##### 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
    March 31, 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

(I.R.S. Employerincorporation or
    organization)

Identification No.)501 Fifth Street,
    Bristol, TN(Address of principal
    executive offices)

37620(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




---



##### 



Table of
    Contents
   
 PagePART I  Financial
    Information


2Item 1.


Financial Statements


2Condensed Consolidated Balance Sheets


2Condensed Consolidated Statements of
    Operations


3Condensed Consolidated Statements of Changes in
    Shareholders Equity and Other Comprehensive Income


4Condensed Consolidated Statements of Cash
    Flows


5Notes to Condensed Consolidated Financial
    Statements


6Item 2.


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


36Item 3.


Quantitative and Qualitative Disclosures about
    Market Risk


64Item 4.


Controls and Procedures


65PART II  Other
    Information


66Item 1.


Legal Proceedings


66Item 1A.


Risk Factors


66Item 6.


Exhibits


66Signatures


II-1EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  KING
    PHARMACEUTICALS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS
    (In thousands)
  March 31,


December 31,2009


2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
436,793


$
940,212Investments in debt securities


13,682



6,441Marketable securities


624



511Accounts receivable, net of allowance of $3,723 and $4,713


227,710



245,070Inventories


256,106



258,303Deferred income tax assets


144,455



89,513Income tax receivable


4,074



Prepaid expenses and other current assets


128,479



129,214Total current assets


1,211,923



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


410,489



417,259Intangible assets, net


896,699



934,219Goodwill


415,095



450,548Deferred income tax assets


252,735



267,749Investments in debt securities


334,049



353,848Other assets (includes restricted cash of $16,645 and $16,580)


116,296



122,826Assets held for sale


7,900



11,500Total assets

$
3,645,186


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

$
97,286


$
140,908Accrued expenses


316,603



411,488Income taxes payable






10,448Short-term debt


5,149



5,230Current portion of long-term debt


51,349



439,047Total current liabilities


470,387



1,007,121Long-term debt


837,989



877,638Other liabilities


117,638



110,022Total liabilities


1,426,014



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


2,219,172



2,232,432Total liabilities and shareholders equity

$
3,645,186


$
4,227,213    2




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.



CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS

(In
    thousands, except per share data)  Three Months EndedMarch 31,2009


2008(Unaudited)Revenues:Net sales

$
414,299


$
412,910Royalty revenue


14,758



19,123Total revenues


429,057



432,033Operating costs and expenses:Cost of revenues, exclusive of depreciation and amortization
    shown below


150,939



91,461Selling, general and administrative, exclusive of co-promotion
    fees


137,136



111,901Acquisition related costs


3,789



Co-promotion fees


1,398



17,957Total selling, general and administrative expense


142,323



129,858Research and development


27,256



28,508Depreciation and amortization


53,349



59,866Restructuring charges (Note 14)


48,050



1,059Total operating costs and expenses


421,917



310,752Operating income


7,140



121,281Other income (expense):Interest income


2,788



13,629Interest expense


(23,103
)


(4,980
)Loss on investments


(823
)


Other, net


(2,779
)


(704
)Total other income


(23,917
)


7,945(Loss) income before income taxes


(16,777
)


129,226Income tax (benefit) expense


(6,055
)


43,670Net (loss) income

$
(10,722
)

$
85,556Income per common share:Basic net (loss) income per common share

$
(0.04
)

$
0.35Diluted net (loss) income per common share

$
(0.04
)

$
0.35    3




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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)
  AccumulatedOtherCommon Stock


Retained


ComprehensiveShares


Amount


Earnings


Income (Loss)


Total(Unaudited)Balance at December 31, 2007


245,937,709


$
1,359,817


$
1,213,057


$
1,957


$
2,574,831Comprehensive income:Net income










85,556







85,556Net unrealized gain on marketable securities, net of tax of $172














282



282Net unrealized loss on investments in debt securities, net of
    taxes of $10,799














(17,619
)


(17,619
)Foreign currency translation














(480
)


(480
)Total comprehensive income


















67,739Stock-based award activity


606,726



6,639











6,639Balance at March 31, 2008


246,544,435


$
1,366,456


$
1,298,613


$
(15,860
)

$
2,649,209Balance at December 31, 2008


246,487,232


$
1,389,698


$
871,021


$
(28,287
)

$
2,232,432Comprehensive income:Net (loss)










(10,722
)






(10,722
)Net unrealized gain on marketable securities, net of tax of $43














70



70Net unrealized loss on interest rate swap, net of taxes of $202














(329
)


(329
)Net unrealized loss on investments in debt securities, net of
    taxes of $1,634














(2,666
)


(2,666
)Foreign currency translation














(5,026
)


(5,026
)Total comprehensive income


















(18,673
)Stock-based award activity


1,326,589



5,413











5,413Balance at March 31, 2009


247,813,821


$
1,395,111


$
860,299


$
(36,238
)

