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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-19119

Cephalon, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Registrant's telephone number, including area code: (610) 344-0200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

        Indicate by check mark whether the registrant (1) has filed all reports 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 ý    No o.

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1933). Yes ý    No o.

        The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2004, was approximately $1.6 billion. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Nasdaq National Market on June 30, 2004. For purposes of making this calculation only, the registrant has defined affiliates as including only directors and executive officers and shareholders holding greater than 10% of the voting stock of the registrant as of June 30, 2004.

        The number of shares of the registrant's Common Stock outstanding as of March 7, 2005 was 58,030,839.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive proxy statement for its 2005 annual meeting of stockholders are incorporated by reference into Items 10, 11, 12, 13, and 14 of Part III of this Form 10-K.

TABLE OF CONTENTS

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements contained in this report constitute our expectations or forecasts of future events as of the date this report was filed with the SEC and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as "anticipate," "will," "estimate," "expect," "project," "intend," "should," "plan," "believe," "hope," and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:

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our dependence on sales of PROVIGIL® (modafinil) tablets [C-IV], ACTIQ® (oral transmucosal fentanyl citrate) [C-II] and GABITRIL® (tiagabine hydrochloride) in the United States and the market prospects and future marketing efforts for these products, including with respect to any new formulations or indications for such products;



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any potential expansion of the authorized uses of our existing products;



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our anticipated scientific progress in our research programs and our development of potential pharmaceutical products including our ongoing or planned clinical trials, the timing and costs of such trials and the likelihood or timing of revenues from these products, if any;



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the timing and predictability of regulatory approvals for our product candidates;



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our ability to adequately protect our technology and enforce our intellectual property rights and the future expiration of patent and/or regulatory exclusivity on certain of our products;



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our ability to realize the anticipated benefits of our acquisition of CIMA LABS INC.;



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our future cash flow, our ability to service or repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected level of operations; and



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other statements regarding matters that are not historical facts or statements of current condition.

        Any or all of our forward-looking statements in this report and in the documents we have referred you to may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Therefore, you should not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, among others:

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the acceptance of our products by physicians and patients in our current markets and new markets;



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our ability to obtain regulatory approvals of our product candidates or of expanded indications for certain of our existing products;



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scientific, regulatory or other setbacks in our research programs, clinical trials, or manufacturing activities with respect to our product candidates, particularly ATTENACE™, NUVIGIL™, ORAVESCENT® fentanyl, GABITRIL for use in generalized anxiety disorder and CEP-1347, or our existing products;



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unanticipated cash requirements to support current operations, expand our business or incur capital expenditures;

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the inability to adequately protect our key intellectual property rights, including as a result of an adverse adjudication in connection with the PROVIGIL or ACTIQ patent litigation;



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the loss of key management or scientific personnel;



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the activities of our competitors in the industry, including the filing of Abbreviated New Drug Applications (ANDAs) with a Paragraph IV certification for any product containing modafinil or the entry of a generic competitor to ACTIQ;



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the loss of one or more key customers of CIMA LABS;



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market conditions in the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both; and



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enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to us or our interests.

        We do not intend to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We discuss in more detail the risks that we anticipate in the section included in Part II, Item 7 hereof and entitled "Certain Risks Related to our Business." This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

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PART I

ITEM 1.    BUSINESS

Overview

        Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat sleep and neurological disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and numerous products in various countries throughout Europe. Through our wholly-owned subsidiary, CIMA LABS INC., we develop and manufacture orally disintegrating tablets using proprietary technologies that allow an active drug ingredient to be formulated into a new dosage form that quickly disintegrates in the mouth without chewing or the need for water.

        Our three most important products PROVIGIL® (modafinil) Tablets [C-IV], ACTIQ® (oral transmucosal fentanyl citrate) [C-II] and GABITRIL® (tiagabine hydrochloride), comprised approximately 90% of our worldwide net sales. Approximately 95% of PROVIGIL, ACTIQ and GABITRIL sales for the year ended December 31, 2004 were in the U.S. market. We market our U.S. products through a nearly 500-person field sales and sales management team that calls on primary care physicians (e.g., internists, general practitioners and family practitioners), neurologists, psychiatrists, oncologists and pain and sleep specialists. Outside of the United States, we have a sales organization in France numbering approximately 140 persons detailing our products to office-based and hospital-based physicians, and sales and marketing organizations with approximately 70 persons in the aggregate that support our presence in other European countries, including the United Kingdom, Germany, the Republic of Ireland, Switzerland and Austria. In territories where we have not established our own sales and marketing groups, we market our products through a select group of distribution companies with expertise in the development, marketing and sale of pharmaceuticals in those territories. In most cases, we have granted rights to our distribution partners to market, sell and distribute our products in their respective territories, and we supply finished product for resale in such territories.

        During 2004, we advanced our efforts to broaden the range of clinical uses that are approved by regulatory authorities, seek new and improved formulations of our currently marketed products and license or acquire new product candidates. Some notable achievements include:

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we received final approval from the U.S. Food and Drug Administration to expand the label for PROVIGIL to include improving wakefulness in patients with excessive sleepiness associated with shift work sleep disorder (SWSD) and in patients with obstructive sleep apnea/hypopnea syndrome (OSA/HS);



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we submitted a supplemental new drug application (sNDA) to the FDA seeking marketing approval of ATTENACE™ (modafinil), a new proprietary once-daily dosage form of modafinil for the treatment of attention deficit/hyperactivity disorder (ADHD) in children and adolescents between the ages of six and 17. We are targeting launch of ATTENACE by early 2006;



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we recently reported positive Phase 3 clinical trials results with NUVIGIL™ (armodafinil), a single-isomer of PROVIGIL, in narcolepsy, OSA/HS and SWSD and expect to submit an NDA for NUVIGIL to the FDA in March 2005;



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we initiated a Phase 3 clinical program evaluating GABITRIL for the treatment of generalized anxiety disorder (GAD) and, if the results of these studies are positive, expect to submit an NDA to the FDA in early 2006;



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we submitted to the FDA an sNDA seeking regulatory approval of a sugar-free formulation of ACTIQ and anticipate approval by mid-2005; and

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through our acquisition of CIMA LABS, we acquired the ORAVESCENT® fentanyl product candidate. ORAVESCENT fentanyl is in Phase 3 clinical trials for the treatment of breakthrough cancer pain in opioid-tolerant patients, and we are targeting submission of an NDA to the FDA later this year and approval of this product by the FDA in late 2006.

        We also have significant discovery research programs focused on developing therapeutics to treat neurological and oncological disorders. Our technology principally focuses on an understanding of kinases and the role they play in cellular survival and proliferation. We have coupled this knowledge with a library of novel, small, synthetic molecules that are orally-active and inhibit the activities of specific kinases and currently have three molecules in clinical development. One such molecule, CEP-1347, is being evaluated by us and our partner, H. Lundbeck A/S, in an 800-patient, randomized, double-blind, placebo-controlled, Phase 2/3 clinical trial for the treatment of patients with early stage Parkinson's disease.

