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
      1934For
      the quarterly period ended September 30, 2010ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      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
o





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 definitions of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.





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
November 2, 2010, there were 15,658,938 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 September 30, 2010 and December 31,
      2009
                            1Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Three and Nine Months Ended September 30, 2010 and
2009
                            2Condensed
      Consolidated Statement of Changes in Stockholders’ Equity for the Nine
      Months Ended September 30, 2010
                            3Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended September
      30, 2010 and 2009
                            4Notes
      to Condensed Consolidated Financial Statements
                            5Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            21Item
      3.
                            Quantitative
      and Qualitative Disclosures about Market Risk
                            32Item
      4.
                            Controls
      and Procedures
                            32Part
      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.
                            (Removed
      and Reserved)
                            32Item
      5.
                            Other
      Information
                            32Item
      6.
                            Exhibits
                            34SIGNATURES
                            35INDEX
      TO EXHIBITS
                            36





PART
I — FINANCIAL INFORMATION





Item
1.Condensed
Consolidated Financial Statements (Unaudited)





SUCAMPO
PHARMACEUTICALS, INC.


Condensed
Consolidated Balance Sheets (Unaudited)


(In
thousands, except share data)





September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  39,290
                  
                  
                  $
                  26,714Investments,
      current
                  
                  
                  59,789
                  
                  
                  
                  72,434Product
      royalties receivable
                  
                  
                  10,400
                  
                  
                  
                  11,023Unbilled
      accounts receivable
                  
                  
                  716
                  
                  
                  
                  644Accounts
      receivable, net
                  
                  
                  6,348
                  
                  
                  
                  512Deferred
      tax assets, net
                  
                  
                  151
                  
                  
                  
                  315Prepaid
      expenses and other current assets
                  
                  
                  2,677
                  
                  
                  
                  3,137Total
      current assets
                  
                  
                  119,371
                  
                  
                  
                  114,779Investments,
      non-current
                  
                  
                  11,646
                  
                  
                  
                  19,167Property
      and equipment, net
                  
                  
                  2,067
                  
                  
                  
                  2,242Deferred
      tax assets, non-current
                  
                  
                  4,476
                  
                  
                  
                  3,995Other
      assets
                  
                  
                  3,535
                  
                  
                  
                  4,788Total
      assets
                  
                  $
                  141,095
                  
                  
                  $
                  144,971LIABILITIES
      AND STOCKHOLDERS' EQUITY:Current
      liabilities:Accounts
      payable
                  
                  $
                  5,070
                  
                  
                  $
                  3,195Accrued
      expenses
                  
                  
                  9,101
                  
                  
                  
                  6,545Deferred
      revenue, current
                  
                  
                  1,410
                  
                  
                  
                  10,565Income
      taxes payable
                  
                  
                  496
                  
                  
                  
                  349Total
      current liabilities
                  
                  
                  16,077
                  
                  
                  
                  20,654Deferred
      revenue, non-current
                  
                  
                  8,109
                  
                  
                  
                  8,643Other
      liabilities
                  
                  
                  2,084
                  
                  
                  
                  2,121Total
      liabilities
                  
                  
                  26,270
                  
                  
                  
                  31,418Commitments
      (Note 7)Stockholders'
      equity:Preferred
      stock, $0.01 par value; 5,000,000 shares authorized at September 30, 2010
      and December 31, 2009; no shares issued and outstanding at September 30,
      2010 and December 31, 2009
                  
                  
                  -
                  
                  
                  
                  -Class
      A common stock, $0.01 par value; 270,000,000 shares authorized at
      September 30, 2010 and December 31, 2009; 15,658,938 and 15,655,730
      shares issued and outstanding at September 30, 2010 and December 31, 2009,
      respectively
                  
                  
                  156
                  
                  
                  
                  156Class
      B common stock, $0.01 par value; 75,000,000 shares authorized at September
      30, 2010 and  December 31, 2009; 26,191,050 shares issued and
      outstanding at September 30, 2010 and December 31, 2009
                  
                  
                  262
                  
                  
                  
                  262Additional
      paid-in capital
                  
                  
                  99,531
                  
                  
                  
                  98,636Accumulated
      other comprehensive income
                  
                  
                  730
                  
                  
                  
                  484Retained
      earnings
                  
                  
                  14,146
                  
                  
                  
                  14,015Total
      stockholders' equity
                  
                  
                  114,825
                  
                  
                  
                  113,553Total
      liabilities and stockholders' equity
                  
                  $
                  141,095
                  
                  
                  $
                  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 September
      30,
                
                
                Nine Months Ended September
    30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenues:Research
      and development revenue
                
                $
                9,072
                
                
                $
                7,045
                
                
                $
                15,918
                
                
                $
                19,966Product
      royalty revenue
                
                
                10,400
                
                
                
                9,367
                
                
                
                29,785
                
                
                
                27,227Co-promotion
      revenue
                
                
                1,282
                
                
                
                1,266
                
                
                
                3,357
                
                
                
                3,406Contract
      and collaboration revenue
                
                
                154
                
                
                
                153
                
                
                
                459
                
                
                
                451Total
      revenues
                
                
                20,908
                
                
                
                17,831
                
                
                
                49,519
                
                
                
                51,050Operating
      expenses:Research
      and development
                
                
                6,261
                
                
                
                7,383
                
                
                
                16,481
                
                
                
                26,969General
      and administrative
                
                
                6,138
                
                
                
                4,317
                
                
                
                18,501
                
                
                
                10,696Selling
      and marketing
                
                
                2,602
                
                
                
                3,047
                
                
                
                7,102
                
                
                
                7,747Milestone
      royalties - related parties
                
                
                1,251
                
                
                
                -
                
                
                
                1,251
                
                
                
                875Product
      royalties - related parties
                
                
                1,823
                
                
                
                1,664
                
                
                
                5,269
                
                
                
                4,837Total
      operating expenses
                
                
                18,075
                
                
                
                16,411
                
                
                
                48,604
                
                
                
                51,124Income
      (loss) from operations
                
                
                2,833
                
                
                
                1,420
                
                
                
                915
                
                
                
                (74
                )Non-operating
      income (expense):Interest
      income
                
                
                113
                
                
                
                211
                
                
                
                501
                
                
                
                742Other
      expense, net
                
                
                (115
                )
                
                
                (250
                )
                
                
                (342
                )
                
                
                (36
                )Total
      non-operating income (expense), net
                
                
                (2
                )
                
                
                (39
                )
                
                
                159
                
                
                
                706Income
      before income taxes
                
                
                2,831
                
                
                
                1,381
                
                
                
                1,074
                
                
                
                632Income
      tax provision
                
                
                (423
                )
                
                
                (1,469
                )
                
                
                (943
                )
                
                
                (2,733
                )Net
      income (loss)
                
                $
                2,408
                
                
                $
                (88
                )
                
                $
                131
                
                
                $
                (2,101
                )Net
      income (loss) per share:Basic
      net income (loss) per share
                
                $
                0.06
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (0.05
                )Diluted
      net income (loss) per share
                
                $
                0.06
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (0.05
                )Weighted
      average common shares outstanding - basic
                
                
                41,849
                
                
                
                41,844
                
                
                
                41,848
                
                
                
                41,844Weighted
      average common shares outstanding - diluted
                
                
                41,849
                
                
                
                41,844
                
                
                
                41,851
                
                
                
                41,844Comprehensive
      income (loss):Net
      income (loss)
                
                $
                2,408
                
                
                $
                (88
                )
                
                $
                131
                
                
                $
                (2,101
                )Other
      comprehensive income (loss):Unrealized
      gain (loss) on investments, net of tax effect
                
                
                12
                
                
                
                20
                
                
                
                5
                
                
                
                (52
                )Foreign
      currency translation
                
                
                441
                
                
                
                15
                
                
                
                241
                
                
                
                152Comprehensive
      income (loss)
                
                $
                2,861
                
                
                $
                (53
                )
                
                $
                377
                
                
                $
                (2,001
                )





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
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    884
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    884Stock
      issued under employee stock purchase plan
                    
                    
                    3,208
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11Foreign
      currency translation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    241
                    
                    
                    
                    -
                    
                    
                    
                    241Unrealized
      gain on investments, net of tax effect
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    5Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    131
                    
                    
                    
                    131Balance
      at September 30, 2010
                    
                    
                    15,658,938
                    
                    
                    $
                    156
                    
                    
                    
                    26,191,050
                    
                    
                    $
                    262
                    
                    
                    $
                    99,531
                    
                    
                    $
                    730
                    
                    
                    $
                    14,146
                    
                    
                    $
                    114,825





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)