$
2,219,172    4




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
    thousands)
  Three Months Ended March 31,2009


2008(Unaudited)Cash flows provided by operating activities

$
16,740


$
100,232Cash flows from investing activities:Transfers (to) from restricted cash


(65
)


144Purchases of investments in debt securities






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


8,000



1,006,630Purchases of property, plant and equipment


(6,892
)


(19,914
)Proceeds from sale of property and equipment






13Acquisition of Alpharma


(69,706
)


Acquisition of
    Avinza®


(1
)


(34
)Purchases of intellectual property and product rights


(548
)


(715
)Net cash (used in) provided by investing activities


(69,212
)


706,949Cash flows from financing activities:Proceeds from exercise of stock options


36



54Net (payments) proceeds related to stock based activity


(2,000
)


(662
)Payments on long-term debt


(433,249
)


Debt issuance costs


(1,220
)


Net cash used in financing activities


(436,433
)


(608
)Net cash flows from exchange rate changes


(14,514
)


(Decrease) increase in cash and cash equivalents


(503,419
)


806,573Cash and cash equivalents, beginning of period


940,212



20,009Cash and cash equivalents, end of period

$
436,793


$
826,582    5




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 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 Accounting for Convertible Debt Instruments that May be
    Settled in Cash Upon Conversion
    2.
    Earnings
    Per Share    Three Months Ended March 31,2009

2008Basic income per common share:Weighted average common shares


243,888,839



243,290,375Diluted income per common share:Weighted average common shares


243,888,839



243,290,375Effect of stock options






34,750Effect of dilutive share awards






1,363,413Weighted average common shares


243,888,839



244,688,538     1 4
 6




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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. Accounting for Derivative Instruments and
    Hedging Activities
   7




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value of Derivative Instruments as of March 31,
    2009Fair Value ofFair value of

LiabilityBalance sheet location

Asset Derivatives

DerivativesDerivatives designated as hedging instruments under
    SFAS No. 133Interest rate swap

Other liabilities

$



$
531Derivatives not designated as hedging instruments under
    SFAS No. 133Foreign currency contracts

Prepaid expenses and
    other current assets

$
963


$
     Gain or

Gain or(Loss) in

(Loss) ReclassifiedDerivatives in

Other Comprehensive

from Accumulated

Gain/(Loss)SFAS No. 133

Income on

Other Comprehensive

RecordedCash Flow

Derivative (Effective

Income into Income

(IneffectiveHedging

Portion)

(Effective Portion)

Portion)Relationships

Amount

Amount

AmountInterest rate swap

$
(531
)

$



$
   Gain or (Loss)Derivatives not Designated as Hedging

Recognized in Income onInstruments Under SFAS No. 133

DerivativeAmountLocationForeign currency contracts


Other income (expense
)

$
3,545   Marketable Securities.
  Investments in Debt Securities. Accounting for Certain Investments in Debt and
    Equity Securities.
     8




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        The Fair Value Option for Financial Assets and Financial
    Liabilities
      Fair Value Measurements at 3/31/2009 UsingQuoted Prices in


Significant Other


SignificantActive Markets for


Observable


UnobservableIdentical Assets


Inputs


InputsDescription

3/31/2009


(Level 1)


(Level 2)


(Level 3)Assets:Money Market Funds

$
436,707


$
436,707


$



$
Marketable Securities


624



624







Investments in Debt Securities


347,731







700



347,031Forward foreign exchange contracts


963







963



Right to Sell Debt Securities


3,459











3,459Total Assets

$
789,484


$
437,331


$
1,663


$
350,490Liabilities:Interest Rate Swap

$
531


$



$
531


$
   9




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##### Table of Contents



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


$
           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


$
541,357  10




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5.
    Inventories    March 31,


December 31,2009


2008Raw materials

$
82,786


$
82,273Work-in-process


54,098



62,836Finished goods (including $7,062 and $7,385 of sample inventory,
    respectively)


186,324



176,582323,208



321,691Inventory valuation allowance


(67,102
)


(63,388
)Total inventories

$
256,106


$
258,303   6.
    Property,
    Plant and Equipment    ®
    7.
    Acquisitions,
    Dispositions, Co-Promotions and Alliances  ® tm
 11




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
        ValuationCurrent Assets

$
915,578Current deferred income taxes


30,463Property, plant and equipment


156,981Intangible Assets


300,000Goodwill


285,945In-Process Research and Development


590,000Other Long Term Assets


26,679Current Liabilities


(229,740
)Convertible Debentures


(385,227
)Long-term deferred income taxes


(21,708
)Other Long-Term Liabilities


(49,860
)$
1,619,111     Weighted AverageValuation


Amortization PeriodFlector®

    Patch

$
130,000



11 yearsAnimal Health intangibles


170,000



19 yearsTotal

$
300,000     Branded prescription pharmaceuticals

$
197,712Animal Health


88,233Total

$
285,945    12




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    tm
  tm tm
      Three Months EndedMarch 31, 2008Total revenues