        Our future success is highly dependent on obtaining and maintaining patent protection for our products and technology. With respect to PROVIGIL, we have filed patent infringement lawsuits against six generic companies based upon the abbreviated new drug applications (ANDAs) filed by these companies seeking FDA approval to market a generic version of modafinil. The first five lawsuits are currently in the discovery phase; we anticipate that the first trial will begin no earlier than late 2005. We filed the sixth lawsuit in February 2005. See "Management's Discussion and Analysis of Financial Condition—Certain Risks Related to Our Business." For ACTIQ, the patents covering the previous and current formulations of the product are set to expire as early as May 2005 and September 2006, respectively. As a result of the License and Supply Agreement we entered into with Barr Laboratories, Inc. in July 2004, we could face generic competition from Barr prior to September 2006 if we receive FDA approval of ORAVESCENT® fentanyl before this date. See "Acquisition of CIMA LABS INC." below. In December 2004, we announced that FDA had acknowledged receipt of an ANDA filed by Barr seeking approval for a generic form of ACTIQ. In January 2005, we filed a patent infringement lawsuit against Barr to defend our patents until the license effective date. Neither the ANDA filing nor the lawsuit modifies the existing license grant to Barr, and we do not expect any change in the anticipated date of Barr's entry to the market (absent resolution of the lawsuit). We intend to vigorously defend the validity, and prevent infringement of, our patents. The loss of patent protection on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or patent expiration, would materially impact our results of operations.

        As a biopharmaceutical company, our activities and operations are subject to significant government regulations and oversight. In September 2004, we announced that we had received subpoenas from the U.S. Attorney's Office in Philadelphia with respect to PROVIGIL, ACTIQ and GABITRIL. This investigation is ongoing and appears to be focused on our sales and promotional practices. We are cooperating with the investigation and are providing documents to the government. In addition, we have engaged in ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of instances of abuse and diversion of ACTIQ. We have had similar discussions with the Office of the Connecticut Attorney General; in September 2004, we received a voluntary request for information from the Office of the Connecticut Attorney General asking us to provide information generally relating to our sales and promotional practices for our U.S. products. We have agreed to comply with this voluntary request. Each of these matters may involve the bringing of criminal charges and fines, and/or civil penalties. We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse outcome. However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.

        For the year ended December 31, 2004, our total revenues and net loss were $1.0 billion and $73.8 million, respectively. Our revenues from U.S. and European operations are detailed in Note 18 to

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our consolidated financial statements included in Item 8 of this Form 10-K. The third quarter of 2001 was our first profitable quarter from commercial operations since inception. Our accumulated deficit at December 31, 2004 was $395.1 million. These accumulated losses have resulted principally from costs incurred in research and development, including clinical trials, and from selling, general and administrative costs associated with our pre-commercial and commercial activities. Prior to 2001, we funded our operations principally from the proceeds of private and public sales of our equity and debt securities. While we seek to increase profitability and cash flow from operations, we will need to continue to achieve growth of product sales and other revenues sufficient for us to attain these objectives. The rate of our future growth will depend, in part, upon our ability to obtain and maintain adequate intellectual property protection for our currently marketed products, or to successfully develop or acquire and commercialize new product candidates.

        We are a Delaware corporation with our principal executive offices located at 41 Moores Rd., P.O. Box 4011, Frazer, Pennsylvania, 19355. Our telephone number is (610) 344-0200 and our web site address is www.cephalon.com. Our research and development headquarters are located in West Chester, Pennsylvania and we also have offices in Salt Lake City, Utah, suburban Minneapolis-St. Paul, Minnesota, France, the United Kingdom, Germany and Switzerland. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance in PROVIGIL, ATTENACE and NUVIGIL. We also have manufacturing facilities in Salt Lake City, Utah, for the production of ACTIQ for worldwide distribution and sale, and Eden Prairie and Brooklyn Park, Minnesota, for the production of orally disintegrating versions of drugs for pharmaceutical company partners.

        Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Investor Relations section of our web site as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web site address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our web site.

ACQUISITION OF CIMA LABS INC.

        On August 12, 2004, we completed our acquisition of CIMA LABS INC. Under the Agreement and Plan of Merger dated November 3, 2003, we acquired each outstanding share of CIMA LABS common stock for $34.00 per share in cash. The total cash paid to CIMA LABS stockholders in the transaction was approximately $482.5 million, net of CIMA LABS' existing cash on hand, or $409.4 million, net of its cash, cash equivalents and investments. As a result of the acquisition, we obtained the rights to CIMA LABS' ORAVESCENT fentanyl product candidate, which is currently in Phase 3 clinical trials for the treatment of breakthrough cancer pain in opioid-tolerant patients. ORAVESCENT fentanyl utilizes an enhanced absorption transmucosal drug delivery technology that we believe may facilitate the rapid onset of pain relief in such patients. We are targeting approval of this product by the FDA in late 2006.

        CIMA LABS also develops and manufactures orally disintegrating tablets using its proprietary technologies, OraSolv® and DuraSolv®, that allow an active drug ingredient to be formulated into a new dosage form that quickly disintegrates in the mouth without chewing or the need for water. CIMA LABS enters into collaborative agreements with pharmaceutical companies to develop products based on its oral drug delivery technologies. It currently manufactures for its partners, including AstraZeneca, N.V. Organon and Wyeth, five prescriptions and three over-the-counter pharmaceutical brands incorporating either the OraSolv or DuraSolv technologies. Revenues from these arrangements consist of net sales of manufactured product to partners, product development and licensing fees and royalties.

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For the period August 13, 2004 to December 31, 2004, revenues attributable to CIMA LABS totaled $28.4 million. CIMA LABS has facilities in Eden Prairie and Brooklyn Park, Minnesota, which house its executive offices, manufacturing facility, research and product development center and warehouse space.

        To secure FTC clearance of the CIMA LABS acquisition, we entered into a license and supply agreement with Barr whereby we agreed to license to Barr our U.S. rights to any intellectual property related to ACTIQ. The license to ACTIQ will become effective upon the earliest to occur of (i) final FDA approval of ORAVESCENT fentanyl, (ii) September 5, 2006, if we have not received either (A) an approvable letter from FDA for the sugar free formulation of ACTIQ by July 1, 2005 (or final FDA approval within 180 days of such approvable letter) or (B) a pediatric extension for ACTIQ or (iii) February 3, 2007, if we have received a pediatric extension for ACTIQ. As we currently expect to receive both a pediatric extension for ACTIQ prior to September 2006 and FDA approval for the sugar-free formulation of ACTIQ within the timeframe agreed upon with the FTC, we anticipate that the Barr license will be effective upon ORAVESCENT fentanyl approval. Under the agreement, Barr also may receive a license to the sugar-free formulation of ACTIQ under development; this license would become effective upon ORAVESCENT fentanyl approval by the FDA or if the sugar-free approval timelines described above are not achieved. We have filed an sNDA with the FDA requesting approval for the sugar-free formulation of ACTIQ, and we anticipate final FDA approval of this formulation by mid-2005.

        Under the license and supply agreement, we also agreed to transfer to Barr our technological know-how and intellectual property related to ACTIQ and to sell to Barr, for period of up to three years, a generic form of ACTIQ for resale in the United States if Barr is unable to manufacture an FDA-approved generic version of ACTIQ by the date the license takes effect. In addition, we have agreed to forbear from asserting any remaining patent rights in ACTIQ against other parties beginning on the earlier of August 3, 2007 or six months following the effective date of Barr's license.