Nine Months Ended September
    30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    131
                    
                    
                    $
                    (2,101
                    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    698
                    
                    
                    
                    532Deferred
      tax provision
                    
                    
                    (317
                    )
                    
                    
                    616Stock-based
      compensation
                    
                    
                    884
                    
                    
                    
                    259Amortization
      of premiums on investments
                    
                    
                    1,254
                    
                    
                    
                    898Unrealized
      gain on trading securities
                    
                    
                    -
                    
                    
                    
                    (2,601
                    )Unrealized
      loss on settlement rights of auction rate securities
                    
                    
                    -
                    
                    
                    
                    2,352Realized
      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
                    
                    
                    (5,496
                    )
                    
                    
                    (472
                    )Unbilled
      accounts receivable
                    
                    
                    (72
                    )
                    
                    
                    3,545Product
      royalties receivable
                    
                    
                    623
                    
                    
                    
                    357Income
      taxes payable
                    
                    
                    147
                    
                    
                    
                    441Accounts
      payable
                    
                    
                    1,643
                    
                    
                    
                    643Accrued
      expenses
                    
                    
                    2,476
                    
                    
                    
                    (520
                    )Deferred
      revenue
                    
                    
                    (10,050
                    )
                    
                    
                    (483
                    )Other
      assets and liabilities, net
                    
                    
                    442
                    
                    
                    
                    (501
                    )Net
      cash provided by (used in) operating activities
                    
                    
                    (7,637
                    )
                    
                    
                    2,965Cash
      flows from investing activities:Purchases
      of investments
                    
                    
                    (58,440
                    )
                    
                    
                    (129,094
                    )Proceeds
      from sales of investments
                    
                    
                    13,200
                    
                    
                    
                    9,504Maturities
      of investments
                    
                    
                    65,247
                    
                    
                    
                    88,856Purchases
      of property and equipment
                    
                    
                    (247
                    )
                    
                    
                    (463
                    )Purchase
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    (2,915
                    )Net
      cash provided by (used in) investing activities
                    
                    
                    19,760
                    
                    
                    
                    (34,112
                    )Cash
      flows from financing activities:Proceeds
      from employee stock purchase plan
                    
                    
                    11
                    
                    
                    
                    14Net
      cash provided by financing activities
                    
                    
                    11
                    
                    
                    
                    14Effect
      of exchange rates on cash and cash equivalents
                    
                    
                    442
                    
                    
                    
                    889Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    12,576
                    
                    
                    
                    (30,244
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    26,714
                    
                    
                    
                    62,562Cash
      and cash equivalents at end of period
                    
                    $
                    39,290
                    
                    
                    $
                    32,318Supplemental
      disclosure of non-cash investing and financing activities:Purchase
      of intangible assets included in accrued expenses
                    
                    $
                    -
                    
                    
                    $
                    500





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 a U.S. Food and Drug Administration, or 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 lowering of intra-ocular pressure,
or IOP, in open-angle glaucoma and ocular hypertension patients who are
intolerant of or insufficiently responsive to other IOP lowering
medications.





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. In September 2010, the Company submitted a marketing
application to the Japanese Pharmaceuticals and Medical Devices Agency for
lubiprostone at a dosage strength of 24 micrograms for the indication of CIC in
Japanese adults.





In
November 2009, Amitiza received marketing authorization for CIC from Swissmedic,
the Swiss Agency for Therapeutic Products. The Company continues to evaluate the
opportunities to commercialize Amitiza in the European Union consistent with its
approval by the FDA in the U.S. for chronic therapy for either CIC or
IBS-C.





In April
2009, the Company acquired the rights to Rescula that allow the Company to
commercialize Rescula in the U.S. and Canada for its approved indication and any
new indication developed by the Company. The Company plans to re-launch Rescula
in the U.S. for the treatment of open-angle glaucoma and ocular hypertension
after receiving approval of a supplemental new drug application,
or sNDA, from the FDA. In September 2010, Rescula received an Orphan Drug
designation from the FDA for retinitis pigmentosa. Additionally, the Company
plans to initiate clinical trials of Rescula for the indication of dry
age-related macular degeneration, or dry AMD, in 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 as a potential treatment 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 that the
Company filed with the SEC on March 15, 2010. The financial information as of
September 30, 2010 and for the three and nine months ended September 30, 2010
and 2009 is unaudited. In the opinion of the Company’s 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) –
(Continued)





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. 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 also included in the consolidated financial statements. All
inter-company balances and transactions have been eliminated.





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 classified its investments in
ARS as trading securities and recorded 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 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
8.


6


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





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 Takeda 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.





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
and all 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 co-promotion 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 September 30, 2010 and December 31, 2009, approximately $59.7 million, or
53.8%, 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 Company’s remaining ARS were redeemed at par value of $10.0
million per the agreement with the ARS broker.





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.


7


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





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.





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 62.4% and 79.8% of the Company’s
total revenues for the three months ended September 30, 2010 and 2009,
respectively, and 75.0% and 84.8% for the nine months ended September 30, 2010
and 2009, respectively. Accounts receivable, unbilled accounts receivable and
product royalties receivable from Takeda accounted for 69.0% and 96.5% of the
Company’s total accounts receivable, unbilled accounts receivable and product
royalties receivable at September 30, 2010 and December 31, 2009, respectively.
Revenues from another unrelated party, Abbott, accounted for 37.1% and 19.6% of
the Company’s total revenues for the three months ended September 30, 2010 and
2009, respectively, and 24.3% and 14.6% for the nine months ended September 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 (See Note 8 for additional
details).





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 (See Note 9
for additional details).





In June
2006, the Company 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 (See Note 9 for additional
details). If each
operating subsidiary has not either (i) incurred at least $333,333 of
development costs annually for at least one prostone compound other than
Amitiza, cobiprostone and SPI-017, or in the aggregate for all operating
subsidiaries at least $1.0 million annually in development costs for any
prostone compound other than Amitiza, cobiprostone and SPI-017 or (ii) provided
to SAG certain development data by the later of June 30, 2011or the date upon which Drs.
Ryuji Ueno and Sachiko Kuno are no longer controlling stockholders of the
Company, SAG may terminate the commercial license rights to certain compounds.
In addition, SAG may not sell any or all of its business without providing the
Company with notice of the terms of the sale, upon which the Company has 60 days
in which to notify SAG that it wishes to purchase SAG on such terms. In the
event that the Company does not respond to the SAG notice within 60 days, SAG
may proceed to sell SAG to a third party on terms no less favorable than the
terms provided to the Company.





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 $567,000 from current investments to cash and cash equivalents as
of September 30, 2009. The Company has adjusted the cash flow statement for the
nine months ended September 30, 2009 accordingly.


8


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)


Recent
Accounting Pronouncements


In June
2009, the Financial Accounting Standards Board, or 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 Company’s
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.





In
January 2010, the FASB issued authoritative guidance on improving the
disclosures about fair value measurements. This guidance 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 guidance 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 Company’s 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 guidance, 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 guidance is
limited to transactions involving research or development. This guidance 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.


9


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)








Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,(in
      thousands, except per share data)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Basic
      net loss per share:Net
      income (loss)
                
                $
                2,408
                
                
                $
                (88
                )
                
                $
                131
                
                
                $
                (2,101
                )Weighted
      average class A and B common shares outstanding
                
                
                41,849
                
                
                
                41,844
                
                
                
                41,848
                
                
                
                41,844Basic
      net income (loss) per share
                
                $
                0.06
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (0.05
                )Diluted
      net loss per share:Net
      income (loss)
                
                $
                2,408
                
                
                $
                (88
                )
                
                $
                131
                
                
                $
                (2,101
                )Weighted
      average class A and B common shares outstanding for diluted net
      income per share
                
                
                41,849
                
                
                
                41,844
                
                
                
                41,848
                
                
                
                41,844Assumed
      exercise of stock options under the  treasury stock
      method
                
                
                -
                
                
                
                -
                
                
                
                3
                
                
                
                -41,849
                
                
                
                41,844
                
                
                
                41,851
                
                
                
                41,844Diluted
      net income (loss) per share
                
                $
                0.06
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (0.05
                )





For the
periods listed above, the potentially dilutive securities used in the
calculations of diluted historical net income per share as of September 30, 2010
and 2009 are as follows:





September
      30,(In
      thousands)
                
                2010
                
                
                2009Employee
      stock options
                
                
                130
                
                
                
                -Non-employee
      stock options
                
                
                -
                
                
                