$
547,787Income from continuing operations


2,275Net income


212,490Basic earnings per common share

$
0.87Diluted earnings per common share

$
0.87   ® ® ® ®
 13




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  Maximum PurchasePrice 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   ® ®
  8.
    Intangible
    Assets and Goodwill    March 31, 2009


December 31, 2008Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationBranded prescription pharmaceuticals

$
1,252,300


$
660,782


$
1,252,300


$
627,233Animal Health


170,000



2,408



170,000



Meridian Auto-Injector


180,537



43,316



179,879



41,281Royalties


3,731



3,363



3,731



3,177Other














Total intangible assets

$
1,606,568


$
709,869


$
1,605,910


$
671,691     ® ® ®
 14




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® and/or ®
  ® ® ® and/or
  ® ® and/or
    Branded


Animal Health


MeridianSegment


Segment


Segment


TotalGoodwill at December 31, 2008

$
258,092


$
84,046


$
108,410


$
450,548Adjustment to Alpharma acquisition


(39,640
)


4,187







(35,453
)Goodwill at March 31, 2009

$
218,452


$
88,233


$
108,410


$
415,095     9.
    Long-Term
    Debt    March 31,


December 31,2009


2008Convertible senior notes

$
318,770


$
314,416Senior secured revolving credit facility


392,908



425,000Senior secured term facility


177,660



192,042Alpharma convertible senior notes






385,227Total long-term debt


889,338



1,316,685Less current portion


51,349



439,047Long-term portion

$
837,989


$
877,638  15




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Convertible
    Senior Notes
  14-1, Accounting for Convertible Debt Instruments that May be
    Settled in Cash Upon Conversion 14-1). 14-1 14-1
  14-1, 1 4
    Condensed
    Consolidated Statement of Operations
    Three months ended March 31, 2008
  As Computed


As Reportedunder


before


Effect ofAPB 14-1


APB 14-1


ChangeDeprecation and amortization

$
59,866


$
59,698


$
168Total operating costs and expenses


310,752



310,584



168Operating income


121,281



121,449



(168
)Interest expense


(4,980
)


(1,804
)


(3,176
)Total other income


7,945



11,121



(3,176
)Income before income taxes


129,226



132,570



(3,344
)Income tax expense


43,670



44,937



(1,267
)Net Income

$
85,556


$
87,633


$
(2,077
)Income per common share:Basic net income per common share

$
0.35


$
0.36


$
(0.01
)Diluted net income per common share

$
0.35


$
0.36


$
(0.01
)Total comprehensive income

$
67,739


$
69,816


$
(2,077
)  16




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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 Computed

As Reportedunder

before

Effect ofAPB 14-1

APB 14-1

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
)       March 31, 2009


December 31, 2008Gross carrying amount

$
400,000


$
400,000Unamortized debt costs


81,230



85,584Net carrying amount

$
318,770


$
314,416     Senior
    Secured Revolving Credit Facility
        Senior
    Secured Term Facility
     17




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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®
  ® ® ®
  ® ® ®
  ®
  Skelaxin®
  ® ® ®
 18




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
  30-month 30-month 30-month
  ® ®
 19




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ®
  ® ® ® ®
  ® ® ® ®
  Avinza®
  ® ®
 20




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® ®
  Adenoscan®
  ®
  Average
    Wholesale Price Litigation
  In re:
    Pharmaceutical Industry Average Wholesale Pricing Litigation
   21




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Governmental
    Pricing Investigation and Related Matters
      and/or
 22




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Fen-Phen
    Litigation
  In re Fen-Phen Litigation. and/or
  ®
  ®
   23




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Hormone
    Replacement Therapy
  In re: Prempro Products
    Liability Litigation
  Alpharma
    Matters
  and/or
  Department
    of Justice Investigation
  ® ® and/or ® ® ® ®
    Chicken
    Litter Litigation
   24




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        AWP
    Litigation
  ®
    Other
    Contingencies
  ® ®
 25




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  11.
    Accounting
    Developments  14-1, Accounting for Convertible Debt Instruments that May be
    Settled in Cash Upon Conversion.
  Disclosures
    about Derivative Instruments and Hedging Activities 
    an amendment of FASB Statement No. 133
  Business Combinations
  Employers Disclosures about
    Postretirement Benefit Plan Assets
  SFAS 107-1 No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1). Disclosures about Fair Values of Financial Instruments Interim
    Financial Reporting 107-1 FSP 107-1
  SFAS No. 157-4, Determining fair value when the volume and level of Activity
    for the Asset or Liability have Significantly Decreased and
    Identifying Transactions that are not Orderly 157-4). FSP 157-4 Fair Value
    Measurements FSP 157-4
  SFAS 115-2 SFAS 124-2, Recognition and Presentation of Other-Than-Temporary
    Impairments (FSP 115-2). FSP 115-2
 26




