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 June
30, 2010





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: 001-33609





SUCAMPO
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
              
              30-0520478(State
      or other jurisdiction of
              
              (I.R.S.
      employerincorporation
      or organization)
              
              identification
      no.)4520
      East-West Highway, Suite 300
              
              (301)
      961-3400Bethesda,
      MD 20814
              
              (Registrant’s
      telephone number,(Address
      of principal executive offices,
              
              including
      area code)including
      zip code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes þ     No
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes o   No
þ





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
Please see definition of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):





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





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





As of
August 2, 2010, there were 15,657,937 shares of the registrant’s class A common
stock outstanding and 26,191,050 shares of the registrant’s class B common stock
outstanding.










Sucampo
Pharmaceuticals, Inc.





Form
10-Q Index





PagePart
      I.  FINANCIAL INFORMATIONItem
      1.
                      Condensed
      Consolidated Financial Statements (unaudited)
                      
                      1Condensed
      Consolidated Balance Sheets as of June 30, 2010 and December 31,
      2009
                      
                      1Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Three and Six Months Ended June 30, 2010 and 2009
                      
                      2Condensed
      Consolidated Statement of Changes in Stockholders’ Equity for the Six
      Months EndedJune
      30, 2010
                      
                      3Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June 30,
      2010 and 2009
                      
                      4Notes
      to Condensed Consolidated Financial Statements
                      
                      5Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      20Item
      3.
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      30Item
      4.
                      Controls
      and Procedures
                      
                      30Part
      II.  OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      
                      32Item
      1A.
                      Risk
      Factors
                      
                      32Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      32Item
      3.
                      Defaults
      Upon Senior Securities
                      
                      32Item
      4.
                      Reserved
                      
                      32Item
      6.
                      Exhibits
                      
                      33SIGNATURES
                      
                      34INDEX
      TO EXHIBITS





PART
I — FINANCIAL INFORMATION





Item
1.Condensed
Consolidated Financial Statements (Unaudited)





SUCAMPO
PHARMACEUTICALS, INC.


Condensed
Consolidated Balance Sheets (Unaudited)


(In
thousands, except share data)





June
      30,
                                
                                
                                December
      31,2010
                                
                                
                                2009ASSETS:Current
      assets:Cash
      and cash equivalents
                                
                                $
                                42,293
                                
                                
                                $
                                26,714Investments,
      current
                                
                                
                                56,163
                                
                                
                                
                                72,434Product
      royalties receivable
                                
                                
                                9,612
                                
                                
                                
                                11,023Unbilled
      accounts receivable
                                
                                
                                16
                                
                                
                                
                                644Accounts
      receivable, net
                                
                                
                                889
                                
                                
                                
                                512Deferred
      tax assets, net
                                
                                
                                135
                                
                                
                                
                                315Prepaid
      expenses and other current assets
                                
                                
                                2,209
                                
                                
                                
                                3,137Total
      current assets
                                
                                
                                111,317
                                
                                
                                
                                114,779Investments,
      non-current
                                
                                
                                15,935
                                
                                
                                
                                19,167Property
      and equipment, net
                                
                                
                                2,117
                                
                                
                                
                                2,242Deferred
      tax assets, non-current
                                
                                
                                4,255
                                
                                
                                
                                3,995Other
      assets
                                
                                
                                3,551
                                
                                
                                
                                4,788Total
      assets
                                
                                $
                                137,175
                                
                                
                                $
                                144,971LIABILITIES
      AND STOCKHOLDERS' EQUITY:Current
      liabilities:Accounts
      payable
                                
                                $
                                2,335
                                
                                
                                $
                                3,195Accrued
      expenses
                                
                                
                                7,941
                                
                                
                                
                                6,545Deferred
      revenue, current
                                
                                
                                4,298
                                
                                
                                
                                10,565Income
      taxes payable
                                
                                
                                428
                                
                                
                                
                                349Total
      current liabilities
                                
                                
                                15,002
                                
                                
                                
                                20,654Deferred
      revenue, non-current
                                
                                
                                8,296
                                
                                
                                
                                8,643Other
      liabilities
                                
                                
                                2,098
                                
                                
                                
                                2,121Total
      liabilities
                                
                                
                                25,396
                                
                                
                                
                                31,418Commitments
      (Note 7)Stockholders'
      equity:Preferred
      stock, $0.01 par value; 5,000,000 shares authorized at June 30, 2010 and
      December 31,2009; no shares issued and outstanding at June 30,
      2010 and December 31, 2009
                                
                                
                                -
                                
                                
                                
                                -Class
      A common stock, $0.01 par value; 270,000,000 shares authorized at June 30,
      2010 andDecember 31, 2009; 15,657,937 and 15,655,730 shares issued
      and outstanding at June 30, 2010 and December 31, 2009,
      respectively
                                
                                
                                156
                                
                                
                                
                                156Class
      B common stock, $0.01 par value; 75,000,000 shares authorized at June 30,
      2010 andDecember 31, 2009; 26,191,050 shares issued and
      outstanding at June 30, 2010 and December 31, 2009
                                
                                
                                262
                                
                                
                                
                                262Additional
      paid-in capital
                                
                                
                                99,346
                                
                                
                                
                                98,636Accumulated
      other comprehensive income
                                
                                
                                277
                                
                                
                                
                                484Retained
      earnings
                                
                                
                                11,738
                                
                                
                                
                                14,015Total
      stockholders' equity
                                
                                
                                111,779
                                
                                
                                
                                113,553Total
      liabilities and stockholders' equity
                                
                                $
                                137,175
                                
                                
                                $
                                144,971





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


1


SUCAMPO
PHARMACEUTICALS, INC.


Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)


(In
thousands, except per share data)





Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenues:Research
      and development revenue
                
                $
                2,789
                
                
                $
                7,395
                
                
                $
                6,846
                
                
                $
                12,921Product
      royalty revenue
                
                
                9,612
                
                
                
                8,914
                
                
                
                19,385
                
                
                
                17,860Co-promotion
      revenue
                
                
                1,220
                
                
                
                1,244
                
                
                
                2,075
                
                
                
                2,140Contract
      and collaboration revenue
                
                
                154
                
                
                
                152
                
                
                
                305
                
                
                
                298Total
      revenues
                
                
                13,775
                
                
                
                17,705
                
                
                
                28,611
                
                
                
                33,219Operating
      expenses:Research
      and development
                
                
                4,854
                
                
                
                9,621
                
                
                
                10,220
                
                
                
                19,586General
      and administrative
                
                
                6,604
                
                
                
                2,924
                
                
                
                12,363
                
                
                
                6,379Selling
      and marketing
                
                
                2,313
                
                
                
                2,188
                
                
                
                4,500
                
                
                
                4,700Milestone
      royalties - related parties
                
                
                -
                
                
                
                375
                
                
                
                -
                
                
                
                875Product
      royalties - related parties
                
                
                1,709
                
                
                
                1,583
                
                
                
                3,446
                
                
                
                3,173Total
      operating expenses
                
                
                15,480
                
                
                
                16,691
                
                
                
                30,529
                
                
                
                34,713Income
      (loss) from operations
                
                
                (1,705
                )
                
                
                1,014
                
                
                
                (1,918
                )
                
                
                (1,494
                )Non-operating
      income (expense):Interest
      income
                
                
                177
                
                
                
                219
                
                
                
                388
                
                
                
                531Other
      income (expense), net
                
                
                (135
                )
                
                
                (608
                )
                
                
                (227
                )
                
                
                214Total
      non-operating income (expense), net
                
                
                42
                
                
                
                (389
                )
                
                
                161
                
                
                
                745Income
      (loss) before income taxes
                
                
                (1,663
                )
                
                
                625
                
                
                
                (1,757
                )
                
                
                (749
                )Income
      tax provision
                
                
                (315
                )
                
                
                (863
                )
                
                
                (520
                )
                
                
                (1,264
                )Net
      loss
                
                $
                (1,978
                )
                
                $
                (238
                )
                
                $
                (2,277
                )
                
                $
                (2,013
                )Net
      loss per share:Basic
      net loss per share
                
                $
                (0.05
                )
                
                $
                (0.01
                )
                
                $
                (0.05
                )
                
                $
                (0.05
                )Diluted
      net loss per share
                
                $
                (0.05
                )
                
                $
                (0.01
                )
                
                $
                (0.05
                )
                
                $
                (0.05
                )Weighted
      average common shares outstanding - basic
                
                
                41,848
                
                
                
                41,844
                
                
                
                41,847
                
                
                
                41,844Weighted
      average common shares outstanding - diluted
                
                
                41,848
                
                
                
                41,844
                
                
                
                41,847
                
                
                
                41,844Comprehensive
      income (loss):Net
      loss
                
                $
                (1,978
                )
                
                $
                (238
                )
                
                $
                (2,277
                )
                
                $
                (2,013
                )Other
      comprehensive income (loss):Unrealized
      gain (loss) on investments, net of tax effect
                
                
                10
                
                
                
                (7
                )
                
                
                (7
                )
                
                
                (72
                )Foreign
      currency translation
                
                
                (220
                )
                
                
                340
                
                
                
                (200
                )
                
                
                137Comprehensive
      income (loss)
                
                $
                (2,188
                )
                
                $
                95
                
                
                $
                (2,484
                )
                
                $
                (1,948
                )




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


2


SUCAMPO
PHARMACEUTICALS, INC.


Condensed
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)


(In
thousands, except share data)





AccumulatedClass
      A
                    
                    
                    Class
      B
                    
                    
                    Additional
                    
                    
                    Other
                    
                    
                    
                    
                    
                    TotalCommon
      Stock
                    
                    
                    Common
      Stock
                    
                    
                    Paid-In
                    
                    
                    Comprehensive
                    
                    
                    Retained
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Income
                    
                    
                    Earnings
                    
                    
                    EquityBalance
      at December 31, 2009
                    
                    
                    15,655,730
                    
                    
                    $
                    156
                    
                    
                    
                    26,191,050
                    
                    
                    $
                    262
                    
                    
                    $
                    98,636
                    
                    
                    $
                    484
                    
                    
                    $
                    14,015
                    
                    
                    $
                    113,553Employee
      stock option expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    702
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    702Stock
      issued under employee stock purchase plan
                    
                    
                    2,207
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8Foreign
      currency translation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (200
                    )
                    
                    
                    -
                    
                    
                    
                    (200
                    )Unrealized
      loss on investments, net of tax effect
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7
                    )
                    
                    
                    -
                    
                    
                    
                    (7
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,277
                    )
                    
                    
                    (2,277
                    )Balance
      at June 30, 2010
                    
                    
                    15,657,937
                    
                    
                    $
                    156
                    
                    
                    
                    26,191,050
                    
                    
                    $
                    262
                    
                    
                    $
                    99,346
                    
                    
                    $
                    277
                    
                    
                    $
                    11,738
                    
                    
                    $
                    111,779





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3


SUCAMPO
PHARMACEUTICALS, INC.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(In
thousands)





Six
      Months Ended June 30,2010
                      
                      
                      2009Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (2,277
                      )
                      
                      $
                      (2,013
                      )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                      
                      
                      459
                      
                      
                      
                      309Deferred
      tax provision
                      
                      
                      (76
                      )
                      
                      
                      738Stock-based
      compensation
                      
                      
                      702
                      
                      
                      
                      188Amortization
      of premiums on investments
                      
                      
                      869
                      
                      
                      
                      508Unrealized
      gain on trading securities
                      
                      
                      -
                      
                      
                      
                      (2,611
                      )Unrealized
      loss on settlement rights of auction rate securities
                      
                      
                      -
                      
                      
                      
                      2,362Realized
      gain on trading securities
                      
                      
                      (1,086
                      )
                      
                      
                      -Realized
      loss on settlement rights of auction rate securities
                      
                      
                      1,086
                      
                      
                      
                      -Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (377
                      )
                      
                      
                      (26
                      )Unbilled
      accounts receivable
                      
                      
                      628
                      
                      
                      
                      750Product
      royalties receivable
                      
                      
                      1,411
                      
                      
                      
                      812Income
      taxes payable
                      
                      
                      79
                      
                      
                      
                      (936
                      )Accounts
      payable
                      
                      
                      (887
                      )
                      
                      
                      601Accrued
      expenses
                      
                      
                      1,376
                      
                      
                      
                      1,009Deferred
      revenue
                      
                      
                      (6,806
                      )
                      
                      
                      9,445Other
      assets and liabilities, net
                      
                      
                      927
                      
                      
                      
                      (123
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      (3,972
                      )
                      
                      
                      11,013Cash
      flows from investing activities:Purchases
      of investments
                      
                      
                      (40,534
                      )
                      
                      
                      (90,882
                      )Proceeds
      from sales of investments
                      
                      
                      12,000
                      
                      
                      
                      9,504Maturities
      of investments
                      
                      
                      48,242
                      
                      
                      
                      52,760Purchases
      of property and equipment
                      
                      
                      (157
                      )
                      
                      
                      (308
                      )Purchase
      of intangible assets
                      
                      
                      -
                      
                      
                      
                      (2,919
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      19,551
                      
                      
                      
                      (31,845
                      )Cash
      flows from financing activities:Proceeds
      from employee stock purchase plan
                      
                      
                      8
                      
                      
                      
                      9Net
      cash provided by financing activities
                      
                      
                      8
                      
                      
                      
                      9Effect
      of exchange rates on cash and cash equivalents
                      
                      
                      (8
                      )
                      
                      
                      184Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      15,579
                      
                      
                      
                      (20,639
                      )Cash
      and cash equivalents at beginning of period
                      
                      
                      26,714
                      
                      
                      
                      62,562Cash
      and cash equivalents at end of period
                      
                      $
                      42,293
                      
                      
                      $
                      41,923





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)




1.      Business
Organization and Basis of Presentation


Description
of the Business





Sucampo
Pharmaceuticals, Inc., or the Company, is an international biopharmaceutical
company focused on the discovery, development and commercialization of
proprietary drugs based on prostones. Prostones are a class of compounds that
occur naturally in the human body as a result of enzymatic, 15-PGDH,
transformation of certain fatty acids. The Company is focused on developing
prostones for the treatment of gastrointestinal, ophthalmic, respiratory,
vascular and central nervous system diseases and other disorders for which there
are unmet or underserved medical needs and significant commercial
potential.