                -





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





September
      30,(In
      thousands)
                
                2010
                
                
                2009Employee
      stock options
                
                
                1,261
                
                
                
                778Non-employee
      stock options
                
                
                450
                
                
                
                450





4.    Current
and Non-Current Investments





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


10


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





September 30, 2010Unrealized
                
                
                Unrealized(In
      thousands)
                
                Cost
                
                
                Gains
                
                
                Losses
                
                
                Fair ValueCurrent:U.S.
      Treasury bills and notes
                
                $
                1,003
                
                
                $
                1
                
                
                $
                -
                
                
                $
                1,004U.S.
      commercial paper
                
                
                5,186
                
                
                
                1
                
                
                
                -
                
                
                
                5,187U.S.
      government securities
                
                
                12,808
                
                
                
                10
                
                
                
                (3
                )
                
                
                12,815Municipal
      securities
                
                
                18,177
                
                
                
                10
                
                
                
                (9
                )
                
                
                18,178Certificates
      of deposits
                
                
                1,250
                
                
                
                1
                
                
                
                (1
                )
                
                
                1,250Corporate
      bonds
                
                
                21,332
                
                
                
                23
                
                
                
                -
                
                
                
                21,355Total
                
                $
                59,756
                
                
                $
                46
                
                
                $
                (13
                )
                
                $
                59,789Non-current:U.S.
      government securities
                
                $
                6,808
                
                
                $
                2
                
                
                $
                (2
                )
                
                $
                6,808Corporate
      bonds
                
                
                4,824
                
                
                
                14
                
                
                
                -
                
                
                
                4,838Total
                
                $
                11,632
                
                
                $
                16
                
                
                $
                (2
                )
                
                $
                11,646





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 Company’s remaining ARS were redeemed
per the settlement agreement with the ARS broker at par value of $10.0 million,
which also terminated the related settlement rights.





The
Company performs fair value measurements in accordance with the FASB’s 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


11


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





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 including cash
equivalents, which are subject to the fair value disclosure requirements, are as
follows:





Fair Value Measurements at Reporting Date
      UsingSeptember
      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
                
                
                19,623
                
                
                
                -
                
                
                
                -
                
                
                
                19,623U.S.
      commercial paper
                
                
                -
                
                
                
                5,187
                
                
                
                -
                
                
                
                5,187Corporate
      bonds
                
                
                26,193
                
                
                
                -
                
                
                
                -
                
                
                
                26,193Municipal
      securities
                
                
                37,228
                
                
                
                -
                
                
                
                -
                
                
                
                37,228Certificates
      of deposits
                
                
                -
                
                
                
                1,250
                
                
                
                -
                
                
                
                1,250Money
      market funds
                
                
                10,732
                
                
                
                -
                
                
                
                -
                
                
                
                10,732Total
      assets measured at fair value
                
                $
                94,780
                
                
                $
                6,437
                
                
                $
                -
                
                
                $
                101,217





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
                  
                  
                  34,090
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  34,090U.S.
      commercial paper
                  
                  
                  -
                  
                  
                  
                  3,000
                  
                  
                  
                  -
                  
                  
                  
                  3,000Corporate
      bonds
                  
                  
                  17,709
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,709Municipal
      securities
                  
                  
                  28,287
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28,287Auction
      rate securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,914
                  
                  
                  
                  8,914Settlement
      rights for auction rate securities*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,086
                  
                  
                  
                  1,086Certificates
      of deposits
                  
                  
                  -
                  
                  
                  
                  1,747
                  
                  
                  
                  -
                  
                  
                  
                  1,747Money
      market funds
                  
                  
                  8,759
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,759Total
      assets measured at fair value
                  
                  $
                  91,844
                  
                  
                  $
                  4,747
                  
                  
                  $
                  10,000
                  
                  
                  $
                  106,591





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





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.


12


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





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 its FDA-approved
indication and any new indications in the U.S. and Canada. Although Rescula eye
drops have been approved by the FDA 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 September 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 $256,000 and $142,000 for the nine
months ended September 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:





September
      30,
                
                
                December
      31,(In
      thousands)
                
                2010
                
                
                2009Research
      and development costs
                
                $
                3,151
                
                
                $
                3,624Employee
      compensation
                
                
                1,566
                
                
                
                879Selling
      and marketing costs
                
                
                242
                
                
                
                731Milestone
      and product royalty expenses
                
                
                1,823
                
                
                
                48Other
      accrued expenses
                
                
                2,319
                
                
                
                1,263Total
                
                $
                9,101
                
                
                $
                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 $15,000, were as follows as of September 30,
2010:





(In
      thousands)2010
      (October - December)
                
                $
                3662011
                
                
                1,1812012
                
                
                9662013
                
                
                9952014
                
                
                1,0242015
      and thereafter
                
                
                2,275Total
      minimum lease payments
                
                $
                6,807





Rent
expense for all operating leases was approximately $335,000 and $322,000 for the
three months ended September 30, 2010 and 2009, respectively, and $980,000 and
$965,000 for the nine months ended September 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 September 30,
2010 were approximately $15.3 million. This amount does not include expected
costs relating to the phase 2 studies for Rescula, for which the CRO agreement
has not been finalized as of September 30, 2010.


13


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





8.   
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.





To date,
the Company has received a total of $22.5 million in up-front and development
milestone payments under this agreement, including a $5.0 million development
milestone payment, received in October 2010, for the submission of a marketing
application to the Japanese Pharmaceuticals and Medical Devices Agencyfor lubiprostone at a
dosage strength of 24 micrograms for the indication of CIC in Japanese adults.
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
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. The following table summarizes the cash
streams and related revenue recognized or deferred this agreement for the nine
months ended September 30, 2010:





Amount
                        Deferred
      at
                        December
      31,
                      
                      
                      Revenue
                        Recognizedfor
                        the
      Nine Months
                        Ended
                        September
      30,
                      
                      
                      Foreign
      Currency
                        Effects
      for the Nine
                        Months
      Ended
                        September
      30,
                      
                      
                      Change
      in
                        Accounts
                        Receivable
      for
                        the
      Nine Months
                        Ended
      September
                        30,
                      
                      
                      Amount
                        Deferred
      at
                        September
      30,(In
      thousands)
                      
                      2009
                      
                      
                      2010
                      
                      
                      2010
                      
                      
                      2010
                      
                      
                      2010Collaboration
      revenue:Up-front
      payment associated with the Company'sobligation to participate in
      joint committees
                      
                      $
                      812
                      
                      
                      $
                      35
                      
                      
                      $
                      82
                      
                      
                      $
                      -
                      
                      
                      $
                      859Research
      and development revenue:Up-front
      payment
                      
                      $
                      3,991
                      
                      
                      $
                      3,879
                      
                      
                      $
                      168
                      
                      
                      $
                      -
                      
                      
                      $
                      280Development
      milestone payments
                      
                      
                      3,366
                      
                      
                      
                      8,133
                      
                      
                      
                      143
                      
                      
                      
                      5,000
                      
                      
                      
                      376Total
                      
                      $
                      7,357
                      
                      
                      $
                      12,012
                      
                      
                      $
                      311
                      
                      
                      $
                      5,000
                      
                      
                      $
                      656





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 supplemented 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. The provision in the supplemental agreement concerning the
co-promotion reimbursement for the Company’s sales force is subject to
negotiation by the parties no later than 60 months after the first date the
Company deploys its sales force or April 2011. In the event the parties fail to
reach an agreement to extend the terms of this provision, the reimbursement
terms of the collaboration agreement may apply,but the impact is
unknown.