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FSP 115-2
  12.
    Income
    Taxes      13.
    Segment
    Information  ®
   27




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  Three Months EndedMarch 31,2009


2008Total revenues:Branded prescription pharmaceuticals

$
277,704


$
369,372Animal Health


79,835



Meridian Auto-Injector


56,607



42,912Royalties


14,758



19,123Contract manufacturing


147,328



133,826Other


(56
)


313Eliminations


(147,119
)


(133,513
)Consolidated total net revenues

$
429,057


$
432,033Segment profit:Branded prescription pharmaceuticals

$
211,777


$
297,003Animal Health


19,217



Meridian Auto-Injector


34,097



26,305Royalties


12,942



16,805Contract manufacturing


169



151Other


(84
)


308Other operating costs and expense


(270,978
)


(219,291
)Other income


(23,917
)


7,945Income before tax

$
(16,777
)

$
129,226     Three Months EndedMarch 31,2009


2008Total revenues:Neuroscience

$
157,101


$
164,617Hospital


51,959



70,917Acute care


19,440



19,789Legacy:Cardiovascular/metabolic


44,968



109,547Other


4,236



4,502Consolidated branded prescription pharmaceutical revenues

$
277,704


$
369,372   14.
    Restructuring
    Activities  First
    Quarter of 2009 Action
  ®
 28




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
  ®
      Fourth
    Quarter of 2008 Action
      Third
    Quarter of 2008 Action
  ®
  Third
    Quarter of 2007 Action
  ®
     29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  tm
    Third
    Quarter of 2006 Action
  ®
    Accrued














AccruedBalance at


Income











Balance atDecember 31,


Statement


Alpharma


Cash


Non-Cash


March 31,2008


Impact


Acquisition


Payments


Costs


2009First quarter of 2009 actionEmployee separation payments

$



$
46,309


$



$
7,495


$
3,007


$
35,807Contract termination






352







352







Other






538







422







116Accelerated depreciation(1)






485











485



Fourth quarter of 2008 actionEmployee separation payments


49,437



925







7,120



207



43,035Contract termination


16,801



2



394



1,263



(280
)


16,214Other


182



















182Accelerated depreciation(1)






196











196



Third quarter of 2008 actionEmployee separation payments


9











5







4Third quarter of 2007 actionEmployee separation payments


103



(103
)














Contract termination






4







4







Third quarter of 2006 actionEmployee separation payments


2,462



23







25



23



2,437Accelerated depreciation(1)






291











291



Fourth quarter of 2005 actionEmployee separation payments


8











6







2$
69,002


$
49,022


$
394


$
16,692


$
3,929


$
97,797     (1)
    
    Included in depreciation and amortization on the Consolidated
    Statements of Operations.   30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Stock-Based
    Compensation          16.
    Pension
    Plans and Postretirement Benefits        Three Months EndedMarch 31, 2009Pension


PostretirementBenefits


BenefitsService Cost

$



$
21Interest Cost


758



101Expected return on plan assets


(707
)


Recognized net actuarial loss


24



53Net periodic benefit cost

$
75


$
175  31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  17.
    Subsequent
    Events      18.
    Guarantor
    Financial Statements  1 4
   32




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING BALANCE SHEETS
    (In thousands)
    (unaudited)
  March 31, 2009


December 31, 2008Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
198,887


$
11,689


$
226,217


$



$
436,793


$
401,657


$
52


$
538,503


$



$
940,212Investments in debt securities


13,682















13,682



6,441















6,441Marketable securities


624















624



511















511Accounts receivable, net


1,091



190,404



36,215







227,710



61



140,502



104,507







245,070Inventories


63,770



160,874



34,176



(2,714
)


256,106



59,279



26,406



172,618







258,303Deferred income tax assets


43,051



102,148



(744
)






144,455



36,041



26,146



27,326







89,513Income tax receivable


4,805



(1,315
)


584







4,074



















Prepaid expenses and other current assets


14,503



112,569



1,407







128,479



14,090



8,283



106,841







129,214Total current assets


340,413



576,369



297,855



(2,714
)


1,211,923



518,080



201,389



949,795







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


144,920



252,085



13,484







410,489



140,314



115,996



160,949







417,259Intangible assets, net






858,308



38,391







896,699







633,300



300,919







934,219Goodwill






415,095











415,095







129,150



321,398







450,548Investments in debt securities


334,049















334,049



353,848















353,848Deferred income tax assets


(23,235
)


278,627



(2,657
)






252,735



(18,117
)


340,764



(54,898
)






267,749Other assets


68,134



47,871



291







116,296



72,442



23,704



26,680







122,826Assets held for sale






7,900











7,900







11,500











11,500Investments in subsidiaries


2,899,473



879,291



(28
)


(3,778,736
)






2,896,242











(2,896,242
)


Total assets

$
3,763,754


$
3,315,546


$
347,336


$
(3,781,450
)

