##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number 1-10581
 BENTLEY PHARMACEUTICALS, INC.
  DELAWARE
(State or other jurisdiction of 
incorporation or organization)
    
    No. 59-1513162
(I.R.S. Employer
Identification No.)
 Bentley Park, 2 Holland Way, Exeter, New Hampshire 03833    (603) 658-6100
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




---



##### 



Bentley Pharmaceuticals, Inc. and Subsidiaries
Form 10-Q for the Quarter Ended September 30, 2007
 Index
 PagePart I.
    
    Financial InformationItem 1.
    

Unaudited Condensed Consolidated Financial Statements:Unaudited Consolidated Balance Sheets as of September 30, 2007
and December 31, 2006
    
    
    3Unaudited Consolidated Income Statements for the
three and nine months
ended September 30, 2007 and 2006
    
    
    4Unaudited Consolidated Statement of Changes in Stockholders
Equity for the nine months ended September 30, 2007 and 2006
    
    
    5Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2007 and 2006
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    38Part II.
    

Other InformationItem 6.
    
    Exhibits
    
    
    38EX-10.1 EMPLOYMENT AGREEMENT DATED AS OF AUGUST 20, 2007EX-31.1 CERTIFICATION OF THE CEO PURSUANT TO SECTION 302EX-31.2 CERTIFICATION OF THE CFO PURSUANT TO SECTION 302EX-32.1 CERTIFICATION OF CEO PURSUANT TO SECTION 906EX-32.2 CERTIFICATION OF CFO PURSUANT TO SECTION 906
  2




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Unaudited Consolidated Balance Sheets
 (in thousands, except per share data)
    
    September 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    38,452
    
    
    $
    12,424Marketable securities
    
    
    560
    
    
    
    3,177Receivables, net
    
    
    31,469
    
    
    
    32,963Inventories
    
    
    15,043
    
    
    
    16,279Deferred taxes
    
    
    1,579
    
    
    
    1,049Prepaid expenses and other
    
    
    2,437
    
    
    
    1,798Total current assets
    
    
    89,540
    
    
    
    67,690Non-current assets:Fixed assets, net
    
    
    55,821
    
    
    
    48,556Drug licenses and related costs, net
    
    
    17,147
    
    
    
    16,026Restricted cash
    
    
    1,000
    
    
    
    1,000Deferred taxes
    
    
    195
    
    
    
    240Other
    
    
    945
    
    
    
    844Total non-current assets
    
    
    75,108
    
    
    
    66,666$
    164,648
    
    
    $
    134,356Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    15,582
    
    
    $
    14,566Accrued expenses
    
    
    11,276
    
    
    
    9,704Short-term borrowings
    
    
    
    
    
    
    247Current portion of long-term debt
    
    
    
    
    
    
    307Deferred income
    
    
    998
    
    
    
    1,045Other current liabilities
    
    
    1,571
    
    
    
    1,518Total current liabilities
    
    
    29,427
    
    
    
    27,387Non-current liabilities:Long-term debt
    
    
    15,559
    
    
    
    Deferred income
    
    
    4,757
    
    
    
    3,899Other
    
    
    4,055
    
    
    
    2,739Total non-current liabilities
    
    
    24,371
    
    
    
    6,638Commitments and contingenciesStockholders equity:Preferred stock, $1.00 par value, authorized 2,000 shares,
issued and outstanding, none
    
    
    
    
    
    
    Common stock, $0.02 par value, authorized 100,000 shares,
issued and outstanding, 22,323 and 22,262 shares
    
    
    446
    
    
    
    445Additional paid-in capital
    
    
    142,092
    
    
    
    140,030Accumulated deficit
    
    
    (46,952
    )
    
    
    (49,016
    )Accumulated other comprehensive income
    
    
    15,264
    
    
    
    8,872Total stockholders equity
    
    
    110,850
    
    
    
    100,331$
    164,648
    
    
    $
    134,356
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
 3




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Unaudited Consolidated Income Statements
 For the Three Months Ended
    
    
    For the Nine Months Ended(in thousands, except per share data)
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Net product sales
    
    $
    24,131
    
    
    $
    22,873
    
    
    $
    81,598
    
    
    $
    75,900Licensing and collaboration revenues
    
    
    3,217
    
    
    
    2,283
    
    
    
    8,320
    
    
    
    6,517Total revenues
    
    
    27,348
    
    
    
    25,156
    
    
    
    89,918
    
    
    
    82,417Cost of net product sales
    
    
    14,451
    
    
    
    11,778
    
    
    
    46,138
    
    
    
    37,182Gross profit
    
    
    12,897
    
    
    
    13,378
    
    
    
    43,780
    
    
    
    45,235Operating expenses:Selling and marketing
    
    
    4,080
    
    
    
    3,495
    
    
    
    13,338
    
    
    
    11,876General and administrative
    
    
    4,098
    
    
    
    3,751
    
    
    
    12,016
    
    
    
    11,320Research and development
    
    
    3,017
    
    
    
    2,447
    
    
    
    9,194
    
    
    
    7,850Litigation settlement
    
    
    
    
    
    
    8,932
    
    
    
    
    
    
    
    10,269Separation costs
    
    
    846
    
    
    
    
    
    
    
    1,153
    
    
    
    Depreciation and amortization
    
    
    489
    
    
    
    460
    
    
    
    1,543
    
    
    
    1,341Total operating expenses
    
    
    12,530
    
    
    
    19,085
    
    
    
    37,244
    
    
    
    42,656Income (loss) from operations
    
    
    367
    
    
    
    (5,707
    )
    
    
    6,536
    
    
    
    2,579Other income (expenses):Interest income
    
    
    339
    
    
    
    223
    
    
    
    706
    
    
    
    661Interest expense
    
    
    (247
    )
    
    
    (15
    )
    
    
    (348
    )
    
    
    (109
    )Other, net
    
    
    (149
    )
    
    
    
    
    
    
    84
    
    
    
    36Income (loss) before income taxes
    
    
    310
    
    
    
    (5,499
    )
    
    
    6,978
    
    
    
    3,167Provision for income taxes
    
    
    911
    
    
    
    1,730
    
    
    
    4,509
    
    
    
    6,607Net (loss) income
    
    $
    (601
    )
    
    $
    (7,229
    )
    
    $
    2,469
    
    
    $
    (3,440
    )Net (loss) income per common share:Basic
    
    $
    (0.03
    )
    
    $
    (0.33
    )
    
    $
    0.11
    
    
    $
    (0.16
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.33
    )
    