14


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





The
Company has received a total of $150.0 million in up-front and development
milestone payments through September 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 it is entitled, a declaration of termination of applicable
agreements, and all available monetary relief, equitable relief, attorneys’ fees
and costs. All the arbitrators have been confirmed and the arbitration
proceedings have commenced. The Company has spent and expects to spend
significant resources in the dispute with Takeda and these arbitration
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 nine
months ended September 30, 2010:





Amount
                          Deferred at
                          December 31,
                        
                        
                        Cash Received
                          for the Nine
                          Months Ended
                          September 30,
                        
                        
                        Revenue
                          Recognized for
                          the Nine Months
                          Ended
                          September 30,
                        
                        
                        Change in Accounts
                          Receivable for the
                          Nine Months Ended
                          September 30,
                        
                        
                        Amount
                          Deferred at
                          September 30,(In
      thousands)
                        
                        2009
                        
                        
                        2010
                        
                        
                        2010
                        
                        
                        2010*
                        
                        
                        2010Collaboration
      revenue:Up-front
      payment associated with the Company'sobligation to participate in
      joint
      committees
                        
                        $
                        1,617
                        
                        
                        $
                        -
                        
                        
                        $
                        110
                        
                        
                        $
                        -
                        
                        
                        $
                        1,507Research
      and development revenue:Reimbursement
      of research and development expenses
                        
                        $
                        2,734
                        
                        
                        $
                        1,215
                        
                        
                        $
                        3,898
                        
                        
                        $
                        73
                        
                        
                        $
                        124Product
      royalty revenue
                        
                        $
                        -
                        
                        
                        $
                        30,408
                        
                        
                        $
                        29,785
                        
                        
                        $
                        (623
                        )
                        
                        $
                        -Co-promotion
      revenue
                        
                        $
                        -
                        
                        
                        $
                        2,846
                        
                        
                        $
                        3,357
                        
                        
                        $
                        511
                        
                        
                        $
                        -





*     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 in the second quarter of 2010
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, during the third
quarter of 2010, the Company increased the total estimated costs for the OBD
program. 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. This change in estimate did not have material impact on the
financial statements for the nine months ended September 30,
2010.


15


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)


9.    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 September
      30,
                        
                        
                        Nine Months Ended September
    30,(In
      thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Clinical
      supplies
                        
                        $
                        145
                        
                        
                        $
                        720
                        
                        
                        $
                        348
                        
                        
                        $
                        2,341Other
      research and development services
                        
                        
                        61
                        
                        
                        
                        7
                        
                        
                        
                        207
                        
                        
                        
                        3,046$
                        206
                        
                        
                        $
                        727
                        
                        
                        $
                        555
                        
                        
                        $
                        5,387





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:





September
      30,
                    
                    
                    December
      31,(In
      thousands)
                    
                    2010
                    
                    
                    2009Deferred
      revenue, current
                    
                    $
                    433
                    
                    
                    $
                    431Deferred
      revenue, non-current
                    
                    
                    5,940
                    
                    
                    
                    6,256$
                    6,373
                    
                    
                    $
                    6,687





The
Company recognized approximately $105,000 of revenue relating to its agreements
with R-Tech for each of the three months ended September 30, 2010 and 2009, and
approximately $314,000 for the nine months ended September 30, 2010 and 2009,
which was recorded as contract and collaboration revenue in the accompanying
condensed consolidated statements of operations and comprehensive income
(loss).





Sucampo
AG License Agreements





The
submission of the Japanese marketing application by the Company for lubiprostone
with a dosage strength of 24 micrograms for the indication of CIC related to the
Abbott agreement triggered the obligation on the part of the Company under the
license agreement with SAG to make a $1.0 million payment to SAG. The Company
recorded the expense as milestone royalties – related parties in the third
quarter of 2010 and paid the milestone in October 2010. The Company expensed an
additional $250,000 in milestone royalties – related parties expense under the
sublicense agreement with SAG for the three months ended September 30, 2010,
reflecting 5% of the $5.0 million development payment earned from Abbott in the
third quarter of 2010 upon the submission of the marketing
application.





The
Company expensed approximately $875,000 in milestone royalties – related parties
expense under the sublicense agreement with SAG for the nine months ended
September 30, 2009, reflecting 5% of the $10.0 million upfront payment and the
$7.5 million development payments received from Abbott.





The
Company expensed approximately $1.8 million and $1.7 million in product
royalties – related parties under the license agreement with SAG for the three
months ended September 30, 2010 and 2009, respectively, and approximately $5.3
million and $4.8 million for the nine months ended September 30, 2010 and 2009,
respectively, reflecting 3.2% of Amitiza net sales in the U.S. during each of
these periods.





According
to the June 2006 license agreement with SAG, the license is perpetual as to
Amitiza, cobiprostone and SPI-017 and cannot be terminated unless the Company
defaults in the payment obligations to SAG. With respect to any other licensed
prostone compounds, the Company is required to perform preclinical testing over
a specified period on those compounds and to generate specified pharmacological
and toxicity data. The specified period ends on the later of June 30, 2011, or
the date upon which Drs. Ueno and Kuno no longer control the company. For
purposes of this agreement, Drs. Ueno and Kuno will be deemed to control the
company as long as either they together own a majority of the voting power of
the Company’s stock or at least one of them is a member of the Board of
Directors. Following the end of the specified period, SAG can terminate the
license with respect to any compounds to which the Company has not performed the
required testing, except for any compounds the Company designates as compounds
for which the Company intends in good faith to perform the required testing
within the 15 months following the end of the specified period. At the end of
the 15-month extension period, SAG may terminate the Company’s license to any of
the designated compounds for which the Company has not performed the required
testing.


16


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





10.  Stock
Option Plans





The
following table summarizes the employee stock option activity for the nine
months ended September 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, September 30, 2010
                
                
                345,100
                
                
                
                10.44
                
                
                
                3.37
                
                
                $
                -Options
      exercisable, September 30, 2010
                
                
                345,100
                
                
                
                10.44
                
                
                
                3.37
                
                
                $
                -





The
following table summarizes the employee stock option activity for the nine
months ended September 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
                
                
                548,000
                
                
                
                3.77Options
      forfeited
                
                
                (3,000
                )
                
                
                14.12Options
      expired
                
                
                (9,000
                )
                
                
                14.12Options
      outstanding, September 30, 2010
                
                
                1,045,800
                
                
                
                5.99
                
                
                
                8.65
                
                
                $
                -Options
      exercisable, September 30, 2010
                
                
                444,242
                
                
                
                6.98
                
                
                
                8.32
                
                
                $
                -





The
weighted average grant date fair value of options granted during the nine months
ended September 30, 2010 and the year ended December 31, 2009 were $2.01 and
$2.73, respectively. As of September 30, 2010, approximately $1.4 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 2.45 years.





During
the nine months ended September 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 Company’s 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 Company’s 2001 Incentive Plan. As of
September 30, 2010 and December 31, 2009, a total of 450,000 of these 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
September 30, 2010 and December 31, 2009 and a remaining contractual life of
4.59 and 5.33 years, respectively, as of September 30, 2010 and December 31,
2009.


17


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





Employee
Stock Purchase Plan





Under the
Company’s 2006 Employee Stock Purchase Plan, or ESPP, a total of 3,208 and 2,409
shares of class A common stock were purchased during the nine months ended
September 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, as amended, and in accordance with
accounting 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 $11,018 and $13,801 upon purchase of shares under the ESPP
for the nine months ended September 30, 2010 and 2009,
respectively.





11.  Income
Taxes





For the
three months ended September 30, 2010 and 2009, the Company recorded a tax
provision of $423,000 and $1.5 million, respectively. For the nine months ended
September 30, 2010 and 2009, the Company recorded a tax provision of $943,000
and $2.7 million, respectively. The tax provision for the respective periods
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 nine months ended September 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 accounting 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
$798,000 for uncertain tax positions as of September 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 September 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.


18


SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





(In
      thousands)
                  
                  Americas
                  
                  
                  Europe
                  
                  
                  Asia
                  
                  
                  Intercompany
                    Eliminations
                  
                  
                  ConsolidatedThree
      Months Ended September 30, 2010Research
      and development revenue
                  
                  $
                  1,325
                  
                  
                  $
                  -
                  
                  
                  $
                  7,747
                  
                  
                  $
                  -
                  
                  
                  $
                  9,072Product
      royalty revenue
                  
                  
                  10,400
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,400Co-promotion
      revenue
                  
                  
                  1,282
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,282Contract
      and collaboration revenue
                  
                  
                  142
                  
                  
                  
                  -
                  
                  
                  
                  290
                  
                  
                  
                  (278
                  )
                  
                  
                  154Total
      revenues
                  
                  
                  13,149
                  
                  
                  
                  -
                  
                  
                  
                  8,037
                  
                  
                  
                  (278
                  )
                  
                  
                  20,908Research
      and development expenses
                  
                  
                  3,304
                  
                  
                  
                  338
                  
                  
                  
                  2,903
                  
                  
                  
                  (284
                  )
                  
                  
                  6,261Depreciation
      and amortization
                  
                  
                  228
                  
                  
                  
                  3
                  
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  239Other
      operating expenses
                  
                  
                  9,680
                  
                  
                  
                  368
                  
                  
                  
                  1,521
                  
                  
                  
                  6
                  
                  
                  
                  11,575Income
      (loss) from operations
                  
                  
                  (63
                  )
                  
                  
                  (709
                  )
                  