$
3,645,186


$
3,962,809


$
1,455,803


$
1,704,843


$
(2,896,242
)

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

$
43,725


$
51,893


$
1,668


$



$
97,286


$
61,255


$
20,107


$
59,546


$



$
140,908Accrued expenses


30,659



278,691



7,253







316,603



32,456



165,460



213,572







411,488Income taxes payable






















1,288



169



8,991







10,448Short-term debt










5,149







5,149











5,230







5,230Current portion of long-term debt


51,349















51,349



53,820







385,227







439,047Total current liabilities


125,733



330,584



14,070







470,387



148,819



185,736



672,566







1,007,121Long-term debt


837,989















837,989



877,638















877,638Other liabilities


54,573



48,322



14,743







117,638



54,355



4,595



51,072







110,022Intercompany payable (receivable)


526,287



(577,041
)


50,754











649,565



(655,145
)


5,580







Total liabilities


1,544,582



(198,135
)


79,567







1,426,014



1,730,377



(464,814
)


729,218







1,994,781Shareholders equity


2,219,172



3,513,681



267,769



(3,781,450
)


2,219,172



2,232,432



1,920,617



975,625



(2,896,242
)


2,232,432Total liabilities and shareholders equity

$
3,763,754


$
3,315,546


$
347,336


$
(3,781,450
)

$
3,645,186


$
3,962,809


$
1,455,803


$
1,704,843


$
(2,896,242
)

$
4,227,213   33




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
    (In thousands)
    (Unaudited)
  Three Months Ended March 31, 2009


Three Months Ended March 31, 2008Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
95,149


$
397,356


$
30,477


$
(108,683
)

$
414,299


$
119,137


$
412,242


$
338


$
(118,807
)

$
412,910Royalty revenue






14,758











14,758







19,123











19,123Total revenues


95,149



412,114



30,477



(108,683
)


429,057



119,137



431,365



338



(118,807
)


432,033Operating costs and expenses:Cost of revenues


26,930



209,395



23,101



(108,487
)


150,939



34,999



175,460



30



(119,028
)


91,461Selling, general and administrative


59,419



76,219



6,685







142,323



72,905



56,912



41







129,858Research and development


1,609



24,327



1,320







27,256



582



27,926











28,508Depreciation and amortization


4,857



47,946



546







53,349



4,220



55,586



60







59,866Restructuring charges


13,504



34,546











48,050



(344
)


1,403











1,059Total operating costs and expenses


106,319



392,433



31,652



(108,487
)


421,917



112,362



317,287



131



(119,028
)


310,752Operating (loss) income


(11,170
)


19,681



(1,175
)


(196
)


7,140



6,775



114,078



207



221



121,281Other income (expense):Interest income


1,449



267



1,072







2,788



13,595



29



5







13,629Interest expense


(22,066
)


(961
)


(76
)






(23,103
)


(4,966
)


(14
)










(4,980
)Loss on investments


(823
)














(823
)


















Other, net


(441
)


(99
)


(2,239
)






(2,779
)


(376
)


(873
)


545







(704
)Equity in earnings (loss) of subsidiaries


12,618



7,810



(20
)


(20,408
)






77,641











(77,641
)


Intercompany interest (expense) income


(1,391
)


3,748



(2,357
)










(3,566
)


3,573



(7
)






Total other income (expense)


(10,654
)


10,765



(3,620
)


(20,408
)


(23,917
)


82,328



2,715



543



(77,641
)


7,945Income (loss) before income taxes


(21,824
)


30,446



(4,795
)


(20,604
)


(16,777
)


89,103



116,793



750



(77,420
)


129,226Income tax (benefit) expense


(11,102
)


5,984



(937
)






(6,055
)


3,547



39,935



188







43,670Net (loss) income

$
(10,722
)

$
24,462


$
(3,858
)

$
(20,604
)

$
(10,722
)

$
85,556


$
76,858


$
562


$
(77,420
)

$
85,556  34




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
    (In thousands)
    (Unaudited)
  Three Months Ended March 31, 2009


Three Months Ended March 31, 2008Non











NonGuarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


ConsolidatedCash flows provided by operating activities

$
(22,649
)

$
49,858


$
(10,469
)

$
16,740


$
32,908


$
66,860


$
464


$
100,232Cash flows from investing activities:Transfers (to) from restricted cash


(38
)


(27
)






(65
)


144











144Purchases of investments in debt securities


















(279,175
)










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


8,000











8,000



1,006,630











1,006,630Purchases of property, plant and equipment


(4,681
)


(2,099
)


(112
)


(6,892
)


(16,434
)


(3,480
)






(19,914
)Proceeds from sale of property and equipment


















13











13Acquisition of Alpharma


(13,104
)


(56,602
)






(69,706
)














Acquisition of
    Avinza®


(1
)










(1
)


(34
)










(34
)Purchases of intellectual property and product rights






(548
)






(548
)






(715
)






(715
)Net cash provided by (used in) investing activities


(9,824
)