PROVIGIL

Overview

        Modafinil, the active ingredient in PROVIGIL, is the first in a new class of wakefulness-promoting agents. While its exact mechanism of action remains to be fully elucidated, modafinil appears to act selectively in regions of the brain believed to regulate normal sleep and wakefulness. In December 1998, the FDA approved PROVIGIL to improve wakefulness in patients with excessive daytime sleepiness associated with narcolepsy and we launched the product in the United States in February 1999. In January 2004, we received FDA approval to expand the label for PROVIGIL to include improving wakefulness in patients with excessive sleepiness associated with OSA/HS and SWSD. For patients with OSA/HS, PROVIGIL is indicated as an adjunct to standard treatments for the underlying condition. In clinical studies, PROVIGIL was found to be generally well-tolerated, with a low incidence of adverse events relative to placebo. The most commonly observed adverse events were headache, infection, nausea, nervousness, anxiety and insomnia.

        Outside of the U.S., modafinil currently is approved in more than 30 countries, including France, the United Kingdom, Ireland, Italy and Germany, for the treatment of excessive daytime sleepiness associated with narcolepsy. In certain of these countries, including the United Kingdom, France, the Republic of Ireland and Germany, we also have approval to market modafinil to treat excessive daytime sleepiness in patients with OSA/HS. In the United Kingdom, PROVIGIL also is indicated for excessive sleepiness associated with SWSD.

Narcolepsy

        Narcolepsy is a debilitating, lifelong sleep disorder whose symptoms often first arise in late childhood. Its most common symptom is an uncontrollable propensity to fall asleep during the day.

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This sleep disorder impairs a person's ability to perform basic daily activities, significantly impacting their quality of life. There is no known cure for narcolepsy, which is estimated by the National Institutes of Health (NIH) to affect approximately 200,000 people in the United States of which many remain undiagnosed and untreated. PROVIGIL has been recognized by the American Academy of Sleep Medicine as a standard of therapy for the treatment of excessive daytime sleepiness associated with narcolepsy.

Obstructive Sleep Apnea/Hypopnea Syndrome

        Individuals with OSA/HS experience frequent awakenings, sometimes occurring hundreds of times during the night as a result of blockage of the airway passage, usually the relaxation and collapse of the soft tissue in the back of the throat during sleep. Symptoms of OSA/HS may include restless sleep, loud, heavy snoring (often interrupted by silence and then gasps), falling asleep during the day, morning headaches, loss of energy, trouble concentrating, irritability, forgetfulness, mood or behavior changes, anxiety or depression, and obesity. According to the National Center on Sleep Disorders Research, OSA is estimated to afflict at least 15 million Americans. Continuous positive airway pressure, or CPAP, a medical device that blows air through the nasal passage, is the primary treatment for OSA/HS. However, approximately 30 percent of patients that use CPAP continue to experience excessive sleepiness, for which PROVIGIL may be an appropriate adjunctive treatment.

Shift Work Sleep Disorder

        SWSD is defined as a persistent or recurrent pattern of sleep disruption that leads to excessive sleepiness or insomnia due to a mismatch between the natural circadian sleep-wake pattern and the sleep-wake schedule required by a person's environment. Characterized by extreme sleepiness, insomnia, headaches and difficulty concentrating, SWSD particularly affects those who frequently rotate shifts or work at night, which is contrary to the body's natural circadian rhythms. According to the National Institutes of Health, about 20 million U.S. adults, or 20 to 25 percent of the national labor force, perform shift work. Excessive sleepiness is a major problem for shift workers, with several million experiencing this disorder.

Market expansion strategies

        While applicable laws and regulations prevent us from promoting our products for uses beyond those contained in the approved label, our analysis of prescription data for PROVIGIL in the United States indicates that many physicians have elected to prescribe the product to treat conditions outside its currently labeled indications, including for excessive sleepiness associated with depression, fatigue associated with multiple sclerosis and for ADHD.

        Our ongoing clinical programs have been focused on the exploration of the potential use of modafinil in treating other clinical conditions. To that end, in December 2004 we submitted an sNDA to the FDA seeking marketing approval of ATTENACE, a new proprietary once-daily dosage form of modafinil for the treatment of ADHD in children and adolescents between the ages of six and 17. The sNDA was based on the results of three multi-center clinical trials that show that new proprietary once-daily dosage forms of ATTENACE significantly improve symptoms of ADHD in children and adolescents. In three nine-week, double-blind, placebo-controlled studies, 600 children and adolescents between the ages of six and 17 with ADHD were randomized to either placebo or ATTENACE. The primary endpoint in all studies was the teacher-completed school version of the ADHD Rating Scale IV. All of the ATTENACE-treated groups showed a highly statistically significant improvement on the primary endpoint compared to placebo. ATTENACE was generally well tolerated, and the most common side effects observed in these studies were consistent with those observed in other studies of this compound and included insomnia, headache and loss of appetite. We are targeting launch of ATTENACE by early 2006.

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        Finally, an important focus of our PROVIGIL strategy is the development of follow-on compounds. In early 2005, we announced that Phase 3 clinical trials of 150- and 250-milligram daily doses of NUVIGIL in patients suffering from either excessive sleepiness associated with narcolepsy, SWSD or OSA/HS show that NUVIGIL significantly improves wakefulness and the overall clinical condition of patients as compared to placebo. The 12-week, double-blind, randomized, placebo-controlled Phase 3 studies of approximately 1,000 patients included one study of excessive sleepiness in narcolepsy, one study in SWSD and two studies in OSA/HS. The primary endpoints in all studies were measures of objective sleep latency (Maintenance of Wakefulness Test or Multiple Sleep Latency Test) and the physician rating of Clinical Global Impression-Change. These primary endpoints are identical to those studied for the currently approved indications for PROVIGIL. In each study, patients treated with NUVIGIL showed a highly statistically significant improvement on both primary endpoints compared to placebo. In these studies, NUVIGIL was generally well tolerated. The most common adverse effects observed included headache, nausea, dizziness, insomnia and anxiety. Based on the results of the Phase 3 trials, we expect to file an NDA for NUVIGIL in March 2005 and launch this new compound in the first quarter of 2006.

Intellectual Property Position

        We own U.S. and foreign patent rights that expire between 2014 and 2015 and cover pharmaceutical compositions and uses of modafinil, specifically, certain particle sizes of modafinil contained in the pharmaceutical composition. Ultimately, these patents might be found invalid if challenged by a third party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents. To date, the FDA has accepted six ANDAs for pharmaceutical products containing modafinil. Each of these ANDAs for modafinil filed with the FDA contain a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size modafinil patent covering PROVIGIL is invalid or will not be infringed by the ANDA product. We have filed patent infringement lawsuits in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., Barr Laboratories, Inc., and Sandoz Inc. based upon the ANDAs filed by each of these companies with the FDA. The lawsuits claim infringement of our U.S. Patent No. RE37,516, which covers pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL. Each of the defendants has asserted defenses and/or counterclaims for non-infringement and patent invalidity, and defendants Teva, Ranbaxy and Mylan have moved to amend their answers and counterclaims to state inequitable conduct as a defense to our claims (we have opposed the motions and a decision is pending). These lawsuits are currently in the discovery phase; we expect a trial to begin no earlier than late 2005. We also recently filed suit against Carlsbad Technology, Inc. with respect to the ANDA they have filed with the FDA, and discovery in this action has not yet commenced. While we intend to vigorously defend the validity of this patent and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful.