    $
    0.11
    
    
    $
    (0.16
    )Weighted average common
shares outstanding:Basic
    
    
    22,354
    
    
    
    22,194
    
    
    
    22,322
    
    
    
    22,107Diluted
    
    
    22,354
    
    
    
    22,194
    
    
    
    22,829
    
    
    
    22,107
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
 4




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Unaudited Consolidated Statement of Changes in Stockholders Equity
 Accumulated$0.02 Par Value
    
    
    Additional
    
    
    
    
    
    
    Other(in thousands)
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance at December 31, 2006
    
    
    22,262
    
    
    $
    445
    
    
    $
    140,030
    
    
    $
    (49,016
    )
    
    $
    8,872
    
    
    $
    100,331Cumulative effect change in accounting
from the implementation of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    
    
    
    
    (405
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,469
    
    
    
    
    
    
    
    2,469Other comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,392
    
    
    
    6,392Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,861Exercise of stock options
    
    
    46
    
    
    
    1
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    192Purchase of treasury shares
    
    
    (4
    )
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    (52
    )Stock-based compensation
    
    
    19
    
    
    
    
    
    
    
    1,923
    
    
    
    
    
    
    
    
    
    
    
    1,923Balance at September 30, 2007
    
    
    22,323
    
    
    $
    446
    
    
    $
    142,092
    
    
    $
    (46,952
    )
    
    $
    15,264
    
    
    $
    110,850
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
 5




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Unaudited Consolidated Statements of Cash Flows
 For the Nine Months Ended(in
thousands)
    
    September 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    2,469
    
    
    $
    (3,440
    )Adjustments
to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    4,959
    
    
    
    4,038Non-cash charge for inventory write-down and reserves
    
    
    416
    
    
    
    Foreign currency gains
    
    
    (56
    )
    
    
    Stock-based compensation expense
    
    
    1,923
    
    
    
    1,633Change in fair value of derivative instrument
    
    
    131
    
    
    
    Loss on disposal of assets
    
    
    429
    
    
    
    50Other non-cash items
    
    
    8
    
    
    
    8(Increase) decrease in assets and
increase (decrease) in liabilities:Receivables,
net
    
    
    3,507
    
    
    
    (3,805
    )Inventories
    
    
    1,883
    
    
    
    (2,118
    )Deferred income taxes
    
    
    (358
    )
    
    
    (694
    )Prepaid expenses and other current assets
    
    
    (548
    )
    
    
    229Other assets
    
    
    (58
    )
    
    
    (6
    )Accounts payable and accrued expenses
    
    
    978
    
    
    
    1,331Deferred income
    
    
    399
    
    
    
    1,351Other liabilities
    
    
    511
    
    
    
    7,546Net cash provided by operating activities
    
    
    16,593
    
    
    
    6,123Cash flows from investing activities:Additions to fixed assets
    
    
    (7,489
    )
    
    
    (12,070
    )Additions to drug licenses and related costs
    
    
    (1,780
    )
    
    
    (1,803
    )Proceeds from the sale of fixed assets
    
    
    30
    
    
    
    Purchase of investments
    
    
    (2
    )
    
    
    (2,402
    )Proceeds from investments
    
    
    2,659
    
    
    
    Net cash used in investing activities
    
    
    (6,582
    )
    
    
    (16,275
    )
  The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
 6




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 Unaudited Consolidated Statements of Cash Flows (Concluded)
 For the Nine Months Ended(in thousands)
    
    September 30,2007
    
    
    2006Cash flows from financing activities:Proceeds from the exercise of stock options
    
    $
    192
    
    
    $
    150Remittance of employee tax liabilities in exchange
for common stock tendered to the Company
    
    
    (52
    )
    
    
    (1,907
    )Proceeds from borrowings
    
    
    14,807
    
    
    
    1,404Repayment of borrowings
    
    
    (554
    )
    
    
    (3,700
    )Net cash provided by (used) in financing activities
    
    
    14,393
    
    
    
    (4,053
    )Effect of exchange rate changes on cash
    
    
    1,624
    
    
    
    21Net increase (decrease) in cash and cash equivalents
    
    
    26,028
    
    
    
    (14,184
    )Cash and cash equivalents at beginning of period
    
    
    12,424
    
    
    
    32,384Cash and cash equivalents at end of period
    
    $
    38,452
    
    
    $
    18,200Supplemental Disclosures of Cash Flow InformationThe Company paid cash during the period for:Interest
    
    $
    22
    
    
    $
    110Foreign income taxes
    
    $
    4,099
    
    
    $
    4,372Supplemental Disclosures of Non-Cash Financing and Investing
ActivitiesThe Company has issued Common Stock as equity-based
compensation in lieu of cash during the period as follows:Shares
    
    
    19
    
    
    
    14Amount
    
    $
    191
    
    
    $
    182Amounts included in accounts payable at end of
period for fixed asset and drug license purchases
    
    $
    2,202
    
    
    $
    3,796
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
 7




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 History and Operations
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing
of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced drug
delivery technologies and pharmaceutical products.
  ® ®
  8




---



##### Table of Contents



separation costs general and administrative separation costs
 Basis
of Unaudited Condensed Consolidated Financial Statements
   Cash and cash equivalents
 marketable securities
 cash and cash equivalents
 Fair value of financial instruments
 Fair Value Measurements
 9




---



##### Table of Contents



Receivables
  September 30, 2007
    
    
    December 31, 2006Trade receivables (of which $0 and
$247, respectively, collateralize short-term
borrowings with Spanish financial
institutions)
    
    $
    26,443
    
    
    $
    27,880VAT receivable
    
    
    2,453
    
    
    
    3,151Royalties receivable
    
    
    3,065
    
    
    
    2,261Other
    
    
    123
    
    
    
    8232,084
    
    
    
    33,374Less-allowance for doubtful accounts
    
    
    (615
    )
    
    
    (411
    )$
    31,469
    
    
    $
    32,963
 Inventories
   September 30, 2007
    
    
    December 31, 2006Raw materials
    
    $
    10,034
    
    
    $
    8,669Finished goods
    
    
    5,818
    
    
    
    7,62115,852
    
    
    
    16,290Less allowance for slow moving
inventory
    
    
    (809
    )
    
    
    (11
    )$
    15,043
    
    
    $
    16,279
 cost
of net product sales
 other current liabilities
 10




---



##### Table of Contents



Fixed assets
 
 September 30, 2007
    
    
    December 31, 2006Land
    
    $
    3,035
    
    
    $
    2,875Buildings and improvements
    
    
    25,194
    
    
    
    17,538Equipment
    
    
    25,432
    
    
    