The
therapeutic potential of prostones was first identified by one of the Company’s
founders, Dr. Ryuji Ueno. To date, two prostone products have received marketing
approval. Amitiza®
(lubiprostone) is an FDA-approved treatment for two gastrointestinal
indications: (i) chronic idiopathic constipation, or CIC, in adults of both
genders and all ages and (ii) irritable bowel syndrome with constipation, or
IBS-C, in adult women. Rescula®
(unoprostone isopropyl) is FDA-approved for the treatment of open-angle glaucoma
and ocular hypertension.





Amitiza
is being marketed and developed in the U.S. for gastrointestinal indications
under a collaboration and license agreement with Takeda Pharmaceutical Company
Limited, or Takeda. The Company is primarily responsible for development
activities under the agreement. The Company and Takeda initiated commercial
sales of Amitiza in the U.S. for the treatment of CIC in April 2006 and for the
treatment of IBS-C in May 2008. Amitiza is currently being developed for the
treatment of opioid-induced bowel dysfunction, or OBD.





In Japan,
lubiprostone is being developed for gastrointestinal indications under
a license, commercialization and supply agreement with Abbott Japan Co.
Ltd., or Abbott.





The
Company continues to evaluate the opportunities to obtain an appropriate label
in the European Union consistent with the fact that lubiprostone is approved by
the FDA in the U.S. for chronic therapy for either CIC or IBS-C and received
marketing authorization from Swissmedic, the Swiss Agency for Therapeutic
Products, in November 2009 for CIC.





In April
2009, the Company acquired the rights to Rescula that allow the Company to
commercialize Rescula in the U.S. and Canada for the treatment of glaucoma and
ocular hypertension and any new indication developed by the Company, including
retinitis pigmentosa and dry aged-related macular degeneration, or dry AMD. The
Company plans to re-launch Rescula in the U.S. for the treatment of open-angle
glaucoma and ocular hypertension. Additionally, the Company plans to initiate
clinical trials of Rescula for the treatment of dry AMD in early
2011.





Other
prostone compounds in the Company’s development pipeline include cobiprostone
for the prevention of gastric ulcers and other gastrointestinal injuries in
patients treated with non-steroidal anti-inflammatory drugs, or NSAIDs, for use
as a treatment for chronic obstructive pulmonary disease, or COPD, and as a
potential treatment for wound healing. Additionally, the Company is developing
SPI-017 for peripheral arterial disease, or PAD, and SPI-3608 as a potential
treatment for spinal stenosis.





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States, or GAAP, and the rules and regulations of the Securities and
Exchange Commission, or SEC, for interim financial information. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements and should be read in conjunction with the
Company’s consolidated financial statements as of and for the year ended
December 31, 2009 included in the Company’s Annual Report on Form 10-K. The
financial information as of June 30, 2010 and for the three and six months ended
June 30, 2010 and 2009 is unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments or accruals,
considered necessary for a fair statement of the results of these interim
periods have been included. The results of the Company’s operations for any
interim period are not necessarily indicative of the results that may be
expected for any other interim period or for a full fiscal
year.


5


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





The
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries: Sucampo Pharma Ltd., based in Tokyo and
Osaka, Japan, through which the Company conducts its Asian operations; Sucampo
Pharma Americas, Inc., based in Bethesda, Maryland, through which the Company
conducts operations in North and South America; and Sucampo Pharma Europe Ltd.,
based in Oxford, U.K., through which the Company conducts operations in Europe
and the rest of the world. All inter-company balances and transactions have been
eliminated. In April 2010, the Company incorporated another wholly owned
subsidiary, Sucampo Manufacturing & Research AG, in Wollerau, Switzerland,
whose operations will focus on managing specific manufacturing, commercial,
research and intellectual property activities and whose activity and accounts
are included in the consolidated financial statements.





2.      Summary
of Significant Accounting Policies





Cash
and Cash Equivalents





For the
purpose of the condensed consolidated balance sheets and statements of cash
flows, cash equivalents include all highly liquid investments with an original
maturity of 90 days or less at the time of purchase.





Current
and Non-current Investments





Current
and non-current investments consist primarily of U.S. Treasury bills and notes,
U.S. government agencies securities, municipal and corporate bonds, mutual funds
and auction rate securities, or ARS. The Company classifies its investments into
current and non-current based on their maturities and management’s reasonable
expectation to realize these investments in cash. The Company classifies all of
its investments, except ARS, as available for sale securities and reports
unrealized gains or losses, net of related tax effects, in other comprehensive
income. Pursuant to the Company’s acceptance of settlement rights for its
investments in ARS in October 2008, the Company classifies its investments in
ARS as trading securities and records gains or losses resulting from the changes
in fair values of its ARS and related settlement rights in other income
(expense), net. The fair value of the settlement rights related to ARS is
recorded in non-current other assets. The fair value of the settlement rights
has been derived from the par value of the Company’s investment in ARS and the
fair value of ARS as of the recognition date, since the settlement rights
obligate the broker to redeem the ARS at par value. The redemption of the
remaining ARS and the related settlement rights are described in Note 4
below.





Fair
Value





The
carrying amounts of the Company’s financial instruments, which include cash and
cash equivalents, restricted cash, current and non-current investments,
receivables, accounts payable and accrued expenses, approximate their fair
values based on their short maturities, independent valuations or internal
assessments.





Revenue
Recognition





The
Company’s revenues are derived primarily from collaboration and license
agreements and include up-front payments, development milestone payments,
reimbursements of development and co-promotion costs and product
royalties.





The
Company evaluated the multiple deliverables within the collaboration and license
agreements in accordance with the guidance of multiple deliverables to determine
whether the delivered elements that are the obligation of the Company have value
to other parties to the agreement on a stand-alone basis and whether objective
reliable evidence of fair value of the undelivered items exists. Deliverables
that meet these criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and accounted for as a
single unit of accounting. The appropriate recognition of revenue is then
applied to each separate unit of accounting. The Company’s deliverables under
the Takeda and Abbott agreements, including the related rights and obligations,
contractual cash flows and performance periods, are more fully described in Note
9.





The
Company applies a time-based model of revenue recognition for cash flows
associated with research and development deliverables under the Takeda
collaboration and license agreement. Under this model, cash flow streams related
to each unit of accounting are recognized as revenue over the estimated
performance period. Upon receipt of cash payments, such as development
milestones, revenue is recognized to the extent the accumulated service time has
occurred. The remainder is deferred and recognized as revenue ratably over the
remaining estimated performance period. A change in the period of time expected
to complete the deliverable is accounted for as a change in estimate on a
prospective basis. In cases where milestone payments are received after the
completion of the associated development period, the Company recognizes revenue
upon completion of the performance obligation. Revenue is limited to amounts
that are nonrefundable and that the other party to the agreement is
contractually obligated to pay to the Company. The Company recognizes
reimbursable research and development costs under the Takeda agreement as
research and development revenue using a time-based model over the estimated
performance period. The research and development revenue for these obligations
is limited to the lesser of the actual reimbursable costs incurred or the
straight-line amount of revenue recognized over the estimated performance
period. Revenues are recognized for reimbursable costs only if those costs
can be reasonably determined.


6


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





The
Company applies a proportional-performance model using the
percentage-of-completion method of revenue recognition for cash flows associated
with research and development deliverables under the Abbott license,
commercialization and supply agreement. Since the Company has previous research
and development experience and the expected cost to complete the development can
be reasonably estimated, the Company believes a proportional-performance
methodology of revenue recognition is appropriate. Under this method, revenue in
any period is recognized as a percentage of the total actual cost expended
relative to the total estimated costs required to satisfy the performance
obligations under the arrangement related to the development. Revenue recognized
is limited to the amounts that are non-refundable and that the other party to
the agreement is contractually obligated to pay to the Company. A change in the
period of time expected to complete the deliverable is accounted for as a change
in estimate on a prospective basis. Research and development costs are not
reimbursable under the Abbott agreement.





Under the
Takeda agreement, royalties are based on net sales of licensed products and are
recorded on the accrual basis when earned in accordance with contractual terms
when third party results are reliably measurable, collectability is reasonably
assured and all other revenue recognition criteria are met. Under the Abbott
agreement, should Amitiza be commercialized in Japan, the Company will purchase
and assume title to inventories of Amitiza and recognize revenues from the sales
of such product to Abbott when earned.





The
Takeda supplemental agreement consists of the following key funding streams:
reimbursements of co-promotion costs based upon a per-day rate up to a specific
annual amount and reimbursements of the costs of miscellaneous marketing
activities, which the Company recognizes as revenue as the related costs are
incurred and Takeda becomes contractually obligated to pay the
amounts.





The
Company considers its participation in the joint committees under the
collaboration and license agreements as separate deliverables under the
contracts and recognizes the fair value of such participation as collaboration
revenue over the period of the participation per the terms of the
contracts.





The
Company has determined that it is acting as a principal under both the Takeda
and Abbott agreements and, as such, records revenue on a gross basis in the
condensed consolidated statements of operations and comprehensive income
(loss).





Contract
revenue relates to development, manufacturing and consulting activities with a
related party, R-Tech Ueno, Ltd. or R-Tech, a Japanese manufacturing and
research and development company that is majority owned by the Company’s
founders. The contract revenue includes upfront payments received for exclusive
manufacturing and supply agreements which are accounted for under the time-based
model.





Certain
Risks, Concentrations and Uncertainties





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents, restricted cash,
investments and receivables. In accordance with its investment policy, the
Company places its cash, cash equivalents and restricted cash with highly rated
financial institutions and invests its excess cash in highly rated investments.
As of June 30, 2010 and December 31, 2009, approximately $62.7 million, or
54.7%, and $60.7 million, or 51.2%, respectively, of the Company’s cash, cash
equivalents, restricted cash and investments was issued or insured by the
federal government or government agencies. The Company has not experienced
any losses on these accounts related to amounts in excess of insured limits. On
June 8, 2010, the issuer of the Company’s remaining ARS redeemed the security at
par value of $10.0 million.





The
Company’s products and product candidates under development require approval
from the FDA or other international regulatory agencies prior to commercial
sales. For those product candidates or indications that have not yet been
approved by the FDA or international regulatory agencies, there can be no
assurance the products will receive the necessary approval. If the Company is
denied approval or approval is delayed, it may have a material adverse impact on
the Company.





The
Company’s products, Amitiza and Rescula, compete in a rapidly changing, highly
competitive market, which is characterized by advances in scientific discovery,
changes in customer requirements, evolving regulatory requirements and
developing industry standards. Any failure by the Company to anticipate or to
respond adequately or timely to scientific developments in its industry, changes
in customer requirements or changes in regulatory requirements or industry
standards, or any significant delays in the development or introduction of
products could have a material adverse effect on the Company’s business,
operating results and future cash flows.


7


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





The
Company’s expected activities may necessitate significant uses of working
capital. The Company’s working capital requirements will depend on many factors,
including the successful sales of Amitiza and Rescula, research and development
efforts to develop new products or indications, payments received under
contractual agreements with other parties, the status of competitive products,
market acceptance of the Company’s new products by physicians and patients and
resolution of pending legal matters. The Company plans to continue financing
operations with its existing cash and investments as well as with product
royalty revenue and cash received from milestones and other revenue related to
its joint collaboration, commercialization, license and supply
agreements.





Revenues
from one unrelated party, Takeda, accounted for 88.1% and 79.2% of the Company’s
total revenues for the three months ended June 30, 2010 and 2009, respectively,
and 84.3% and 87.5% for the six months ended June 30, 2010 and 2009,
respectively. Accounts receivable, unbilled accounts receivable and product
royalties receivable from Takeda accounted for 99.7% and 96.5% of the Company’s
total accounts receivable, unbilled accounts receivable and product royalties
receivable at June 30, 2010 and December 31, 2009, respectively. Revenues from
another unrelated party, Abbott, accounted for 11.1% and 20.2% of the Company’s
total revenues for the three months ended June 30, 2010 and 2009, respectively,
and 15.0% and 11.9% for the six months ended June 30, 2010 and 2009,
respectively. The Company depends significantly upon the collaborations with
Takeda and Abbott and its activities may be impacted if these relationships are
disrupted (Note 9).





The
Company has an exclusive supply arrangement with R-Tech to provide it with
commercial and clinical supplies of its product and product candidates.
Additionally, in April 2009, the Company acquired from R-Tech all patents and
other intellectual property rights related to Rescula in the U.S. and Canada.
R-Tech also provides certain preclinical and other research and development
services. Any difficulties or delays in performing the services under these
arrangements may cause the Company to lose revenues, delay research and
development activities or otherwise disrupt the Company’s operations (Note
8).





The
Company has previously entered into a restated license agreement with a related
party, Sucampo AG, or SAG, to grant the Company a royalty-bearing, exclusive,
worldwide license to develop prostone compounds, other than Rescula. SAG is a
Swiss-patent holding company and an entity wholly-owned by the Company’s
founders. The Company’s success depends, in part, on SAG’s ability to obtain and
maintain proprietary protection for the intellectual property rights relating to
the prostone technology and products (Note 8).





Reclassifications





Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation. The Company reclassified money market funds of
approximately $186,000 from current investments to cash and cash equivalents as
of June 30, 2009. The Company has adjusted the cash flow statement for the
quarter ended June 30, 2009 accordingly.