        Barr, Mylan and Ranbaxy have each announced the receipt of tentative FDA approval for their respective generic versions of PROVIGIL. Under the provisions of the Hatch-Waxman Act, we are entitled to a 30-month stay of final FDA approval of these generic versions of PROVIGIL. This stay precludes these companies from selling a modafinil-based product until the earlier to occur of the conclusion of the lawsuit or June 2006. However, if the court finds the particle-size patent is invalid or not infringed, these companies could begin selling their modafinil-based products upon the expiration of our FDA orphan drug exclusivity, currently in December 2005, which would significantly and negatively impact revenues from PROVIGIL. We do not know whether the ANDAs filed by Teva, Sandoz or Carlsbad have been, or will be, tentatively approved by the FDA.

        If we complete clinical studies of PROVIGIL in pediatric patients that are acceptable to the FDA, the FDA could grant us a six-month extension of our orphan drug exclusivity (to June 2006) and six months of exclusivity beyond the 2014 expiration of the particle-size patent term.

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        We own composition of matter patents directed to NUVIGIL that are set to expire in May 2007 in the United States and in January 2007 outside the United States. Assuming success in attaining FDA approval for this compound in early 2006, we would expect to receive a three year period of marketing exclusivity (until early 2009). In addition, assuming this same timetable for approval, we would anticipate that the term of this patent would be extended under the Hatch-Waxman Act until approximately early 2009. If we perform an additional clinical study of this product in pediatric patients, the FDA could grant us six months of exclusivity beyond the expiration of the patent and the three-year period of marketing exclusivity (until mid-2009). We intend to perform such a study once a mutually agreed upon clinical protocol is reached with the FDA. We hold a patent covering a method of treating ADHD with modafinil, and patent applications covering the ATTENACE formulation, that currently are set to expire in 2020 and 2022, respectively. Assuming FDA approval, we would expect to receive a three year period of marketing exclusivity for the use of ATTENACE in ADHD (until early 2009). We also hold rights to other patents and patent applications directed to manufacturing processes, formulations, and uses of modafinil and to next generation modafinil products. We also own rights to various trademarks for our pharmaceutical products containing the active drug substance modafinil.

Manufacturing and Product Supply

        At our manufacturing facility in Mitry-Mory, France, we produce the active drug substance modafinil. In 2004, we continued a $30 million modernization and expansion project at this facility. We have two qualified manufacturers of finished commercial supplies of PROVIGIL, DSM Pharmaceuticals, Inc. and Patheon, Inc. Any future change in manufacturers or manufacturing processes requires regulatory approval. We seek to maintain inventories of active drug substance and finished products to protect against supply disruptions. We are in the process of qualifying manufacturers for finished commercial supplies of ATTENACE. We expect to qualify two suppliers of the active pharmaceutical ingredient and two manufacturers of finished commercial supplies for NUVIGIL.

Competition

        With respect to PROVIGIL, and, if approved, NUVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy in the United States. Many of these products, including methylphenidate products such as RITALIN® by Novartis, have been available for a number of years and are available in inexpensive generic forms. Moreover, as described above, we could face generic competition to PROVIGIL as early as December 2005, which would significantly and negatively impact our future sales of PROVIGIL and potentially NUVIGIL, if approved. If we are successful in obtaining FDA approval of ATTENACE for the treatment of ADHD in children and adolescents, we will face significant competition from established stimulants such as RITALIN® by Novartis, STRATERRA® by Eli Lilly, and CONCERTA® by McNeil Consumer, as well as from amphetamines such as DEXEDRINE® by GlaxoSmithKline and ADDERALL® by Shire.

ACTIQ

Overview

        ACTIQ is approved in the United States for the management of breakthrough cancer pain in opioid tolerant patients. It was approved by the FDA in November 1998 and was launched in the United States in March 1999. Following our acquisition of Anesta Corp. in October 2000, we relaunched ACTIQ in February 2001. In October 2002, we reacquired rights to ACTIQ in twelve countries, principally in Europe, from Elan Pharma International Limited. While applicable laws and regulations prevent us from promoting our product for uses beyond those contained in the approved label, our analysis of prescription data for ACTIQ in the United States indicated that many physicians have elected to prescribe the product to treat conditions outside its labeled indication.

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        ACTIQ uses our proprietary oral transmucosal delivery system (OTS®) to deliver fentanyl citrate, a powerful, Schedule II opioid analgesic. The OTS delivery system consists of a drug matrix that is mounted on a handle. It is designed to achieve rapid absorption of fentanyl through the oral mucosa (the lining of the mouth) and into the bloodstream. With ACTIQ, a patient places the product between his or her cheek and gum and moves it from side to side. A portion of the fentanyl citrate is rapidly absorbed through the mucosal tissues into the blood stream, while the remaining dose is swallowed and absorbed more slowly through the gastro-intestinal tract. Pain relief may begin within 15 minutes. ACTIQ is available in six dosage strengths to allow individualization of dosing. Side effects of ACTIQ are typical of opioid products and include somnolence, nausea, vomiting and dizziness. The greatest risk from improper use of ACTIQ, as with all opioid-based products, is the potential for respiratory depression, which can be life-threatening. We market ACTIQ under a comprehensive risk management program of educational and safe use messages that inform health care professionals, patients and their families of proper use, storage, handling and disposal of the product.

Breakthrough Cancer Pain

        One of the most challenging components of cancer pain is breakthrough pain. Breakthrough pain is a flare of moderate to severe pain that "breaks through" the medication patients use to control their persistent pain. Breakthrough pain may be related to a specific activity, or may occur spontaneously and unpredictably. Breakthrough cancer pain typically develops rapidly and often reaches maximum intensity in three to five minutes. It has a duration that varies from minutes to several hours and can be extremely painful and debilitating. Cancer patients who suffer from breakthrough pain may suffer a number of episodes every day. The ideal management of breakthrough pain requires medication that has a rapid onset of action and the ability for dosing to be tailored to the individual characteristics of the breakthrough pain episodes, such as intensity and duration.

License to Barr Laboratories, Inc.

        To secure FTC clearance of the CIMA LABS acquisition, we entered into a license and supply agreement with Barr Laboratories, Inc. whereby we agreed to license to Barr our U.S. rights to any intellectual property related to ACTIQ. The license to ACTIQ will become effective upon the earliest to occur of (i) final FDA approval of ORAVESCENT fentanyl, (ii) September 5, 2006, if we have not received either (A) an approvable letter from FDA for the sugar free formulation of ACTIQ by July 1, 2005 (or final FDA approval within 180 days of such approvable letter) or (B) a pediatric extension for ACTIQ or (iii) February 3, 2007, if we have received a pediatric extension for ACTIQ. As we currently expect approval of ORAVESCENT fentanyl in the late 2006 and FDA approval for the sugar-free formulation of ACTIQ within the timeframe agreed upon with the FTC, we anticipate that the Barr license will be effective upon approval of ORAVESCENT fentanyl by the FDA. Under the agreement, Barr also may receive a license to the sugar-free formulation of ACTIQ under development; this license would become effective upon ORAVESCENT fentanyl approval by the FDA or if the sugar-free approval timelines described above are not achieved. We have filed an sNDA with the FDA requesting approval for the sugar-free formulation of ACTIQ, and we anticipate final FDA approval of this formulation by mid-2005.

        Under the license and supply agreement, we also agreed to transfer to Barr our technological know-how and intellectual property related to ACTIQ and to sell to Barr, for period of up to three years, a generic form of ACTIQ for resale in the United States if Barr is unable to manufacture an FDA-approved generic version of ACTIQ by the date the license takes effect. In addition, we have agreed to forbear from asserting any remaining patent rights in ACTIQ against other parties beginning on the earlier of August 3, 2007 or six months following the effective date of Barr's license.