(59,276
)


(112
)


(69,212
)


711,144



(4,195
)






706,949Cash flows from financing activities:Proceeds from exercise of stock options


36











36



54











54Net (payments) proceeds related to stock-based award activity


(2,000
)










(2,000
)


(662
)










(662
)Payments on long-term debt


(48,022
)


(385,227
)






(433,249
)














Debt issuance costs


(1,220
)










(1,220
)














Intercompany


(119,091
)


116,338



2,753







62,566



(62,669
)


103



Net cash (used in) provided by financing activities


(170,297
)


(268,889
)


2,753



(436,433
)


61,958



(62,669
)


103



(608
)Net cash flows from exchange rate changes










(14,514
)


(14,514
)














(Decrease) increase in cash and cash equivalents


(202,770
)


(278,307
)


(22,342
)


(503,419
)


806,010



(4
)


567



806,573Cash 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

$
198,887


$
11,689


$
226,217


$
436,793


$
815,728


$
4,641


$
6,213


$
826,582  35




---



##### 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 which follows; (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 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, which
    we refer to as the 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.   36




---



##### Table of Contents



Recent
    Developments
  Skelaxin®
  ® ® ®
  ®
  Remoxy®
  ® ® ®
  ® ® ®
  ® tm
  Acurox®

    Tablets
  ® ®
 37




---



##### Table of Contents



® ® ® ® ® ®
  Class-Wide
    Risk Evaluation and Mitigation Strategy
  ® class-wide
  class-wide class-wide
  Embedatm
  tm tm tm tm tm
  CorVuetm(binodenoson) for Injection
  tm tm tm tm
 38




---



##### Table of Contents



T-62
  T-62,
  Generic
    Competition
  ® ® ®
  II.
    RESULTS
    OF OPERATIONS  Three
    Months Ended March 31, 2009 and 2008
    For the Three MonthsEnded March 31,2009


2008(In thousands)Total RevenuesBranded prescription pharmaceuticals

$
277,704


$
369,372Animal Health


79,835



Meridian Auto-Injector


56,607



42,912Royalties


14,758



19,123Contract manufacturing


209



313Other


(56
)


313Total revenues

$
429,057


$
432,033Cost of Revenues, exclusive of depreciation, amortization and
    impairmentsBranded prescription pharmaceuticals

$
65,927


$
72,369Animal Health


60,618



Meridian Auto-Injector


22,510



16,607Royalties


1,816



2,318Contract manufacturing


40



162Other


28



5Total cost of revenues

$
150,939


$
91,461  39




---



##### Table of Contents



For the Three MonthsEnded March 31,2009


2008(In thousands)Gross Sales

$
507,044


$
549,419Commercial Rebates


15,459



41,676Medicare Part D Rebates


2,539



16,197Medicaid Rebates


11,623



12,264Chargebacks


28,176



20,212Returns


2,883



4,450Trade Discounts/Other


17,307



22,587Net Sales

$
429,057


$
432,033     ® ® ® ®
    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


$
51,778     ® ® ® ® ® ® ®
 40




---



##### 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


$
33,175   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


$
10,252   Branded
    Prescription Pharmaceuticals Segment
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


%(In thousands)Branded prescription pharmaceuticals revenue:Skelaxin®

$
100,599


$
115,884


$
(15,285
)


(13.2
)%Flector®

    Patch


16,776







16,776



Thrombin-JMI®


47,339



67,151



(19,812
)


(29.5
)Avinza®


38,980



32,023



6,957



21.7Levoxyl®


19,572



15,658



3,914



25.0Altace®


9,811



79,811



(70,000
)


(87.7
)Other


44,627



58,845



(14,218
)


(24.2
)Total revenue

$
277,704


$
369,372


$
(91,668
)


(24.8
)%Cost of revenues, exclusive of depreciation, amortization and
    impairments

$
65,927


$
72,369


$
(6,442
)


(8.9
)%   Sales
    of Key Products
  Skelaxin®
  No. 04-cv-5540 ® ® ® ®
  ®
 41




---



##### Table of Contents



® ® ®
  Thrombin-JMI®
  ® ®
  Flector®

    Patch
  ® ® ® ® ® ®
  Avinza®
  ® ®
  ® ® ®
  ®
  ®
  Levoxyl®
  ® ®
 42




---



##### Table of Contents



Altace®
  ® ® ® ®
  ®
  Other
  ® ® ® ®
  ® ® ®
  ® ®
  Cost
    of Revenues
  ® ®
    Business Combinations ®
 43




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##### Table of Contents



®
  Animal
    Health
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


%(In thousands)Animal Health revenue

$
79,835


$



$
79,835



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


60,618







60,618



     Business Combinations.
  Meridian
    Auto-Injector
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


%(In thousands)Meridian Auto-Injector revenue

$
56,607


$
42,912


$
13,695



31.9
%Cost of revenues, exclusive of depreciation, amortization and
    impairments