                  
                  3,605
                  
                  
                  
                  -
                  
                  
                  
                  2,833Interest
      income
                  
                  
                  196
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  (84
                  )
                  
                  
                  113Other
      non-operating income (expense), net
                  
                  
                  (9
                  )
                  
                  
                  (36
                  )
                  
                  
                  (154
                  )
                  
                  
                  84
                  
                  
                  
                  (115
                  )Income
      (loss) before income taxes
                  
                  $
                  124
                  
                  
                  $
                  (744
                  )
                  
                  $
                  3,451
                  
                  
                  $
                  -
                  
                  
                  $
                  2,831Capital
      expenditures
                  
                  $
                  74
                  
                  
                  $
                  1
                  
                  
                  $
                  15
                  
                  
                  $
                  -
                  
                  
                  $
                  90Three
      Months Ended September 30, 2009Research
      and development revenue
                  
                  $
                  3,562
                  
                  
                  $
                  -
                  
                  
                  $
                  3,483
                  
                  
                  $
                  -
                  
                  
                  $
                  7,045Product
      royalty revenue
                  
                  
                  9,367
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,367Co-promotion
      revenue
                  
                  
                  1,266
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,266Contract
      and collaboration revenue
                  
                  
                  141
                  
                  
                  
                  -
                  
                  
                  
                  282
                  
                  
                  
                  (270
                  )
                  
                  
                  153Total
      revenues
                  
                  
                  14,336
                  
                  
                  
                  -
                  
                  
                  
                  3,765
                  
                  
                  
                  (270
                  )
                  
                  
                  17,831Research
      and development expenses
                  
                  
                  3,310
                  
                  
                  
                  459
                  
                  
                  
                  3,884
                  
                  
                  
                  (270
                  )
                  
                  
                  7,383Depreciation
      and amortization
                  
                  
                  213
                  
                  
                  
                  3
                  
                  
                  
                  7
                  
                  
                  
                  -
                  
                  
                  
                  223Other
      operating expenses
                  
                  
                  7,520
                  
                  
                  
                  1,029
                  
                  
                  
                  256
                  
                  
                  
                  -
                  
                  
                  
                  8,805Income
      (loss) from operations
                  
                  
                  3,293
                  
                  
                  
                  (1,491
                  )
                  
                  
                  (382
                  )
                  
                  
                  -
                  
                  
                  
                  1,420Interest
      income
                  
                  
                  277
                  
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  (68
                  )
                  
                  
                  211Other
      non-operating income (expense), net
                  
                  
                  (17
                  )
                  
                  
                  (22
                  )
                  
                  
                  (279
                  )
                  
                  
                  68
                  
                  
                  
                  (250
                  )Income
      (loss) before income taxes
                  
                  $
                  3,553
                  
                  
                  $
                  (1,513
                  )
                  
                  $
                  (659
                  )
                  
                  $
                  -
                  
                  
                  $
                  1,381Capital
      expenditures
                  
                  $
                  64
                  
                  
                  $
                  -
                  
                  
                  $
                  87
                  
                  
                  $
                  -
                  
                  
                  $
                  151


19




SUCAMPO
PHARMACEUTICALS, INC.





Notes
to Condensed Consolidated Financial Statements (Unaudited) –
(Continued)





(In
      thousands)
                            
                            Americas
                            
                            
                            Europe
                            
                            
                            Asia
                            
                            
                            IntercompanyEliminations
                            
                            
                            ConsolidatedNine
      Months Ended September 30, 2010Research
      and development revenue
                            
                            $
                            3,898
                            
                            
                            $
                            -
                            
                            
                            $
                            12,020
                            
                            
                            $
                            -
                            
                            
                            $
                            15,918Product
      royalty revenue
                            
                            
                            29,785
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            29,785Co-promotion
      revenue
                            
                            
                            3,357
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,357Contract
      and collaboration revenue
                            
                            
                            424
                            
                            
                            
                            -
                            
                            
                            
                            860
                            
                            
                            
                            (825
                            )
                            
                            
                            459Total
      revenues
                            
                            
                            37,464
                            
                            
                            
                            -
                            
                            
                            
                            12,880
                            
                            
                            
                            (825
                            )
                            
                            
                            49,519Research
      and development expenses
                            
                            
                            7,673
                            
                            
                            
                            699
                            
                            
                            
                            8,940
                            
                            
                            
                            (831
                            )
                            
                            
                            16,481Depreciation
      and amortization
                            
                            
                            668
                            
                            
                            
                            9
                            
                            
                            
                            21
                            
                            
                            
                            -
                            
                            
                            
                            698Other
      operating expenses
                            
                            
                            28,392
                            
                            
                            
                            1,088
                            
                            
                            
                            1,939
                            
                            
                            
                            6
                            
                            
                            
                            31,425Income
      (loss) from operations
                            
                            
                            731
                            
                            
                            
                            (1,796
                            )
                            
                            
                            1,980
                            
                            
                            
                            -
                            
                            
                            
                            915Interest
      income
                            
                            
                            723
                            
                            
                            
                            1
                            
                            
                            
                            2
                            
                            
                            
                            (225
                            )
                            
                            
                            501Other
      non-operating income (expense), net
                            
                            
                            (42
                            )
                            
                            
                            (184
                            )
                            
                            
                            (341
                            )
                            
                            
                            225
                            
                            
                            
                            (342
                            )Income
      (loss) before income taxes
                            
                            $
                            1,412
                            
                            
                            $
                            (1,979
                            )
                            
                            $
                            1,641
                            
                            
                            $
                            -
                            
                            
                            $
                            1,074Capital
      expenditures
                            
                            $
                            228
                            
                            
                            $
                            2
                            
                            
                            $
                            17
                            
                            
                            $
                            -
                            
                            
                            $
                            247Nine
      Months Ended September 30, 2009Research
      and development revenue
                            
                            $
                            12,539
                            
                            
                            $
                            -
                            
                            
                            $
                            7,427
                            
                            
                            $
                            -
                            
                            
                            $
                            19,966Product
      royalty revenue
                            
                            
                            27,227
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            27,227Co-promotion
      revenue
                            
                            
                            3,406
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,406Contract
      and collaboration revenue
                            
                            
                            424
                            
                            
                            
                            -
                            
                            
                            
                            717
                            
                            
                            
                            (690
                            )
                            
                            
                            451Total
      revenues
                            
                            
                            43,596
                            
                            
                            
                            -
                            
                            
                            
                            8,144
                            
                            
                            
                            (690
                            )
                            
                            
                            51,050Research
      and development expenses
                            
                            
                            17,088
                            
                            
                            
                            788
                            
                            
                            
                            9,783
                            
                            
                            
                            (690
                            )
                            
                            
                            26,969Depreciation
      and amortization
                            
                            
                            512
                            
                            
                            
                            9
                            
                            
                            
                            11
                            
                            
                            
                            -
                            
                            
                            
                            532Other
      operating expenses
                            
                            
                            20,161
                            
                            
                            
                            1,659
                            
                            
                            
                            1,803
                            
                            
                            
                            -
                            
                            
                            
                            23,623Income
      (loss) from operations
                            
                            
                            5,835
                            
                            
                            
                            (2,456
                            )
                            
                            
                            (3,453
                            )
                            
                            
                            -
                            
                            
                            
                            (74
                            )Interest
      income
                            
                            
                            928
                            
                            
                            
                            -
                            
                            
                            
                            4
                            
                            
                            
                            (190
                            )
                            
                            
                            742Other
      non-operating income (expense), net
                            
                            
                            191
                            
                            
                            
                            (392
                            )
                            
                            
                            (25
                            )
                            
                            
                            190
                            
                            
                            
                            (36
                            )Income
      (loss) before income taxes
                            
                            $
                            6,954
                            
                            
                            $
                            (2,848
                            )
                            
                            $
                            (3,474
                            )
                            
                            $
                            -
                            
                            
                            $
                            632Capital
      expenditures
                            
                            $
                            3,259
                            
                            
                            $
                            3
                            
                            
                            $
                            116
                            
                            
                            $
                            -
                            
                            
                            $
                            3,378As
      of September 30, 2010Property
      and equipment, net
                            
                            $
                            1,825
                            
                            
                            $
                            27
                            
                            
                            $
                            215
                            
                            
                            $
                            -
                            
                            
                            $
                            2,067Identifiable
      assets, net of intercompanyloans
      and investments
                            
                            $
                            131,874
                            
                            
                            $
                            6,277
                            
                            
                            $
                            7,165
                            
                            
                            $
                            (4,221
                            )
                            
                            $
                            141,095As
      of December 31, 2009Property
      and equipment, net
                            
                            $
                            2,008
                            
                            
                            $
                            34
                            
                            
                            $
                            200
                            
                            
                            $
                            -
                            
                            
                            $
                            2,242Identifiable
      assets, net of intercompanyloans
      and investments
                            
                            $
                            134,714
                            
                            
                            $
                            864
                            
                            
                            $
                            11,294
                            
                            
                            $
                            (1,901
                            )
                            
                            $
                            144,971




13.   Subsequent
Events




On
October 29, 2010, the Company was informed by the Internal Revenue Service that
the Company’s applications for certification of Qualified Therapeutic Discovery
Projects were approved. Accordingly, the Company expects to receive grants of
approximately $732,000 related to the Company’s qualified expenditures for 2009
and 2010. The research expenditures related to these grants are generally not
deductible for federal and state income tax purposes. The expected tax benefit
of approximately $425,000 related to these grants will be recorded in the period
ended December 31, 2010.