Recent
Accounting Pronouncements





In June
2009, the FASB issued an amendment to the accounting and disclosure requirements
for the consolidation of variable interest entities, or VIEs. The elimination of
the concept of qualifying special-purpose entities, or QSPEs, removes the
exception from applying the consolidation guidance within this amendment. This
amendment requires an enterprise to perform a qualitative analysis when
determining whether or not it must consolidate a VIE. The amendment also
requires an enterprise to continuously reassess whether it must consolidate a
VIE. Additionally, the amendment requires enhanced disclosures about an
enterprise’s involvement with VIEs and any significant change in risk exposure
due to that involvement, as well as how its involvement with VIEs impacts the
enterprise’s financial statements. Finally, an enterprise will be required to
disclose significant judgments and assumptions used to determine whether or not
to consolidate a VIE. This amendment is effective for financial statements
issued for fiscal years beginning after November 15, 2009. The Company adopted
the guidance effective January 1, 2010 and such adoption did not have an impact
on the condensed consolidated financial statements.





In
September 2009, the FASB issued an amendment to the authoritative guidance which
addresses how revenues should be allocated among products and services in a
singular sales arrangement. The guidance establishes a hierarchy for determining
the selling price of each product or service, with vendor-specific objective
evidence, or VSOE, at the highest level, third-party evidence of VSOE at the
intermediate level, and management's best estimate at the lowest level. It
replaces "fair value" with "selling price" in revenue allocation guidance. It
also significantly expands the disclosure requirements for multiple-deliverable
revenue arrangements. This guidance will be effective prospectively for
agreements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. The Company is continuing to evaluate the impact that this
amendment would have on its financial condition and results of operation upon
adoption.


8


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





In
January 2010, the FASB issued authoritative guidance on improving the
disclosures about fair value measurements. This statement requires additional
disclosures about fair value measurements including transfers in and out of
Levels 1 and 2 and a higher level of disaggregation for the different types of
financial instruments. For the reconciliation of Level 3 fair value
measurements, information about purchases, sales, issuances and settlements
should be presented separately. This statement is effective for annual and
interim reporting periods beginning after December 15, 2009 for most of the new
disclosures and for periods beginning after December 15, 2010 for the new Level
3 disclosures. The Company adopted the relevant guidance effective January 1,
2010 and such adoption did not have a material impact on the condensed
consolidated financial statements.





In March
2010, the FASB issued authoritative guidance on applying the milestone method to
milestone payments for achieving specified performance measures when those
payments are related to uncertain future events. Under this statement, an
accounting policy election can be made to recognize arrangement consideration
received for achieving specified performance measures during the period in which
the milestones are achieved, provided certain criteria are met. This statement
is limited to transactions involving research or development. This statement is
effective for annual and interim reporting periods beginning on or after June
15, 2010 and may be early adopted. Since the Company elected to continue to use
the existing revenue models, the relevant guidance has not been
adopted.





3.      Earnings
per Share





Basic net
income (loss) per share is computed by dividing net income (loss) by the sum of
the weighted average class A and B common shares outstanding. Diluted net income
per share is computed by dividing net income by the weighted average common
shares and potential dilutive common shares outstanding. Diluted net loss per
share, when applicable, is computed by dividing net loss by the weighted average
common shares outstanding without the impact of potential dilutive common shares
outstanding because they would have an anti-dilutive impact on diluted net loss
per share.





The
computation of net income (loss) per share for the three and six months ended
June 30, 2010 and 2009 is shown below:





Three
      Months Ended June 30,
                      
                      
                      Six
      Months Ended June 30,(in
      thousands, except per share data)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Basic
      net loss per share:Net
      loss
                      
                      $
                      (1,978
                      )
                      
                      $
                      (238
                      )
                      
                      $
                      (2,277
                      )
                      
                      $
                      (2,013
                      )Weighted
      average class A and B common sharesoutstanding
                      
                      
                      41,848
                      
                      
                      
                      41,844
                      
                      
                      
                      41,847
                      
                      
                      
                      41,844Basic
      net loss per share
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.05
                      )Diluted
      net loss per share:Net
      loss
                      
                      $
                      (1,978
                      )
                      
                      $
                      (238
                      )
                      
                      $
                      (2,277
                      )
                      
                      $
                      (2,013
                      )Weighted
      average class A and B common sharesoutstanding
      for diluted net income per share
                      
                      
                      41,848
                      
                      
                      
                      41,844
                      
                      
                      
                      41,847
                      
                      
                      
                      41,844Diluted
      net loss per share
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.05
                      )





For the
periods listed above, the following securities were excluded from the
computation of diluted net loss per share as their effect would be anti-dilutive
as of June 30, 2010 and 2009:


9


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





June
      30,(In
      thousands)
                
                2010
                
                
                2009Employee
      stock options
                
                
                1,400
                
                
                
                670Non-employee
      stock options
                
                
                450
                
                
                
                450





4.      Current
and Non-Current Investments





At June
30, 2010 and December 31, 2009, current and non-current available-for-sale
investments consisted of the following securities:





June
      30, 2010Unrealized
                    
                    
                    Unrealized(In
      thousands)
                    
                    Cost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair
      ValueCurrent:U.S.
      Treasury bills and notes
                    
                    $
                    1,004
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,004U.S.
      commercial paper
                    
                    
                    5,181
                    
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    5,183U.S.
      government securities
                    
                    
                    13,016
                    
                    
                    
                    12
                    
                    
                    
                    (5
                    )
                    
                    
                    13,023Municipal
      securities
                    
                    
                    16,600
                    
                    
                    
                    6
                    
                    
                    
                    (9
                    )
                    
                    
                    16,597Certificates
      of deposits
                    
                    
                    1,750
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    1,751Corporate
      bonds
                    
                    
                    18,585
                    
                    
                    
                    27
                    
                    
                    
                    (7
                    )
                    
                    
                    18,605Total
                    
                    $
                    56,136
                    
                    
                    $
                    48
                    
                    
                    $
                    (21
                    )
                    
                    $
                    56,163Non-current:U.S.
      government securities
                    
                    $
                    6,703
                    
                    
                    $
                    5
                    
                    
                    $
                    (7
                    )
                    
                    $
                    6,701Municipal
      securities
                    
                    
                    3,358
                    
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    3,366Certificates
      of deposits
                    
                    
                    250
                    
                    
                    
                    -
                    
                    
                    
                    (1
                    )
                    
                    
                    249Corporate
      bonds
                    
                    
                    5,625
                    
                    
                    
                    -
                    
                    
                    
                    (6
                    )
                    
                    
                    5,619Total
                    
                    $
                    15,936
                    
                    
                    $
                    13
                    
                    
                    $
                    (14
                    )
                    
                    $
                    15,935





December
      31, 2009Unrealized
                    
                    
                    Unrealized(In
      thousands)
                    
                    Cost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair
      ValueCurrent:U.S.
      Treasury bills and notes
                    
                    $
                    2,999
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,999U.S.
      commercial paper
                    
                    
                    1,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,000U.S.
      government securities
                    
                    
                    26,020
                    
                    
                    
                    16
                    
                    
                    
                    (6
                    )
                    
                    
                    26,030Municipal
      securities
                    
                    
                    25,339
                    
                    
                    
                    4
                    
                    
                    
                    (7
                    )
                    
                    
                    25,336Certificates
      of deposits
                    
                    
                    1,250
                    
                    
                    
                    -
                    
                    
                    
                    (1
                    )
                    
                    
                    1,249Corporate
      bonds
                    
                    
                    15,782
                    
                    
                    
                    38
                    
                    
                    
                    -
                    
                    
                    
                    15,820Total
                    
                    $
                    72,390
                    
                    
                    $
                    58
                    
                    
                    $
                    (14
                    )
                    
                    $
                    72,434Non-current:U.S.
      government securities
                    
                    $
                    6,065
                    
                    
                    $
                    7
                    
                    
                    $
                    (12
                    )
                    
                    $
                    6,060Municipal
      securities
                    
                    
                    1,802
                    
                    
                    
                    4
                    
                    
                    
                    -
                    
                    
                    
                    1,806Certificates
      of deposits
                    
                    
                    500
                    
                    
                    
                    -
                    
                    
                    
                    (2
                    )
                    
                    
                    498Corporate
      bonds
                    
                    
                    1,891
                    
                    
                    
                    1
                    
                    
                    
                    (3
                    )
                    
                    
                    1,889Auction
      rate securities
                    
                    
                    10,000
                    
                    
                    
                    -
                    
                    
                    
                    (1,086
                    )
                    
                    
                    8,914Total
                    
                    $
                    20,258
                    
                    
                    $
                    12
                    
                    
                    $
                    (1,103
                    )
                    
                    $
                    19,167





The
Company records unrealized gains and losses resulting from changes in the fair
value of the auction rate securities and related settlement rights within other
income (loss). On June 8, 2010, the issuer of the Company’s remaining ARS
redeemed the security at par value of $10.0 million, which terminated the
related settlement rights.


10


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





The
Company performs fair value measurements in accordance with the guidance for
fair value measurements and disclosures, which defines fair value as the
exchange price that would be received for selling an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. A fair value hierarchy is established which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The Company classifies its investments into
the following categories based on the three levels of inputs used to measure
fair value:





Level 1: quoted
prices in active markets for identical assets or liabilities;


Level 2: inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted
prices in active markets for similar assets or liabilities, quoted prices for
identical or similar assets or liabilities in markets that are not active, or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities;
or


Level 3: unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.





The
Company’s assets measured at fair value on a recurring basis, which are subject
to the fair value disclosure requirements, are as follows:





Fair Value Measurements at Reporting Date UsingJune 30, 2010
                  
                  Quoted Prices in
                    Active Markets
                    for identical
                    Assets
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    Inputs(In
      thousands)
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)
                  
                  
                  TotalU.S.
      Treasury bills and notes
                  
                  $
                  1,004
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,004U.S.
      government securities
                  
                  
                  19,723
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,723U.S.
      commercial paper
                  
                  
                  -
                  
                  
                  
                  5,183
                  
                  
                  
                  -
                  
                  
                  
                  5,183Corporate
      bonds
                  
                  
                  24,225
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  24,225Municipal
      securities
                  
                  
                  19,963
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,963Certificates
      of deposits
                  
                  
                  -
                  
                  
                  
                  2,000
                  
                  
                  
                  -
                  
                  
                  
                  2,000Total
      assets measured at fair value
                  
                  $
                  64,915
                  
                  
                  $
                  7,183
                  
                  
                  $
                  -
                  
                  
                  $
                  72,098





Fair Value Measurements at Reporting Date UsingDecember 31, 2009
                  
                  Quoted Prices in
                    Active Markets
                    for identical
                    Assets
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    Inputs(In
      thousands)
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)
                  
                  
                  TotalU.S.
      Treasury bills and notes
                  
                  $
                  2,999
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,999U.S.
      government securities
                  
                  
                  32,090
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  32,090U.S.
      commercial paper
                  
                  
                  -
                  
                  
                  
                  1,000
                  
                  
                  
                  -
                  
                  
                  
                  1,000Corporate
      bonds
                  
                  
                  17,709
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,709Municipal
      securities
                  
                  
                  27,142
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27,142Auction
      rate securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,914
                  
                  
                  
                  8,914Settlement
      rights for auction rate securities*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,086
                  
                  
                  
                  1,086Certificates
      of deposits
                  
                  
                  -
                  
                  
                  
                  1,747
                  
                  
                  
                  -
                  
                  
                  
                  1,747Total
      assets measured at fair value
                  
                  $
                  79,940
                  
                  
                  $
                  2,747
                  
                  
                  $
                  10,000
                  
                  
                  $
                  92,687





*
included in non-current other assets in the accompanying condensed consolidated
balance sheets.


11


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





If quoted
prices in active markets for identical assets and liabilities are not available
to determine fair value, then the Company uses quoted prices for similar assets
and liabilities or inputs other than the quoted prices that are observable,
either directly or indirectly. This pricing methodology applies to the Company’s
Level 2 investments.





The fair
value of the Company's auction rate security holdings and settlement rights as
of December 31, 2009 were estimated based on an internal pricing model and
categorized in Level 3 of the fair value hierarchy. The pricing model takes into
consideration the characteristics of the underlying securities as well as
multiple inputs, including counterparty credit quality, expected timing of
redemptions and the yield premium that a market participant would require over
otherwise comparable securities. These inputs require significant management
judgment.





5.      Intangible
Assets





In April
2009, the Company entered into two agreements with R-Tech to acquire all patents
and other intellectual property rights related to Rescula for glaucoma and
ocular hypertension and any new indications in the U.S. and Canada. Although
Rescula eye drops have been approved by the FDA for the treatment of open-angle
glaucoma and ocular hypertension since 2000, Rescula is not currently marketed
in the U.S. or Canada.





Under the
terms of the R-Tech agreements, the Company made an upfront payment of $3.0
million and may be required to pay up to $5.5 million in additional milestone
payments to R-Tech based on the achievement of specified development and
commercialization goals. The first milestone payment of $500,000 is payable upon
the re-launch of Rescula for the treatment of glaucoma which is considered as
being probable; therefore, this amount is recorded as part of the initial cost
of the acquired assets. The Company allocated the acquisition cost between an
intangible asset of $3.4 million and a non-current prepaid inventory of $85,000,
both of which are reflected in other non-current assets in the accompanying
consolidated balance sheet as of June 30, 2010. The Company is amortizing the
$3.4 million over the 10-year life of the license agreement, which management
believes approximates the useful life of the existing underlying rights and
data. Amortization expense was $171,000 and $57,000 for the six months ended
June 30, 2010 and 2009, respectively. The annual amortization expense will be
approximately $342,000 through April 2019.