    20,591Furniture and fixtures
    
    
    2,310
    
    
    
    2,138Other
    
    
    338
    
    
    
    39456,309
    
    
    
    43,536Capital in-progress
    
    
    19,539
    
    
    
    20,21375,848
    
    
    
    63,749Less accumulated depreciation
    
    
    (20,027
    )
    
    
    (15,193
    )$
    55,821
    
    
    $
    48,556
 depreciation and amortization expense cost of net product
sales
 Long-term debt
  September 30, 2007
    
    
    December 31, 2006Loans payable
    
    $
    15,559
    
    
    $
    307Less-current portion of long-term debt
    
    
    
    
    
    
    (307
    )$
    15,559
    
    
    $
    
  Year
    
    Principal Payment2007
    
    $
    2008
    
    
    5832009
    
    
    2,3342010
    
    
    2,3342011
    
    
    2,3342012 and 2013
    
    
    7,974Total
    
    $
    15,559
  11




---



##### Table of Contents



Stockholders equity
  U.S. Dollars per Euro
    
    September 30, 2007
    
    December 31, 2006YTD weighted average exchange rate
    
    1.34
    
    1.26Exchange rate
    
    1.41
    
    1.31
 accumulated
other comprehensive income
 Supplemental
disclosures related to Unaudited Consolidated Statements of Cash Flows
 additional paid in
capital
  12




---



##### Table of Contents



Revenue recognition
 Revenue Recognition When Right of
Return Exists
 Accounting for Revenue Arrangements with Multiple Deliverables
   Provision for income taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 13




---



##### Table of Contents



Basic and diluted net income (loss) per common share
    Effect of DilutiveBasic EPS
    
    Securities
    
    Diluted EPSNet Income
    
    $
    2,469
    
    
    $
    
    
    
    $
    2,469Weighted Average CommonShares Outstanding
    
    
    22,322
    
    
    
    507
    
    
    
    22,829Net Income Per CommonShare
    
    $
    0.11
    
    
    $
    
    
    
    $
    0.11
    14




---



##### Table of Contents



Share-based compensation
     For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of net product sales
    
    $
    10
    
    
    $
    4
    
    
    $
    25
    
    
    $
    19Selling and marketing expenses
    
    
    5
    
    
    
    2
    
    
    
    13
    
    
    
    10General and administrative expenses
    
    
    410
    
    
    
    392
    
    
    
    1,029
    
    
    
    913Research and development expenses
    
    
    241
    
    
    
    200
    
    
    
    603
    
    
    
    482$
    666
    
    
    $
    598
    
    
    $
    1,670
    
    
    $
    1,424
  General and
administrative expenses Research and
development expenses
 15




---



##### Table of Contents



Business segment information
 Disclosures About Segments of an Enterprise and Related Information,
     Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    23,930
    
    
    $
    201
    
    
    $
    
    
    
    $
    
    
    
    $
    24,131Licensing and collaboration revenues
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    3,069
    
    
    
    3,217Total revenues
    
    
    24,078
    
    
    
    201
    
    
    
    
    
    
    
    3,069
    
    
    
    27,348Cost of net product sales
    
    
    14,291
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    14,451Gross Profit
    
    
    9,787
    
    
    
    41
    
    
    
    
    
    
    
    3,069
    
    
    
    12,897Selling and marketing expense
    
    
    4,080
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,080General and administrative expense
    
    
    2,021
    
    
    
    (8
    )
    
    
    
    
    
    
    2,085
    
    
    
    4,098Research and development expense
    
    
    341
    
    
    
    
    
    
    
    1,338
    
    
    
    1,338
    
    
    
    3,017Separation costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    846
    
    
    
    846Depreciation and amortization expense
    
    
    290
    
    
    
    39
    
    
    
    
    
    
    
    160
    
    
    
    489Income (loss) from operations
    
    
    3,055
    
    
    
    10
    
    
    
    (1,338
    )
    
    
    (1,360
    )
    
    
    367Interest income
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    339Interest expense
    
    
    (246
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (247
    )Other income (expense), net
    
    
    (147
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (149
    )Income (loss) before income taxes
    
    
    2,850
    
    
    
    10
    
    
    
    (1,338
    )
    
    
    (1,212
    )
    
    
    310Provision for income taxes
    
    
    911
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    911Net income (loss)
    
    
    1,939
    
    
    
    10
    
    
    
    (1,338
    )
    
    
    (1,212
    )
    
    
    (601
    )Expenditures for fixed assets
    
    
    3,174
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    3,231Expenditures for drug licenses
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575
 16




---



##### Table of Contents



Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    22,834
    
    
    $
    39
    
    
    $
    
    
    
    $
    
    
    
    $
    22,873Licensing and collaboration revenues
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    2,113
    
    
    
    2,283Total revenues
    
    
    23,004
    
    
    
    39
    
    
    
    
    
    
    
    2,113
    
    
    
    25,156Cost of net product sales
    
    
    11,739
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    11,778Gross profit
    
    
    11,265
    
    
    
    
    
    
    
    
    
    
    
    2,113
    
    
    
    13,378Selling and marketing expense
    
    
    3,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,495General and administrative expense
    
    
    1,901
    
    
    
    
    
    
    
    1
    
    
    
    1,849
    
    
    
    3,751Research and development expense
    
    
    421
    
    
    
    
    
    
    
    1,013
    
    
    
    1,013
    
    
    
    2,447Litigation settlement
    
    
    7,764
    
    
    
    1,168
    
    
    
    
    
    
    
    
    
    
    
    8,932Depreciation
and amortization expense
    
    
    270
    
    
    
    21
    
    
    
    
    
    
    
    169
    
    
    
    460Loss from operations
    
    
    (2,586
    )
    
    
    (1,189
    )
    
    
    (1,014
    )
    
    
    (918
    )
    
    
    (5,707
    )Interest income
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    168
    
    
    
    223Interest expense
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Loss before income taxes
    
    
    (2,546
    )
    
    
    (1,189
    )
    
    
    (1,014
    )
    
    
    (750
    )
    
    
    (5,499
    )Provision for income taxes
    
    
    1,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,730Net loss
    
    
    (4,276
    )
    
    
    (1,189
    )
    
    
    (1,014
    )
    
    
    (750
    )
    
    
    (7,229
    )Expenditures for fixed assets
    
    
    4,597
    
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    4,754Expenditures for drug licenses
    
    
    572
    
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    932
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    80,997
    
    
    $
    601
    
    
    $
    
    
    
    $
    
    
    
    $
    81,598Licensing and collaboration revenues
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    7,887
    