22,510



16,607



5,903



35.5
%     ® ® ®
    Royalties
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


%(In thousands)Royalty revenue

$
14,758


$
19,123


$
(4,365
)


(22.8
)%Cost of revenues, exclusive of depreciation, amortization and
    impairments


1,816



2,318



(502
)


(21.7
)%  44




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##### Table of Contents



®
  ® ® ® ®
  ®
  Operating
    Costs and Expenses
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


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

$
150,939


$
91,461


$
59,478



65.0
%Selling, general and administrative


142,323



129,858



12,465



9.6Research and development


27,256



28,508



(1,252
)


(4.4
)Depreciation and amortization


53,349



59,866



(6,517
)


(10.9
)Restructuring charges


48,050



1,059



46,991



>100Total operating costs and expenses

$
421,917


$
310,752


$
111,165



35.8
%   Selling,
    General and Administrative Expenses
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


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

$
137,136


$
111,901


$
25,235



22.6
%Acquisition related costs


3,789







3,789



Co-promotion fees


1,398



17,957



(16,559
)


(92.2
)Total selling, general and administrative

$
142,323


$
129,858


$
12,465



9.6
%     ® ® ® ®
 45




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##### Table of Contents



Research
    and Development Expense
  For the Three Months


ChangeEnded March 31,


2009 vs. 20082009


2008


$


%Research and development

$
27,256


$
28,508



(1,252
)


(4.4
)%     Depreciation
    and Amortization Expense
  ® ®
  ® ® ® ®
  ® ® ® ® and/or ®
    ® ® ®
  ® ®
 46




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##### Table of Contents



and/or
  ® ®
  Other
    Operating Expenses
  ®
  Non-Operating
    Items
  For the Three MonthsEnded March 31,2009

2008(In thousands)Interest income

$
2,788


$
13,629Interest expense


(23,103
)


(4,980
)Loss on investment


(823
)


Other, net


(2,779
)


(704
)Total other income


(23,917
)


7,945Income tax expense


(6,055
)


43,670   Interest
    Income
    Interest
    Expense
      
    On January 1, 2009, we adopted the Financial Accounting
    Standards Board (FASB) Staff Position No. APB
    14-1,
    Accounting for Convertible Debt Instruments that May be
    Settled in Cash Upon Conversion(FSP APB
    14-1).
    In accordance with FSP APB
    14-1 we
    separately accounted for the liability and equity components of
    our $400.0 million
    11/4% Convertible
    Senior Notes due April 1, 2026 that can be settled for cash
    based on the estimated nonconvertible debt borrowing rate. The
    standard requires retrospective application to all periods
    presented. Thus interest expense in the first quarter of 2009
    and 2008 reflects an increase in interest expense of
    $4.4 million and $4.1 million, respectively, due to
    the adoption of this standard.
    A loss of $0.8 million in the first quarter of 2009 related
    to our investment in debt securities. 47




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##### Table of Contents



Income
    Tax Expense
      Liquidity
    and Capital Resources
  General
    Investments
    in Debt Securities
      Fair Value Measurements
     48




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##### Table of Contents



The
    Fair Value Option for Financial Assets and Financial
    Liabilities
      Skelaxin®
  ® No. 04-cv-5540 ® ®
   49




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##### Table of Contents



Alpharma
  ® tm
    ® ® ® ®
  ®
  Maximum PurchasePrice 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   ® ®
 50




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##### Table of Contents



cash-related
    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    51




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##### Table of Contents



Senior
    Secured Term Facility
      2009

$
30.0 million2010

$
40.0 million2011

$
40.0 million2012

$
90.0 million         CorePharma
  ®
  Acura
  ® ® ® ®
 52




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##### Table of Contents



® ® ®
  Altace®
  ® ® ® ® ®
  ®
  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
  ® Co-Promotion
 53




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##### Table of Contents



® ® ®
  
    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.  ® ®
  ® ®
  ®
  ® ® ® ® ® ® ® ®
 54




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##### Table of Contents



Governmental
    Pricing Investigation and Related Matters
    Patent
    Challenges
  ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  For the Three MonthsEnded March 31,2009

2008(In thousands)Net cash provided by operating activities

$
16,740


$
100,232     ®
    For the Three MonthsEnded March 31,2009


2008(In thousands)Accounts receivable, net of allowance

$
16,726


$
(3,539
)Inventories


(20,345
)


(253
)Prepaid expenses and other current assets


1,437



(1,066
)Accounts payable


(45,471
)


(14,418
)Accrued expenses and other liabilities


(18,853
)


(84,201
)Income taxes payable


(9,552
)


38,907Deferred revenue


(1,170
)


(1,170
)Other assets


988



3,649Deferred taxes


(5,135
)


5,438Total changes from operating assets and liabilities and deferred
    taxes

$
(81,375
)

$
(56,653
)  55




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##### Table of Contents



Investing
    Activities
  For the Three MonthsEnded March 31,2009

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

$
(69,212
)