6.      Accrued
Expenses





Accrued
expenses consisted of the following as of:





June
      30,
                
                
                December
      31,(In
      thousands)
                
                2010
                
                
                2009Research
      and development costs
                
                $
                2,500
                
                
                $
                3,624Employee
      compensation
                
                
                1,473
                
                
                
                879Selling
      and marketing costs
                
                
                129
                
                
                
                731Other
      accrued expenses
                
                
                3,839
                
                
                
                1,311Total
                
                $
                7,941
                
                
                $
                6,545





7.     
Commitments





Operating
Leases





The
Company leases office space in the U.S., the United Kingdom and Japan under
operating leases ranging through 2017. Total future minimum, non-cancelable
lease payments under operating leases, which do not include future sub-lease
receipts of approximately $30,000, were as follows as of June 30,
2010:


12


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





(In
      thousands)2010
      (July - December)
                
                $
                7152011
                
                
                1,1692012
                
                
                9662013
                
                
                9942014
                
                
                1,0242015
      and thereafter
                
                
                2,275Total
      minimum lease payments
                
                $
                7,143





Rent
expense for all operating leases was approximately $313,000 and $341,000 for the
three months ended June 30, 2010 and 2009, respectively, and $645,000 and
$642,000 for the six months ended June 30, 2010 and 2009,
respectively.





Research
and Development Costs





The
Company routinely enters into agreements with third-party clinical research
organizations, or CROs, to oversee clinical research and development studies
provided on an outsourced basis. The Company is not generally contractually
obligated to pay the CRO if the service or reports are not provided. Total
future estimated costs through 2013 under these agreements as of June 30, 2010
were approximately $6.0 million. This amount does not include expected costs
relating to the third phase 3 study for Amitiza in OBD and the phase 2 studies
for Rescula, for which the CRO agreements have not been finalized as of June 30,
2010.





8.      Related
Party Transactions





R-Tech
Ueno, Ltd.





In
addition to the Rescula agreements described in Note 5 above, the Company is a
party to other development and exclusive supply agreements with R-Tech covering
various compounds and territories. The Company’s founders, Drs. Ueno and Kuno,
directly or indirectly, own a majority of the stock of R-Tech. Dr. Kuno is a
member of the board of directors of R-Tech.





The
Company recorded the following expenses under its agreements with
R-Tech:





Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,(In
      thousands)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Clinical
      supplies
                
                $
                91
                
                
                $
                577
                
                
                $
                203
                
                
                $
                1,620Other
      research and development services
                
                
                83
                
                
                
                3,034
                
                
                
                147
                
                
                
                3,039$
                174
                
                
                $
                3,611
                
                
                $
                350
                
                
                $
                4,659





The
following table summarizes the amounts included in deferred revenue resulting
from the deferral of upfront payments relating to the exclusive supply
agreements with R-Tech:





June
      30,
                
                
                December
      31,(In
      thousands)
                
                2010
                
                
                2009Deferred
      revenue, current
                
                $
                432
                
                
                $
                431Deferred
      revenue, non-current
                
                
                6,035
                
                
                
                6,256$
                6,467
                
                
                $
                6,687





The
Company recognized approximately $105,000 of revenue relating to its agreements
with R-Tech for each of the three months ended June 30, 2010 and 2009, and
approximately $209,000 for the six months ended June 30, 2010 and 2009, which
was recorded as contract and collaboration revenue in the accompanying condensed
consolidated statements of operations and comprehensive income
(loss).


13


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





Sucampo
AG License Agreements





The
Company expensed approximately $375,000 in milestone royalties – related parties
expense under our sublicense agreement with SAG for the three months ended June
30, 2009, reflecting 5% of the $7.5 million development payment received from
Abbott. The Company expensed approximately $875,000 in milestone royalties –
related parties expense under our sublicense agreement with SAG for the six
months ended June 30, 2009, reflecting 5% of the $10.0 million upfront payment
and the $7.5 million development payments received from Abbott. There was no
corresponding expense in 2010.





The
Company expensed approximately $1.7 million and $1.6 million in product
royalties – related parties under the license agreement with SAG for the three
months ended June 30, 2010 and 2009, respectively, and approximately $3.4
million and $3.2 million for the six months ended June 30, 2010 and 2009,
respectively, reflecting 3.2% of Amitiza net sales in the U.S. during each of
these periods.





9.      Collaboration
and License Agreements





Abbott
license, commercialization and supply agreement





In
February 2009, the Company entered into an exclusive 15-year license,
commercialization and supply agreement with Abbott to develop and commercialize
lubiprostone for the treatment of CIC in Japan. Additionally, the agreement
grants Abbott the right of first refusal to any additional indications for which
lubiprostone is developed in Japan under all relevant patents, know-how and
trademarks. Payments to the Company under the terms of the agreement include a
non-refundable upfront payment and non-refundable development and commercial
milestone payments based on achieving specified development, regulatory and
sales goals.





The
Company has received a total of $17.5 million in up-front and development
milestone payments through June 30, 2010 under this agreement. Subject to future
development and commercial milestones, the Company will receive additional
development milestone and commercial milestone payments under this agreement
with Abbott, although there can be no assurance that the Company will receive
any such payments.





The
following table summarizes the cash streams and related revenue recognized or
deferred under the license, commercialization and supply agreement with Abbott
for the six months ended June 30, 2010:





Amount
                        Deferred at
                        December 31,
                      
                      
                      Cash Received
                        for the Six
                        Months Ended
                        June 30,
                      
                      
                      Revenue
                        Recognized for
                        the Six Months
                        Ended June 30,
                      
                      
                      Foreign Currency
                        Effects for the Six
                        Months Ended June
                        30,
                      
                      
                      Amount
                        Deferred at
                        June 30,(In
      thousands)
                      
                      2009
                      
                      
                      2010
                      
                      
                      2010
                      
                      
                      2010
                      
                      
                      2010Collaboration
      revenue:Up-front
      payment associated with the Company'sobligation
      to participate in joint committees
                      
                      $
                      812
                      
                      
                      $
                      -
                      
                      
                      $
                      23
                      
                      
                      $
                      33
                      
                      
                      $
                      822Research
      and development revenue:Up-front
      payment
                      
                      $
                      3,991
                      
                      
                      $
                      -
                      
                      
                      $
                      2,313
                      
                      
                      $
                      93
                      
                      
                      $
                      1,771Development
      milestone payment
                      
                      $
                      3,366
                      
                      
                      
                      -
                      
                      
                      
                      1,951
                      
                      
                      
                      78
                      
                      
                      $
                      1,493Total
                      
                      $
                      7,357
                      
                      
                      $
                      -
                      
                      
                      $
                      4,264
                      
                      
                      $
                      171
                      
                      
                      $
                      3,264





Takeda
commercialization and license agreement





In
October 2004, the Company entered into a 16-year collaboration and license
agreement with Takeda to exclusively co-develop, commercialize and sell products
that contain lubiprostone for gastroenterology indications in the United States
and Canada. On February 1, 2006, the Company entered into a supplemental
agreement with Takeda, which amended the responsibilities of both the Company
and Takeda for the co-promotion of Amitiza and clarified the funding
arrangements for other marketing services to be performed by both parties.
Payments to the Company under these agreements include a non-refundable up-front
payment, non-refundable development and commercial milestone payments,
reimbursement of certain development and co-promotion costs and product
royalties.


14


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





The
Company has received a total of $150.0 million in up-front and development
milestone payments through June 30, 2010 under these agreements. Subject to
future development and commercial milestones, the Company will receive
additional development milestone and commercial milestone payments under the
collaboration and license agreements with Takeda, although there can be no
assurance that the Company will receive any such payments.





On March
12, 2010, the Company submitted for filing with the International Court of
Arbitration, International Chamber of Commerce a demand for arbitration under
the applicable provisions of the Collaboration and License Agreement between the
Company and Takeda dated October 29, 2004. The Company is disappointed with the
level of U.S. sales of Amitiza being generated by Takeda and what the Company
believes to be other failures of performance by Takeda under the agreements. The
Company believes that Takeda materially breached its agreement, without
limitation, by its continuing failure to exercise its best efforts to
commercialize Amitiza and maximize net sales revenue, and its ongoing refusal to
collaborate and provide the Company with information to which the Company is
entitled under the agreement. The Company also claimed that Takeda’s conduct,
including, without limitation, its dealings with pharmacy benefit
managers/managed care organizations, has injured not only the Company and the
Amitiza brand, but also consumers.The Company
is seeking all appropriate relief, including production by Takeda of all
information to which we are entitled, a declaration of termination of applicable
agreements, and all available monetary relief, equitable relief, attorneys’ fees
and costs. The respective arbitrators for both the Company and Takeda have been
confirmed and both parties have selected a third arbitrator. If the third
arbitrator is confirmed, then it will comprisethe panel
that will conduct the arbitration proceedings. The Company spent and expects to
spend significant resources in the dispute with Takeda and these legal
proceedings may require the continuing attention of the Company’s senior
management.





The
following table summarizes the cash streams and related revenue recognized or
deferred under the collaboration and license agreements with Takeda for the six
months ended June 30, 2010:





Amount
                        Deferred at
                        December 31,
                      
                      
                      Cash Received
                        for the Six
                        Months Ended
                        June 30,
                      
                      
                      Revenue
                        Recognized for
                        the Six Months
                        Ended June 30,
                      
                      
                      Change inAccounts
                        Receivable for the
                        Six Months Ended
                        June 30,
                      
                      
                      Amount
                        Deferred at
                        June 30,(In
      thousands)
                      
                      2009
                      
                      
                      2010
                      
                      
                      2010
                      
                      
                      2010*
                      
                      
                      2010Collaboration
      revenue:Up-front
      payment associated with the Company'sobligation
      to participate in joint committees
                      
                      $
                      1,617
                      
                      
                      $
                      -
                      
                      
                      $
                      73
                      
                      
                      $
                      -
                      
                      
                      $
                      1,544Research
      and development revenue:Reimbursement
      of research and development expenses
                      
                      $
                      2,734
                      
                      
                      $
                      965
                      
                      
                      $
                      2,573
                      
                      
                      $
                      (628
                      )
                      
                      $
                      498Product
      royalty revenue
                      
                      $
                      -
                      
                      
                      $
                      20,796
                      
                      
                      $
                      19,385
                      
                      
                      $
                      (1,411
                      )
                      
                      $
                      -Co-promotion
      revenue
                      
                      $
                      -
                      
                      
                      $
                      2,028
                      
                      
                      $
                      2,075
                      
                      
                      $
                      47
                      
                      
                      $
                      -





*      Includes
billed and unbilled accounts receivable.





As a
result of the mixed results of the Company’s phase 3 efficacy trials for Amitiza
in OBD that were completed in 2009 and a subsequent meeting with the FDA in
April 2010, the Company agreed with Takeda to conduct another phase 3 efficacy
trial of Amitiza for the treatment of OBD in order to file its sNDA for this
indication. Accordingly, the Company concluded that the estimated completion of
the OBD program would be extended from late 2010 to mid-2012 and, therefore, the
recognition period for associated research and development revenue would be
extended. Additionally, since Takeda funds the first $50.0 million of the
development expenses for the OBD program and the Company and Takeda share
equally development costs that exceed that amount, the estimated future
additional revenue and expenses reflect this arrangement. This change in
estimate did not have material impact on the financial statements for the three
months ended June 30, 2010.


15


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





10.    Stock
Option Plans





The
following table summarizes the employee stock option activity for the six months
ended June 30, 2010 under the Company’s 2001 Incentive Plan:





Shares
                  
                  
                  Weighted Average
                    Exercise Price Per
                    Share
                  
                  
                  Weighted Average
                    Remaining
                    Contractual Term
                    (Years)
                  
                  
                  Aggregate
                    Intrinsic ValueOptions
      outstanding, December 31, 2009
                  
                  
                  358,700
                  
                  
                  $
                  10.43Options
      expired
                  
                  
                  (13,600
                  )
                  
                  
                  10.00Options
      outstanding, June 30, 2010
                  
                  
                  345,100
                  
                  
                  
                  10.44
                  
                  
                  
                  3.62
                  
                  
                  $
                  -Options
      exercisable, June 30, 2010
                  
                  
                  345,100
                  
                  
                  
                  10.44
                  
                  
                  
                  3.62
                  
                  
                  $
                  -





The
following table summarizes the employee stock option activity for the six months
ended June 30, 2010 under the Company’s 2006 Incentive Plan:





Shares
                  
                  
                  Weighted Average
                    Exercise Price Per
                    Share
                  
                  
                  Weighted Average
                    Remaining
                    Contractual Term
                    (Years)
                  
                  
                  Aggregate
                    Intrinsic ValueOptions
      outstanding, December 31, 2009
                  
                  
                  509,800
                  
                  
                  $
                  8.58Options
      granted
                  
                  
                  546,000
                  
                  
                  
                  3.77Options
      forfeited
                  
                  
                  (3,000
                  )
                  
                  
                  14.12Options
      outstanding, June 30, 2010
                  
                  
                  1,052,800
                  
                  
                  
                  6.07
                  
                  
                  
                  8.89
                  
                  
                  $
                  -Options
      exercisable, June 30, 2010
                  
                  
                  405,617
                  
                  
                  
                  7.42
                  
                  
                  
                  8.44
                  
                  
                  $
                  -





The
weighted average grant date fair value of options granted during the six months
ended June 30, 2010 and the year ended December 31, 2009 were $1.89 and $2.73,
respectively. As of June 30, 2010, approximately $1.6 million of total
unrecognized compensation costs, net of estimated forfeitures, related to
non-vested awards are expected to be recognized over a weighted average period
of 2.50 years.





During
the three months ended June 30, 2010, the Company granted (i) annual stock
options for 80,000 shares of class A common stock to its independent directors
and (ii) fully vested stock options for 177,000 shares of class A common stock
to its non-executive employees, both under the 2006 Incentive Plan.





The
Company granted 510,000 stock options with an exercise price of $5.85 per share
to non-employees in August 2005 under the 2001 Incentive Plan. As of June 30,
2010 and December 31, 2009, 450,000 options were outstanding and exercisable.
These non-employee stock options vested immediately. These options have a
weighted average exercise price of $5.85 as of June 30, 2010 and December 31,
2009 and a remaining contractual life of 4.84 and 5.33 years, respectively, as
of June 30, 2010 and December 31, 2009.