    
    
    8,320Total revenues
    
    
    81,430
    
    
    
    601
    
    
    
    
    
    
    
    7,887
    
    
    
    89,918Cost of net product sales
    
    
    45,134
    
    
    
    1,004
    
    
    
    
    
    
    
    
    
    
    
    46,138Gross profit (loss)
    
    
    36,296
    
    
    
    (403
    )
    
    
    
    
    
    
    7,887
    
    
    
    43,780Selling and marketing expense
    
    
    13,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,338General and administrative expense
    
    
    6,689
    
    
    
    (36
    )
    
    
    
    
    
    
    5,363
    
    
    
    12,016Research and development expense
    
    
    1,341
    
    
    
    
    
    
    
    3,926
    
    
    
    3,927
    
    
    
    9,194Separation costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,153
    
    
    
    1,153Depreciation and amortization expense
    
    
    848
    
    
    
    117
    
    
    
    
    
    
    
    578
    
    
    
    1,543Income (loss) from operations
    
    
    14,080
    
    
    
    (484
    )
    
    
    (3,926
    )
    
    
    (3,134
    )
    
    
    6,536Interest income
    
    
    323
    
    
    
    
    
    
    
    
    
    
    
    383
    
    
    
    706Interest expense
    
    
    (339
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (348
    )Other income (expense), net
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    84Income (loss) before income taxes
    
    
    14,153
    
    
    
    (484
    )
    
    
    (3,926
    )
    
    
    (2,765
    )
    
    
    6,978Provision for income taxes
    
    
    4,509
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,509Net income (loss)
    
    
    9,644
    
    
    
    (484
    )
    
    
    (3,926
    )
    
    
    (2,765
    )
    
    
    2,469Expenditures for fixed assets
    
    
    7,404
    
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    7,489Expenditures for drug licenses
    
    
    1,591
    
    
    
    32
    
    
    
    
    
    
    
    157
    
    
    
    1,780
 17




---



##### Table of Contents



Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    75,861
    
    
    $
    39
    
    
    $
    
    
    
    $
    
    
    
    $
    75,900Licensing
and collaboration revenues
    
    
    409
    
    
    
    
    
    
    
    
    
    
    
    6,108
    
    
    
    6,517Total revenues
    
    
    76,270
    
    
    
    39
    
    
    
    
    
    
    
    6,108
    
    
    
    82,417Cost of net product sales
    
    
    37,143
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    37,182Gross profit
    
    
    39,127
    
    
    
    
    
    
    
    
    
    
    
    6,108
    
    
    
    45,235Selling and marketing expense
    
    
    11,876
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,876General and
administrative expense
    
    
    5,507
    
    
    
    
    
    
    
    68
    
    
    
    5,745
    
    
    
    11,320Research and
development expense
    
    
    1,374
    
    
    
    
    
    
    
    3,238
    
    
    
    3,238
    
    
    
    7,850Litigation settlement
    
    
    8,034
    
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    10,269Depreciation
and amortization expense
    
    
    784
    
    
    
    63
    
    
    
    
    
    
    
    494
    
    
    
    1,341Income (loss) from operations
    
    
    11,552
    
    
    
    (2,298
    )
    
    
    (3,306
    )
    
    
    (3,369
    )
    
    
    2,579Interest income
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    551
    
    
    
    661Interest expense
    
    
    (109
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109
    )Other income (expense), net
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Income (loss) before income taxes
    
    
    11,589
    
    
    
    (2,298
    )
    
    
    (3,306
    )
    
    
    (2,818
    )
    
    
    3,167Provision for income taxes
    
    
    6,607
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,607Net income (loss)
    
    
    4,982
    
    
    
    (2,298
    )
    
    
    (3,306
    )
    
    
    (2,818
    )
    
    
    (3,440
    )Expenditures for fixed assets
    
    
    11,734
    
    
    
    
    
    
    
    
    
    
    
    336
    
    
    
    12,070Expenditures for drug licenses
    
    
    1,128
    
    
    
    
    
    
    
    
    
    
    
    675
    
    
    
    1,803
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedReceivables, net
    
    $
    28,345
    
    
    $
    
    
    
    $
    
    
    
    $
    3,124
    
    
    $
    31,469Other current assets
    
    
    44,042
    
    
    
    55
    
    
    
    
    
    
    
    13,974
    
    
    
    58,071Fixed assets
    
    
    53,174
    
    
    
    
    
    
    
    
    
    
    
    2,647
    
    
    
    55,821Drug
licenses and related costs
    
    
    12,357
    
    
    
    1,746
    
    
    
    
    
    
    
    3,044
    
    
    
    17,147Other non-current assets
    
    
    993
    
    
    
    
    
    
    
    
    
    
    
    1,147
    
    
    
    2,140Total assets
    
    
    138,911
    
    
    
    1,801
    
    
    
    
    
    
    
    23,936
    
    
    
    164,648Current liabilities
    
    
    25,105
    
    
    
    398
    
    
    
    
    
    
    
    3,924
    
    
    
    29,427Long term debt
    
    
    15,559
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,559Other
non-current liabilities
    
    
    8,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,812Total liabilities
    
    
    49,476
    
    
    
    398
    
    
    
    
    
    
    
    3,924
    
    
    
    53,798
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedReceivables, net
    
    $
    30,558
    
    
    $
    39
    
    
    $
    
    
    
    $
    2,366
    
    
    $
    32,963Other current assets
    
    
    21,758
    
    
    
    1,338
    
    
    
    
    
    
    
    11,631
    
    
    
    34,727Fixed assets
    
    
    45,738
    
    
    
    
    
    
    
    
    
    
    
    2,818
    
    
    
    48,556Drug
licenses and related costs
    
    
    10,697
    
    
    
    1,833
    
    
    
    
    
    
    
    3,496
    
    
    
    16,026Other non-current assets
    
    
    885
    
    
    
    
    
    
    
    
    
    
    
    1,199
    
    
    
    2,084Total assets
    
    
    109,636
    
    
    
    3,210
    
    
    
    
    
    
    
    21,510
    
    
    
    134,356Current liabilities
    
    
    24,651
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    27,387Non-current liabilities
    
    
    6,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,638Total liabilities
    
    
    31,289
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    34,025
 18




---



##### Table of Contents



Subsequent event
  Recently issued accounting pronouncements
 Fair Value Measurements
 The
Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115
 Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities
 19




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Planned Spin-off
   separation costs
 Overview
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients and the manufacturing of
pharmaceuticals for ourselves and others in Spain, other parts of Europe and international
markets, including the U.S. market; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced
proprietary drug delivery technologies for new and existing pharmaceutical products.
 Generic Pharmaceuticals
  20