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Intellectual Property Position

        We hold an exclusive license to the U.S. patents covering the currently approved compressed powder pharmaceutical composition and the method for administering fentanyl via this composition that are set to expire in September 2006. If we complete a clinical study of ACTIQ in pediatric patients prior to September 2006, the FDA could grant us six months of exclusivity beyond the September 2006 patent expiration. As described above, we have agreed to license to Barr our U.S. rights to any intellectual property related to ACTIQ. Corresponding patents covering the current formulation of ACTIQ in foreign countries expire between 2009 and 2010.

        Our patent protection with respect to the ACTIQ formulation we sold in the United States prior to June 2003 expires in May 2005. The entry of a generic competitor with this formulation as a result of the loss of patent protection on ACTIQ beginning in May 2005 could significantly and negatively impact our revenues from the sale of ACTIQ.

        Other issued patents and pending patent applications in the United States and foreign countries that are owned or licensed by us are directed to various formulations (including a sugar free formulation), processes for manufacturing the product, methods of using the product and disposable containers required by the FDA to be provided as part of the product. We also hold the rights to the ACTIQ trademark covering pharmaceuticals for oral transmucosal delivery containing fentanyl as the active drug substance.

Manufacturing and Product Supply

        At our facility in Salt Lake City, Utah, we manufacture ACTIQ for sale in the United States and international markets. In 2004, we began a nearly $70 million, two-year capital expansion project at our Salt Lake City facility that will increase our ACTIQ manufacturing and packaging capacity and provide us with flexibility to manufacture other products at this facility.

        Fentanyl, the active ingredient in ACTIQ, is a Schedule II controlled substance under the Controlled Substances Act. Our purchases of fentanyl for use in the production of ACTIQ are subject to quota that is approved by the U.S. Drug Enforcement Administration. Supply disruption could result from delays in obtaining DEA approvals or the receipt of approvals for quantities of fentanyl that are insufficient to meet current or projected product demand. The quota system also limits our ability to build inventories as a method of insuring against possible supply disruptions.

Competition

        Both long-acting and short-acting formulations are prescribed to treat cancer pain. Persistent pain is typically treated by around-the-clock administration of long- or short-acting opioids. Breakthrough cancer pain is usually treated with short-acting product, such as ACTIQ, that is used in conjunction with an around-the-clock formulation. ACTIQ is intended for treatment of breakthrough cancer pain in patients already taking opioids for persistent pain.

        Long-acting products, which have a slower onset and longer duration of action relative to ACTIQ, are commonly prescribed to treat persistent pain. Three long-acting opioid analgesics currently marketed for chronic pain dominate this market: Johnson & Johnson's DURAGESIC® and Purdue Pharmaceuticals' OXYCONTIN® and MS-CONTIN®. Persistent cancer pain also is treated with short-acting opioid tablets, capsules and elixirs, as well as quick-acting invasive opioid delivery systems (i.e., intravenous, intramuscular and subcutaneous), many of which have been available for many years and are available in inexpensive generic form.

        The overwhelming majority of prescriptions written to treat breakthrough cancer pain are for short-acting opioids other than ACTIQ, such as morphine and combination products (with acetaminophen and oxycodone or hydrocodone), as well as quick-acting opioids delivered via invasive

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delivery systems. In some cases, physicians also may attempt to manage breakthrough pain by increasing the dose of a long-acting opioid.

        We are aware of numerous companies developing other technologies for rapidly delivery opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray, inhaled delivery systems, among others. If these technologies are successfully developed and approved over the next few years, they could represent significant competition for ACTIQ and, if approved, ORAVESCENT fentanyl. Even without new competitive products, we will face at least one generic competitor to ACTIQ in late 2006 to early 2007 as a result of the license to Barr, which will have a significant and negative impact on ACTIQ sales thereafter. The availability of inexpensive generic forms of ACTIQ could potentially have a negative impact on sales of ORAVESCENT fentanyl, if approved.

GABITRIL

Overview

        GABITRIL is a selective GABA (gamma-aminobutyric acid) reuptake inhibitor approved for use as adjunctive therapy in the treatment of partial seizures in epileptic patients. GABA is an important inhibitory transmitter in the central nervous system and is widely distributed in all regions of the brain. The FDA approved GABITRIL in September 1997 and it was launched in the United States in 1998 by Abbott. In late 2000, we acquired all U.S. rights to GABITRIL from Abbott in exchange for payments totaling $100 million over five years. We made an additional $10 million payment to Abbott upon the extension to 2011 of the composition patent covering the active drug substance contained in GABITRIL. In December 2001, we acquired product rights to GABITRIL worldwide, excluding Canada, Latin America and Japan, from Sanofi-Synthelabo and the product inventor, Novo Nordisk A/S. We also market GABITRIL in France, the United Kingdom, Germany, Austria and Switzerland through Cephalon affiliates and in numerous other countries throughout the world through third-party distributors.

        While applicable laws and regulations prevent us from promoting our products for uses beyond those contained in the approved label, our analysis of prescription data in the United States for GABITRIL indicates that many physicians have elected to prescribe the product to treat conditions outside of its currently labeled indication, including generalized anxiety disorder and neuropathic pain. In February 2005, working with the FDA, we updated our prescribing information for GABITRIL to include a bolded warning describing the risk of new onset seizures in non-induced patients without epilepsy.

Epilepsy

        Epilepsy is a chronic disorder characterized by seizures that cause sudden, involuntary, time-limited alteration in behavior, including changes in motor activities, autonomic functions, consciousness or sensations, and accompanied by an abnormal electrical discharge in the brain. A partial seizure arises from a disorder emanating from a distinct, identifiable region of the brain and produces a given set of symptoms depending on the area of onset. A general seizure arises from a general dysfunction of biochemical mechanisms throughout the brain and may produce different types of convulsions. Epilepsy usually begins in early childhood, but can appear at any time during an individual's lifespan. It is estimated that more than one million adult Americans suffer from epilepsy.

Market expansion strategies

        Because GABITRIL works selectively to increase the amount of available GABA in the brain, it may be useful in treating conditions where additional GABA may prove effective. One such condition is generalized anxiety disorder. According to the National Institute of Mental Health, GAD is characterized by chronic, exaggerated worry and tension that is unfounded or much more severe than

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the normal anxiety most people experience. Many people with GAD also have physical symptoms, such as fatigue, trembling, muscle tension, headaches, irritability or hot flashes. According to NIMH, about 2.8 percent of U.S. adults have been diagnosed with GAD.

        In the third quarter of 2004, we initiated a Phase 3 clinical program evaluating GABITRIL for the treatment of GAD. We expect to enroll at least 1,600 patients in multiple studies and are targeting a product launch in 2007. Our decision to move forward with a Phase 3 clinical program was based on data from an eight-week, double-blind, randomized, multi-center, placebo-controlled Phase 2 study with a flexible-dose design. The study included 260 adult patients with GAD and was designed to determine the dose, time of onset and magnitude of GABITRIL's effect in GAD. Statistically significant improvements were seen at weeks one and eight of the study in patients receiving GABITRIL, versus those receiving placebo, as measured by the Hamilton Anxiety Scale.