20




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. Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and those discussed in
the section titled “Risk Factors” included elsewhere in this Quarterly Report
Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, which we filed with the SEC on
March 15, 2010. You should also 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 with little or no
affinity to prostaglandin receptors. As a result, prostones promote fluid
secretion, enhance microcirculation and 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 lowering of intra-ocular pressure,
or IOP, in open-angle glaucoma and ocular hypertension patients who are
intolerant of or insufficiently responsive to other IOP lowering
medications.





We
generate revenue through product royalties, development milestone payments and
clinical development support payments. We expect to continue to incur
significant expenses for the next several years as we continue our research and
development activities for new and existing prostones, seek regulatory approvals
for additional indications for Amitiza, Rescula and other compounds in the U.S.,
Japan 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 (Japan), or Takeda,
for gastrointestinal indications.





Under the
Takeda agreement for Amitiza, 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. This
co-promotion arrangement in the supplemental agreement is subject to negotiation
by the parties no later than 60 months after the first date the Company deploys
its sales force or April 2011. In the event the parties fail to reach an
agreement to extend the terms of this provision, the reimbursement terms of the
collaboration agreement may apply, but the impact is unknown.





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 the Company to commercialize
Rescula in the U.S. and Canada for its approved indication and any new
indication developed by us. We plan to re-launch Rescula in the U.S. for its
FDA-approved indication after approval of a supplemental new drug application,
or sNDA, from the FDA. In September 2010, Rescula received an Orphan Drug
designation from the FDA for retinitis pigmentosa. Additionally, we plan to
initiate clinical trials of Rescula for the indication of dry
age-related macular degeneration, or dry AMD, in 2011.




21




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.





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 9 to the accompanying condensed
consolidated financial statements included in Part I, Item 1 to this Quarterly
Report on Form 10-Q. 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.





According
to the June 2006 license agreement with SAG, the license is perpetual as to
Amitiza, cobiprostone and SPI-017 and cannot be terminated unless we default in
our payment obligations to SAG. With respect to any other licensed prostone
compounds, we are required to perform preclinical testing over a specified
period on those compounds and to generate specified pharmacological and toxicity
data. The specified period ends on the later of June 30, 2011, or the date upon
which Drs. Ueno and Kuno no longer control our company. For purposes of this
agreement, Drs. Ueno and Kuno will be deemed to control our company as long as
either they together own a majority of the voting power of our stock or at least
one of them is a member of our Board of Directors. Following the end of the
specified period, SAG can terminate our license with respect to any compounds to
which we have not performed the required testing, except for any compounds we
designate as compounds for which we intend in good faith to perform the required
testing within the 15 months following the end of the specified period. At the
end of the 15-month extension period, SAG may terminate our license to any of
the designated compounds for which we have not performed the required
testing.





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. All the arbitrators have been confirmed and the arbitration
proceedings have commenced. We have spent and expect to spend significant
resources in the dispute with Takeda and these arbitration 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 have decided to conduct one additional phase 3
efficacy study in order to submit a sNDA for the OBD indication. We plan to
initiate this trial in late 2010.




22




Amitiza (lubiprostone) in
Japan. 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 at the mid-point of the clinical trial.
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.





In
September 2010, we submitted a marketing application to the Japanese
Pharmaceuticals and Medical Devices Agency for lubiprostone at a dosage strength
of 24 micrograms for the indication of CIC. The marketing application has been
submitted with the phase 2 and phase 3 efficacy trial results. The phase 3
efficacy trial which enrolled 124 patients and the results of which we reported
in June 2010, met the primary endpoint with statistical significance
(p<0.001) and demonstrated a safety profile consistent with previously
reported lubiprostone clinical data. The marketing application will be amended
in early 2011 with the complete results of the phase 3 long-term, open-label,
multi-center, confirmatory, safety trial in 209 Japanese CIC
patients.





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 Amitiza’s first European regulatory approval and is the first
prescription medicine to be approved in Switzerland for the long-term treatment
of CIC. We are currently pursuing the pricing approval with the Swiss
authorities and expect a decision in 2011. We continue to evaluate the
opportunities to obtain an appropriate label in the E.U. for chronic therapy of
CIC and OBD.





Rescula. Under our agreement with
R-Tech, we hold the exclusive rights to commercialize Rescula in the U.S. and
Canada for its approved indications 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 an additional indication for which unoprostone is
developed by R-Tech. We plan to re-launch Rescula in the U.S. for its approved
indication after receiving approval of a sNDA from the FDA. In October 2010,
Rescula received an Orphan Drug designation from the FDA for retinitis
pigmentosa. Additionally, we plan to initiate clinical trials of Rescula
for the indication of dry AMD in 2011.





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
gastrointestinal 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 2011.





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.




23




Results
of Operations





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





Revenues





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





Three Months EndedSeptember 30,(In
      thousands)
                    
                    2010
                    
                    
                    2009Research
      and development revenue
                    
                    $
                    9,072
                    
                    
                    $
                    7,045Product
      royalty revenue
                    
                    
                    10,400
                    
                    
                    
                    9,367Co-promotion
      revenue
                    
                    
                    1,282
                    
                    
                    
                    1,266Contract
      and collaboration revenue
                    
                    
                    154
                    
                    
                    
                    153Total
                    
                    $
                    20,908
                    
                    
                    $
                    17,831




Total
revenues were $20.9 million for the three months ended September 30, 2010
compared to $17.8 million for the three months ended September 30, 2009, an
increase of $3.1 million or 17.3%.





Research
and development revenue was $9.1 million for the three months ended September
30, 2010 compared to $7.0 million for the three months ended September 30, 2009,
an increase of $2.0 million or 28.8%. The increase was primarily due to $7.7
million in revenue recognized under the agreement with Abbott for the three
months ended September 30, 2010, which included revenue recognized from the $5.0
million milestone earned upon the filing of the Japanese marketing application,
as compared to $3.5 million recognized for this program for the three months
ended September 30, 2009. We recognize the revenue from the payments from Abbott
using a percentage-of-completion model over the estimated term of the CIC
development program.





The
research and development revenue increase was partially offset by reduced
revenue recognized in respect to the OBD program for Amitiza. The research and
development revenue recognized under the agreement with Takeda in the
U.S. decreased to $1.3 million for the three months ended September 30,
2010 from $3.6 million for the three months ended September 30, 2009, reflecting
a completion of the 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.





Product
royalty revenue represents royalty revenue earned on net sales of Amitiza in the
United States. For the three months ended September 30, 2010 and 2009, we
recognized $10.4 million and $9.4 million, respectively, of product royalty
revenue, an increase of $1.0 million or 11.0%, reflecting mainly a higher price
per pill as the volume was essentially flat.





Co-promotion
revenues represent reimbursement by Takeda of co-promotion costs for our
specialty sales force. For the three months ended September 30, 2010 and 2009,
we recognized $1.3 million of co-promotion revenue for reimbursement of our
sales force costs.