---



##### Table of Contents



cost of net product sales
   Drug Delivery Technologies and Products
  Research and Development Focus
 TM
 21




---



##### Table of Contents



Diabetes Technology & Therapeutics th
 Effect of Foreign Currency Fluctuations
   RESULTS OF OPERATIONS:
 Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2006
 Revenues by Segment
 For the Three Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    
    %
    
    
    2006
    
    
    %
    
    
    $
    
    
    %Specialty GenericsNet product sales
    
    $
    24,131
    
    
    
    88
    %
    
    $
    22,873
    
    
    
    91
    %
    
    $
    1,258
    
    
    
    5
    %Licensing and collaboration revenues
    
    
    148
    
    
    
    1
    %
    
    
    170
    
    
    
    1
    %
    
    
    (22
    )
    
    
    -13
    %24,279
    
    
    
    89
    %
    
    
    23,043
    
    
    
    92
    %
    
    
    1,236
    
    
    
    5
    %Drug DeliveryLicensing and collaboration revenues
    
    
    3,069
    
    
    
    11
    %
    
    
    2,113
    
    
    
    8
    %
    
    
    956
    
    
    
    45
    %Total revenues
    
    $
    27,348
    
    
    
    100
    %
    
    $
    25,156
    
    
    
    100
    %
    
    $
    2,192
    
    
    
    9
    %
 22




---



##### Table of Contents



(in thousands)
    
    Revenues Within Spain
    
    
    RevenuesBranded
    
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    
    Generics
    
    
    Other
    
    
    Spain
    
    
    Total
    
    
    RevenuesOmeprazole
    
    $
    406
    
    
    $
    4,091
    
    
    $
    
    
    
    $
    
    
    
    $
    4,497
    
    
    
    16
    %Enalapril
    
    
    1,227
    
    
    
    348
    
    
    
    
    
    
    
    
    
    
    
    1,575
    
    
    
    6
    %Simvastatin
    
    
    153
    
    
    
    1,041
    
    
    
    
    
    
    
    
    
    
    
    1,194
    
    
    
    4
    %Lansoprazole
    
    
    805
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    1,099
    
    
    
    4
    %Paroxetine
    
    
    297
    
    
    
    795
    
    
    
    
    
    
    
    
    
    
    
    1,092
    
    
    
    4
    %All other products
    
    
    2,624
    
    
    
    2,603
    
    
    
    105
    
    
    
    426
    
    
    
    5,758
    
    
    
    21
    %Sales to
licensees and others
    
    
    
    
    
    
    
    
    
    
    3,075
    
    
    
    5,841
    
    
    
    8,916
    
    
    
    33
    %Licensing
and collaborations
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    3,069
    
    
    
    3,217
    
    
    
    12
    %Total Revenues
    
    $
    5,512
    
    
    $
    9,172
    
    
    $
    3,328
    
    
    $
    9,336
    
    
    $
    27,348
    
    
    
    100
    %% of Q3 2007 Revenues
    
    
    20
    %
    
    
    34
    %
    
    
    12
    %
    
    
    34
    %
    
    
    100
    %
  (in thousands)
    
    Revenues Within Spain
    
    
    RevenuesBranded
    
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    
    Generics
    
    
    Other
    
    
    Spain
    
    
    Total
    
    
    RevenuesOmeprazole
    
    $
    671
    
    
    $
    3,896
    
    
    $
    
    
    
    $
    
    
    
    $
    4,567
    
    
    
    18
    %Simvastatin
    
    
    457
    
    
    
    1,371
    
    
    
    
    
    
    
    
    
    
    
    1,828
    
    
    
    7
    %Enalapril
    
    
    1,241
    
    
    
    347
    
    
    
    
    
    
    
    
    
    
    
    1,588
    
    
    
    6
    %Lansoprazole
    
    
    633
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    852
    
    
    
    4
    %Paroxetine
    
    
    319
    
    
    
    774
    
    
    
    
    
    
    
    
    
    
    
    1,093
    
    
    
    4
    %All other products
    
    
    2,408
    
    
    
    2,580
    
    
    
    301
    
    
    
    473
    
    
    
    5,762
    
    
    
    23
    %Sales to
licensees and others
    
    
    
    
    
    
    
    
    
    
    2,642
    
    
    
    4,541
    
    
    
    7,183
    
    
    
    29
    %Licensing
and collaborations
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    2,113
    
    
    
    2,283
    
    
    
    9
    %Total Revenues
    
    $
    5,729
    
    
    $
    9,187
    
    
    $
    3,113
    
    
    $
    7,127
    
    
    $
    25,156
    
    
    
    100
    %% of Q3 2006 Revenues
    
    
    23
    %
    
    
    37
    %
    
    
    12
    %
    
    
    28
    %
    
    
    100
    %
 Branded Generic Pharmaceutical Products
 For the Three Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    
    %
    
    
    2006
    
    
    %
    
    
    $
    
    
    %Branded Generic Product Sales:Enalapril
    
    $
    1,227
    
    
    
    22
    %
    
    $
    1,241
    
    
    
    22
    %
    
    $
    (14
    )
    
    
    -1
    %Lansoprazole
    
    
    805
    
    
    
    15
    %
    
    
    633
    
    
    
    11
    %
    
    
    172
    
    
    
    27
    %Codeisan
    
    
    621
    
    
    
    11
    %
    
    
    588
    
    
    
    10
    %
    
    
    33
    
    
    
    6
    %Ibuprofen
    
    
    549
    
    
    
    10
    %
    
    
    354
    
    
    
    6
    %
    
    
    195
    
    
    
    55
    %Mio Relax
    
    
    465
    
    
    
    8
    %
    
    
    397
    
    
    
    7
    %
    
    
    68
    
    
    
    17
    %All other branded generic products
    
    
    1,845
    
    
    
    34
    %
    
    
    2,516
    
    
    
    44
    %
    
    
    (671
    )
    
    
    - 27
    %Total branded generic sales
    
    $
    5,512
    
    
    
    100
    %
    
    $
    5,729
    
    
    
    100
    %
    
    $
    (217
    )
    
    
    - 4
    %
 23




---



##### Table of Contents



Generic Pharmaceutical Products
 For the Three Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Generic Product Sales:Omeprazole
    
    $
    4,091
    
    
    
    45
    %
    
    $
    3,896
    
    
    
    43
    %
    
    $
    195
    
    
    
    5
    %Simvastatin
    
    
    1,041
    
    
    
