Facility
        
    maintenance of maximum funded debt to consolidated EBITDA ratios
    that range from 1.50:1 to 3.25:1 (depending on dates and the
    occurrence of certain events relating to certain
    patents); and
    maintenance of minimum consolidated EBITDA to interest expense
    ratios that range from 3.75:1 to 4.00:1 (depending on dates and
    the occurrence of certain events relating to certain patents).   63




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long-term long-term
    Alpharma
    Convertible Senior Notes
      Impact
    of Inflation
    Recently
    Issued Accounting Standards
    Critical
    Accounting Policies and Estimates
     64




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
    Intangible assets, goodwill and other long-lived
    assets.  When we acquire product rights in
    conjunction with either business or asset acquisitions, we
    allocate an appropriate portion of the purchase price to
    intangible assets, goodwill and other long-lived assets. The
    purchase price is allocated to products, acquired research and
    development, if any, and other intangibles using the assistance
    of valuation consultants. We estimate the useful lives of the
    assets by factoring in the characteristics of the products such
    as: patent protection, competition by products prescribed for
    similar indications, estimated future introductions of competing
    products and other issues. The factors that drive the estimate
    of the life of the asset are inherently uncertain. We use the
    straight-line method of amortization for our intangible assets.     65




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##### Table of Contents



GrossCarrying


Accumulated


Net BookAmount


Amortization


Value(In thousands)Branded Prescription PharmaceuticalsAvinza®

$
285,700


$
68,848


$
216,852Skelaxin®


278,853



221,997



56,856Sonata®


61,961



61,961



Flector®

    Patch


130,000



8,864



121,136Neuroscience


756,514



361,670



394,844Synercid®


70,959



46,404



24,555Other hospital


8,442



6,655



1,787Hospital


79,401



53,059



26,342Bicillin®


92,350



34,045



58,305Other legacy products


324,035



279,107



44,928Legacy products


416,385



313,152



103,233Total Branded


1,252,300



727,881



524,419Animal Health


170,000



7,167



162,833Meridian Auto-Injector


182,587



47,480



135,107Royalties


3,731



3,501



230Total intangible assets

$
1,608,618


$
786,029


$
822,589     Three Months Ended


Three Months EndedSeptember 30, 2009


September 30, 2008Amortization





AmortizationImpairments


Expense


Impairments


Expense(In thousands)


(In thousands)Branded Prescription PharmaceuticalsAvinza®

$



$
6,639


$



$
6,638Skelaxin®






20,041







5,973Flector®

    Patch






2,954







Neuroscience






29,634







12,611Synercid®






1,485







1,491Other hospital






76







76Hospital






1,561







1,567Bicillin®






925







926Other legacy products






1,430







2,970Legacy products






2,355







3,896Total Branded






33,550







18,074Animal Health






2,348







Meridian Auto-Injector






2,102







1,981Royalties






11







185Total

$



$
38,011


$



$
20,240  66




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##### Table of Contents



Nine Months Ended


Nine Months EndedSeptember 30, 2009


September 30, 2008Amortization





AmortizationImpairments


Expense


Impairments


Expense(In thousands)


(In thousands)Branded Prescription PharmaceuticalsAvinza®

$



$
19,915


$



$
19,915Skelaxin®






60,123







17,686Sonata®














315Flector®

    Patch






8,864







Neuroscience






88,902







37,916Synercid®






4,453



38,064



6,241Other hospital






228







228Hospital






4,681



38,064



6,469Bicillin®






2,775







2,777Altace®














29,687Other legacy products






4,290



1,251



8,964Legacy products






7,065



1,251



41,428Total Branded






100,648



39,315



85,813Animal Health






7,167







Meridian Auto-Injector






6,199







5,846Royalties






324







552Total

$



$
114,338


$
39,315


$
92,211     Remaining Life atSeptember 30,  2009Skelaxin®

9 monthsAvinza®

8 years 2 monthsFlector®

    Patch

10 years 3 monthsSynercid®

4 years 3 monthsBicillin®

15 years 9 months   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. We evaluate our entire inventory
    for short-dated or slow-moving product and inventory commitments
    under supply agreements based on projections of future demand
    and market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with some of our
    vendors which contain minimum purchase requirements. We estimate
    future inventory requirements based on current facts and trends.
    Should our minimum purchase requirements under supply
    agreements, or if our estimated future inventory requirements
    exceed actual inventory quantities that we will be able to sell
    to our customers, we record a charge in costs of revenues.
    Accruals for rebates, returns and
    chargebacks.  We establish accruals for returns,
    chargebacks and Medicaid, Medicare and commercial rebates in the
    same period we recognize the related sales. The 67