Employee
Stock Purchase Plan





Under the
2006 Employee Stock Purchase Plan, or ESPP, a total of 2,207 and 1,526 shares of
class A common stock were purchased during the six months ended June 30, 2010
and 2009, respectively. The ESPP is non-compensatory and is intended to qualify
as an Employee Stock Purchase Plan as defined in Section 423 of the Internal
Revenue Code of 1986 and in accordance with GAAP guidance that requires
estimates in the fair value of share-based payment awards on the date of the
grant using an option-pricing model and recognizing the expense over the
required service periods in the accompanying condensed consolidated statement of
operations and comprehensive income (loss). The Company received $7,452 and
$8,910 upon purchase of shares under the ESPP for the six months ended June 30,
2010 and 2009, respectively.


16


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





11.    Income
Taxes





For the
three months ended June 30, 2010 and 2009, the Company recorded a tax
provision of $315,000 and $863,000, respectively. For the six months ended
June 30, 2010 and 2009, the Company recorded a tax provision of $520,000 and
$1.3 million, respectively. The tax provision for the three and six months ended
June 30, 2010 and 2009 primarily pertained to taxable income generated by the
Company’s U.S. subsidiary. The Company’s other subsidiaries based in Europe and
Japan incurred pre-tax losses for the three and six months ended June 30,
2010, for which no tax benefit was recognized.





The
Company has estimated its annual effective tax rate for the full fiscal year
2010 and 2009 and applied that rate to its income before income taxes in
determining its income tax provision for the interim periods. There is no tax
benefit recognized on the net operating losses incurred in the foreign
jurisdictions due to the lack of evidence supporting the Company’s ability to
use these losses in the future.





Uncertain
Tax Positions





The
Company applies the FASB’s guidance for uncertainty in income taxes that
requires the application of a more likely than not threshold to the recognition
and derecognition of uncertain tax positions.





The
Company had an outstanding non-current income tax liability of approximately
$788,000 for uncertain tax positions as of June 30, 2010. The amount represented
the aggregate tax effect of differences between tax return positions and the
amounts otherwise recognized in the Company’s condensed consolidated financial
statements, and is reflected in other liabilities in the accompanying condensed
consolidated balance sheets. The liability for uncertain tax positions as of
June 30, 2010 mainly pertained to the Company’s interpretation of nexus in
certain states related to revenue sourcing for state income tax
purposes.





The
Company recognizes accrued interest and penalties related to uncertain tax
positions as a component of the income tax provision. The Company has identified
no uncertain tax position for which it is reasonably possible that the total
amount of liability for unrecognized tax benefits will significantly increase or
decrease within 12 months, except for recurring accruals on existing uncertain
tax positions.





12.    Segment
Reporting





The
Company has determined that it has three reportable segments based on the
Company’s method of internal reporting, which disaggregates business by
geographic location. These segments are the Americas, Europe and Asia. The
Company evaluates the performance of these segments based on income (loss) from
operations, as well as other factors, including the progress of its research and
development activities. The reportable segments have historically derived their
revenue from joint collaboration and strategic alliance agreements. Transactions
between the segments consist primarily of loans and the provision of research
and development services. Following is a summary of financial information by
reportable geographic segment.


17


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





(In thousands)
                
                Americas
                
                
                Europe
                
                
                Asia
                
                
                Intercompany
                  Eliminations
                
                
                ConsolidatedThree
      Months Ended June 30, 2010Research
      and development revenue
                
                $
                1,269
                
                
                $
                -
                
                
                $
                1,520
                
                
                $
                -
                
                
                $
                2,789Product
      royalty revenue
                
                
                9,612
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,612Co-promotion
      revenue
                
                
                1,220
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,220Contract
      and collaboration revenue
                
                
                141
                
                
                
                -
                
                
                
                285
                
                
                
                (272
                )
                
                
                154Total
      revenues
                
                
                12,242
                
                
                
                -
                
                
                
                1,805
                
                
                
                (272
                )
                
                
                13,775Research
      and development expenses
                
                
                1,996
                
                
                
                142
                
                
                
                2,988
                
                
                
                (272
                )
                
                
                4,854Depreciation
      and amortization
                
                
                222
                
                
                
                3
                
                
                
                6
                
                
                
                -
                
                
                
                231Other
      operating expenses
                
                
                9,707
                
                
                
                468
                
                
                
                220
                
                
                
                -
                
                
                
                10,395Income
      (loss) from operations
                
                
                317
                
                
                
                (613
                )
                
                
                (1,409
                )
                
                
                -
                
                
                
                (1,705
                )Interest
      income
                
                
                254
                
                
                
                -
                
                
                
                1
                
                
                
                (78
                )
                
                
                177Other
      non-operating income (expense), net
                
                
                3
                
                
                
                (49
                )
                
                
                (167
                )
                
                
                78
                
                
                
                (135
                )Income
      (loss) before income taxes
                
                $
                574
                
                
                $
                (662
                )
                
                $
                (1,575
                )
                
                $
                -
                
                
                $
                (1,663
                )Capital
      expenditures
                
                $
                63
                
                
                $
                1
                
                
                $
                (1
                )
                
                $
                -
                
                
                $
                63Three
      Months Ended June 30, 2009Research
      and development revenue
                
                $
                3,825
                
                
                $
                -
                
                
                $
                3,570
                
                
                $
                -
                
                
                $
                7,395Product
      royalty revenue
                
                
                8,914
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,914Co-promotion
      revenue
                
                
                1,244
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,244Contract
      and collaboration revenue
                
                
                142
                
                
                
                -
                
                
                
                220
                
                
                
                (210
                )
                
                
                152Total
      revenues
                
                
                14,125
                
                
                
                -
                
                
                
                3,790
                
                
                
                (210
                )
                
                
                17,705Research
      and development expenses
                
                
                5,807
                
                
                
                177
                
                
                
                3,847
                
                
                
                (210
                )
                
                
                9,621Depreciation
      and amortization
                
                
                182
                
                
                
                3
                
                
                
                2
                
                
                
                -
                
                
                
                187Other
      operating expenses
                
                
                6,154
                
                
                
                302
                
                
                
                427
                
                
                
                -
                
                
                
                6,883Income
      (loss) from operations
                
                
                1,982
                
                
                
                (482
                )
                
                
                (486
                )
                
                
                -
                
                
                
                1,014Interest
      income
                
                
                292
                
                
                
                -
                
                
                
                (1
                )
                
                
                (72
                )
                
                
                219Other
      non-operating income (expense), net
                
                
                (36
                )
                
                
                (334
                )
                
                
                (310
                )
                
                
                72
                
                
                
                (608
                )Income
      (loss) before income taxes
                
                $
                2,238
                
                
                $
                (816
                )
                
                $
                (797
                )
                
                $
                -
                
                
                $
                625Capital
      expenditures
                
                $
                3,068
                
                
                $
                3
                
                
                $
                29
                
                
                $
                -
                
                
                $
                3,100


18




SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited)





(In thousands)
                  
                  Americas
                  
                  
                  Europe
                  
                  
                  Asia
                  
                  
                  Intercompany
                    Eliminations
                  
                  
                  ConsolidatedSix
      Months Ended June 30, 2010Research
      and development revenue
                  
                  $
                  2,573
                  
                  
                  $
                  -
                  
                  
                  $
                  4,273
                  
                  
                  $
                  -
                  
                  
                  $
                  6,846Product
      royalty revenue
                  
                  
                  19,385
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,385Co-promotion
      revenue
                  
                  
                  2,075
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,075Contract
      and collaboration revenue
                  
                  
                  282
                  
                  
                  
                  -
                  
                  
                  
                  570
                  
                  
                  
                  (547
                  )
                  
                  
                  305Total
      revenues
                  
                  
                  24,315
                  
                  
                  
                  -
                  
                  
                  
                  4,843
                  
                  
                  
                  (547
                  )
                  
                  
                  28,611Research
      and development expenses
                  
                  
                  4,369
                  
                  
                  
                  361
                  
                  
                  
                  6,037
                  
                  
                  
                  (547
                  )
                  
                  
                  10,220Depreciation
      and amortization
                  
                  
                  440
                  
                  
                  
                  6
                  
                  
                  
                  13
                  
                  
                  
                  -
                  
                  
                  
                  459Other
      operating expenses
                  
                  
                  18,712
                  
                  
                  
                  720
                  
                  
                  
                  418
                  
                  
                  
                  -
                  
                  
                  
                  19,850Income
      (loss) from operations
                  
                  
                  794
                  
                  
                  
                  (1,087
                  )
                  
                  
                  (1,625
                  )
                  
                  
                  -
                  
                  
                  
                  (1,918
                  )Interest
      income
                  
                  
                  527
                  
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  (141
                  )
                  
                  
                  388Other
      non-operating income (expense), net
                  
                  
                  (33
                  )
                  
                  
                  (148
                  )
                  
                  
                  (187
                  )
                  
                  
                  141
                  
                  
                  
                  (227
                  )Income
      (loss) before income taxes
                  
                  $
                  1,288
                  
                  
                  $
                  (1,235
                  )
                  
                  $
                  (1,810
                  )
                  
                  $
                  -
                  
                  
                  $
                  (1,757
                  )Capital
      expenditures
                  
                  $
                  154
                  
                  
                  $
                  1
                  
                  
                  $
                  2
                  
                  
                  $
                  -
                  
                  
                  $
                  157Six
      Months Ended June 30, 2009Research
      and development revenue
                  
                  $
                  8,977
                  
                  
                  $
                  -
                  
                  
                  $
                  3,944
                  
                  
                  $
                  -
                  
                  
                  $
                  12,921Product
      royalty revenue
                  
                  
                  17,860
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,860Co-promotion
      revenue
                  
                  
                  2,140
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,140Contract
      and collaboration revenue
                  
                  
                  283
                  
                  
                  
                  -
                  
                  
                  
                  435
                  
                  
                  
                  (420
                  )
                  
                  
                  298Total
      revenues
                  
                  
                  29,260
                  
                  
                  
                  -
                  
                  
                  
                  4,379
                  
                  
                  
                  (420
                  )
                  
                  
                  33,219Research
      and development expenses
                  
                  
                  13,778
                  
                  
                  
                  329
                  
                  
                  
                  5,899
                  
                  
                  
                  (420
                  )
                  
                  
                  19,586Depreciation
      and amortization
                  
                  
                  299
                  
                  
                  
                  6
                  
                  
                  
                  4
                  
                  
                  
                  -
                  
                  
                  
                  309Other
      operating expenses
                  
                  
                  12,641
                  
                  
                  
                  630
                  
                  
                  
                  1,547
                  
                  
                  
                  -
                  
                  
                  
                  14,818Income
      (loss) from operations
                  
                  
                  2,542
                  
                  
                  
                  (965
                  )
                  
                  
                  (3,071
                  )
                  
                  
                  -
                  
                  
                  
                  (1,494
                  )Interest
      income
                  
                  
                  651
                  
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  (122
                  )
                  
                  
                  531Other
      non-operating income (expense), net
                  
                  
                  208
                  
                  
                  
                  (370
                  )
                  
                  
                  254
                  
                  
                  
                  122
                  
                  
                  
                  214Income
      (loss) before income taxes
                  
                  $
                  3,401
                  
                  
                  $
                  (1,335
                  )
                  
                  $
                  (2,815
                  )
                  
                  $
                  -
                  
                  
                  $
                  (749
                  )Capital
      expenditures
                  
                  $
                  3,195
                  
                  
                  $
                  3
                  
                  
                  $
                  29
                  
                  
                  $
                  -
                  
                  
                  $
                  3,227As
      of June 30, 2010Property
      and equipment, net
                  
                  $
                  1,892
                  
                  
                  $
                  28
                  
                  
                  $
                  197
                  
                  
                  $
                  -
                  
                  
                  $
                  2,117Identifiable
      assets, net of intercompany loans and investments
                  
                  $
                  129,759
                  
                  
                  $
                  6,316
                  
                  
                  $
                  3,900
                  
                  
                  $
                  (2,800
                  )
                  
                  $
                  137,175As
      of December 31, 2009Property
      and equipment, net
                  
                  $
                  2,008
                  
                  
                  $
                  34
                  
                  
                  $
                  200
                  
                  
                  $
                  -
                  
                  
                  $
                  2,242Identifiable
      assets, net of intercompany loans and investments
                  
                  $
                  134,714
                  
                  
                  $
                  864
                  
                  
                  $
                  11,294
                  
                  
                  $
                  (1,901
                  )
                  
                  $
                  144,971




19


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





This
Quarterly Report on Form 10-Q contains forward-looking statements regarding
Sucampo Pharmaceuticals, Inc. (the “Company,” “we,” “us,” or “our”) and our
business, financial condition, results of operations and prospects within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include those that express plans, anticipation,
intent, contingency, goals, targets or future development and/or otherwise are
not statements of historical fact. These forward-looking statements are based on
our current expectations and projections about future events and they are
subject to risks and uncertainties known and unknown that could cause actual
results and developments to differ materially from those expressed or implied in
such statements. You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with our
consolidated financial statements as of and for the year ended December 31, 2009
included in our Annual Report on Form 10-K.





Overview





We are an
international biopharmaceutical company focused on the discovery, development
and commercialization of proprietary drugs based on prostones. Prostones are a
class of compounds that occur naturally in the human body as a result of
enzymatic, 15-PGDH, transformation of certain fatty acids. We believe that most
prostones function as activators of cellular ion channels and do not function in
the same manner as prostaglandins. As a result, prostones promote fluid
secretion and enhance cell protection, including the recovery of cellular
barrier function. This activity gives prostones wide-ranging therapeutic
potential, particularly for age-related diseases. We are focused on developing
prostones for the treatment of gastrointestinal, ophthalmic, respiratory,
vascular and central nervous system diseases and other disorders for which there
are unmet or underserved medical needs and significant commercial
potential.