    11
    %
    
    
    1,371
    
    
    
    15
    %
    
    
    (330
    )
    
    
    -24
    %Paroxetine
    
    
    795
    
    
    
    9
    %
    
    
    774
    
    
    
    8
    %
    
    
    21
    
    
    
    3
    %Pentoxifylline
    
    
    682
    
    
    
    7
    %
    
    
    654
    
    
    
    7
    %
    
    
    28
    
    
    
    4
    %Trimetazidine
    
    
    636
    
    
    
    7
    %
    
    
    586
    
    
    
    6
    %
    
    
    50
    
    
    
    9
    %All other generic products
    
    
    1,927
    
    
    
    21
    %
    
    
    1,906
    
    
    
    21
    %
    
    
    21
    
    
    
    1
    %Total generic sales
    
    $
    9,172
    
    
    
    100
    %
    
    $
    9,187
    
    
    
    100
    %
    
    $
    (15
    )
    
    
    -0
    %
  Sales to Licensees and Others
 For the Three Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Specialty generics
    
    $
    8,916
    
    
    $
    7,183
    
    
    $
    1,733
    
    
    
    24
    %
 net
product sales
 24




---



##### Table of Contents



Licensing and Collaboration Revenues
 For the Three Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    148
    
    
    $
    170
    
    
    $
    (22
    )
    
    
    -13
    %Drug delivery
    
    
    3,069
    
    
    
    2,113
    
    
    
    956
    
    
    
    45
    %Total
    
    $
    3,217
    
    
    $
    2,283
    
    
    $
    934
    
    
    
    41
    %
  Gross Profit
 For the Three Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    9,828
    
    
    $
    11,265
    
    
    $
    (1,437
    )
    
    
    -13
    %Drug delivery
    
    
    3,069
    
    
    
    2,113
    
    
    
    956
    
    
    
    45
    %Total
    
    $
    12,897
    
    
    $
    13,378
    
    
    $
    (481
    )
    
    
    -4
    %
  Selling and Marketing Expenses
 For the Three Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    4,080
    
    
    $
    3,495
    
    
    $
    585
    
    
    
    17
    %
  General and Administrative Expenses
 For the Three Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    2,013
    
    
    $
    1,901
    
    
    $
    112
    
    
    
    6
    %Drug delivery
    
    
    2,085
    
    
    
    1,850
    
    
    
    235
    
    
    
    13
    %Total
    
    $
    4,098
    
    
    $
    3,751
    
    
    $
    347
    
    
    
    9
    %
  25




---



##### Table of Contents



Research and Development Expenses
 For the Three Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    341
    
    
    $
    421
    
    
    $
    (80
    )
    
    
    -19
    %Drug delivery
    
    
    2,676
    
    
    
    2,026
    
    
    
    650
    
    
    
    32
    %Total
    
    $
    3,017
    
    
    $
    2,447
    
    
    $
    570
    
    
    
    23
    %
  Litigation Settlement Expenses
 For the Three Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Specialty generics
    
    $
    
    
    
    $
    8,932
    
    
    $
    (8,932
    )
    
    
    *
 
 *
    
    Not meaningful  Separation Costs
 For the Three Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Drug delivery
    
    $
    846
    
    
    $
    
    
    
    $
    846
    
    
    
    *
 
 *
    
    Not meaningful  26




---



##### Table of Contents



Provision for Income Taxes
 For the Three Months Ended September 30,2007
    
    2006(in thousands)
    
    Spain
    
    Ireland
    
    U.S.
    
    Consol.
    
    Spain
    
    Ireland
    
    U.S.
    
    Consol.Income (loss) before income taxes
    
    $
    3,008
    
    
    $
    (1,496
    )
    
    $
    (1,202
    )
    
    $
    310
    
    
    $
    (2,545
    )
    
    $
    (1,015
    )
    
    $
    (1,939
    )
    
    $
    (5,499
    )Provision (benefit) for income taxes
    
    
    911
    
    
    
    (187
    )
    
    
    (306
    )
    
    
    418
    
    
    
    1,730
    
    
    
    (126
    )
    
    
    (690
    )
    
    
    914Valuation allowance
    
    
    
    
    
    
    187
    
    
    
    306
    
    
    
    493
    
    
    
    
    
    
    
    126
    
    
    
    690
    
    
    
    816Net provision for income taxes
    
    
    911
    
    
    
    
    
    
    
    
    
    
    
    911
    
    
    
    1,730
    
    
    
    
    
    
    
    
    
    
    
    1,730Net income (loss)
    
    $
    2,097
    
    
    $
    (1,496
    )
    
    $
    (1,202
    )
    
    $
    (601
    )
    
    $
    (4,275
    )
    
    $
    (1,015
    )
    
    $
    (1,939
    )
    
    $
    (7,229
    )Effective tax rate
    
    
    30
    %
    
    
    0
    %
    
    
    0
    %
    
    
    294
    %
    
    
    68
    %
    
    
    0
    %
    
    
    0
    %
    
    
    31
    %
    Net (Loss) Income
 For the Three Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    1,949
    
    
    $
    (5,465
    )
    
    $
    7,414
    
    
    
    136
    %Drug delivery
    
    
    (2,550
    )
    
    
    (1,764
    )
    
    
    (786
    )
    
    
    -45
    %Total
    
    $
    (601
    )
    
    $
    (7,229
    )
    
    $
    6,628
    
    
    
    92
    %
  27




---



##### Table of Contents



28




---



##### Table of Contents



Nine Months Ended September 30, 2007 versus Nine Months Ended September 30, 2006
 Revenues by Segment
 For the Nine Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Specialty GenericsNet product sales
    
    $
    81,598
    
    
    
    91
    %
    
    $
    75,900
    
    
    
    92
    %
    
    $
    5,698
    
    
    
    8
    %Licensing and collaboration revenues
    
    
    433
    
    
    
    *
    
    
    
    409
    
    
    
    *
    
    
    
    24
    
    
    
    6
    %82,031
    
    
    
    91
    %
    
    
    76,309
    
    
    
    92
    %
    
    
    5,722
    
    
    
    7
    %Drug DeliveryLicensing and
collaboration
revenues
    
    
    7,887
    
    
    
    9
    %
    
    
    6,108
    
    
    
    8
    %
    
    
    1,779
    
    
    
    29
    %Total revenues
    
    $
    89,918
    
    
    
    100
    %
    
    $
    82,417
    
    
    
    100
    %
    
    $
    7,501
    
    
    
    9
    %
 
 *
    
    Less than 1% Revenues.
  (in thousands)
    