Intellectual Property Position

        GABITRIL is our trademark that is used in connection with pharmaceuticals containing tiagabine as the active drug substance. This product is covered by U.S. and foreign patents that are held by Novo-Nordisk A/S. The U.S. patents have been licensed in the United States exclusively to Abbott Laboratories. We have an exclusive sublicense from Abbott to these patents in the United States and exclusive licenses from Novo-Nordisk to corresponding foreign patents.

        There are four U.S. composition-of-matter patents covering the currently approved product: a patent claiming tiagabine, the active drug substance in GABITRIL; a patent claiming crystalline tiagabine hydrochloride monohydrate and its use as an anti-epileptic agent; a patent claiming the pharmaceutical formulation and a patent claiming anhydrous crystalline tiagabine hydrochloride and processes for its preparation. These patents currently are set to expire in 2011, 2012, 2016 and 2017, respectively. Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011.

Manufacturing and Product Supply

        Abbott is required to supply us with finished commercial supplies of GABITRIL for the U.S. market until at least December 2008. Outside of the United States, our agreement with Sanofi-Synthelabo to supply GABITRIL expired in January 2005, although Sanofi has agreed to continue to produce GABITRIL through the end of the second quarter of 2005. We have identified a third party manufacturer for the future production of the active drug substance tiagabine and finished commercial supplies of GABITRIL outside the United States and are in the process of qualifying this manufacturer with appropriate U.S. and European regulatory authorities. We seek to maintain inventories of finished commercial supplies of GABITRIL to protect against supply disruptions. For non-U.S. markets, we have on hand approximately 12 months supply of GABITRIL and expect to have 24 months supply by the expiration of the Sanofi-Synthelabo extension.

Competition

        The pharmaceutical market for the treatment of partial seizures in epileptic patients generally is well served with a number of available therapeutics, several of which are recent entrants to the market. The market is dominated by Pfizer's NEURONTIN® (gabapentin). In addition, several treatments for partial seizures are available in inexpensive generic forms. Growth of pharmaceutical products in this market tends to be slow both because of the number of therapies available and also because physicians are unlikely to change the medication of a patient whose condition is well controlled.

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OTHER PRODUCTS

International Products

        In addition to PROVIGIL, ACTIQ and GABITRIL, we are engaged in the sale and marketing of our products and certain third party products in various international markets, principally in France, the United Kingdom and Germany. For the year ended December 31, 2004, aggregate worldwide net sales of these other products accounted for approximately 10% of our total net sales, with the majority of this revenue derived from sales of our products in France. The following is a summary of certain other products we market and sell.

        We manufacture certain of the Cephalon products above at our manufacturing facilities in Mitry-Mory and Nevers, France. We perform warehousing, packaging and distribution activities for France and other export territories from our facilities in Maisons-Alfort, France. We have a sales organization in France numbering approximately 140 persons detailing our products to office-based and hospital-based physicians. Outside of France, we have sales and marketing organizations with approximately 70 persons in the aggregate that support sales of our products and third-party products in other European countries, including the United Kingdom, Germany, the Republic of Ireland, Switzerland and Austria.

        Our largest product in terms of product sales in France is SPASFON. SPASFON is an antimuscarinic, antispasmodic muscle relaxant indicated for biliary tract spasms, irritable bowel syndrome, urinary tract spasm and the treatment of certain gynecological-related spasms. The product

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is sold in a variety of formats, including solid oral tablets, fast-dissolve tablets (LYOC) and suppositories. French government efforts to control healthcare costs may result in the rapid growth of generic competition to our proprietary products in France.

        In December 2004, Cephalon France purchased Sanofi-Synthelabo France's rights to promote, distribute and sell NAXY and MONO-NAXY in France and French overseas territories. The purchase price for these product rights was approximately $44.3 million. Abbott France holds the underlying rights to the product. Abbott France manufactures clarithromycin and also promotes, distributes and sells clarithromycin under the trademark ZECLAR® in the French market.

        Under an exclusive collaboration arrangement with Novartis Pharma AG established in November 2000, we market PROVIGIL, TEGRETOL, RITALIN, ANAFRANIL and LIORESAL in the United Kingdom. We share with Novartis the earnings from sales of the four Novartis neurology products and PROVIGIL in the United Kingdom. We now face competition from generic versions of many of the branded products included in the collaboration. European Union pricing laws also allow the parallel importation of branded drugs between member countries. Due to pricing variations within the European Union, it is possible that our overall margins on our branded drugs could be impacted negatively as a result of the importation of product from relatively lower-margin member countries to relatively higher-margin member countries.

Collaborations with Pharmaceutical Company Partners

        Through our wholly-owned subsidiary, CIMA LABS INC., we pursue collaborative relationships with pharmaceutical companies that leverage the capabilities of these partners with our drug delivery and manufacturing capabilities to deliver new products incorporating our OraSolv® or DuraSolv® orally disintegrating drug delivery technologies. Revenues from these arrangements consist of net sales of manufactured products to partners, product development and licensing fees and royalties. For the period August 13, 2004 to December 31, 2004, revenues earned by CIMA LABS totaled $28.4 million, or 2.8% of our total revenue for the year ended December 31, 2004. The following table summarizes our major collaborative relationships:

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        We currently have three manufacturing lines at our Eden Prairie, Minnesota facility for product requiring blister packaging and a manufacturing line at our Brooklyn Park, Minnesota facility for bottled product. We also have granulation and taste masking capabilities at our Eden Prairie facility. We believe that our production capacity will be adequate to meet our partners' needs for the foreseeable future.

RESEARCH AND DEVELOPMENT

        In addition to our clinical programs focused on our marketed products, our research and development efforts focus primarily on two therapeutic areas: neurodegenerative disorders and cancers. Neurodegenerative disorders are characterized by the death of neurons (i.e., the specialized conducting cells of the nervous system) which, in turn, results in the loss of certain functions such as memory and motor coordination. Cancers are characterized by the uncontrolled proliferation of cells that may form tumors. Our research has focused on an understanding of kinases and the role they play in cellular survival and proliferation. We have coupled this knowledge with a library of novel, small, orally-active synthetic molecule inhibitors of kinases that allows us to intervene in these processes. This technology base has resulted in three molecules that are currently in clinical development: CEP-1347, CEP-701 and CEP-7055.

Neurology

        A growing body of evidence, substantiated by our own research findings, suggests that neuronal death is caused by a series of biochemical events that are themselves precipitated by the activation of intracellular signaling pathways. Our research, and that of others, has demonstrated that one of the initial events involved in the cell death process is the activation of the stress-activated protein kinase pathway. Thus, we believe inhibition of this pathway should lead to neuronal survival and result clinically in the inhibition of the progression of neurodegenerative diseases. We have identified targets within this pathway known as mixed lineage kinases (MLK); inhibition of MLK in preclinical models results in inactivation of the cell death process. We are pursuing the development of certain potent inhibitors of the MLK for the treatment of Parkinson's disease, as described below.