Research
and Development Expenses





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





Three Months EndedSeptember 30,(In
      thousands)
                
                2010
                
                
                2009Direct
      costs:Amitiza
                
                $
                4,991
                
                
                $
                5,721Cobiprostone
                
                
                162
                
                
                
                568SPI-017
                
                
                348
                
                
                
                309Rescula
                
                
                235
                
                
                
                90Other
                
                
                27
                
                
                
                184Total
                
                
                5,763
                
                
                
                6,872Indirect
      costs
                
                
                498
                
                
                
                511Total
                
                $
                6,261
                
                
                $
                7,383




24




Total
research and development expenses for the three months ended September 30, 2010
were $6.3 million compared to $7.4 million for the three months ended September
30, 2009, a decrease of $1.1 million or 15.2%. The decrease was primarily due to
the July 2009 completion of the initial two phase 3 pivotal clinical trials of
Amitiza for the treatment of OBD and the July 2009 completion of the phase 2
clinical trial of cobiprostone for the prevention of NSAID-induced ulcers,
partially offset by a slight increase in overall preclinical and basic
development costs related to SPI-017 and pre-clinical compounds. We incurred
data purchase costs of approximately $250,000, which were necessary to submit
the marketing application in Japan.





General
and Administrative Expenses





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





Three Months EndedSeptember 30,(In
      thousands)
                  
                  2010
                  
                  
                  2009Salaries,
      benefits and related costs
                  
                  $
                  1,227
                  
                  
                  $
                  963Legal,
      consulting and other professional expenses
                  
                  
                  3,342
                  
                  
                  
                  2,009Other
      expenses
                  
                  
                  1,569
                  
                  
                  
                  1,345Total
                  
                  $
                  6,138
                  
                  
                  $
                  4,317





General
and administrative expenses were $6.1 million for the three months ended
September 30, 2010, compared to $4.3 million for the three months ended
September 30, 2009, an increase of $1.8 million or 42.2%. The increase in
salaries, benefits and related costs was primarily attributable to an increase
in the number of key personnel and a change in the incentive compensation plans
for 2010. The increase in legal, consulting and other professional expenses
relates primarily to costs incurred in connection with ongoing legal matters,
including our dispute with Takeda.





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 $2.6 million for the
three months ended September 30, 2010, compared to $3.0 million for the three
months ended September 30, 2009, a decrease of $445,000 or 14.6%. 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.





Milestone
Royalties − Related Parties





Milestone
royalties – related parties expense was $1.3 million for the three months ended
September 30, 2010. The milestone royalties consist of $1.0 million payable to
SAG upon the filing of the Japanese marketing application, and $250,000 payable
to SAG, reflecting 5% of the $5.0 million development milestone payment that we
earned from Abbott in September 2010. There was no corresponding expense during
the three months ended September 30, 2009.





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 $1.8 million for the three
months ended September 30, 2010 from $1.7 million for the three months ended
September 30, 2009, which was consistent with the increase of net sales and
product royalty revenue from that product in the U.S.




25




Non-Operating
Income and Expense





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





Three Months EndedSeptember 30,(In
      thousands)
                
                2010
                
                
                2009Interest
      income
                
                $
                113
                
                
                $
                211Other
      expense, net
                
                
                (115
                )
                
                
                (250
                )Total
                
                $
                (2
                )
                
                $
                (39
                )





Interest
income was $113,000 for the three months ended September 30, 2010, compared to
$211,000 for the three months ended September 30, 2009, a decrease of $98,000,
or 46.4%. The decrease was primarily due to lower 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. Our remaining investment in ARS was redeemed in June 2010. The
increase in other income was primarily attributable to foreign exchange gains
and losses.





Income
Taxes





We
recorded a tax provision of $423,000 and $1.5 million for the three months ended
September 30, 2010 and 2009, respectively. The tax provision for the three
months ended September 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 September 30, 2010, for which no tax
benefit was recognized. As of September 30, 2010, we had an outstanding
non-current income tax liability of approximately $798,000 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 September 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 nine months ended September 30, 2010 and September 30, 2009





Revenues





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





Nine Months EndedSeptember 30,(In
      thousands)
                  
                  2010
                  
                  
                  2009Research
      and development revenue
                  
                  $
                  15,918
                  
                  
                  $
                  19,966Product
      royalty revenue
                  
                  
                  29,785
                  
                  
                  
                  27,227Co-promotion
      revenue
                  
                  
                  3,357
                  
                  
                  
                  3,406Contract
      and collaboration revenue
                  
                  
                  459
                  
                  
                  
                  451Total
                  
                  $
                  49,519
                  
                  
                  $
                  51,050





Total
revenues were $49.5 million for the nine months ended September 30, 2010
compared to $51.1 million for the nine months ended September 30, 2009, a
decrease of $1.6 million or 3.0%.





Research
and development revenue was $15.9 million for the nine months ended September
30, 2010 compared to $20.0 million for the nine months ended September 30, 2009,
a decrease of $4.1 million or 20.3%. The decrease was primarily due to reduced
revenue recognized in respect to the OBD program for Amitiza in the U.S.,
partially offset by $12.0 million in revenue recognized under the agreement with
Abbott. The research and development revenue recognized under the agreement with
Takeda decreased to $3.9 million for the nine months ended September 30, 2010
from $12.5 million for the nine months ended September 30, 2009, generally
reflecting the July 2009 completion of the two phase 3 efficacy trials 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.




26




The
research and development revenue recognized under the agreement with Abbott
increased to $12.0 million for the nine months ended September 30, 2010 from
$7.4 million for the nine months ended September 30, 2009, reflecting the
revenue recognized from the $5.0 million milestone payment earned in September
2010 upon filing the Japanese marketing application. We recognize 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 nine months ended September 30, 2010 and 2009, we
recognized $29.8 million and $27.2 million, respectively, of product royalty
revenue, an increase of $2.6 million or 9.4%, reflecting mainly a higher price
per pill as the volume was essentially flat.





Co-promotion
revenues represent reimbursement by Takeda of co-promotion costs for our
specialty sales force. For the nine months ended September 30, 2010 and 2009, we
recognized $3.4 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 nine months
ended September 30, 2010 and 2009:





Nine Months EndedSeptember 30,(In
      thousands)
                
                2010
                
                
                2009Direct
      costs:Amitiza
                
                $
                11,988
                
                
                $
                20,071Cobiprostone
                
                
                469
                
                
                
                2,145SPI-017
                
                
                1,891
                
                
                
                2,625Rescula
                
                
                526
                
                
                
                148Other
                
                
                109
                
                
                
                438Total
                
                
                14,983
                
                
                
                25,427Indirect
      costs
                
                
                1,498
                
                
                
                1,542Total
                
                $
                16,481
                
                
                $
                26,969





Total
research and development expenses for the nine months ended September 30, 2010
were $16.5 million compared to $27.0 million for the nine months ended September
30, 2009, a decrease of $10.5 million or 38.9%. The decrease was primarily due
to the July 2009 completion of the initial two phase 3 pivotal clinical trials
of Amitiza for the treatment of OBD and the July 2009 completion of the phase 2
clinical trial of cobiprostone for the prevention of NSAID-induced ulcers
partially offset by a slight decrease 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 nine months
ended September 30, 2010 and 2009:





Nine Months EndedSeptember 30,(In
      thousands)
                  
                  2010
                  
                  
                  2009Salaries,
      benefits and related costs
                  
                  $
                  3,895
                  
                  
                  $
                  2,873Legal,
      consulting and other professional expenses
                  
                  
                  10,079
                  
                  
                  
                  3,998Other
      expenses
                  
                  
                  4,527
                  
                  
                  
                  3,825Total
                  
                  $
                  18,501
                  
                  
                  $
                  10,696





General
and administrative expenses were $18.5 million for the nine months ended
September 30, 2010, compared to $10.7 million for the nine months ended
September 30, 2009, an increase of $7.8 million or 73.0%. The increase in
salaries, benefits and related costs was primarily attributable to an increase
in the number of key personnel and a change in the incentive compensation plans
for 2010. The increase in legal, consulting and other professional expenses
relates primarily to costs incurred in connection with ongoing legal matters,
including our dispute with Takeda.




27




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 $7.1 million for the
nine months ended September 30, 2010, compared to $7.7 million for the nine
months ended September 30, 2009, a decrease of $645,000 or 8.3%. 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.





Milestone
Royalties − Related Parties





Milestone
royalties – related parties expense was $1.3 million for the nine months ended
September 30, 2010, compared to $875,000 for the nine months ending September
30, 2009. The milestone royalties of $1.3 million consist of $1.0 million
payable to SAG upon the filing of the Japanese marketing application, and
$250,000 payable to SAG, reflecting 5% of the $5.0 million development milestone
payment that we earned from Abbott in September 2010. The milestone royalties of
$875,000 for the nine months ended September 30, 2009 reflect the 5% royalty
payment to SAG as a result of the $10.0 million upfront payment and the $7.5
million development milestone payment we received from Abbott in
2009.