    Revenues Within Spain
    
    RevenuesBranded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    1,367
    
    
    $
    11,916
    
    
    $
    
    
    
    $
    
    
    
    $
    13,283
    
    
    
    15
    %Enalapril
    
    
    3,778
    
    
    
    1,112
    
    
    
    
    
    
    
    
    
    
    
    4,890
    
    
    
    5
    %Simvastatin
    
    
    723
    
    
    
    3,631
    
    
    
    
    
    
    
    
    
    
    
    4,354
    
    
    
    5
    %Paroxetine
    
    
    1,112
    
    
    
    2,485
    
    
    
    
    
    
    
    
    
    
    
    3,597
    
    
    
    4
    %Lansoprazole
    
    
    2,571
    
    
    
    895
    
    
    
    
    
    
    
    
    
    
    
    3,466
    
    
    
    4
    %All other products
    
    
    8,964
    
    
    
    9,824
    
    
    
    472
    
    
    
    2,540
    
    
    
    21,800
    
    
    
    24
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    10,062
    
    
    
    20,146
    
    
    
    30,208
    
    
    
    34
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    433
    
    
    
    7,887
    
    
    
    8,320
    
    
    
    9
    %Total Revenues
    
    $
    18,515
    
    
    $
    29,863
    
    
    $
    10,967
    
    
    $
    30,573
    
    
    $
    89,918
    
    
    
    100
    %% of YTD 2007 Revenues
    
    
    21
    %
    
    
    33
    %
    
    
    12
    %
    
    
    34
    %
    
    
    100
    %
  (in thousands)
    
    Revenues Within Spain
    
    RevenuesBranded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,012
    
    
    $
    12,589
    
    
    $
    
    
    
    $
    
    
    
    $
    14,601
    
    
    
    18
    %Enalapril
    
    
    3,538
    
    
    
    1,477
    
    
    
    
    
    
    
    
    
    
    
    5,015
    
    
    
    6
    %Simvastatin
    
    
    1,383
    
    
    
    4,334
    
    
    
    
    
    
    
    
    
    
    
    5,717
    
    
    
    7
    %Paroxetine
    
    
    1,094
    
    
    
    2,389
    
    
    
    
    
    
    
    
    
    
    
    3,483
    
    
    
    4
    %Lansoprazole
    
    
    1,958
    
    
    
    671
    
    
    
    
    
    
    
    
    
    
    
    2,629
    
    
    
    3
    %All other products
    
    
    7,693
    
    
    
    8,172
    
    
    
    782
    
    
    
    1,100
    
    
    
    17,747
    
    
    
    22
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    9,553
    
    
    
    17,155
    
    
    
    26,708
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    409
    
    
    
    6,108
    
    
    
    6,517
    
    
    
    8
    %Total Revenues
    
    $
    17,678
    
    
    $
    29,632
    
    
    $
    10,744
    
    
    $
    24,363
    
    
    $
    82,417
    
    
    
    100
    %% of YTD 2006 Revenues
    
    
    21
    %
    
    
    36
    %
    
    
    13
    %
    
    
    30
    %
    
    
    100
    %
 29




---



##### Table of Contents



Branded Generic Pharmaceutical Products
 For the Nine Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Branded Generic Product Sales:Enalapril
    
    $
    3,778
    
    
    
    20
    %
    
    $
    3,538
    
    
    
    20
    %
    
    $
    240
    
    
    
    7
    %Codeisan
    
    
    2,630
    
    
    
    14
    %
    
    
    2,051
    
    
    
    12
    %
    
    
    579
    
    
    
    28
    %Lansoprazole
    
    
    2,571
    
    
    
    14
    %
    
    
    1,958
    
    
    
    11
    %
    
    
    613
    
    
    
    31
    %Ibuprofen
    
    
    1,676
    
    
    
    9
    %
    
    
    1,097
    
    
    
    6
    %
    
    
    579
    
    
    
    53
    %Omeprazole
    
    
    1,367
    
    
    
    8
    %
    
    
    2,012
    
    
    
    11
    %
    
    
    (645
    )
    
    
    -32
    %All other branded generic
products
    
    
    6,493
    
    
    
    35
    %
    
    
    7,022
    
    
    
    40
    %
    
    
    (529
    )
    
    
    -8
    %Total branded generic sales
    
    $
    18,515
    
    
    
    100
    %
    
    $
    17,678
    
    
    
    100
    %
    
    $
    837
    
    
    
    5
    %==
  Generic Pharmaceutical Products
 For the Nine Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Generic Product Sales:Omeprazole
    
    $
    11,916
    
    
    
    40
    %
    
    $
    12,589
    
    
    
    42
    %
    
    $
    (673
    )
    
    
    -5
    %Simvastatin
    
    
    3,631
    
    
    
    12
    %
    
    
    4,334
    
    
    
    15
    %
    
    
    (703
    )
    
    
    -16
    %Paroxetine
    
    
    2,485
    
    
    
    8
    %
    
    
    2,389
    
    
    
    8
    %
    
    
    96
    
    
    
    4
    %Trimetazidine
    
    
    2,181
    
    
    
    7
    %
    
    
    1,679
    
    
    
    6
    %
    
    
    502
    
    
    
    30
    %Pentoxifylline
    
    
    2,038
    
    
    
    7
    %
    
    
    1,932
    
    
    
    6
    %
    
    
    106
    
    
    
    5
    %All other generic products
    
    
    7,612
    
    
    
    26
    %
    
    
    6,709
    
    
    
    23
    %
    
    
    903
    
    
    
    13
    %Total generic sales
    
    $
    29,863
    
    
    
    100
    %
    
    $
    29,632
    
    
    
    100
    %
    
    $
    231
    
    
    
    1
    %==
  30




---



##### Table of Contents



Sales to Licensees and Others
 For the Nine Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Specialty generics
    
    $
    30,208
    
    
    $
    26,708
    
    
    $
    3,500
    
    
    
    13
    %
 Sales to Licensees and Others
 Licensing and Collaboration Revenues
 For the Nine Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    433
    
    
    $
    409
    
    
    $
    24
    
    
    
    6
    %Drug delivery
    
    
    7,887
    
    
    
    6,108
    
    
    
    1,779
    
    
    
    29
    %Total
    
    $
    8,320
    
    
    $
    6,517
    
    
    $
    1,803
    
    
    
    28
    %
 Licensing and Collaboration Revenues
 Gross Profit
 For the Nine Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    35,893
    
    
    $
    39,127
    
    
    $
    (3,234
    )
    
    
    -8
    %Drug delivery
    
    
    7,887
    
    
    