Parkinson's disease

        We have discovered several proprietary compounds that are potent MLK inhibitors and that are also efficacious in preclinical models in preventing neuronal death. We are developing one such MLK inhibitor, CEP-1347, for use as a potential treatment for Parkinson's disease. Parkinson's disease is a progressive disorder of the central nervous system affecting over one million Americans. The primary pathology of the disease is the degeneration of the dopamine neurons in the substantial nigra region of the brain, which results in a slowing of spontaneous movements, gait difficulty, postural instability, rigidity and tremor. In a variety of preclinical models of Parkinson's disease, CEP-1347 demonstrated therapeutic potential in inhibiting the characteristic neuronal cell death associated with Parkinson's disease. Specifically, in non-human primate models, CEP-1347 protected against loss of dopamine neurons in the regions of the brain affected by Parkinson's disease and prevented the appearance of the associated behavioral symptoms. Our rights to develop and market CEP-1347 in the United States are derived from our 1992 collaboration with Kyowa Hakko Kogyo Co., Ltd. In 1999, we entered into a collaborative agreement with H. Lundbeck A/S, a Danish pharmaceutical company, to discover and develop products to treat neurodegenerative disorders, such as Parkinson's and Alzheimer's diseases. This collaboration covers the development and marketing of CEP-1347 and other proprietary small molecules that may inhibit the MLK family of kinases.

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        In 2002, Cephalon and Lundbeck initiated an 800-patient randomized, double-blind, placebo-controlled, multi-dose, sixty-five center Phase 2/3 clinical trial of CEP-1347 in patients with early stage Parkinson's disease. The objective of the study is to determine whether or not CEP-1347 may be effective in delaying disability due to progression of Parkinson's disease. Patients enrolled into the study are expected to be treated for two years and will receive either placebo or CEP-1347. The study is fully enrolled. In mid-2005, an independent third party will conduct an interim analysis of the data to determine whether treatment with CEP-1347 has the potential to demonstrate statistical significance compared to placebo. So long as the results of this analysis do not indicate futility, we anticipate complete study results will be available in 2006. We have a supply agreement with Abbott under which it supplies the key chemical intermediate used for the manufacture of CEP-1347. Lundbeck then uses that intermediate for the manufacture of CEP-1347 for use in clinical trials.

Oncology

        In normal tissues, cellular proliferation is balanced by cellular death, and these processes are governed in part by a class of soluble protein molecules (commonly referred to as growth factors) that serve as communication signals between cells. The uncontrolled proliferation of cells associated with cancer may be linked to inappropriate signaling from growth factors. Many of these growth factors bind to cell surface receptors (many of which are kinases) and trigger intracellular signals that maintain cell survival or direct the cell to proliferate. Inhibition of these kinases provides a novel therapeutic strategy for treating a variety of oncological disorders without the undesirable side effects associated with traditional chemotherapeutics.

Receptor Tyrosine Kinase Inhibitors

        We have synthesized a class of small, orally active molecules that are selective inhibitors of the nerve growth factor receptor tyrosine kinase (trk). Trk may play an important role in the development and propagation of prostate and pancreatic cancers; inhibiting trk antagonizes the "survival" signal elicited by this receptor in such tumors. Our lead compound in this area, CEP-701, is administered orally. We have licensed our rights to develop and market CEP-701 from Kyowa Hakko. We have a supply agreement with Abbott under which it supplies the key chemical intermediate for CEP-701.

        Our scientists have discovered that CEP-701, in addition to its trk activity, is also a potent inhibitor of the flt-3 kinase. Flt-3 kinase has been shown to be mutated in a subset of patients suffering from Acute Myeloid Leukemia (AML) who are treatment resistant, which results in a poor prognosis. Thus, inhibition of this kinase may lead to a novel treatment for AML. We have completed Phase 2 studies with CEP-701 to study its effect in patients refractory to other therapies and suffering from AML. In early studies in AML, we observed positive signals from the use of CEP-701, although the treatment effect seen was not sufficient to justify continued studies as monotherapy in refractory patients. We initiated additional Phase 2 studies with CEP-701 in this area utilizing higher doses of CEP-701 in combination with other therapies. Our Phase 2 studies are enrolling earlier stage patients than were included in our previous Phase 2 study with CEP-701, and are utilizing a combination of other therapies.

Angiogenesis Inhibitors

        As cancer cells aggregate and form solid tumors, they secrete growth factors that promote the formation of new blood vessels necessary for providing nutrients to the growing tumor; this process is called angiogenesis. Angiogenesis is promoted by a number of these growth factors but appears to be particularly dependent upon the vascular endothelial growth factor (VEGF). VEGF acts at its receptor kinase to initiate blood vessel growth into the tumor. We believe that inhibition of the receptor kinase for VEGF will result in inhibition of the angiogenesis process thus starving the tumor of needed nutrients. We believe that this approach has potential utility in the treatment of solid tumors.

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        We have synthesized a number of proprietary, orally active molecules that are potent and selective inhibitors of the VEGF receptor kinase. These molecules have been shown to slow the growth of a variety of tumors in preclinical models. Our lead compound in this area is CEP-7055. We have filed an Investigational New Drug application (IND) and are conducting Phase 1 clinical trials with CEP-7055. In December 2001, we entered into a collaborative agreement with Sanofi-Synthelabo to discover, develop and market worldwide products that inhibit angiogenesis, excluding nervous system and opthalmic disorders. The collaboration covers the development and marketing of CEP-7055 and other proprietary small molecules.

Neurotrophic Factors

        Under a collaboration with Chiron Corporation that was terminated in February 2001, we conducted clinical trials using IGF-I, also known as MYOTROPHIN® (mecasermin) Injection, in patients in North America and Europe suffering from amyotrophic lateral sclerosis (ALS). ALS is a fatal disorder of the nervous system characterized by the chronic, progressive degeneration of motor neurons, which leads to muscle weakness, muscle atrophy and, eventually, to the patient's death. In February 1997, we submitted an NDA to the FDA for approval to market MYOTROPHIN in the United States for the treatment of ALS. In May 1998, the FDA issued a letter stating that the NDA was "potentially approvable," under certain conditions. We do not believe those conditions can be met without conducting an additional Phase 3 clinical study, and we have no plans to conduct such a study at this time. However, certain physicians have obtained governmental and non-governmental funding to be used to conduct such a study. We have agreed with these physicians to allow reference to our IND and have agreed to supply MYOTROPHIN in quantities sufficient for them to conduct the study in exchange for the right to use any clinical data generated by such study in support of FDA approval of our pending NDA. These physicians commenced the study in mid-2003 and expect to complete study enrollment by the third quarter of 2005; if the study is not fully enrolled by early 2006, we may be unable to provide quantities of MYOTROPHIN sufficient to complete the study. Even if this additional study is concluded, the results will not be available for several years and may not be sufficient to obtain regulatory approval to market the product. Furthermore, we do not have a source for finished commercial supply of MYOTROPHIN in the event regulatory approval is obtained.

Other Discovery Research Efforts

        Since our inception, we have been engaged in research to discover innovative medicines. To date, we have focused our efforts on neurodegenerative diseases and cancer. This research has resulted in the discovery of compounds that could potentially be useful in treating important clinical conditions beyond those for which we have active development programs. In these and other cases, we often seek to establish collaborative partnerships with companies whose clinical development and marketing capabilities will maximize the value of these discoveries.

        In addition to our research programs discussed above, we are pursuing a variety of other innovative discovery research efforts. For example, we have a multi-year research collaboration with TransTech Pharma, Inc. The collaboration is utilizing TransTech's Translational Technology™, a highly automated and fully integrated proprietary drug discovery process, to discover and develop small molecules for up to three therapeutic targets. We also have collaboration with Euroscreen s.a. to discover and develop small molecule therapeutics targeting G-Protein Coupled Receptors, or GPCR, a family of receptors that play a major role in cell signaling. This collaboration strengthens our internal efforts to provide a more diverse therapeutic breadth and depth to our research efforts.