The
therapeutic potential of prostones was first identified by Dr. Ryuji Ueno. To
date, two prostone products have received marketing approval. Amitiza®
(lubiprostone) is an FDA-approved treatment for two gastrointestinal
indications: (i) chronic idiopathic constipation, or CIC, in adults of both
genders and all ages and (ii) irritable bowel syndrome with constipation, or
IBS-C, in adult women. Rescula®
(unoprostone isopropyl) is FDA-approved for the treatment of open-angle glaucoma
and ocular hypertension.





We
generate revenue through product royalties, development milestone payments, and
clinical development activities. We expect to continue to incur significant
expenses for the next several years as we continue our research and development
activities, seek regulatory approvals for additional indications for Amitiza,
Rescula and other compounds both in the U.S. and other countries and expand our
international operations. We hold an exclusive worldwide royalty-bearing license
from Sucampo AG, or SAG, a Swiss patent-holding company, to develop and
commercialize Amitiza and all other prostone compounds covered by patents and
patent applications held by SAG. We are obligated to assign to SAG all
patentable improvements that we make in the field of prostones, which in turn
SAG is obligated to license back to us on an exclusive basis.





In the
United States, Amitiza is being marketed and developed under a collaboration and
license agreement with Takeda Pharmaceutical Company Limited, or Takeda, for
gastrointestinal indications. In Japan, lubiprostone is developed under
a license, commercialization and supply agreement with Abbott Japan Co.
Ltd., or Abbott.





In April
2009, we acquired the rights to Rescula that allow us to commercialize Rescula
in the U.S. and Canada for the treatment of glaucoma and ocular hypertension and
any new indication developed by us.





Under the
Takeda agreement, Takeda is primarily responsible for the sales and marketing of
Amitiza in the U.S. and Canada. Takeda currently sells Amitiza in the U.S.,
mainly to office-based specialty and primary care physicians and reimburses us a
part of our co-promotion expenses. We currently co-promote Amitiza in the
U.S. through a specialty sales force focused on the institutional marketplace,
including specialist physicians based in academic medical centers and long-term
care and veteran’s affairs facilities. Takeda records all sales of Amitiza and
we receive a tiered royalty based on net sales. We are primarily responsible for
Amitiza research and development efforts and hold the new drug application, or
NDA. Takeda reimburses us for a significant portion of our research and
development activities.





Our
operations are conducted through subsidiaries based in Japan, the United States,
Switzerland and the United Kingdom. Our reportable geographic segments are Asia,
the United States and Europe and we evaluate the performance of these segments
based primarily on income (loss) from operations, as well as other factors that
depend on the development status of these subsidiaries. Such measures include
the progress of research and development activities, collaboration and licensing
efforts, commercialization activities and other factors.


20





Our
founders, Drs. Ryuji Ueno and Sachiko Kuno, together, directly or indirectly,
own all of the stock of SAG, and a majority of the stock of R-Tech Ueno, or
R-Tech, as described more fully in Note 8 to the condensed consolidated
financial statements. Drs. Ueno and Kuno also are our controlling stockholders
and are married to each other. Dr. Ueno is our chief executive officer and
chairman of the Board of Directors. Dr. Kuno is a member of our Board of
Directors, our advisor on international business development and is a member of
the Board of Directors of R-Tech.





On March
12, 2010, we submitted for filing with the International Court of Arbitration,
International Chamber of Commerce a demand for arbitration under the applicable
provisions of the Collaboration and License Agreement between us and Takeda
Pharmaceuticals Company Limited dated October 29, 2004. We are disappointed with
the level of U.S. sales of Amitiza being generated by Takeda and other failures
of performance by Takeda under the agreements. We believe that Takeda materially
breached its agreement, without limitation, by its continuing failure to
exercise its best efforts to commercialize Amitiza and maximize net sales
revenue, and its ongoing refusal to collaborate and provide us with information
to which we are entitled under the agreement. We also claimed that Takeda’s
conduct, including, without limitation, its dealings with pharmacy benefit
managers/managed care organizations, has injured not only us and the Amitiza
brand, but also consumers.We are
seeking all appropriate relief, including production by Takeda of all
information to which we are entitled, a declaration of termination of applicable
agreements, and all available monetary relief, equitable relief, attorneys’ fees
and costs. The respective arbitrators for both us and Takeda have been confirmed
and both parties have selected a third arbitrator. If the third arbitrator is
confirmed, then it will comprisethe panel
that will conduct the arbitration proceedings. We spent and expect to spend
significant resources in the dispute with Takeda and these legal proceedings may
require the continuing attention of our senior management.





Our
Clinical Development Programs





We are
developing prostone compounds for the treatment of a broad range of diseases.
The most advanced of these programs are:





Amitiza (lubiprostone) in the United
States and Canada.We currently are pursuing development of a third
gastrointestinal indication of Amitiza for the treatment of opioid-induced bowel
dysfunction, or OBD, in patients with non-malignant pain, a constipation-related
gastrointestinal indication. In July 2009, we reported top-line results for the
two identically-designed efficacy studies conducted by a clinical research
organization, or CRO, one of which met the primary endpoint by demonstrating a
statistically significant change from baseline in the frequency of spontaneous
bowel movements, or SBM, at week 8 of treatment when compared to placebo. We
have advised the CRO of our concerns over its conduct of the studies. Based on a
recent meeting with the FDA, we will conduct one additional phase 3 efficacy
study in order to submit a supplemental new drug application, or sNDA, for the
OBD indication, which we plan to initiate in late 2010.





Amitiza (lubiprostone) in
Japan. In June 2010, we reported that the phase 3 efficacy trial of
lubiprostone in Japanese CIC patients met the primary endpoint by demonstrating
a statistically significant (p<0.001) change in the frequency of SBMs at the
end of week 1 of treatment when compared to placebo.





In August
2010, we reported the interim results through 24 weeks of our fully enrolled
48-week phase 3 clinical trial to evaluate the long-term safety of lubiprostone
in Japanese CIC patients. Those results showed that lubiprostone was safe and
well-tolerated. As of this interim analysis, a total of 7.7% of patients
experienced moderate adverse drug reactions, 65.6% experienced mild adverse drug
reactions and no severe adverse drug reactions were reported. The two most
common adverse drug reactions reported were diarrhea (32.5% of patients) and
nausea (26.3% of patients). The nausea was transient in duration and the
majority of patients experiencing nausea remained on treatment. Data from
patients’ daily diary cards showed improvements from baseline in all efficacy
endpoints, including bowel movements frequency, straining, incomplete
evacuation, stool consistency, abdominal bloating and abdominal discomfort.
Patients’ quality of life, or QOL, as measured by the IBS-QOL and SF-36
questionnaires, also showed improvement from baseline at Week 24. Top-line data
from this 48-week long-term safety study are expected to be available during the
fourth quarter of 2010.





Amitiza (lubiprostone) in other
countries.We have retained full rights to develop and commercialize
Amitiza for the rest of the world’s markets outside of the U.S., Canada and
Japan. In November 2009, we obtained a marketing authorization for
lubiprostone in Switzerland for the long-term treatment of adult patients with
CIC. This is the first European regulatory approval for us. Amitiza is the first
prescription medicine to be approved in Switzerland for the long-term treatment
of CIC and we are currently pursuing the pricing approval with the Swiss
authorities. We continue to evaluate the opportunities to obtain an appropriate
label in the E.U. for chronic therapy of CIC and OBD.


21





Rescula. Under our agreement with
R-Tech, we hold the exclusive rights to commercialize Rescula in the U.S. and
Canada for the treatment of glaucoma and ocular hypertension and any new
indication developed by us. We also have the right of first refusal to
commercialize Rescula in the U.S. and Canada for any additional indications for
which unoprostone is developed by R-Tech. Currently, we intend to develop
Rescula as a treatment for ophthalmic diseases including retinitis pigmentosa
(an orphan indication), dry age-related macular degeneration, or dry AMD, and
diabetic retinopathy. We anticipate initiating two phase 2 trials to evaluate
Rescula as a potential treatment for (i) retinitis pigmentosa and (ii) dry AMD
in 2011.We also plan to re-launch Rescula in the U.S. for the treatment of
open-angle glaucoma and ocular hypertension.





Cobiprostone. In July 2009,
we reported top-line results from our phase 2a clinical trial of orally
administered cobiprostone for the prevention of gastric ulcers and other
gastrointentinal injuries in patients treated with non-steroidal
anti-inflammatory drugs, or NSAIDs. Cobiprostone patients experienced an overall
statistically significant reduction in the number of gastric erosions through
the treatment period of 12 weeks as compared to placebo patients. In addition,
the high dose cobiprostone group experienced a 50.0% reduction in the overall
incidence of gastric ulcers when compared to patients taking placebo. We are
evaluating a phase 2b study to complement the findings of earlier studies. We
also are designing a preclinical study of cobiprostone for use as a treatment
for chronic obstructive pulmonary disease, or COPD, and as a potential treatment
for wound healing.





SPI-017 is currently in
preclinical and clinical testing in peripheral arterial diseases as well as
central nervous system disorders. We have recently completed a phase 1 clinical
program of the intravenous formulation of SPI-017 for peripheral arterial
disease, or PAD, in Japan and plan to initiate a phase 2 study for this
indication in late 2010.





SPI-3608:  A novel
prostone, SPI-3608, will continue to undergo preclinical testing. Based on
preclinical results seen to date, this compound may have potential as a
treatment for spinal stenosis.





Results
of Operations





Comparison
of three months ended June 30, 2010 and June 30, 2009





Revenues





The
following table summarizes our revenues for the three months ended June 30, 2010
and 2009:





Three Months EndedJune 30,(In thousands)
                
                2010
                
                
                2009Research
      and development revenue
                
                $
                2,789
                
                
                $
                7,395Product
      royalty revenue
                
                
                9,612
                
                
                
                8,914Co-promotion
      revenue
                
                
                1,220
                
                
                
                1,244Contract
      and collaboration revenue
                
                
                154
                
                
                
                152Total
                
                $
                13,775
                
                
                $
                17,705





Total
revenues were $13.8 million for the three months ended June 30, 2010 compared to
$17.7 million for the three months ended June 30, 2009, a decrease of $3.9
million or 22.2%.





Research
and development revenue was $2.8 million for the three months ended June 30,
2010 compared to $7.4 million for the three months ended June 30, 2009, a
decrease of $4.6 million or 62.3%. The decrease was primarily due to reduced
revenue recognized in respect to the OBD program for Amitiza in the U.S.,
partially offset by $1.5 million in revenue recognized under the agreement with
Abbott in Japan. The research and development revenue recognized under the
agreement with Takeda decreased to $1.3 million for the three months ended June
30, 2010 from $3.8 million for the three months ended June 30, 2009, reflecting
a completion of the initial two phase 3 efficacy trials in July 2009 funded by
Takeda and the change in estimated costs and timeline to complete the OBD
program, including an additional phase 3 efficacy trial. Since Takeda funds the
first $50.0 million of the development expenses for the OBD program and we and
Takeda share equally development costs that exceed that amount, we expect to
fund about 50.0% of the upcoming phase 3 trial. The research and development
revenue recognized under the agreement with Abbott decreased to $1.5 million for
the three months ended June 30, 2010 from $3.6 million for the three months
ended June 30, 2009, reflecting the progress of the Japanese development program
for lubiprostone. We are recognizing the revenue from the payments from Abbott
using a percentage-of-completion model over the estimated term of the CIC
development program.


22





Product
royalty revenue represents royalty revenue earned on net sales of Amitiza in the
United States. For the three months ended June 30, 2010 and 2009, we recognized
$9.6 million and $8.9 million, respectively, of product royalty revenue, an
increase of $698,000 or 7.8%, reflecting mainly a higher price per pill and a
slight increase in volume.





Co-promotion
revenues represent reimbursement by Takeda of co-promotion costs for our
specialty sales force. For each of the three months ended June 30, 2010 and
2009, we recognized $1.2 million of co-promotion revenues for reimbursement of
our sales force costs.





Research
and Development Expenses





The
following summarizes our research and development expenses for the three months
ended June 30, 2010 and 2009:





Three Months EndedJune30,(In thousands)
                
                2010
                
                
                2009Direct
      costs:Amitiza
                
                $
                3,223
                
                
                $
                7,579Cobiprostone
                
                
                162
                
                
                
                687SPI-017
                
                
                733
                
                
                
                679Rescula
                
                
                174
                
                
                
                58Other
                
                
                21
                
                
                
                110Total
                
                
                4,313
                
                
                
                9,113Indirect
      costs
                
                
                541
                
                
                
                508Total
                
                $
                4,854
                
                
                $
                9,621





Total
research and development expenses for the three months ended June 30, 2010 were
$4.9 million compared to $9.6 million for the three months ended June 30, 2009,
a decrease of $4.7 million or 49.5%. The decrease was primarily due to the
completion in July 2009 of the initial two phase 3 pivotal clinical trials for
the treatment of OBD, the completion in July 2009 of the phase 2 clinical trial
of cobiprostone for the prevention of NSAID-induced ulcers and a slight increase
in overall preclinical and basic development costs related to SPI-017 and
pre-clinical compounds.





General
and Administrative Expenses





The
following summarizes our general and administrative expenses for the three
months ended June 30, 2010 and 2009:





Three Months EndedJune 30,(In thousands)
                    
                    2010
                    
                    
                    2009Salaries,
      benefits and related costs
                    
                    $
                    1,423
                    
                    
                    $
                    751Legal,
      consulting and other professional expenses
                    
                    
                    3,503
                    
                    
                    
                    911Other
      expenses
                    
                    
                    1,678
                    
                    
                    
                    1,262Total
                    
                    $
                    6,604
                    
                    
                    $
                    2,924





General
and administrative expenses were $6.6 million for the three months ended June
30, 2010, compared to $2.9 million for the three months ended June 30, 2009, an
increase of $3.7 million or 125.9%. The increase in salaries, benefits and
related costs was primarily attributable to an increase in the number of key
personnel and in the incentive compensation plans for 2010. The increase in
legal, consulting and other professional expenses relates primarily to costs
incurred in connection with the ongoing legal matters.