$
706,949       Financing
    Activities
  For theThree MonthsEnded March 31,2009

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

$
(436,433
)

$
(608
)       Certain
    Indebtedness and Other Matters
  1 4 1 4
    Senior
    Secured Revolving Credit Facility
   56




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##### Table of Contents




    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) an
    applicable percentage of 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) an applicable percentage
    of 5.0%.      
    maintenance of maximum funded debt to consolidated EBITDA ratios
    that range from 1.50 to 1 to 3.25 to 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 to 1 to 4.00 to 1 (depending on
    dates and the occurrence of certain events relating to certain
    patents).         57




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##### Table of Contents



Senior
    Secured Term Facility
        
    5.00% plus the Adjusted LIBO Rate or
    4.00% plus the Alternate Base Rate.      
    maintenance of maximum funded debt to consolidated EBITDA ratios
    that range from 1.50 to 1 to 3.25 to 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 to 1 to 4.00 to 1 (depending on
    dates and the occurrence of certain events relating to certain
    patents).      long-term
   58




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Alpharma
    Convertible Senior Notes
      Impact
    of Inflation
    Recently
    Issued Accounting Standards
    Critical
    Accounting Policies and Estimates
              
    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 59




---



##### Table of Contents



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 both intangibles.     60




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##### Table of Contents



GrossCarrying


Accumulated


Net BookAmount


Amortization


Value(In thousands)Branded Prescription PharmaceuticalsAvinza®

$
285,700


$
55,571


$
230,129Skelaxin®


278,853



181,915



96,938Sonata®


61,961



61,961



Flector®

    Patch


130,000



2,955



127,045Neuroscience


756,514



302,402



454,112Synercid®


70,959



43,435



27,524Other hospital


8,442



6,503



1,939Hospital


79,401



49,938



29,463Bicillin®


92,350



32,195



60,155Other legacy products


324,035



276,247



47,788Legacy products


416,385



308,442



107,943Total Branded


1,252,300



660,782



591,518Animal Health


170,000



2,408



167,592Meridian Auto-Injector


180,537



43,316



137,221Royalties


3,731



3,363



368Contract manufacturing










All other










Total intangible assets

$
1,606,568


$
709,869


$
896,699  61




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##### Table of Contents



Three Months Ended


Three Months EndedMarch 31, 2009


March 31, 2008Amortization





AmortizationImpairments


Expense


Impairments


Expense(In thousands)


(In thousands)Branded Prescription PharmaceuticalsAvinza®

$



$
6,638


$



$
6,638Skelaxin®






20,041







5,811Sonata®














315Flector®

    Patch






2,955







Neuroscience






29,634







12,764Synercid®






1,484







2,375Other hospital






76







76Hospital






1,560







2,451Altace®













$
29,687Bicillin®






925







925Other legacy products






1,430







2,998Legacy products






2,355







33,610Total Branded






33,549







48,825Animal Health






2,408







Meridian Auto-Injector






2,035







1,920Royalties






186







182Contract manufacturing














All other














Total

$



$
38,178


$



$
50,927     Remaining Life at March 31, 2009Skelaxin®


1 year 3 monthsAvinza®


8 years 8 monthsSynercid®


4 years 9 monthsBicillin®


16 years 3 monthsFlector®

    Patch


10 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. 62




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##### Table of Contents




    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 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. 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
     63




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##### Table of Contents



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

    Skelaxin®,

    Avinza®,

    Thrombin-JMI®,

    the
    Flector®

    Patch,
    Levoxyl®,

    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®,

    Embedatm,

    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 of various pending legal
    proceedings including the
    Skelaxin®

    and
    Avinza®

    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   64




---



##### Table of Contents



Item 4.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
         65




---



##### Table of Contents



PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K
  Item 6.
    Exhibits  ExhibitNumber

Description10
.1*

2009 Executive Management Incentive Award10
.2*

Form of Option Certificate and Nonstatutory Stock Option
    Agreement10
.3*

Form of Restricted Stock Certificate and Restricted Stock Grant
    Agreement10
.4*

Form of Long-Term Performance Unit Award Agreement 
    One-Year Performance Cycle10
.5*

Form of Long-Term Performance Unit Award Agreement 
    Three-Year Performance Cycle31
.1

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

Certificate of Chief 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 Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002     *
    
    Denotes management contract or compensatory plan or arrangement.
    
    Pursuant to
    Rule 24b-2
    of the Securities Exchange Act of 1934, as amended, confidential
    portions of this exhibit have been omitted and filed separately
    with the Securities and Exchange Commission (SEC)
    pursuant to a Confidential Treatment Request filed with the SEC. 66




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##### Table of Contents



SIGNATURES      By:
    /s/  Brian
    A. Markison   President and Chief Executive Officer
    By:
    /s/  Joseph
    Squicciarino   Chief Financial Officer
   II-1