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DRUG DELIVERY TECHNOLOGIES

Overview

        Drug delivery technologies have been developed for a variety of therapeutic compounds, improving safety, efficacy, ease of patient use and patient compliance. In addition, drug delivery technologies can be used to expand markets for existing products, as well as to develop new products.

        We have focused our research and development efforts on developing new product applications using two primary drug delivery technologies: Orally Disintegrating Tablet (ODT) technologies and Oral Transmucosal technologies (OTM). Orally disintegrating tablet technology has emerged as an important drug delivery technology that enables tablets to disintegrate quickly in the mouth without the use of water or chewing. ODT may improve compliance with a prescribed drug regimen, as orally disintegrating medications are easier to swallow and may taste better than non-taste masked alternatives. In addition, ODT technology may improve dosing accuracy relative to liquid formulations. Finally, and most importantly, ODT technology may provide a significant commercial benefit, as studies we have conducted indicate that patients often prefer it to conventional tablets and other formulations. OTM technologies are designed to increase the absorption of active drug ingredients across the mucosal membranes lining the oral cavity, gastrointestinal tract and colon.

        We believe that pharmaceutical companies are attracted to our technologies because of the advantages such as rapid development timelines, excellent taste masking, proven commercial manufacturing capabilities, and applicability to a wide range of pharmaceutical compounds, enhanced convenience and other patient benefits.

ODT Technologies

        Our two primary ODT drug delivery technologies are OraSolv® and DuraSolv®. Our OraSolv technology incorporates taste masked active drug ingredients in orally disintegrating tablets. The low level of compaction pressure applied to OraSolv tablets allows higher porosity, faster disintegration time and larger amounts of taste masked active drug ingredients to be compressed into the tablets. The core U.S. patent for our OraSolv technology expires in 2010. We have developed and manufacture several important OraSolv formulations, which include Triaminic Soft-chews for Novartis, FazaClo for Alamo Pharmaceuticals and Remeron SolTab and its equivalent for markets outside the U.S. for Organon. In addition, we are developing OraSolv formulations of Allegra for Aventis and three other products for other partners.

        Our DuraSolv technology uses higher compaction forces than OraSolv to produce orally disintegrating tablets incorporating active drug ingredients in a more durable orally disintegrating tablet. Due to their greater durability, DuraSolv tablets are easier to handle and package, and may cost less to produce and package. The core U.S. patent for our DuraSolv technology expires in 2018. We have developed and currently manufacture several important DuraSolv formulations, which include Alavert and Dimetapp ND for Wyeth, Zomig-ZMT and its equivalents marketed outside the U.S. for AstraZeneca, and NuLev and Parcopa for Schwarz. In addition, we are developing several new prescription products based on our DuraSolv technology.

        In addition to our OraSolv and DuraSolv technologies, we continue to develop our LYOC technology to create ODT using freeze drying methods to manufacture tablets. We have a fully dedicated LYOC manufacturing site in Nevers, France, which we expect to expand to increase capacity. Once complete, we will have additional capacity for both in-house and third party manufacturing. In late 2004, we signed an agreement with Schwarz Pharma to manufacture two of their products at this facility. We currently manufacture and sell several drugs in France using our LYOC technology, including SPASFON LYOC, PARALYOC, PROXALYOC, and LOPERAMIDE LYOC, and we are considering other compounds that may be suitable for formulation using this technology.

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OTM Technologies

        In the area of OTM technologies, we are investing in research and development of our proprietary ORAVESCENT technologies. Our ORAVESCENT drug delivery technologies include ORAVESCENT SL for drug delivery under the tongue ("sublingual") and ORAVESCENT BL for drug delivery between the gum and the cheek ("buccal"). An additional ORAVESCENT technology, ORAVESCENT SS, is designed for site-specific administration, which may allow an active drug ingredient to be transported to a specific part of the gastrointestinal tract where it is released for absorption. We originally designed and continue to design our ORAVESCENT technologies to improve the transport of active drug ingredients across mucosal membranes in the oral cavity or the gastrointestinal tract. The core U.S. patents for our ORAVESCENT technology expire in 2019. In addition to our ORAVESCENT technologies, we continue to assess the potential uses of certain other proprietary buccal delivery systems in several therapeutic areas in which we focus.

OTHER INTELLECTUAL PROPERTY

        We own issued and pending U.S. patents and applications claiming compositions and/or uses of certain kinase inhibitors, including two novel classes of small molecules referred to as "indolocarbazoles" and "fused pyrrolocarbazoles." We have filed foreign counterparts of these patents, as appropriate. We also have licensed U.S. and foreign composition-of-matter and use patents and applications for novel compositions under our collaborative agreement with Kyowa Hakko, including compositions and uses of certain indolocarbazoles for the treatment of pathological conditions of the prostate (including prostate cancer) and for the treatment of neurological disorders. We own issued and pending U.S. and foreign patents and applications claiming compositions and/or uses of inhibitors of certain proteases, including novel classes of small molecules for inhibition of calpain, and novel classes of small molecules for inhibition of the multicatalytic protease.

        Through collaborative agreements with researchers at several academic institutions, we have licenses to or the right to license, generally on an exclusive basis, patents and patent applications issued or filed in the United States and certain other countries arising under or related to such collaborations.

CUSTOMERS

        Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for all pharmaceutical products sold in the United States. Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network. These three wholesaler customers, in the aggregate, accounted for 87% of our worldwide net sales for the year ended December 31, 2004. Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decision or other factors outside of our control, could significantly affect the level of our net sales on a period to period basis. Because of this, the amounts purchased by these customers during any quarterly or annual period may not correlate to the level of underlying demand evidenced by the number of prescriptions written for such products, as reported by IMS Health Incorporated. Furthermore, the loss or bankruptcy of any of these customers could materially and adversely affect our results of operations and financial condition.

COMPETITION

        We face intense competition and rapid technological change in the pharmaceutical marketplace. Large and small companies, academic institutions, governmental agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development in competition with us. Products developed by any of these entities may compete directly with those we develop or sell. In addition, many of the companies and institutions that compete against us have substantially greater capital resources, research and

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development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. These entities represent significant competition for us. Our products also face potential competition from companies seeking to develop and sell generic formulations of our products at a substantial price discount to the current price of our products. In addition, competitors who are developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive. Competition and innovation from these or other sources potentially could negatively affect sales of our products or make them obsolete. Advances in current treatment methods also may adversely affect the market for such products. In addition, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary products than we can. Any failure to maintain our competitive position could adversely affect our business and results of operations.

        As discussed in more detail above, our products face competition in the marketplace. We cannot be sure that we will be able to demonstrate the potential advantages of our products to prescribing physicians and their patients on an absolute basis and/or in comparison to other presently marketed products. We also need to demonstrate to physicians, patients and third party payors that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient.

GOVERNMENT REGULATION

        The manufacture and sale of therapeutics are subject to extensive regulation by U.S. and foreign governmental authorities. In particular, pharmaceutical products are subject to rigorous preclinical and clinical trials and other approval requirements as well as other post-approval requirements by the FDA under the Federal Food, Drug, and Cosmetic Act and by analogous agencies in countries outside the United States.

        As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animals to identify potential safety problems and, in some cases, to evaluate potential efficacy. The results of the preclinical studies are submitted to regulatory authorities as a part of an IND that is fi