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 $5.3 million for the nine
months ended September 30, 2010 from $4.8 million for the nine months ended
September 30, 2009, which was consistent with the increase of net sales and
product royalty revenue from this product in the U.S.





Non-Operating
Income and Expense





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





Nine Months EndedSeptember 30,(In
      thousands)
                
                2010
                
                
                2009Interest
      income
                
                $
                501
                
                
                $
                742Other
      expense, net
                
                
                (342
                )
                
                
                (36
                )Total
                
                $
                159
                
                
                $
                706





Interest
income was $501,000 for the nine months ended September 30, 2010 compared to
$742,000 for the nine months ended September 30, 2009, a decrease of $241,000,
or 32.5%. The decrease was primarily due to lower 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 expense was primarily
attributable to foreign exchange gains and losses.





Income
Taxes





We
recorded a tax provision of $943,000 and $2.7 million for the nine months ended
September 30, 2010 and 2009, respectively. The tax provision for the nine months
ended September 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 nine months ended September 30, 2010, for which no tax
benefit was recognized. As of September 30, 2010, we had an outstanding
non-current income tax liability of approximately $798,000 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 September 30, 2010 was mainly a result of our interpretation of nexus in
certain states related to revenue sourcing for state income tax
purposes.




28




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 $1.4 million for the nine
months ended September 30, 2010, compared to income before taxes of $7.0
million for the nine months ended September 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 resulting
from the ongoing legal matters, including our dispute with Takeda.





Our
segment in Europe recorded a loss before taxes of $2.0 million for the nine
months ended September 30, 2010, compared to a loss before taxes of $2.8 million
for the nine months ended September 30, 2009.





Our
segment in Asia recorded income before taxes of $1.6 million for the nine months
ended September 30, 2010, compared to a loss before taxes of $3.5 million during
the nine months ended September 30, 2009. These results reflect the revenue
recognized from the $5.0 milestone payment earned from Abbott in September 2010
offset by the $1.2 million milestone royalty expenses to SAG.





(In
      thousands)
                  
                  Americas
                  
                  
                  Europe
                  
                  
                  Asia
                  
                  
                  IntercompanyEliminations
                  
                  
                  ConsolidatedThree
      Months Ended September 30, 2010Total
      revenues
                  
                  $
                  13,149
                  
                  
                  $
                  43
                  
                  
                  $
                  8,037
                  
                  
                  $
                  (321
                  )
                  
                  $
                  20,908Income
      (loss) before taxes
                  
                  
                  124
                  
                  
                  
                  (744
                  )
                  
                  
                  3,451
                  
                  
                  
                  -
                  
                  
                  
                  2,831Three
      Months Ended September 30, 2009Total
      revenues
                  
                  $
                  14,336
                  
                  
                  $
                  -
                  
                  
                  $
                  3,765
                  
                  
                  $
                  (270
                  )
                  
                  $
                  17,831Income
      (loss) before taxes
                  
                  
                  3,553
                  
                  
                  
                  (1,513
                  )
                  
                  
                  (659
                  )
                  
                  
                  -
                  
                  
                  
                  1,381Nine
      Months Ended September 30, 2010Total
      revenues
                  
                  $
                  37,464
                  
                  
                  $
                  43
                  
                  
                  $
                  12,880
                  
                  
                  $
                  (868
                  )
                  
                  $
                  49,519Income
      (loss) before taxes
                  
                  
                  1,412
                  
                  
                  
                  (1,979
                  )
                  
                  
                  1,641
                  
                  
                  
                  -
                  
                  
                  
                  1,074Nine
      Months Ended September 30, 2009Total
      revenues
                  
                  $
                  43,596
                  
                  
                  $
                  -
                  
                  
                  $
                  8,144
                  
                  
                  $
                  (690
                  )
                  
                  $
                  51,050Income
      (loss) before taxes
                  
                  
                  6,954
                  
                  
                  
                  (2,848
                  )
                  
                  
                  (3,474
                  )
                  
                  
                  -
                  
                  
                  
                  632Identifiable
      AssetsAs
      of September 30, 2010
                  
                  $
                  131,874
                  
                  
                  $
                  6,277
                  
                  
                  $
                  7,165
                  
                  
                  $
                  (4,221
                  )
                  
                  $
                  141,095As
      of December 31, 2009
                  
                  
                  134,714
                  
                  
                  
                  864
                  
                  
                  
                  11,294
                  
                  
                  
                  (1,901
                  )
                  
                  
                  144,971





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 as of September 30,
2010 and December 31, 2009:




29




September 30,
                
                
                December 31,(In
      thousands)
                
                2010
                
                
                2009Cash
      and cash equivalents
                
                $
                39,290
                
                
                $
                26,714Investments,
      current
                
                
                59,789
                
                
                
                72,434Investments,
      non-current
                
                
                11,646
                
                
                
                19,167Total
                
                $
                110,725
                
                
                $
                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 $7.6
million to $110.7 million at September 30, 2010 from $118.3 million at December
31, 2009 mainly due to the use of cash in our operating activities.





As of
September 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 and U.S. government
securities.





Cash
Flows





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





Nine Months Ended September 30,(In
      thousands)
                
                2010
                
                
                2009Cash
      provided by (used in):Operating
      activities
                
                $
                (7,637
                )
                
                $
                2,965Investing
      activities
                
                
                19,760
                
                
                
                (34,112
                )Financing
      activities
                
                
                11
                
                
                
                14Effect
      of exchange rates
                
                
                442
                
                
                
                889Net
      increase in cash and cash equivalents
                
                $
                12,576
                
                
                $
                (30,244
                )





Nine
Months Ended September 30, 2010





Net cash
used in operating activities was $7.6 million for the nine months ended
September 30, 2010. This reflected a net income of $131,000, a decrease in
deferred revenue of $10.1 million relating to the previously received funds
under the 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 $19.8 million for the nine months ended
September 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 $11,000 for the nine months ended September
30, 2010 resulted from the proceeds we received under our employee stock
purchase plan.





Nine
Months Ended September 30, 2009





Net cash
provided by operating activities was $3.0 million for the nine months ended
September 30, 2009. This reflected a net loss of $2.1 million, which included
$2.3 million in non-cash items and a $3.5 million decrease in unbilled revenue,
offset in part by changes in other operating assets and
liabilities.





Net cash
used in investing activities of $34.1 million for the nine months ended
September 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 $14,000 for the nine months ended September
30, 2009 resulted from proceeds we received under our employee stock purchase
plan.




30




Off-Balance
Sheet Arrangements





As of
September 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.;


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


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


·
              activities
      to resolve our ongoing legal
matters;


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


·
              other
      business development activities, including investments in or acquisitions
      of other businesses, products and
technologies;


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


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


·
              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 dispute 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 September 30, 2010, we have sufficient liquidity to
fund our expected business operations 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.





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 via derivative instruments.




31




Recent
Accounting Pronouncements





Recent
accounting pronouncements applicable to our financial statements are described
in Note 2 to the accompanying condensed consolidated financial statements
included in Part I, Item 1 to this Quarterly Report on Form 10-Q.





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 September 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 September 30, 2010 and
December 31, 2009, approximately 53.8% 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 Company’s remaining ARS were redeemed at par value of $10.0 million
per the agreement with the ARS broker.





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 September 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 the evaluation we carried out,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of September 30, 2010, our disclosure controls and procedures were effective to
provide reasonable assurance that the information required to be disclosed by us
in the reports that we file or submit under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified under the applicable rules and forms 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.





b)
Changes in Internal Controls





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




32




Part
II — OTHER INFORMATION





Item
1.Legal
Proceedings





As
reported in our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2010 and June 30, 2010, 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. All the arbitrators have been confirmed and the arbitration
proceedings have commenced. We have spent and expect to spend significant
resources in the dispute with Takeda and these arbitration 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. There
have not been any material changes from the risk factors as previously disclosed
in our Form 10-K.





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 September 30,
2010, we did not purchase any shares under this program.





Item
3. Defaults Upon Senior
Securities





None.





Item
4. (Removed and
Reserved)





Item
5. Other
Information





None.




33




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




34




SIGNATURES


Pursuant
to the requirements 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.November
      3, 2010
                                By:
                                /s/  RYUJI
      UENORyuji
      Ueno, M.D., Ph.D., Ph.D.Chief
      Executive Officer, Chief Scientific Officer andChairman of the Board
      of Directors(Principal
      Executive Officer)November
      3, 2010
                                By:
                                /s/  JAN
      SMILEKJan
      SmilekChief
      Financial Officer(Principal
      Financial and Accounting
Officer)




35




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





36