23





Selling
and Marketing Expenses





Selling
and marketing expenses represent costs we incur to co-promote Amitiza, including
salaries, benefits and related costs of our sales force and other sales and
marketing personnel, costs of market research and analysis and other selling and
marketing expenses. Selling and marketing expenses were $2.3 million for the
three months ended June 30, 2010, compared to $2.2 million for the three months
ended June 30, 2009, an increase of $125,000 or 5.7%. Part of the Amitiza
co-promotion expenses are funded by Takeda and recorded as co-promotion
revenue.





Product
Royalties − Related Parties





Product
royalties – related parties expense, representing 3.2% of Amitiza net sales for
the respective periods payable to SAG, increased to $1.7 million for the three
months ended June 30, 2010 from $1.6 million for the three months ended June 30,
2009, which was consistent with the increase of net sales and product royalty
revenue.





Non-Operating
Income and Expense





The
following table summarizes our non-operating income and expense for the three
months ended June 30, 2010 and 2009:





Three Months EndedJune 30,(In thousands)
                
                2010
                
                
                2009Interest
      income
                
                $
                177
                
                
                $
                219Other
      income (expense), net
                
                
                (135
                )
                
                
                (608
                )Total
                
                $
                42
                
                
                $
                (389
                )





Interest
income was $177,000 for the three months ended June 30, 2010, compared to
$219,000 for the three months ended June 30, 2009, a decrease of $42,000, or
19.2%. The decrease was primarily due to lower prevailing interest rates
earned by our investments and a shift in the composition of our portfolio from
auction rate securities, or ARS, which bear higher interest rates, to other
types of investments. The increase in other income was primarily attributable to
foreign exchange gains and losses. Our investment in ARS was redeemed in June
2010.





Income
Taxes





We
recorded a tax provision of $315,000 and $863,000 for the three months ended
June 30, 2010 and 2009, respectively. The tax provision for the three months
ended June 30, 2010 mainly pertained to taxable income generated by our U.S.
subsidiary. Our other subsidiaries, based in Europe and Japan, incurred a
pre-tax loss for the three months ended June 30, 2010, for which no tax benefit
was recognized. As of June 30, 2010, we had an outstanding non-current income
tax liability of approximately $788,000 for uncertain tax positions which
represented the aggregate tax effect of differences between tax return positions
and the amounts otherwise recognized in our condensed consolidated financial
statements. The liability for uncertain tax positions as of June 30,
2010 was mainly a result of our interpretation of nexus in certain states
related to revenue sourcing for state income tax purposes.





Comparison
of six months ended June 30, 2010 and June 30, 2009





Revenues





The
following table summarizes our revenues for the six months ended June 30, 2010
and 2009:


24





Six Months EndedJune 30,(In thousands)
                
                2010
                
                
                2009Research
      and development revenue
                
                $
                6,846
                
                
                $
                12,921Product
      royalty revenue
                
                
                19,385
                
                
                
                17,860Co-promotion
      revenue
                
                
                2,075
                
                
                
                2,140Contract
      and collaboration revenue
                
                
                305
                
                
                
                298Total
                
                $
                28,611
                
                
                $
                33,219





Total
revenues were $28.6 million for the six months ended June 30, 2010 compared to
$33.2 million for the six months ended June 30, 2009, a decrease of $4.6 million
or 13.9%.





Research
and development revenue was $6.8 million for the six months ended June 30, 2010
compared to $12.9 million for the six months ended June 30, 2009, a decrease of
$6.1 million or 47.0%. The decrease was primarily due to reduced revenue
recognized in respect to the OBD program for Amitiza in the U.S., partially
offset by $4.3 million in revenue recognized under the agreement with Abbott in
Japan. The research and development revenue recognized under the agreement with
Takeda decreased to $2.6 million for the six months ended June 30, 2010 from
$9.0 million for the six months ended June 30, 2009, generally reflecting a
completion of the initial two phase 3 efficacy trials in July 2009 funded by
Takeda and the change in estimated costs and timeline to complete the OBD
program, including an additional phase 3 efficacy trial. Since Takeda funds the
first $50.0 million of the development expenses for the OBD program and we and
Takeda share equally development costs that exceed that amount, we expect to
fund about 50.0% of the upcoming phase 3 trial. The research and development
revenue recognized under the agreement with Abbott increased to $4.3 million for
the six months ended June 30, 2010 from $3.9 million for the six months ended
June 30, 2009, reflecting the progress of the Japanese development program for
lubiprostone. We are recognizing the revenue from the payments from Abbott using
a percentage-of-completion model over the estimated term of the CIC development
program.





Product
royalty revenue represents royalty revenue earned on net sales of Amitiza in the
United States. For the six months ended June 30, 2010 and 2009, we recognized
$19.4 million and $17.9 million, respectively, of product royalty revenue, an
increase of $1.5 million or 8.5%, reflecting mainly a higher price per pill and
a slight increase in volume.





Co-promotion
revenues represent reimbursement by Takeda of co-promotion costs for our
specialty sales force. For each of the six months ended June 30, 2010 and 2009,
we recognized $2.1 million of co-promotion revenues for reimbursement of our
sales force costs.





Research
and Development Expenses





The
following summarizes our research and development expenses for the six months
ended June 30, 2010 and 2009:





Six Months EndedJune30,(In thousands)
                
                2010
                
                
                2009Direct
      costs:Amitiza
                
                $
                6,997
                
                
                $
                14,350Cobiprostone
                
                
                307
                
                
                
                1,577SPI-017
                
                
                1,542
                
                
                
                2,316Rescula
                
                
                292
                
                
                
                58Other
                
                
                82
                
                
                
                254Total
                
                
                9,220
                
                
                
                18,555Indirect
      costs
                
                
                1,000
                
                
                
                1,031Total
                
                $
                10,220
                
                
                $
                19,586




25


Total
research and development expenses for the six months ended June 30, 2010 were
$10.2 million compared to $19.6 million for the six months ended June 30, 2009,
a decrease of $9.4 million or 47.8%. The decrease was primarily due to the
completion in July 2009 of the two phase 3 pivotal clinical trials for the
treatment of OBD, the completion in July 2009 of the phase 2 clinical trial of
cobiprostone for the prevention of NSAID-induced ulcers and a reduction in
overall preclinical and basic development costs related to SPI-017.





General
and Administrative Expenses





The
following summarizes our general and administrative expenses for the six months
ended June 30, 2010 and 2009:





Six Months EndedJune30,(In thousands)
                  
                  2010
                  
                  
                  2009Salaries,
      benefits and related costs
                  
                  $
                  2,668
                  
                  
                  $
                  1,909Legal,
      consulting and other professional expenses
                  
                  
                  6,738
                  
                  
                  
                  1,989Other
      expenses
                  
                  
                  2,957
                  
                  
                  
                  2,481Total
                  
                  $
                  12,363
                  
                  
                  $
                  6,379





General
and administrative expenses were $12.4 million for the six months ended June 30,
2010, compared to $6.4 million for the six months ended June 30, 2009, an
increase of $6.0 million or 93.8%. The increase in salaries, benefits and
related costs was primarily attributable to an increase in the number of key
personnel and in the incentive compensation plans for 2010. The increase in
legal, consulting and other professional expenses relates primarily to costs
incurred in connection with the ongoing legal matters.





Selling
and Marketing Expenses





Selling
and marketing expenses represent costs we incur to co-promote Amitiza, including
salaries, benefits and related costs of our sales force and other sales and
marketing personnel, costs of market research and analysis and other selling and
marketing expenses. Selling and marketing expenses were $4.5 million for the six
months ended June 30, 2010, compared to $4.7 million for the six months ended
June 30, 2009, a decrease of $200,000 or 4.3%. The decrease in the selling and
marketing expenses was primarily due to a reduction in market research expenses
in 2010. Part of the Amitiza co-promotion expenses are funded by Takeda and
recorded as co-promotion revenue.





Product
Royalties − Related Parties





Product
royalties – related parties expense, representing 3.2% of Amitiza net sales for
the respective periods payable to SAG, increased to $3.4 million for the six
months ended June 30, 2010 from $3.2 million for the six months ended June 30,
2009, which was consistent with the increase of net sales and product royalty
revenue.





Non-Operating
Income and Expense





The
following table summarizes our non-operating income and expense for the six
months ended June 30, 2010 and 2009:





Six Months EndedJune30,(In thousands)
                
                2010
                
                
                2009Interest
      income
                
                $
                388
                
                
                $
                531Other
      income (expense), net
                
                
                (227
                )
                
                
                214Total
                
                $
                161
                
                
                $
                745





Interest
income was $388,000 for the six months ended June 30, 2010 compared to $531,000
for the six months ended June 30, 2009, a decrease of $143,000, or
26.9%. The decrease was primarily due to lower prevailing interest rates
earned by our investments and a shift in the composition of our portfolio from
ARS, which bear higher interest rates, to other types of investments. Our
investment in ARS was redeemed in June 2010. The change in other income
(expense) was primarily attributable to foreign exchange gains and
losses.


26





Income
Taxes





We
recorded a tax provision of $520,000 and $1.3 million for the six months ended
June 30, 2010 and 2009, respectively. The tax provision for the six months ended
June 30, 2010 mainly pertained to taxable income generated by our U.S.
subsidiary. Our other subsidiaries, based in Europe and Japan, incurred a
pre-tax loss for the six months ended June 30, 2010, for which no tax benefit
was recognized. As of June 30, 2010, we had an outstanding non-current income
tax liability of approximately $788,000 for uncertain tax positions which
represented the aggregate tax effect of differences between tax return positions
and the amounts otherwise recognized in our condensed consolidated financial
statements. The liability for uncertain tax positions as of June 30,
2010 was mainly a result of our interpretation of nexus in certain states
related to revenue sourcing for state income tax purposes.





Reportable
Geographic Segments





We have
determined that we have three reportable segments based on our method of
internal reporting, which disaggregates business by geographic location. These
segments are the Americas, Europe and Asia. We evaluate the performance of these
segments based primarily on income (loss) from operations, as well as other
factors, including the progress of research and development
activities.





The
financial results of our segments reflect their varying stages of development.
Our Americas segment recorded income before taxes of $1.3 million for the six
months ended June 30, 2010, compared to income before taxes of $3.4 million
for the six months ended June 30, 2009. These results primarily reflect the
completion of the initial two phase 3 clinical trials of Amitiza for the
treatment of OBD and cobiprostone for the prevention of NSAID-induced ulcers in
2009 offset by an increase in general and administrative expenses.





Our
segment in Europe recorded a loss before taxes of $1.2 million for the six
months ended June 30, 2010, compared to a loss before taxes of $1.3 million for
the six months ended June 30, 2009.





Our
segment in Asia recorded a loss before taxes of $1.8 million for the six months
ended June 30, 2010, compared to a loss before taxes of $2.8 million during the
six months ended June 30, 2009. These results primarily reflect the milestone
royalty payments to SAG of $875,000 during the six months ended June 30, 2009
from the payments received from Abbott in 2009.





(In thousands)
                  
                  Americas
                  
                  
                  Europe
                  
                  
                  Asia
                  
                  
                  Intercompany
                    Eliminations
                  
                  
                  ConsolidatedThree
      Months Ended June 30, 2010Total
      revenues
                  
                  $
                  12,242
                  
                  
                  $
                  -
                  
                  
                  $
                  1,805
                  
                  
                  $
                  (272
                  )
                  
                  $
                  13,775Income
      (loss) before taxes
                  
                  
                  574
                  
                  
                  
                  (662
                  )
                  
                  
                  (1,575
                  )
                  
                  
                  -
                  
                  
                  
                  (1,663
                  )Three
      Months Ended June 30, 2009Total
      revenues
                  
                  $
                  14,125
                  
                  
                  $
                  -
                  
                  
                  $
                  3,790
                  
                  
                  $
                  (210
                  )
                  
                  $
                  17,705Income
      (loss) before taxes
                  
                  
                  2,238
                  
                  
                  
                  (816
                  )
                  
                  
                  (797
                  )
                  
                  
                  -
                  
                  
                  
                  625Six
      Months Ended June 30, 2010Total
      revenues
                  
                  $
                  24,315
                  
                  
                  $
                  -
                  
                  
                  $
                  4,843
                  
                  
                  $
                  (547
                  )
                  
                  $
                  28,611Income
      (loss) before taxes
                  
                  
                  1,288
                  
                  
                  
                  (1,235
                  )
                  
                  
                  (1,810
                  )
                  
                  
                  -
                  
                  
                  
                  (1,757
                  )Six
      Months Ended June 30, 2009Total
      revenues
                  
                  $
                  29,260
                  
                  
                  $
                  -
                  
                  
                  $
                  4,379
                  
                  
                  $
                  (420
                  )
                  
                  $
                  33,219Income
      (loss) before taxes
                  
                  
                  3,401
                  
                  
                  
                  (1,335
                  )
                  
                  
                  (2,815
                  )
                  
                  
                  -
                  
                  
                  
                  (749
                  )Identifiable
      AssetsAs
      of June 30, 2010
                  
                  $
                  129,759
                  
                  
                  $
                  6,316
                  
                  
                  $
                  3,900
                  
                  
                  $
                  (2,800
                  )
                  
                  $
                  137,175As
      of December 31, 2009
                  
                  
                  134,714
                  
                  
                  
                  864
                  
                  
                  
                  11,294
                  
                  
                  
                  (1,901
                  )
                  
                  
                  144,971




27


Liquidity
and Capital Resources





Sources
of Liquidity





We
require cash principally to meet our operating expenses. Historically, we have
financed our operations with a combination of upfront payments, milestone and
royalty payments and research and development expense reimbursements received
from Takeda, Abbott and other parties, private placements of equity securities
and our initial public offering.





Our cash,
cash equivalents and investments consisted of the following:





June 30,
                
                
                December 31,(In thousands)
                
                2010
                
                
                2009Cash
      and cash equivalents
                
                $
                42,293
                
                
                $
                26,714Investments,
      current
                
                
                56,163
                
                
                
                72,434Investments,
      non-current
                
                
                15,935
                
                
                
                19,167Total
                
                $
                114,391
                
                
                $
                118,315





Our cash
and cash equivalents are deposits in operating accounts and highly liquid
investments with an original maturity at time of purchase of 90 days or
less.





Our total
cash, cash equivalents, short and long-term investments decreased by $3.9
million to $114.4 million at June 30, 2010 from $118.3 million at December 31,
2009 mainly due to the use of cash in our operating activities.





As of
June 30, 2010, our short-term investments consisted of corporate bonds, U.S.
government securities, U.S. Treasury notes and bills, U.S. corporate commercial
paper, municipal securities, certificates of deposits and money market funds
which have short-term maturities of one year or less. Our non-current
investments consisted of corporate bonds, U.S. government securities, municipal
securities and certificates of deposits.





Cash
Flows





The
following table summarizes our cash flows for the six months ended June 30, 2010
and 2009:





SixMonthsEndedJune30,(In thousands)
                
                2010
                
                
                2009Cash
      provided by (used in):Operating
      activities
                
                $
                (3,972
                )
                
                $
                11,013Investing
      activities
                
                
                19,551
                
                
                
                (31,845
                )Financing
      activities
                
                
                8
                
                
                
                9Effect
      of exchange rates
                
                
                (8
                )
                
                
                184Net
      increase in cash and cash equivalents
                
                $
                15,579
                
                
                $
                (20,639
                )





Six
Months Ended June 30, 2010





Net cash
used in operating activities was $4.0 million for the six months ended June 30,
2010. This reflected a net loss of $2.3 million, a decrease in deferred revenue
of $6.8 million relating to the previously received funds under Takeda and
Abbott agreements that were recognized as revenue during the period, offset in
part by changes in other operating assets and liabilities.





Net cash
provided by investing activities of $19.6 million for the six months ended June
30, 2010 primarily reflected our proceeds from the sales and maturities of
investments, offset in part by purchases of investments.





Net cash
provided by financing activities of $8,000 for the six months ended June 30,
2010 resulted from the proceeds we received under our employee stock purchase
plan.


28


Six
Months Ended June 30, 2009





Net cash
provided by operating activities was $11.0 million for the six months ended June
30, 2009. This reflected a net loss of $2.0 million, an increase in deferred
revenue of $9.4 million, and changes in other operating assets and liabilities.
The increase in deferred revenue primarily related to a $10.0 million upfront
payment from Abbott upon execution of the license and commercialization
agreement by Sucampo Japan in February 2009 and a $7.5 million development
milestone payment from Abbott for the initiation of a phase 3 study in Japan,
offset by amortization of revenues in the period.





Net cash
used in investing activities of $31.8 million for the six months ended June 30,
2009 primarily reflected our proceeds from the sales and maturities of
investments, offset in part by purchases of investments.





Net cash
provided by financing activities of $9,000 for the six months ended June 30,
2009 resulted from proceeds we received under our employee stock purchase
plan.





Off-Balance
Sheet Arrangements





As of
June 30, 2010, we did not have any off-balance sheet arrangements, as such term
is defined in Item 303(a)(4) of Regulation S-K under the Securities Act of 1933,
as amended.





Funding
Requirements





We may
need substantial amounts of capital to continue growing our business. We may
require this capital, among other things, to:





·
            fund
      our share of the ongoing development program of Amitiza in the
      U.S.;


·
            fund
      development and regulatory efforts in Europe and Asia for
      lubiprostone;


·
            fund
      development and regulatory activities for Rescula in the U.S. and
      Canada;


·
            fund
      research and development activities for other prostone compounds,
      including cobiprostone and SPI-017;


·
            fund
      the expansion of our commercialization activities in the U.S. and the
      initiation of commercialization efforts in non-U.S.
    markets;


·
            fund
      capital expenditures to support the growth of our
  business;


·
            fund
      activities to resolve our ongoing legal matters;
  and


·
            fund
      the purchase of shares of our class A common stock up to $10.0 million, if
      we elect to do so, pursuant to our board-approved stock repurchase
      program.





The
timing of these funding requirements is difficult to predict due to many
factors, including the outcomes of our preclinical and clinical research and
development programs and when those outcomes are determined, the timing of
obtaining regulatory approvals and the presence and status of competing
products. Our capital needs may exceed the capital available from our future
operations, collaborative and licensing arrangements and existing liquid assets.
Our future capital requirements and liquidity will depend on many factors,
including, but not limited to:





·
            the
      revenue from Amitiza and Rescula;


·
            the
      future expenditures we may incur to increase revenue from Amitiza or in
      our disputes with Takeda;


·
            the
      cost and time involved to pursue our research and development
      programs;


·
            our
      ability to establish collaborative arrangements and to enter into
      licensing agreements and contractual arrangements with others;
      and


·
            any
      future change in our business
strategy.





To the
extent that our capital resources may be insufficient to meet our future capital
requirements, we may need to finance our future cash needs through public or
private equity offerings, debt financings or corporate collaboration and
licensing arrangements. At June 30, 2010, we have sufficient liquidity for more
than the next 12 months.





Additional
equity or debt financing, grants or corporate collaboration and licensing
arrangements may not be available on acceptable terms, if at all. If adequate
funds are not available, we may be required to delay, reduce the scope of or
eliminate our research and development programs, reduce our planned
commercialization efforts or obtain funds through arrangements with
collaborators or others that may require us to relinquish rights to certain
product candidates that we might otherwise seek to develop or commercialize
independently. In addition, any future equity funding would dilute the ownership
of our stockholders.


29





Effects
of Foreign Currency





We
currently incur a portion of our operating expenses in the United Kingdom,
Switzerland and Japan. The reporting currency for our consolidated financial
statements is U.S. dollars. As such, the results of our operations could be
adversely affected by changes in exchange rates either due to transaction
losses, which are recognized in the statement of operations, or translation
losses, which are recognized in comprehensive income. We currently do not hedge
foreign exchange rate exposure.





Recent
Accounting Pronouncements





Recent
accounting pronouncements applicable to our financial statements are described
in Note 2 to the accompanying condensed consolidated financial
statements.





Item
3.Quantitative and
Qualitative Disclosures about Market Risk





Foreign
Exchange Risk





We are
subject to foreign exchange risk for revenues and expenses denominated in
foreign currencies. Foreign currency risk arises from the fluctuation of foreign
exchange rates and the degree of volatility of these rates relative to the
United States dollar. We do not believe that we have any material risk due to
foreign currency exchange. We do not currently hedge our foreign currency
transactions.





Interest
Rate Risk





Our
exposure to market risks associated with changes in interest rates relates
primarily to the increase or decrease in the amount of interest income earned on
our investment portfolio. We ensure the safety and preservation of invested
funds by attempting to limit default risk, market risk and reinvestment risk. We
attempt to mitigate default risk by investing in investment grade securities. A
hypothetical one percentage point decline in interest rates would not have
materially affected the fair value of our interest-sensitive financial
instruments as of June 30, 2010.





We do not
use derivative financial instruments for trading or speculative purposes.
However, we regularly invest excess cash in overnight repurchase agreements that
are subject to changes in short-term interest rates. We believe that the market
risk arising from holding these financial instruments is minimal.





Credit
Risk





Our
exposure to credit risk consists of cash and cash equivalents, restricted cash,
investments and receivables. We place our cash, cash equivalents and restricted
cash with what we believe to be highly rated financial institutions and invest
the excess cash in highly rated investments. As of June 30, 2010 and December
31, 2009, approximately 54.7% and 51.2%, respectively, of our cash, cash
equivalents, restricted cash and investments is issued or insured by the federal
government or government agencies. We have not experienced any losses on these
accounts related to amounts in excess of insured limits.





On June
8, 2010, the issuer of our remaining ARS redeemed the security at par value of
$10.0 million, which terminated the related settlement rights.





Item
4.Controls and
Procedures





a)
Evaluation of Disclosure Controls and Procedures





Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, performed an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) as of June 30, 2010. In designing and
evaluating such controls, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the benefits of possible controls and
procedures relative to their costs. Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of June
30, 2010, our disclosure controls and procedures were effective to provide
reasonable assurance that the information required to be disclosed is recorded,
processed, summarized and reported within the time periods specified under
applicable rules of the Securities and Exchange Commission, and that such
information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.


30





b)
Changes in Internal Controls





There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


31




Part
II — OTHER INFORMATION





Item
1.Legal
Proceedings





On March
12, 2010, we submitted for filing with the International Court of Arbitration,
International Chamber of Commerce a demand for arbitration under the applicable
provisions of the Collaboration and License Agreement between us and Takeda
Pharmaceuticals Company Limited dated October 29, 2004. We are disappointed with
the level of U.S. sales of Amitiza being generated by Takeda and what we believe
to be other failures of performance by Takeda under the agreements. We believe
that Takeda materially breached its agreement, without limitation, by its
continuing failure to exercise its best efforts to commercialize Amitiza and
maximize net sales revenue, and its ongoing refusal to collaborate and provide
us with information to which we are entitled under the agreement. We also
claimed that Takeda’s conduct, including, without limitation, its dealings with
pharmacy benefit managers/managed care organizations, has injured not only us
and the Amitiza brand, but also consumers.We are
seeking all appropriate relief, including production by Takeda of all
information to which we are entitled, a declaration of termination of applicable
agreements, and all available monetary relief, equitable relief, attorneys’ fees
and costs. The respective arbitrators for both us and Takeda have been confirmed
and both parties have selected a third arbitrator. If the third arbitrator is
confirmed, then it will comprisethe panel
that will conduct the arbitration proceedings. We spent and expect to spend
significant resources in the dispute with Takeda and these legal proceedings may
require the continuing attention of our senior management.





Item
1A.Risk
Factors





Our
business is subject to certain risks and events that, if they occur, could
adversely affect our financial condition and results of operations and the
trading price of our common stock. For a discussion of these risks, please refer
to the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, filed by us with the SEC on March 15,
2010.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





On
December 11, 2008, we announced a stock repurchase program pursuant to which we
are authorized to purchase up to $10.0 million of our class A common stock from
time to time in open market transactions. During the quarter ended June 30,
2010, we did not purchase any shares under this program.





Item
3. Defaults Upon Senior
Securities.





None.





Item
4. RESERVED


32


Item
6.  Exhibits





(a) 
Exhibits





ExhibitNumber
                      
                      Description
                      
                      Reference3.1
                      
                      Certificate
      of Incorporation
                      
                      Exhibit
      3.1 to the Company's Current Report on Form 8-K (filed December 29,
      2008)3.2
                      
                      Certificate
      of Amendment
                      
                      Exhibit
      3.2 to the Company's Current Report on Form 8-K (filed December 29,
      2008)3.3
                      
                      Restated
      Bylaws
                      
                      Exhibit
      3.3 to the Company's Current Report on Form 8-K (filed December 29,
      2008)4.1
                      
                      Specimen
      Stock Certificate evidencing the shares of class A common
      stock
                      
                      Exhibit
      4.1 to Registration Statement No. 333-135133, Amendment No. 5 (filed
      February 1, 2007)31.1
                      
                      Certification
      of the Principal Executive Officer, as required by Section 302 of the
      Sarbanes-Oxley Act of 2002
                      
                      Included
      herewith31.2
                      
                      Certification
      of the Principal Financial Officer, as required by Section 302 of the
      Sarbanes-Oxley Act of 2002
                      
                      Included
      herewith32.1
                      
                      Certification
      of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                      
                      Included
      herewith32.2
                      
                      Certification
      of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                      
                      Included
      herewith




33




SIGNATURES


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Sucampo
      Pharmaceuticals, Inc.August
      5, 2010
                          By:
                          /s/  RYUJI
UENORyuji
      Ueno, M.D., Ph.D., Ph.D.Chief
      Executive Officer, Chief Scientific Officer and
                            Chairman
      of the Board of Directors(Principal
      Executive Officer)August
      5, 2010
                          By:
                          /s/  JAN
SMILEKJan
      SmilekChief
      Financial Officer(Principal
      Financial and Accounting
Officer)




34




Sucampo
Pharmaceuticals, Inc.


Exhibit
Index





ExhibitNumber
                      
                      Description
                      
                      Reference3.1
                      
                      Certificate
      of Incorporation
                      
                      Exhibit
      3.1 to the Company's Current Report on Form 8-K (filed December 29,
      2008)3.2
                      
                      Certificate
      of Amendment
                      
                      Exhibit
      3.2 to the Company's Current Report on Form 8-K (filed December 29,
      2008)3.3
                      
                      Restated
      Bylaws
                      
                      Exhibit
      3.3 to the Company's Current Report on Form 8-K (filed December 29,
      2008)4.1
                      
                      Specimen
      Stock Certificate evidencing the shares of class A common
      stock
                      
                      Exhibit
      4.1 to Registration Statement No. 333-135133, Amendment No. 5 (filed
      February 1, 2007)31.1
                      
                      Certification
      of the Principal Executive Officer, as required by Section 302 of the
      Sarbanes-Oxley Act of 2002
                      
                      Included
      herewith31.2
                      
                      Certification
      of the Principal Financial Officer, as required by Section 302 of the
      Sarbanes-Oxley Act of 2002
                      
                      Included
      herewith32.1
                      
                      Certification
      of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                      
                      Included
      herewith32.2
                      
                      Certification
      of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                      
                      Included
      herewith




35