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accruals reduce revenues and are included in accrued expenses.
    At the time a rebate or chargeback payment is made or a product
    return is received, which occurs with a delay after the related
    sale, we record a reduction to accrued expenses and, at the end
    of each quarter, adjust accrued expenses for differences between
    estimated and actual payments. Due to estimates and assumptions
    inherent in determining the amount of returns, chargebacks and
    rebates, the actual amount of product returns and claims for
    chargebacks and rebates may be different from our estimates.      
    Revenue recognition.  Revenue is recognized
    when title and risk of loss are transferred to customers,
    collection of sales is reasonably assured and we have no further
    performance obligations. This is generally at the time products
    are received by the customer. Accruals for estimated returns,
    rebates and chargebacks, determined based on historical
    experience, reduce revenues at the time of sale and are included
    in accrued expenses. Medicaid and certain other governmental
    pricing programs involve particularly difficult interpretations
    of relevant statutes and regulatory guidance, which are complex
    and, in certain respects, ambiguous. Moreover, prevailing
    interpretations of these statutes and guidance can change over
    time. We launched
    Embedatm

    in late September 2009. We have recognized revenue on
    Embedatm

    in a manner consistent with our other products, as described
    above, which is generally at the time the product is received by
    the customer. We believe
    Embedatm

    has similar characteristics of certain of our other
    pharmaceutical products such that we can reliably estimate
    expected returns of the product. Royalty revenue is recognized
    based on a percentage of sales (namely, contractually
    agreed-upon
    royalty rates) reported by third parties.  A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
     68




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##### Table of Contents




    the potential of, including anticipated net sales and
    prescription trends for, our branded prescription pharmaceutical
    products, particularly
    Skelaxin®,

    Avinza®,

    Thrombin-JMI®,

    Flector®

    Patch,
    Embedatm,

    Levoxyl®,

    Altace®,

    Cytomel®

    and
    Synercid®;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including, in particular, patents
    related to
    Skelaxin®,

    Avinza®

    and
    Adenoscan®;
    expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;
    the adequacy of our liquidity and capital resources;
    anticipated capital expenditures;
    the development, approval and successful commercialization of
    Remoxy®,

    Acurox®

    Tablets,
    CorVuetm

    and other products;
    the cost of and the successful execution of our growth and
    restructuring strategies;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    products manufactured by third parties;
    the potential costs, outcomes and timing of research, clinical
    trials and other development activities involving pharmaceutical
    products, including, but not limited to, the magnitude and
    timing of potential payments to third parties in connection with
    development activities;
    the development of product line extensions;
    the expected timing of the initial marketing of certain products;
    products developed, acquired or in-licensed that may be
    commercialized;
    our intent, beliefs or current expectations, primarily with
    respect to our future operating performance;
    expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;
    expectations regarding the outcome and potential financial
    effects of various pending legal proceedings, including the
    Skelaxin®,

    Avinza®

    and
    EpiPen®

    patent challenges, litigation, and other legal proceedings
    described in this report;
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings; and
    expectations regarding our ability to liquidate our holdings of
    auction rate securities and the temporary nature of unrealized
    losses recorded in connection with some of those securities.    Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk     69




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##### Table of Contents



Item 4.
    Controls
    and Procedures  Form 10-Q, Rules 13a-15(e) 15d-15(e)
         PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K
 70




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An
    expansion of restrictions on, or bans of, the use of antibiotics
    used in food-producing animals could result in a decrease in our
    sales.
                
    additional countries, such as the U.S., where we have material
    sales of bacitracin-based products, restrict or ban the use of
    zinc bacitracin or other antibiotic feed additives; 71




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##### Table of Contents




    countries which are significant importers of meat act to prevent
    the importation of products from countries that allow the use of
    bacitracin-based or other antibiotic-containing products;
    there is an increase in public pressure to discontinue the use
    of antibiotic feed additives; or
    consumers or retailers decide to purchase fewer meat products
    from animals fed antibiotics.  Item 5.
    Other
    Information  ® ®
  90-day
      Item 6.
    Exhibits  ExhibitNumber

Description3
.1(1)

Second Amended and Restated By laws of King Pharmaceuticals, Inc.31
.1

Certificate of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200231
.2

Certificate of Principal Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200232
.1

Certificate of Chief Executive Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200232
.2

Certificate of Principal Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002     (1)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed on September 17, 2009. 72




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##### Table of Contents



SIGNATURES      By:
    /s/  Brian
    A. Markison   President and Chief Executive Officer
    By:
    /s/  Carla
    M. Shumate   Senior Vice President Finance, Controller
   73