    6,108
    
    
    
    1,779
    
    
    
    29
    %Total
    
    $
    43,780
    
    
    $
    45,235
    
    
    $
    (1,455
    )
    
    
    -3
    %
 cost of net product sales Gross Profit
 Selling and Marketing Expenses
 For the Nine Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    13,338
    
    
    $
    11,876
    
    
    $
    1,462
    
    
    
    12
    %
  31




---



##### Table of Contents



General and Administrative Expenses
 For the Nine Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    6,653
    
    
    $
    5,507
    
    
    $
    1,146
    
    
    
    21
    %Drug delivery
    
    
    5,363
    
    
    
    5,813
    
    
    
    (450
    )
    
    
    -8
    %Total
    
    $
    12,016
    
    
    $
    11,320
    
    
    $
    696
    
    
    
    6
    %
  Research and Development Expenses
 For the Nine Months Ended September 30,
    
    
    Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    1,341
    
    
    $
    1,374
    
    
    $
    (33
    )
    
    
    -2
    %Drug delivery
    
    
    7,853
    
    
    
    6,476
    
    
    
    1,377
    
    
    
    21
    %Total
    
    $
    9,194
    
    
    $
    7,850
    
    
    $
    1,344
    
    
    
    17
    %
 Research and Development Expenses
 Litigation Settlement Expenses
 For the Nine Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Specialty generics
    
    $
    
    
    
    $
    10,269
    
    
    $
    (10,269
    )
    
    
    *
 
 *
    
    Not meaningful  Separation Costs
 For the Nine Months Ended September 30,
    
    Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Drug delivery
    
    $
    1,153
    
    
    $
    
    
    
    $
    1,153
    
    
    
    *
 
 *
    
    Not meaningful 32




---



##### Table of Contents



Separation Costs
 Provision for Income Taxes
 For the Nine Months Ended September 30,2007

    
    2006(in thousands)
    
    Spain
    
    
    Ireland
    
    
    U.S.
    
    
    Consol.
    
    
    Spain
    
    
    Ireland
    
    
    U.S.
    
    
    Consol.Income (loss) before income taxes
    
    $
    14,753
    
    
    $
    (4,526
    )
    
    $
    (3,249
    )
    
    $
    6,978
    
    
    $
    11,630
    
    
    $
    (3,347
    )
    
    $
    (5,116
    )
    
    $
    3,167Provision (benefit) for income taxes
    
    
    4,509
    
    
    
    (566
    )
    
    
    (888
    )
    
    
    3,055
    
    
    
    6,607
    
    
    
    (418
    )
    
    
    (1,863
    )
    
    
    4,326Valuation allowance
    
    
    
    
    
    
    566
    
    
    
    888
    
    
    
    1,454
    
    
    
    
    
    
    
    418
    
    
    
    1,863
    
    
    
    2,281Net provision for income taxes
    
    
    4,509
    
    
    
    
    
    
    
    
    
    
    
    4,509
    
    
    
    6,607
    
    
    
    
    
    
    
    
    
    
    
    6,607Net income (loss)
    
    $
    10,244
    
    
    $
    (4,526
    )
    
    $
    (3,249
    )
    
    $
    2,469
    
    
    $
    5,023
    
    
    $
    (3,347
    )
    
    $
    (5,116
    )
    
    $
    (3,440
    )Effective tax rate
    
    
    31
    %
    
    
    0
    %
    
    
    0
    %
    
    
    65
    %
    
    
    57
    %
    
    
    0
    %
    
    
    0
    %
    
    
    209
    %
 provision for income taxes
 Net
Income (Loss)
 For the Nine MonthsEnded September 30,
    
    
    Change(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    9,160
    
    
    $
    2,684
    
    
    $
    6,476
    
    
    
    241
    %Drug delivery
    
    
    (6,691
    )
    
    
    (6,124
    )
    
    
    (567
    )
    
    
    -9
    %Total net
income (loss)
    
    $
    2,469
    
    
    $
    (3,440
    )
    
    $
    5,909
    
    
    
    172
    %Net
income (loss) per common share:Basic
    
    $
    0.11
    
    
    $
    (0.16
    )
    
    $
    0.27
    
    
    
    169
    %Diluted
    
    $
    0.11
    
    
    $
    (0.16
    )
    
    $
    0.27
    
    
    
    169
    %Weighted average common shares outstanding:Basic
    
    
    22,322
    
    
    
    22,107
    
    
    
    215
    
    
    
    1
    %Diluted
    
    
    22,829
    
    
    
    22,107
    
    
    
    722
    
    
    
    3
    %
  33




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES :
         34




---



##### Table of Contents



Seasonality.
 Effect of Inflation and Changing Prices.
 Liquidity.
  Critical Accounting Policies and Estimates
  35




---



##### Table of Contents



provision for
income taxes, inventories clinical trial expenses
 Provision for income taxes
  Accounting for Uncertainty in Income Taxes ( ) Accounting for Income Taxes
 Inventories
  Clinical trial expenses
  36




---



##### Table of Contents



Important Factors That May Affect Future Results
   
    
    Strategic plans;
    
    Sales growth;
    
    Anticipated sources of future revenues;
    
    Anticipated 2007 expenses, margins and operating performance;
    
    Anticipated expenses associated with the planned spin-off transaction;
    
    Expected launch of new products;
    
    Anticipated expenses and spending;
    
    Planned and continuing clinical trials;
    
    Anticipated regulatory changes and approvals; and
    
    The sufficiency of capital resources to fund our operations.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency.
 U.S. Dollars per Euro
    
    September 30, 2007
    
    December 31, 2006YTD weighted average exchange rate
    
    1.34
    
    1.26Exchange rate
    
    1.41
    
    1.31
 accumulated other comprehensive income
  37




---



##### Table of Contents



Interest Rates.
 
 Item 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 Item 6. Exhibits
  38




---



##### Table of Contents



SIGNATURES
  BENTLEY PHARMACEUTICALS, INC.RegistrantNovember 8, 2007
    
    By:
    
    /s/ James R. MurphyJames R. MurphyChairman of the Board of Directorsand Chief Executive Officer(Principal Executive Officer)November 8, 2007
    
    By:
    
    /s/ Richard P. LindsayRichard P. LindsayVice President, Chief Financial Officer,Secretary and Treasurer(Principal Financial Officer)




---



##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description of Exhibit10.1
    
    *
    
    Employment Agreement dated as of August 20, 2007 by and between
Bentley Pharmaceuticals, Inc. and James R. Murphy.31.1
    
    *
    
    Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    *
    
    Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    *
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    *
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *