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EX-10.1 - EX-10.1 - CEPHALON INC	a09-30855_1ex10d1.htm
EX-10.2 - EX-10.2 - CEPHALON INC	a09-30855_1ex10d2.htm
EX-31.2 - EX-31.2 - CEPHALON INC	a09-30855_1ex31d2.htm
EX-32.1 - EX-32.1 - CEPHALON INC	a09-30855_1ex32d1.htm
EX-31.1 - EX-31.1 - CEPHALON INC	a09-30855_1ex31d1.htm
EX-32.2 - EX-32.2 - CEPHALON INC	a09-30855_1ex32d2.htm
EX-10.3 - EX-10.3 - CEPHALON INC	a09-30855_1ex10d3.htm

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-19119

Cephalon, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		23-2484489
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

41 Moores Road
P.O. Box 4011
Frazer, Pennsylvania		19355
(Address of Principal Executive Offices)		(Zip Code)

(610) 344-0200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

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 x 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 (§232.405 of this chapter) 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. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of October 23, 2009
Common Stock, par value $.01		74,658,665 Shares

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Cautionary Note Regarding Forward-Looking Statements		ii

PART I — FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Statements of Operations — Three and nine months ended September 30, 2009 and 2008	1

	Consolidated Balance Sheets — September 30, 2009 and December 31, 2008	2

	Consolidated Statements of Changes in Equity — September 30, 2009	3

	Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2009 and 2008	4

	Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

PART II — OTHER INFORMATION		46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 5.	Other Information	62

Item 6.	Exhibits	63

SIGNATURES		64

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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 or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission 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:

· our dependence on sales of PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil) Tablets [C-IV] in the United States and the market prospects and future marketing efforts for PROVIGIL, NUVIGIL, FENTORA® (fentanyl buccal tablet) [C-II], AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) and TREANDA® (bendamustine hydrochloride);

· any potential approval of our product candidates, including with respect to any expanded indications for NUVIGIL and/or FENTORA;

· 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;

· 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;

· our ability to comply fully with the terms of our settlement agreements (including our corporate integrity agreement) with the U.S. Attorney’s Office (“USAO”), the U.S. Department of Justice (“DOJ”), the Office of the Inspector General of the Department of Health and Human Services (“OIG”) and other federal government entities, the Offices of the Attorneys General of Connecticut and Massachusetts and the various states;

· our ongoing litigation matters, including litigation stemming from the settlement of the PROVIGIL patent litigation, the FENTORA patent infringement lawsuits we have filed against Watson Laboratories, Inc. (“Watson”) and Barr Laboratories, Inc. (“Barr”) and the AMRIX patent infringement lawsuits we have filed against Barr, Mylan Pharmaceuticals, Inc. (“Mylan”), Impax Laboratories, Inc. (“Impax”) and Anchen Pharmaceuticals, Inc. (“Anchen”);

· 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 general economic conditions; and

· 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:

· the acceptance of our products by physicians and patients in the marketplace, particularly with respect to our recently launched products;

· our ability to obtain regulatory approvals to sell our product candidates, including any additional future indications for FENTORA and NUVIGIL, and to launch such products or indications successfully;

· scientific or regulatory setbacks with respect to research programs, clinical trials, manufacturing activities and/or our existing products;

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· the timing and unpredictability of regulatory approvals;

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

· a finding that our patents are invalid or unenforceable or that generic versions of our marketed products do not infringe our patents or the “at risk” launch of generic versions of our products;

· the loss of key management or scientific personnel;

· the activities of our competitors in the industry;

· regulatory, legal or other setbacks or delays with respect to the settlement agreements with the USAO, the DOJ, the OIG and other federal entities, the state settlement agreements and corporate integrity agreement related thereto, the settlement agreements with the Offices of the Attorneys General of Connecticut and Massachusetts, our settlements of the PROVIGIL patent litigation and the ongoing litigation related to such settlements, the FENTORA patent infringement lawsuits we have filed against Watson and Barr and the AMRIX patent infringement lawsuits we have filed against Barr, Mylan, Impax and Anchen, and Teva Pharmaceuticals USA, Inc.’s Paragraph IV notice with respect to NUVIGIL;

· our ability to integrate successfully technologies, products and businesses we acquire and realize the expected benefits from those acquisitions;

· unanticipated conversion of our convertible notes by our note holders;

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

· the effect of volatility of currency exchange rates; and

· 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 Part II, Item 1A of this Quarterly Report on Form 10-Q. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

iii

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			As adjusted 2008*			2009			As adjusted 2008*
REVENUES:
Net sales	$	535,223		$	489,664		$	1,588,610		$	1,408,603
Other revenues	14,189			8,818			28,583			25,813
	549,412			498,482			1,617,193			1,434,416

COSTS AND EXPENSES:
Cost of sales	90,456			121,477			293,633			312,711
Research and development	99,157			88,325			304,266			250,169
Selling, general and administrative	194,068			222,948			618,314			631,832
Settlement reserve	—			7,450			—			7,450
Restructuring charges	1,062			1,497			3,944			6,973
Acquired in-process research and development	6,000			—			46,118			10,000
	390,743			441,697			1,266,275			1,219,135

INCOME FROM OPERATIONS	158,669			56,785			350,918			215,281

OTHER INCOME (EXPENSE):
Interest income	1,821			4,002			3,455			15,515
Interest expense	(26,495		)	(19,013		)	(63,213		)	(62,080		)
Other income (expense), net	3,775			(2,284		)	42,418			1,488

	(20,899		)	(17,295		)	(17,340		)	(45,077		)

INCOME BEFORE INCOME TAXES	137,770			39,490			333,578			170,204

INCOME TAX EXPENSE (BENEFIT)	42,673			(66,108		)	122,659			(17,727		)

NET INCOME	95,097			105,598			210,919			187,931

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST	7,625			—			35,150			—

NET INCOME ATTRIBUTABLE TO CEPHALON, INC.	$	102,722		$	105,598		$	246,069		$	187,931

BASIC INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.	$	1.38		$	1.55		$	3.44		$	2.77

DILUTED INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.	$	1.31		$	1.34		$	3.17		$	2.49

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	74,647			68,118			71,541			67,855

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING— ASSUMING DILUTION	78,431			78,920			77,552			75,580

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.

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

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	September 30, 2009			December 31, As adjusted 2008*
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,453,814		$	524,459
Short term investments	131,403			—
Receivables, net	329,330			409,580
Inventory, net	240,349			117,297
Deferred tax assets, net	255,136			224,066
Other current assets	67,104			54,120
Total current assets	2,477,136			1,329,522

INVESTMENTS	17,333			8,081
PROPERTY AND EQUIPMENT, net	459,381			467,449
GOODWILL	570,417			445,332
INTANGIBLE ASSETS, net	1,080,791			607,332
DEFERRED TAX ASSETS, net	1,224			46,074
DEBT ISSUANCE COSTS	20,112			11,838
OTHER ASSETS	32,313			167,314
	$	4,658,707		$	3,082,942

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt, net	$	810,081		$	781,618
Accounts payable	94,982			87,079
Accrued expenses	408,752			304,415
Total current liabilities	1,313,815			1,173,112

LONG-TERM DEBT	357,555			3,692
DEFERRED TAX LIABILITIES, net	197,333			77,932
OTHER LIABILITIES	144,877			163,123
Total liabilities	2,013,580			1,417,859

COMMITMENTS AND CONTINGENCIES	—			—

REDEEMABLE EQUITY	217,861			248,403

EQUITY:
Cephalon stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding	—			—
Common stock, $0.01 par value, 400,000,000 and 200,000,000 shares authorized, 77,623,741 and 71,707,041 shares issued, and 74,652,965 and 68,736,642 shares outstanding	776			717
Additional paid-in capital	2,505,552			2,095,324
Treasury stock, at cost, 2,970,776 and 2,970,399 shares	(201,734		)	(201,705		)
Accumulated deficit	(275,217		)	(521,286		)
Accumulated other comprehensive income	114,146			43,630
Total Cephalon stockholders’ equity	2,143,523			1,416,680
Noncontrolling interest	283,743			—
Total equity	2,427,266			1,416,680
	$	4,658,707		$	3,082,942

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

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share data)

(Unaudited)

							Cephalon Stockholders’ Equity
				Comprehensive			Common Stock			Additional Paid-in			Treasury Stock				Accumulated			Accumulated Other Comprehensive		Noncontrolling
	Total			Income (Loss)			Shares	Amount		Capital			Shares	Amount			Deficit			Income		Interest
BALANCE, JANUARY 1, 2009	$	1,502,926					71,707,041	$	717	$	2,071,607		2,970,399	$	(201,705	)	$	(411,323	)	$	43,630	$	—
Impact of adopting the transition provision of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement)	(86,246		)				—	—		23,717			—	—			(109,963		)	—		—
BALANCE, JANUARY 1, 2009, as adjusted*	1,416,680						71,707,041	717		2,095,324			2,970,399	(201,705		)	(521,286		)	43,630		—
Net income	210,919			$	210,919												246,069					(35,150		)
Foreign currency translation gains				71,184
Net prior service costs on retirement-related plans				(43		)
Unrealized investment gains				(625		)
Other comprehensive income	70,516			70,516																70,516
Comprehensive income				$	281,435
Issuance of common stock upon conversion of convertible notes	—						54	—		—
Stock options exercised	6,701						139,035	1		6,700
Tax benefit from equity compensation	1,221						—	—		1,221
Stock-based compensation expense	36,710						1,250	—		36,710
Treasury stock acquired	(29		)										377	(29		)
Amortization of debt discount	30,542									30,542
Ception noncontrolling interest upon consolidation	306,500																					306,500
Arana noncontrolling interest upon consolidation	104,730									—												104,730
Acquisition of Arana noncontrolling interest shares	(111,052		)							(7,353		)										(103,699		)
Issuance of common stock in exchange for stock warrants	—						776,361	8		(8		)
Issuance of common stock	288,000						5,000,000	50		287,950
Issuance of convertible notes	147,650									147,650
Sale of warrants	37,640									37,640
Purchase of convertible note hedge	(121,040		)							(121,040		)
Tax benefit from purchase of convertible note hedge	(9,784		)							(9,784		)
Deconsolidation of Acusphere	10,634																					10,634
Other	728																					728
BALANCE, SEPTEMBER 30, 2009	$	2,427,266					77,623,741	$	776	$	2,505,552		2,970,776	$	(201,734	)	$	(275,217	)	$	114,146	$	283,743

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

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			As Adjusted 2008*			2009			As Adjusted 2008*

Net Income	$	95,097		$	105,598		$	210,919		$	187,931
Other comprehensive income, net of tax:
Foreign Currency Translation Gains and Losses	23,103			(41,317		)	71,184			(19,300		)
Net prior service gains and losses on retirement-related plans	(14		)	(36		)	(43		)	(101		)
Change in unrealized investment gains and losses	(891		)	—			(625		)	(8		)
Total other comprehensive income, net of tax	22,198			(41,353		)	70,516			(19,409		)

Comprehensive income, net of tax	117,295			64,245			281,435			168,522

Comprehensive Loss Attributable to the noncontrolling interest	(7,625		)	—			(35,150		)	—

Comprehensive income attributable to Cephalon, Inc.	$	124,920		$	64,245		$	316,585		$	168,522

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

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months ended
	September 30,
	2009			As adjusted 2008*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	210,919		$	187,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	136,403			128,772
Deferred income tax benefit	(40,182		)	(22,761		)
Stock-based compensation expense	36,710			32,543
Amortization of debt discount and debt issuance costs	41,273			36,383
Gain on foreign exchange contracts	(26,754		)	—
Gain on acquisition of Arana	(10,008		)	—
Acquired in-process research and development from Acusphere deconsolidation	8,366			—
Impairment charges	—			1,164
Loss on disposals of property and equipment	—			2,740
Shortfall tax benefits from stock-based compensation	(38		)	(451		)
Other	(5,041		)	(396		)
Changes in operating assets and liabilities:
Receivables	94,204			(74,258		)
Inventory	(7,060		)	(14,557		)
Other assets	32,206			(99,008		)
Accounts payable, accrued expenses and deferred revenues	89,192			34,526
Other liabilities	(43,059		)	70,149
Net cash provided by operating activities	517,131			282,777

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(43,647		)	(55,689		)
Acquisition of intangible assets	—			(25,575		)
Cash balance from consolidation of variable interest entity	52,563			—
Investment in Ception	(75,000		)	—
Acquisition of Arana, net of cash acquired	(232,527		)	—
Purchases of investments	(9,292		)	(6,242		)
Proceeds from foreign exchange contracts	26,754			—
Sales and maturities of available-for-sale investments	5,074			7,596
Net cash used for investing activities	(276,075		)	(79,910		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock	288,000			—
Proceeds from exercises of common stock options	6,701			37,185
Windfall tax benefits from stock-based compensation	1,259			4,592
Acquisition of treasury stock	(29		)	(24		)
Payments on and retirements of long-term debt	(11,246		)	(216,093		)
Net proceeds from issuance of convertible subordinated notes	484,719			—
Proceeds from sale of warrants	37,640			—
Purchase of convertible note hedge	(121,040		)	—
Net cash provided by (used for) financing activities	686,004			(174,340		)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	2,295			(601		)

NET INCREASE IN CASH AND CASH EQUIVALENTS	929,355			27,926

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	524,459			818,669

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,453,814		$	846,595

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

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. We have evaluated subsequent events through October 28, 2009, the date at which our financial statements were issued. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K (the “2008 Form 10-K”), filed with the U.S. Securities and Exchange Commission (the “SEC”), which includes audited financial statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008. The 2008 Form 10-K has been supplemented by our Current Report on Form 8-K, filed with the SEC on May 20, 2009, to reflect our adoption, effective January 1, 2009 of the transition provisions of Accounting Standards Codification (“ASC”) 470-20-65, formerly Financial Accounting Standards Board (“FASB”) Staff Position Accounting Principles Board No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” and ASC 810-10-65, formerly Statement of Financial Accounting Standard No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. The results of our operations for any interim period are not necessarily indicative of the results of our operations for any other interim period or for a full year.

As discussed below, certain prior year amounts have been retrospectively adjusted to comply with new accounting guidance. We have reclassified noncontrolling interest from liabilities to a component of equity and, beginning on January 1, 2009, we attribute losses to the noncontrolling interest even if that attribution results in a deficit noncontrolling interest balance. We have also revised our accounting for convertible debt on a retrospective basis for all prior periods presented to record the liability and equity components of the convertible debt separately and have presented a temporary equity classification, “redeemable equity,” to highlight cash obligations that are attached to an equity security in order to distinguish this value from permanent capital. See Note 10 for additional details. In addition, certain reclassifications of prior year amounts have been made to conform to the current year presentation, which have no impact on our total assets or liabilities.

In April 2009, the FASB issued revised accounting guidance for assets acquired and liabilities assumed in a business combination that arise from contingencies, which modifies the initial recognition and subsequent accounting for assets and liabilities arising from contingencies in a business combination. The new guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted the new guidance as of January 1, 2009.

In April 2009, the FASB issued revised accounting guidance for interim disclosures about fair value of financial instruments, which requires publicly traded companies to disclose the fair value of financial instruments with each issuance of summarized financial information for interim reporting periods, including the methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions. The new guidance is effective for interim reporting periods ending after June 15, 2009. We adopted the new guidance as of April 1, 2009, resulting in additional interim fair value disclosures.

In May 2009, the FASB issued revised accounting guidance for subsequent events, which establishes principles and requirements for disclosure of subsequent events, defining timing, circumstances and disclosures required for events or transactions that occur after the balance sheet date. The new guidance requires publicly traded companies to recognize, in the financial statements, the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. It is effective for interim reporting periods ending after June 15, 2009. We adopted the new guidance on April 1, 2009 and will include additional disclosures as applicable.

In June 2009, the FASB issued revised accounting guidance, which establishes the ASC as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, but is not intended to change

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existing accounting for public companies. The new guidance is effective for interim and annual reporting periods ending after September 15, 2009. We adopted ASC as of July 1, 2009.

Recent Accounting Pronouncements

In June 2009, the FASB issued revised accounting guidance for transfers of financial assets, which removes the concept of a qualifying special-purpose entity and establishes specific conditions for reporting a transfer of a portion of a financial asset as a sale. The new guidance is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of adoption on our consolidated financial statements.

In June 2009, the FASB issued revised accounting guidance for consolidation of variable interest entities (“VIE”), which replaces the previous quantitative based risk and rewards calculation for determining the primary beneficiary of a VIE with an approach focused on identifying which enterprise has the power to direct the activates of a VIE that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses or (2) the right to receive benefits. The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. It is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of adopting the new guidance but it could change our assessment of which entities are included in our consolidated financial statements.

Collaborative Arrangements

As of January 1, 2009, we adopted the revised provisions for collaborative arrangements, which resulted in the following additional disclosures:

We enter into collaborative arrangements with pharmaceutical or biotech companies to develop and produce orally disintegrating tablets (“ODT’s”) of branded and generic drugs and to develop and improve nominated antibodies supplied by our collaboration partners using our humanization technology. In these arrangements, we earn fees for work performed, license fees, royalties on product sales and/or risk based milestone payments. We also manufacture ODT products under supply agreements. Revenues recognized from product sales are classified as net sales and revenues recognized from fees for services, license fees, royalties and milestone payments are classified as other revenues.

Amounts recognized under collaborative arrangements consisted of the following:

	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Net sales	$	6,631	$	7,281	$	26,166	$	25,763
Other revenues	13,513		6,999		27,028		21,689
Total	$	20,144	$	14,280	$	53,194	$	47,452

2. ACQUISITIONS AND TRANSACTIONS

Equity Offering

On May 27, 2009, we issued an aggregate of 5,000,000 shares of common stock, par value $0.01 per share, at a price of $60.00 per share, resulting in net cash proceeds of $288.0 million. In connection with the equity offering, we also issued $500.0 million aggregate principal amount of 2.5% convertible senior subordinated notes due on May 1, 2014. See Note 10 for additional details.

Arana Therapeutics Limited

On February 27, 2009, we announced that we acquired (through our wholly owned subsidiary Cephalon International Holdings, Inc. (“Cephalon International”)), approximately 19.8% of the total issued share capital (the “Equity Stake”) of Arana Therapeutics Limited, an Australian company listed on the Australian Securities Exchange (“Arana”), for $41.4 million and that we intended to initiate a takeover offer for Arana (through Cephalon International). On March 9, 2009, through Cephalon International, we filed a Bidder’s Statement with the Australian Securities and Investments Commission in connection with our takeover offer for Arana. The offer terms consisted of the following:

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· Payment of Australian dollar (“A$”) 1.40 cash for each Arana ordinary share less any dividends paid by Arana;

· Upon Cephalon International’s receipt of a relevant interest in 90% of Arana ordinary shares, the offer price would increase by A$0.05 to A$1.45 (the “90% Premium”); and

· On March 2, 2009, Arana declared an A$0.05 fully franked special dividend (the “Dividend”) per Arana ordinary share payable to all Arana shareholders on record as of March 30, 2009. The effect of the Dividend was to reduce our offer price by A$0.05.

The takeover offer closed on June 29, 2009. Cephalon International’s relevant interest in Arana as of that date was 93.1%. Cephalon International exercised a compulsory acquisition to acquire the remaining 6.9% interest in Arana’s ordinary shares, which was completed on August 8, 2009. The total funds used to acquire Arana shares was $223.2 million, net of gains on foreign exchange contracts.

Arana is a biopharmaceutical company focused on developing next generation antibody and protein based drugs that will improve the lives of patients with inflammatory diseases and cancer. The company’s lead compound, ART621, is a new generation tumor necrosis factor (TNF) alpha blocker in Phase II development for patients with certain inflammatory diseases. Arana has a patent portfolio related to anti-TNF alpha antibodies and receives licensing income in connection with certain patents. We acquired Arana in order to expand our technology base. Arana is included in our United States operating segment.

Our initial investment in Arana was recorded as an available for sale investment. On May 27, 2009, we acquired additional shares for $89.8 million which increased our Arana holdings to 50.4% of the outstanding shares. As a result, effective on that date we have included Arana in our consolidated financial statements. The 90% Premium payment is considered contingent consideration and was initially recognized at its estimated fair value of $1.0 million for the shares purchased on May 27, 2009. Upon satisfying the 90% criteria on June 12, 2009, the excess of the actual payments over the recorded liability for the 90% premium of $2.8 million was recorded as a charge to other income (expense), net. The fair value of the noncontrolling interest in Arana as of May 27, 2009 was $104.7 million based on the closing stock price for Arana’s shares on that date.

The fair value of our Arana holdings of approximately 19.8% immediately prior to the acquisition on May 27, 2009 was $48.0 million. This investment was remeasured to fair value on the acquisition date with the increase of $6.6 million over the original cost recognized in other income (expense), net. This gain is the result of an increase in the value of the Australian dollar relative to the U.S. dollar, net of changes in the Arana share price. For the quarter and nine months ended September 30, 2009, we have included $6.5 million and $8.5 million of revenues, respectively, and $11.1 million and $15.5 million of net losses, respectively, for Arana in our consolidated results in net income attributable to Cephalon, Inc.

The following summarizes the carrying amounts and classification of Arana’s assets and liabilities included in our consolidated balance sheet as of May 27, 2009:

Cash and cash equivalents	$	9,606
Short term investments	122,817
Accounts receivable	6,766
Other current assets	2,807
Property and equipment, net	7,465
Intangible assets	125,009
Accounts payable	2,551
Accrued expenses	3,080
Other liabilities	4,258
Deferred tax liabilities	12,043
Noncontrolling interest	104,730

The total purchase price consideration as measured in accordance with purchase accounting requirements was A$311.2 million based on the fair value of the Arana stock on May 27, 2009. The fair value of Arana’s net assets on that date was A$324.1 million, which resulted in a gain of A$12.8 million (or $10.0 million) recognized in other income (expense), net. This gain is primarily the difference between the 90% Premium payment actually made and the assessed

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probability of making the 90% Premium payment at the acquisition date. The actual price paid for all of Arana’s outstanding stock including the 90% Premium was A$322.7 million.

The purchase price allocation has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available concerning the fair value and tax basis of the acquired assets and liabilities. There is no goodwill recognized or deductible for tax purposes. The book value of the accounts receivable approximates their fair value and gross contractual value.

The following unaudited pro forma information presents results as if the acquisition occurred at the beginning of each annual reporting period presented:

	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Revenues	$	549,412	$	506,491	$	1,625,755	$	1,456,229
Net income attributable to Cephalon, Inc.	102,722		102,695		238,895		180,806

Basic income per common share attributable to Cephalon, Inc.	1.38		1.51		3.34		2.66
Diluted income per common share attributable to Cephalon, Inc.	1.31		1.30		3.08		2.39

We entered into foreign exchange forward contracts and a foreign exchange option contract related to our Arana transaction to protect against fluctuations between the Australian Dollar and the U.S. Dollar, up to a value of $144.2 million. Changes in the value of these contracts were recognized within net income. All foreign exchange contracts were settled during the second quarter of 2009. Other income (expense), net includes $19.0 million of gains on these foreign exchange contracts for the nine months ended September 30, 2009.

Ception Therapeutics, Inc.

On January 13, 2009, we entered into an option agreement (the “Ception Option Agreement”) with Ception Therapeutics, Inc. (“Ception”). Under the terms of the Ception Option Agreement, we have the irrevocable option (the “Ception Option”) to purchase all of the outstanding capital stock on a fully diluted basis of Ception at any time on or prior to the expiration of the Option Period (as defined below). As consideration for the Ception Option, we paid $50.0 million to Ception and paid Ception stockholders an aggregate of $50.0 million. We also agreed to provide up to $25.0 million of financing to Ception during the Option Period. As of September 30, 2009, we have advanced $3.5 million to Ception under the financing agreement. In October 2009, we advanced an additional $2.5 million to Ception under the financing agreement. We, in our sole discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and including the date that (i) is fifteen business days after our receipt of the final study report for Ception’s ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis (“Res-5-0002 EE Study”) indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our receipt of the final study report for Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the “Option Period”). The Res-5-0002 EE Study is fully enrolled, and we anticipate completion of the study in the fourth quarter of 2009 or the first quarter of 2010. If the data are positive and we exercise the Ception Option, we intend to file a Biologics License Application for reslizumab with the FDA in 2010. If we exercise the Ception Option, we have agreed to pay a total of $250.0 million less any third party debt payable by Ception in exchange for all the outstanding capital stock of Ception on a fully-diluted basis. Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception’s program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.

We have determined that, because of our rights under the Ception Option Agreement, effective on January 13, 2009, Ception is a variable interest entity for which we are the primary beneficiary. As a result, as of January 13, 2009 we have included the financial condition and results of operations of Ception in our consolidated financial statements. However, we do not have an equity interest in Ception and, therefore, we have allocated the losses attributable to the non-controlling interest in Ception to non-controlling interest in the consolidated statement of operations and consolidated balance sheet. Ception did not have a material impact on our revenues or earnings attributable to our Cephalon shareholders for the period ended September 30, 2009 or on a pro forma basis for the periods ended September 30, 2009 and 2008. Ception is included in our U. S. operating segment.

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The following summarizes the carrying amounts and classification of Ception’s assets and liabilities included in our consolidated balance sheet as of January 13, 2009 and September 30, 2009:

	January 13, 2009		September 30, 2009
Cash and cash equivalents	$	52,563	$	56,300
Other current assets	25,225		278
Property and equipment, net	320		206
Goodwill	121,918		121,918
Intangible assets	374,400		374,400
Debt issuance costs	16		—
Other assets	10		137
Current portion of long-term debt, net	4,725		4,996
Accounts payable	2,715		3,619
Accrued expenses	8,326		8,589
Long-term debt	3,394		—
Deferred tax liabilities	148,792		148,792
Noncontrolling interest	306,500		283,743

The goodwill recognized in the opening balance sheet primarily resulted from the recognition of deferred taxes associated with the value assigned to identifiable intangible assets. There is no goodwill recognized or deductible for tax purposes. The fair value of the noncontrolling interest was computed based on the present value of the probability weighted future payments to the current Ception stockholders.

Although Ception is included in our consolidated financial statements, our interest in Ception’s assets is limited to that accorded to us in the agreements with Ception as described above. For example, Ception’s cash and cash equivalents balance includes $50.0 million of Ception Option Agreement proceeds; Ception has retained the right to distribute those cash proceeds to its current stockholders. Ception’s creditors have no recourse to the general credit of Cephalon.

Acusphere, Inc.

On November 3, 2008, we entered into a license and convertible note transaction with Acusphere, Inc. In connection with the transaction, we received an exclusive worldwide license from Acusphere to all of its intellectual property relating to the development and marketing of celecoxib for all current and future indications. Under the license, we paid Acusphere an upfront fee of $5.0 million and agreed to make a $15.0 million milestone payment, as well as royalties on net sales. In addition, we purchased a $15.0 million senior secured three-year convertible note (the “Acusphere Note”) from Acusphere, secured by substantially all the assets of Acusphere. Separately, in March 2008, we purchased license rights for Acusphere’s Hydrophobic Drug Delivery Systems (HDDS™) technology for use in oncology therapeutics for $10 million.

On June 24, 2009, we exchanged the Acusphere Note and $1.0 million for (i) the elimination of the $15.0 million milestone payment and any future royalty payments associated with the celecoxib license agreement and (ii) the Acusphere patent rights relating to the HDDS technology.

We had previously determined that effective on November 3, 2008 Acusphere was a variable interest entity for which we were the primary beneficiary and began including Acusphere in our consolidated financial statements. Effective with the termination of the Acusphere Note, we are no longer considered the primary beneficiary and deconsolidated Acusphere, resulting in a $9.4 million charge to acquired in-process research and development as a result of the elimination of the royalty and milestone payments associated with the celecoxib license agreement.

Effective January 1, 2009 through the deconsolidation of Acusphere on June 24, 2009, we attributed Acusphere’s losses to the noncontrolling interest, which increased net income attributable to Cephalon by $10.6 million during the nine months ended September 30, 2009.

SymBio Pharmaceuticals Limited

On March 9, 2009, we paid $0.8 million to exercise our option pursuant to the Option and Exclusivity Agreement with SymBio Pharmaceuticals Limited (“SymBio”), granting Cephalon an exclusive sublicense to bendamustine

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hydrochloride in China and Hong Kong. As further required by the Option and Exclusivity Agreement, on March 13, 2009, we invested $9.1 million in shares of SymBio. Our investment in SymBio is recorded as a cost basis investment. As of September 30, 2009, we owned 17.4% of SymBio’s outstanding common stock.

3. RESTRUCTURING

On January 15, 2008, we announced a restructuring plan under which we intend to (i) transition manufacturing activities at our CIMA LABS INC. (“CIMA”) facility in Eden Prairie, Minnesota, to our recently expanded manufacturing facility in Salt Lake City, Utah, and (ii) consolidate at CIMA’s Brooklyn Park, Minnesota, facility certain drug delivery research and development activities currently performed in Salt Lake City. The phased transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed in 2011. The consolidation of drug delivery research and development activities at Brooklyn Park was completed in 2008. The plan is intended to increase efficiencies in manufacturing and research and development activities, reduce our cost structure and enhance competitiveness.

As a result of this plan, we will incur certain costs associated with exit or disposal activities. As part of the plan, we estimate that approximately 90 jobs will be eliminated in total, with approximately 175 net jobs eliminated at CIMA and approximately 85 net jobs added in Salt Lake City.

The total estimated pre-tax costs of the plan are as follows:

Severance costs		$14-16 million
Manufacturing and personnel transfer costs		7- 8 million
Total		$21-24 million

The estimated pre-tax costs of the plan are being recognized between 2008 and 2011 and are included in the United States segment. Through September 30, 2009, we have incurred a total of $12.4 million related to the restructuring plan. In addition to the costs described above, we recognized pre-tax, non-cash accelerated depreciation of plant and equipment at the Eden Prairie facility, which we expect to total approximately $18.0 million to $20.0 million. Through September 30, 2009, we have incurred a total of $12.1 million in accelerated depreciation charges.

Total charges and spending related to the restructuring plan recognized in the consolidated statement of operations and included in the United States segment are as follows:

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Restructuring reserves, beginning of period	$	5,258		$	2,109		$	3,733		$	—
Severance costs	909			1,096			2,722			5,990
Manufacturing and personnel transfer costs	153			401			1,222			983
Payments	(190		)	(760		)	(1,547		)	(4,127		)
Restructuring reserves, end of period	$	6,130		$	2,846		$	6,130		$	2,846

4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

During the first nine months of 2009, we incurred expense of :

· $9.4 million in exchange for the elimination of the $15.0 million milestone and royalty payments associated with the celecoxib license agreement and Acusphere patent rights relating to its HDDS technology. See Note 2 for additional information;

· $30.0 million in exchange for the exclusive, worldwide license rights to LUPUZORTM, acquired from ImmuPharma plc (“ImmuPharma”);

· $0.8 million in exchange for exclusive sublicense rights to bendamustine hydrochloride in China and Hong Kong, acquired from SymBio; and

· $6.0 million in exchange for license rights to certain of XOMA Ltd.’s proprietary antibody library materials.

For the nine months of 2008, we recorded acquired in-process research and development expense of:

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· $10.0 million related to our license of Acusphere HDDS technology for use in oncology therapeutics.

5. OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following:

	Three months ended September 30,					Nine months ended September 30,
	2009		2008			2009			2008
Gains on foreign exchange derivative instruments	$	—	$	—		$	19,022		$	—
Arana dividend income	—		—			1,567			—
Loss on Arana contingent consideration (90% ownership incentive payment)	—		—			(2,773		)	—
Gain on excess of Arana net assets over consideration	—		—			10,008			—
Gain on pre-bid Arana holding	—		—			6,596			—
Foreign exchange gains (losses)	3,775		(2,284		)	7,998			1,488
Other income (expense), net	$	3,775	$	(2,284	)	$	42,418		$	1,488

6. FAIR VALUE DISCLOSURES

Our non-current investments are recorded on a cost basis. The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate the respective fair values. Except for our convertible notes, our debt instruments do not have readily ascertainable market values; however, the carrying values approximate the respective fair values. As of September 30, 2009, the fair value and carrying value of our convertible debt, based on quoted market prices was:

	Fair Value		Carrying Value		Face Value
2.0% convertible senior subordinated notes due June 1, 2015	$	1,089,780	$	610,987	$	820,000
2.5% convertible senior subordinated notes due May 1, 2014	526,900		355,876		500,000
Zero Coupon convertible subordinated notes first putable June 2010	221,710		191,097		199,945

As of September 30, 2009 our fair value assets include the following:

	Fair Value Measurements at Reporting Date Using
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Short-term investments	$	131,403	$	—	$	—

7. INVENTORY, NET

Inventory, net consisted of the following:

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	September 30, 2009		December 31, 2008
Raw materials	$	31,298	$	27,555
Work-in-process	150,908		35,501
Finished goods	58,143		54,241
Total inventory, net	$	240,349	$	117,297

Inventory, net included in other non-current assets	$	—	$	111,598

In June 2007, we secured FDA approval of NUVIGIL. We launched NUVIGIL commercially on June 1, 2009 and reclassified our NUVIGIL inventory balances to current inventory at that time. At September 30, 2009, we had $106.0 million of NUVIGIL inventory. At December 31, 2008, we included NUVIGIL inventory balances of $111.6 million in other non-current assets, rather than inventory.

Over the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil. As a result of our plan to manufacture armodafinil in the future using this new process coupled with the launch of NUVIGIL on June 1, 2009, we assessed the potential impact of these items on certain of our existing agreements to purchase modafinil. Under these contracts, we have agreed to purchase minimum amounts of modafinil through 2012. During the third quarter of 2008, we recorded a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized as a charge to cost of sales. We reassessed our future modafinil needs during the second quarter of 2009, in association with the accelerated launch of NUVIGIL, and increased the reserve by $3.0 million, to $29.0 million. During the third quarter of 2009, we entered into an agreement with one of our modafinil suppliers, paying $13.5 million in exchange for a $23.0 million reduction in our existing purchase commitments with this supplier, which resulted in a $9.5 million gain recorded in cost of sales. As of September 30, 2009, our remaining reserve balance for excess purchase commitments is $6.0 million.

8. GOODWILL

Goodwill consisted of the following:

	United States		Europe		Total
December 31, 2008	$	344,310	$	101,022	$	445,332
Foreign currency translation adjustment	—		3,167		3,167
Ception Therapeutics, Inc. goodwill	121,918		—		121,918
September 30, 2009	$	466,228	$	104,189	$	570,417

We completed our annual test of impairment of goodwill as of July 1, 2009 and concluded that goodwill was not impaired.

9. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

		September 30, 2009						December 31, 2008
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Modafinil developed technology	15 years	$	99,000	$	51,150	$	47,850	$	99,000	$	46,200	$	52,800
DURASOLV technology	14 years	70,000		24,957		45,043		70,000		21,304		48,696
ACTIQ marketing rights	10-12 years	83,454		59,227		24,227		83,454		53,637		29,817
GABITRIL product rights	9-15 years	107,257		67,352		39,905		107,148		61,848		45,300
TRISENOX product rights	8-13 years	112,446		37,935		74,511		111,945		31,022		80,923
AMRIX product rights	18 years	99,303		20,753		78,550		99,332		16,932		82,400
MYOCET trademark	20 years	171,028		32,075		138,953		143,077		21,462		121,615
Ception product rights	Indefinite	374,400		—		374,400		—		—		—
TNF inhibitor product rights	Indefinite	91,852		—		91,852		—		—		—
Arana platform technology	20 years	25,753		429		25,324		—		—		—
Arana royalty agreements	1 year	21,741		5,797		15,944		—		—		—
Other product rights	5-20 years	303,259		179,027		124,232		289,337		143,556		145,781
		$	1,559,493	$	478,702	$	1,080,791	$	1,003,293	$	395,961	$	607,332

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Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $26.4 million and $24.0 million for the three months ended September 30, 2009 and 2008, respectively, and $70.6 million and $77.0 million for the nine months ended September 30, 2009 and 2008, respectively.

Research and development intangible assets are classified as indefinite-lived until the completion or abandonment of the associated research and development efforts.

10. LONG-TERM DEBT

Long-term debt consisted of the following:

	September 30, 2009			As adjusted December 31, 2008*
2.0% convertible senior subordinated notes due June 1, 2015	$	820,000		$	820,000
Debt discount on 2.0% convertible senior subordinated notes due June 1, 2015	(209,013		)	(230,614		)
2.5% convertible senior subordinated notes due May 1, 2014	500,000			—
Debt discount on 2.5% convertible senior subordinated notes due May 1, 2014	(144,124		)	—
Zero Coupon convertible subordinated notes first putable June 2010	199,945			199,888
Debt discount on Zero Coupon convertible subordinated notes first putable June 2010	(8,848		)	(17,789		)
Mortgage and building improvement loans	582			1,288
Capital lease obligations	3,187			2,229
Acusphere, Inc. obligations	—			8,896
Ception Therapeutics, Inc. obligations	4,996			—
Other	911			1,412
Total debt	1,167,636			785,310
Less current portion	(810,081		)	(781,618		)
Total long-term debt	$	357,555		$	3,692

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

2.5% Convertible Senior Subordinated Notes

In May 2009, we issued through a public offering $500 million aggregate principal amount of 2.5% convertible senior subordinated notes due May 1, 2014 (the “2.5% Notes”). Interest on the 2.5% Notes is payable semi-annually in arrears on May 1 and November 1 of each year, commencing November 1, 2009.

The 2.5% Notes are subordinate to existing and future senior indebtedness, equal to our existing and future senior subordinated indebtedness and senior in right of payment to our existing and future subordinated indebtedness. We may not redeem the 2.5% Notes prior to maturity. The 2.5% Notes are convertible prior to maturity, subject to certain conditions described below, into cash and, under certain circumstances, shares, of our common stock at an initial conversion price of $69.00, subject to adjustment (equivalent to an initial conversion rate of approximately 14.4928 shares per $1,000 principal amount of the 2.5% Notes).

The Holders of the 2.5% Notes may surrender their notes for conversion any time prior to the close of business on November 1, 2013 only if any of the following conditions is satisfied:

· during any calendar quarter commencing after September 30, 2009, if the closing sale price of our common stock, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price per share of the notes in effect on that last trading day ($89.70 based on the initial conversion price);

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· during the 10 consecutive trading-day period that follows any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then current conversion rate; or

· if we make certain significant distributions to holders of our common stock, we enter into specified corporate transactions or our common stock is not listed on a U.S. national securities exchange.

Holders also may surrender their 2.5% Notes for conversion after November 1, 2013 and on or prior to the close of business on the business day immediately prior to the stated maturity date regardless if any of the foregoing conditions have been satisfied.

Each $1,000 principal amount of 2.5% Notes is convertible into cash and, under certain circumstances, shares of our common stock, based on an amount (the “Daily Conversion Value”), calculated for each of the 25 trading days beginning on and including the third trading day after the conversion date (the “Conversion Period”). The Daily Conversion Value for each trading day during the Conversion Period for each $1,000 aggregate principal amount of 2.5% Notes is equal to one-twenty-fifth (1/25th) of the product of the then applicable conversion rate multiplied by the volume weighted average price of our common stock on that day.

For each $1,000 aggregate principal amount of 2.5% Notes surrendered for conversion, we will deliver to holders of the 2.5% Notes, on the third business day following the end of the Conversion Period, the aggregate of the following for each trading day during the related conversion period:

(1) if the Daily Conversion Value for such day exceeds $40.00, (a) a cash payment of $40.00 and (b) the remaining Daily Conversion Value, in shares of our common stock; or

(2) if the Daily Conversion Value for such day is less than or equal to $40.00, a cash payment equal to the Daily Conversion Value.

If the 2.5% Notes are converted in connection with certain fundamental changes that occur prior to maturity of the 2.5% Notes, we may also be obligated to pay an additional (or “make whole”) premium with respect to the 2.5% Notes so converted. In addition, if certain fundamental changes occur with respect to Cephalon, holders of the 2.5% Notes will have the option to require us to purchase for cash all or a portion of the 2.5% Notes at a purchase price equal to 100% of the principal amount of the 2.5% Notes plus accrued and unpaid interest.

Transaction costs of $15.5 million related to the issuance of the 2.5% Notes are allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Transaction costs of $10.7 million have been capitalized as debt issuance costs and are being amortized through May 1, 2014.

Convertible Note Hedge Agreement

Concurrent with the offering of the 2.5% Notes in May 2009, we purchased a convertible note hedge from Deutsche Bank AG (“DB”) at a cost of $121.0 million. The convertible note hedge must be net share settled. Under the convertible note hedge, if the market price per share of our common stock is between $69.00 and $100.00 per share, DB will deliver to us the number of shares of the Company’s common stock that the Company is obligated to deliver to the holders of the 2.5% Notes with respect to the conversion, with cash in lieu of any fractional shares. We recorded the convertible note hedge in additional paid-in capital, and will not recognize subsequent changes in fair value. We also recognized a deferred tax asset of $46.2 million for the effect of the future tax benefits related to the convertible note hedge.

Warrant Agreement

Concurrent with the offering of the 2.5% Notes in May 2009, we sold to DB warrants to purchase an aggregate of 7,246,377 shares of our common stock and received net proceeds from the sale of these warrants of $37.6 million. The warrants have a strike price of $100.00 per share, subject to customary adjustments. The warrants expire in approximately equal tranches over the forty trading days beginning July 30, 2014 and ending September 24, 2014. The warrants are exercisable only on the applicable expiration date (European style). If the warrants are exercised, we will settle the warrants under net share settlement. We recorded the warrants in additional paid-in capital, and will not recognize subsequent changes in fair value.

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Together, the convertible note hedge and warrant transactions are expected to have the impact of increasing the effective conversion price of the 2.5% Notes from our perspective from $69.00 per share of our common stock to $100.00 per share of our common stock.

Convertible Notes

As of January 1, 2009, we adopted the transition provisions of ASC 470-20-65, requiring issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the liability and equity components of the convertible debt separately. The liability component is computed based on the fair value of a similar liability that does not include the conversion option. The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component (debt discount) and debt issuance costs are amortized as interest expense over the expected term of the debt facility. We adopted the transition provisions on a retrospective basis for all prior periods presented.

The liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date. At September 30, 2009, our stock price was $58.24, and, therefore, the 2.0% Notes are considered to be current liabilities based on conversion price and are presented in current portion of long-term debt on our consolidated balance sheet. At September 30, 2009, the 2010 Zero Coupon Notes are presented in current portion of long-term debt based on maturity date. At December 31, 2008, our stock price was $77.04, and, therefore, all of our convertible notes issued as of that date are presented in the current portion of long-term debt on our consolidated balance sheet.

The effect of the change to the revised accounting requirements for our convertible debt on the consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Interest expense	$	16,959		$	10,182		$	40,459		$	36,383
Income tax benefit	(6,224		)	(3,737		)	(14,848		)	(13,352		)
Net loss attributable to Cephalon, Inc.	(10,735		)	(6,445		)	(25,611		)	(23,031		)
Basic loss per share attributable to Cephalon, Inc.	(0.14		)	(0.09		)	(0.36		)	(0.34		)
Diluted loss per share attributable to Cephalon, Inc.	(0.14		)	(0.08		)	(0.33		)	(0.30		)

The effect of the change to the revised accounting requirements for our convertible debt on the consolidated balance sheet as of September 30, 2009 and December 31, 2008 is as follows:

	September 30, 2009			December 31, 2008
Assets:
Deferred tax assets	$	(81,853	)	$	(96,701	)
Other assets (debt issuance costs)	8,847			10,455
Total assets	$	(73,006	)	$	(86,246	)
Liabilities:
Current portion of long term debt, net	$	(217,861	)	$	(248,403	)
Long term debt, net	8,309			—
Total liabilities	(209,552		)	(248,403		)
Redeemable equity	217,861			248,403
Cephalon stockholders’ equity:
Additional paid-in capital	54,259			23,717
Accumulated deficit	(135,574		)	(109,963		)
Total Cephalon stockholders’ equity	(81,315		)	(86,246		)
Total liabilities, redeemable equity and equity	$	(73,006	)	$	(86,246	)

The effect of the change to the revised accounting requirements for our convertible debt on the consolidated statement of cash flows for the nine months ended September 30, 2009 and 2008 is as follows:

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	Nine months ended September 30,
	2009			2008
Net loss	$	(25,611	)	$	(23,031	)
Deferred income tax benefit	(14,848		)	(13,352		)
Amortization of debt discount	40,459			36,383

At September 30, 2009, we have included $5.0 million of short-term debt related to Ception, a variable interest entity for which we are the primary beneficiary. Ception’s liabilities represent contractual obligations of Ception for general corporate purposes. Ception’s creditors have no recourse to the general credit of Cephalon.

On August 15, 2008, we established a $200.0 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders. The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries. The credit agreement, as amended, contains borrowing conditions and customary covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the credit agreement), senior debt to Consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of September 30, 2009, we have not drawn any amounts under the credit facility.

In the event that a significant conversion of our convertible debt did occur, we believe that we have the ability to fund the payment of principal amounts due through a combination of utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

11. LEGAL PROCEEDINGS AND OTHER MATTERS

PROVIGIL Patent Litigation and Settlements

In March 2003, we filed a patent infringement lawsuit against four companies—Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the abbreviated new drug applications (“ANDA”) filed by each of these firms with the FDA seeking approval to market a generic form of modafinil. The lawsuit claimed infringement of our U.S. Patent No. RE37,516 (the “‘516 Patent”) which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL and which expires on April 6, 2015. We believe that these four companies were the first to file ANDAs with Paragraph IV certifications and thus are eligible for the 180-day period of marketing exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act. In early 2005, we also filed a patent infringement lawsuit against Carlsbad Technology, Inc. (“Carlsbad”) based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

In late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr; in August 2006, we entered into a settlement agreement with Carlsbad and its development partner, Watson Pharmaceuticals, Inc., which we understand has the right to commercialize the Carlsbad product if approved by the FDA. As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date. Various factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due to an adverse judicial decision in a patent infringement lawsuit; (ii) all parties with first-to file ANDAs relinquish their right to the 180-day period of marketing exclusivity, which could allow a subsequent ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable counterparty breaches a PROVIGIL settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania described below.

We also received rights to certain modafinil-related intellectual property developed by each party and in exchange for these rights, we agreed to make payments to Barr, Ranbaxy and Teva collectively totaling up to $136.0 million, consisting of upfront payments, milestones and royalties on net sales of our modafinil products. In order to maintain an adequate supply of the active drug substance modafinil, we entered into agreements with three modafinil suppliers whereby we have agreed to purchase minimum amounts of modafinil through 2012, with aggregate remaining purchase commitments totaling $19.5 million as of September 30, 2009. See Note 7 for additional details.

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We filed each of the settlements with both the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”). The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us in the U.S. District Court for the District of Columbia challenging the validity of the settlements and related agreements entered into by us with each of Teva, Mylan, Ranbaxy and Barr. We filed a motion to transfer the case to the U.S. District Court for the Eastern District of Pennsylvania (the “EDPA”), which was granted in April 2008. The complaint alleges a violation of Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future. We believe the FTC complaint is without merit and we have filed a motion to dismiss the case. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

Numerous private antitrust complaints have been filed in the EDPA, each naming Cephalon, Barr, Mylan, Teva and Ranbaxy as co-defendants and claiming, among other things, that the PROVIGIL settlements violate the antitrust laws of the United States and, in some cases, certain state laws. These actions have been consolidated into a complaint on behalf of a class of direct purchasers of PROVIGIL and a separate complaint on behalf of a class of consumers and other indirect purchasers of PROVIGIL. A separate complaint was filed by an indirect purchaser of PROVIGIL in September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief.

Separately, in June 2006, Apotex, Inc., a subsequent ANDA filer seeking FDA approval of a generic form of modafinil, filed suit against us, also in the EDPA, alleging similar violations of antitrust laws and state law. Apotex asserts that the PROVIGIL settlement agreements improperly prevent it from obtaining FDA approval of its ANDA, and seeks monetary and equitable remedies. Apotex also seeks a declaratory judgment that the ‘516 Patent is invalid, unenforceable and/or not infringed by its proposed generic. In late 2006, we filed a motion to dismiss the Apotex case, which is pending. In May 2009, Apotex also filed a declaratory judgment complaint in the EDPA that our U.S. Patent No. 7,297,346 (the “ ‘346 Patent”) is invalid, unenforceable and/or not infringed by its proposed generic. The ‘346 Patent covers pharmaceutical compositions of modafinil and expires in May 2024. Separately, in April 2008, the Federal Court of Canada dismissed our application to prevent regulatory approval of Apotex’s generic modafinil tablets in Canada. We have learned that Apotex has launched its generic modafinil tablets in Canada, and in April 2009 we filed a patent infringement lawsuit against Apotex in Canada. We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust and declaratory judgment complaints are without merit. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In August 2009, the private antitrust class (e.g. the direct and indirect purchasers), Apotex and the FTC filed amended complaints and, subsequently, we filed motions to dismiss each amended complaint. The private antitrust class, Apotex and the FTC have filed responses to our motions to dismiss. The EDPA heard oral arguments for each motion to dismiss in October 2009.

In November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) and Apotex, respectively, also filed Paragraph IV ANDAs with the FDA in which each firm is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit in the United States against either Caraco or Apotex, although Apotex has filed suit against us, as described above. In early August 2008, we received notice that Hikma Pharmaceuticals plc (“Hikma Pharmaceuticals”) filed a Paragraph IV ANDA with the FDA in which it is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit against Hikma Pharmaceuticals.

NUVIGIL Paragraph IV Notice Letter

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22, 2010, the expiration date of the ‘855 Patent. Under the provisions of the Hatch-Waxman Act, if we initiate a patent infringement lawsuit against Teva within 45 days of our receipt of Teva’s letter, then the FDA would be automatically precluded from approving the Teva ANDA until the earlier of entry of a district court judgment in favor of Teva or 30 months from the date of our receipt of Teva’s letter. We intend to vigorously defend our NUVIGIL intellectual property rights.

AMRIX Patent Litigation

In October 2008, Cephalon and Eurand, Inc. (“Eurand”), received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan and Barr, each requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. In November 2008, we received a similar certification letter from Impax Laboratories, Inc. Mylan and Impax each allege that the U.S. Patent Number 7,387,793 (the “Eurand Patent”), entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants,” issued to Eurand will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserves the right to challenge the validity and/or enforceability of the Eurand Patent. Barr alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. The Eurand Patent does not expire until February 26, 2025. In late November 2008, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Mylan (and its parent) and Barr (and its parent) for infringement of the Eurand Patent. In January 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Impax for infringement of the Eurand Patent.

In late May 2009, Cephalon and Eurand received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Anchen Pharmaceuticals, Inc. (“Anchen”) requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. Anchen alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. In July 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Anchen for infringement of the Eurand Patent.

Under the provisions of the Hatch-Waxman Act, the filing of the Mylan, Barr, Impax and Anchen lawsuits stays any FDA approval of each ANDA until the earlier of entry of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.

FENTORA Patent Litigation

In April 2008 and June 2008, we received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Watson Laboratories, Inc. and Barr, respectively, requesting approval to market and sell a generic equivalent of FENTORA. Both Watson and Barr allege that our U.S. Patent Numbers 6,200,604 and 6,974,590 covering FENTORA are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of the product described in their respective ANDAs. The 6,200,604 and 6,974,590 patents cover methods of use for FENTORA and do not expire until 2019. In June 2008 and July 2008, we and our wholly-owned subsidiary, CIMA, filed lawsuits in U.S. District Court in Delaware against Watson and Barr for infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier of entry of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.

While we intend to vigorously defend the AMRIX and FENTORA intellectual property rights, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

U.S. Attorney’s Office and Connecticut Attorney General Investigations and Related Matters

In September 2008, we entered into a settlement agreement (the “Settlement Agreement”) with the DOJ, the USAO, the OIG, TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the “United States Government”) and the relators identified in the Settlement Agreement to settle the outstanding False Claims Act claims alleging off-label promotion of ACTIQ and PROVIGIL from January 1, 2001 through December 31, 2006 and GABITRIL from January 2, 2001 through February 18, 2005 (the “Claims”). As part of the Settlement Agreement we paid a total of $375 million (the “Payment”) plus interest of $11.3 million. Pursuant to the Settlement Agreement, the United States Government and the relators released us from all Claims and the United States Government agreed to refrain from seeking our exclusion from Medicare/Medicaid, the TRICARE Program or other federal health care programs. In connection with the Settlement Agreement, we pled guilty to one misdemeanor violation of the U.S. Food, Drug and Cosmetic Act and agreed to pay $50 million (in addition to the Payment). All of the payments described above were made in the fourth quarter of 2008.

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As part of the Settlement Agreement, we entered into a five-year Corporate Integrity Agreement (the “CIA”) with the OIG. The CIA provides criteria for establishing and maintaining compliance. We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed. We also agreed to enter into a State Settlement and Release Agreement (the “State Settlement Agreement”) with each of the 50 states and the District of Columbia. Upon entering into the State Settlement Agreement, a state will receive its portion of the Payment allocated for the compensatory state Medicaid payments and related interest amounts. Each state also agrees to refrain from seeking our exclusion from its Medicaid program.

In September 2008, we entered into an Assurance of Voluntary Compliance (the “Connecticut Assurance”) with the Attorney General of the State of Connecticut and the Commissioner of Consumer Protection of the State of Connecticut (collectively, “Connecticut”) to settle Connecticut’s investigation of our promotion of ACTIQ, GABITRIL and PROVIGIL. Pursuant to the Connecticut Assurance, (i) we paid a total of $6.15 million to Connecticut and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject of Connecticut’s investigation. We also entered into an Assurance of Discontinuance (the “Massachusetts Settlement Agreement”) with the Attorney General of the Commonwealth of Massachusetts (“Massachusetts”) to settle Massachusetts’ investigation of our promotional practices with respect to fentanyl-based products. Pursuant to the Massachusetts Settlement Agreement, (i) we paid a total of $0.7 million to Massachusetts and (ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts’ investigation.

In late 2007, we were served with a series of putative class action complaints filed in the EDPA on behalf of entities that claim to have reimbursed for prescriptions of ACTIQ for uses outside of the product’s approved label in non-cancer patients. The complaints allege violations of various state consumer protection laws, as well as the violation of the common law of unjust enrichment, and seek an unspecified amount of money in actual, punitive and/or treble damages, with interest, and/or disgorgement of profits. In May 2008, the plaintiffs filed a consolidated and amended complaint that also alleges violations of RICO and conspiracy to violate RICO. The RICO allegations were dismissed with prejudice in May 2009. In February 2009, we were served with an additional putative class action complaint filed on behalf of two health and welfare trust funds that claim to have reimbursed for prescriptions of GABITRIL and PROVIGIL for uses outside the products approved labels. The complaint alleges violations of RICO and the common law of unjust enrichment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. We believe the allegations in the complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future. These efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In May 2009, we were served with a putative class action complaint filed in New Jersey state court. The complaint alleged violations of the New Jersey consumer fraud act and the common law of fraud and fraudulent concealment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. In July 2009, we removed the complaint to the U.S. District Court for the District of New Jersey and, in October 2009, the court granted our motion to dismiss the complaint.

Derivative Suit

In January 2008, a purported stockholder of the company filed a derivative suit on behalf of Cephalon in the U.S. District Court for the District of Delaware naming each member of our Board of Directors as defendants. The suit alleges, among other things, that the defendants failed to exercise reasonable and prudent supervision over the management practices and controls of Cephalon, including with respect to the marketing and sale of ACTIQ, and in failing to do so, violated their fiduciary duties to the stockholders. The complaint seeks an unspecified amount of money damages, disgorgement of all compensation and other equitable relief. In August 2009, our Motion for Judgment on the Pleadings was granted. The plaintiffs have appealed this ruling. We believe the plaintiff’s allegations in this matter are without merit and we intend to vigorously defend ourselves in this matter. These efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

DURASOLV

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quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. In September 2009, the Board affirmed the Examiner’s position with respect to one of the DURASOLV patents. We have the right to appeal this rejection and, as of the filing date of this report, we are awaiting a hearing and a determination with respect to our appeal regarding the other patent. These efforts will be both expensive and time consuming and, ultimately, due to the nature of patent appeals, there can be no assurance that these efforts will be successful. The invalidity of the DURASOLV patents could have a material adverse impact on revenues from our drug delivery business.

Other Commitments

We have committed to make potential future “milestone” payments to third parties as part of our in-licensing and development programs primarily in the area of research and development agreements. Payments generally become due and payable only upon the achievement of certain developmental, regulatory and/or commercial milestones. These obligations are not recorded as liabilities in accordance with U.S. GAAP and we have not recorded a liability on our balance sheet for any such contingencies. As of September 30, 2009, the potential milestone and other contingency payments due under current contractual agreements are $1,183.0 million. Milestones payable to Ception are not included in this amount, as such payments are contingent upon our exercise of the Ception Option. See Note 2 for additional information.

Other Matters

We are a party to certain other litigation in the ordinary course of our business, including, among others, European patent oppositions, patent infringement litigation and matters alleging employment discrimination, product liability and breach of commercial contract. We do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

12. STOCK-BASED COMPENSATION

Total stock-based compensation expense recognized in the consolidated statement of operations is as follows:

	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Stock option expense	$	6,430	$	5,940	$	20,550	$	19,508
Restricted stock unit expense	5,440		4,710		16,160		13,035
Total stock-based compensation expense*	$	11,870	$	10,650	$	36,710	$	32,543
Total stock-based compensation expense after-tax	$	7,799	$	6,853	$	24,111	$	21,014

*For the three and nine months ended September 30, 2009 and the three months ended September 30, 2008, total stock-based compensation is allocated 4% to cost of sales, 38% to research and development and 58% to selling, general and administrative expenses based on the employees’ compensation allocation between these line items. During the first half of 2008, total stock-based compensation expense was recognized equally between research and development and selling, general and administrative expenses based on the employees’ compensation allocation between these line items.

13. INCOME TAXES

For the three and nine months ended September 30, 2009, we recognized $42.7 million and $122.7 million of income tax expense on income before income taxes of $137.8 million and $333.6 million, resulting in overall effective tax rates of 31.0% and 36.8%, respectively. For the three and nine months ended September 30, 2009, we have not recognized tax benefit for losses attributable to non-controlling interest of $7.6 million and $35.2 million, respectively. In August 2009 we recognized an additional tax benefit of $13.8 million over the benefits recorded at December 31, 2008, due to our closing agreement with the IRS in which both parties agreed that the nondeductible punitive portion of the USAO Settlement Agreement is $152.3 million. During the third quarter of 2008, we recognized a tax benefit of $84.5 million, of which $82.3 million related to the settlement with the USAO, for which the related expense was recorded in 2007.

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The Internal Revenue Service (“IRS”) currently is examining Cephalon, Inc.’s 2006 and 2007 U.S. federal income tax returns. Zeneus Pharma S.a.r.L. is under examination by the French Tax Authorities for 2003, 2004 and 2006 to 2008. Cephalon Gmbh, in Germany, is under examination for 2004 to 2006. During the first quarter of 2009, Cephalon Pharma S.L., in Spain, completed its income tax audit for 2003 with no material findings. Our filings in the United Kingdom remain open to examination for 2006 to 2008. In other significant foreign jurisdictions, the tax years that remain open for potential examination range from 2001 to 2008. We do not believe at this time that the results of these examinations will have a material impact on the financial statements.

In the regular course of business, various state and local tax authorities also conduct examinations of our state and local income tax returns. Depending on the state, state income tax returns are generally subject to examination for a period of three to five years after filing. The state impact of any federal changes that may result from the 2006 and 2007 IRS examination and the agreed to federal changes from the 2003 to 2005 IRS examination, settled in 2008, remain subject to examination by various states for a period of up to one year after formal notification to the states. We currently have several state income tax returns in the process of examination.

In 2009, we received $67.3 million in federal tax refunds of previously paid 2008 estimated federal taxes. This refund was principally due to the tax benefit relating to the termination of our collaboration with Alkermes for the marketing and sale of VIVITROL and the settlement with the USAO.

14. EARNINGS PER SHARE (“EPS”)

Basic income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted income per common share is computed based on the weighted average number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. Common stock equivalents are measured under the treasury stock method.

We have entered into convertible note hedge and warrant agreements that, in combination, have the economic effect of reducing the dilutive impact of the 2.0% Notes, 2.5% Notes and the 2010 Zero Coupon Notes. However, we are required to analyze separately the impact of the convertible note hedge and warrant agreements on diluted EPS. As a result, the purchases of the convertible note hedges are excluded because their impact will always be anti-dilutive. The impact of the warrants is computed using the treasury stock method.

The number of shares included in the diluted EPS calculation for the convertible subordinated notes and warrants is as follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008
Average market price per share of Cephalon stock	$	56.87	$	74.72	$	63.71	$	68.46

Shares included in diluted EPS calculation:
2.0% Notes	3,140		6,584		4,688		5,581
2.5% Notes	—		—		—		—
New Zero Coupon Notes	23		861		399		825
Warrants related to 2.0% Notes	—		1,793		—		155
Warrants related to 2.5% Notes	—		—		—		—
Warrants related to New Zero Coupon Notes	—		125		—		—
Other	1		2		1		5
Total	3,164		9,365		5,088		6,566

The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted income per common share:

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	Three months ended September 30,				Nine months ended September 30,
	2009		As adjusted 2008*		2009		As adjusted 2008*
Basic income per common share computation:
Numerator:
Net income used for basic income per common share	$	102,722	$	105,598	$	246,069	$	187,931
Denominator:
Weighted average shares used for basic income per common share	74,647		68,118		71,541		67,855

Basic income per common share	$	1.38	$	1.55	$	3.44	$	2.77

	Three months ended September 30,				Nine months ended September 30,
	2009		As adjusted 2008*		2009		As adjusted 2008*
Diluted income per common share computation:
Numerator:
Net income used for basic income per common share	$	102,722	$	105,598	$	246,069	$	187,931
Denominator:
Weighted average shares used for basic income per common share	74,647		68,118		71,541		67,855
Effect of dilutive securities:
Convertible subordinated notes and warrants	3,164		9,365		5,088		6,566
Employee stock options and restricted stock units	620		1,437		923		1,159
Weighted average shares used for diluted income per common share	78,431		78,920		77,552		75,580

Diluted income per common share	$	1.31	$	1.34	$	3.17	$	2.49

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

The following reconciliation shows the shares excluded from the calculation of diluted income per common share as the inclusion of such shares would be anti-dilutive:

	Three months ended September 30,		Nine months ended September 30,
	2009	2008	2009	2008
Weighted average shares excluded:
Convertible subordinated notes and warrants	28,336	23,233	25,727	25,602
Employee stock options and restricted stock units	4,142	1,942	3,980	2,917
	32,478	25,175	29,707	28,519

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15. SEGMENT AND SUBSIDIARY INFORMATION

Revenues for the three months ended September 30:

	2009									2008
	United States			Europe			Total			United States			Europe			Total
Net Sales:
PROVIGIL	$	241,301		$	16,693		$	257,994		$	241,366		$	17,793		$	259,159
NUVIGIL	20,991			—			20,991			—			—			—
GABITRIL	11,560			1,340			12,900			12,176			2,337			14,513
CNS	273,852			18,033			291,885			253,542			20,130			273,672

ACTIQ	19,578			13,663			33,241			21,392			14,401			35,793
Generic OTFC	19,332			—			19,332			19,569			—			19,569
FENTORA	35,779			1,201			36,980			41,330			—			41,330
AMRIX	26,703			—			26,703			20,512			—			20,512
Pain	101,392			14,864			116,256			102,803			14,401			117,204

TREANDA	54,532			—			54,532			24,551			—			24,551
Other Oncology	4,010			24,526			28,536			4,691			23,195			27,886
Oncology	58,542			24,526			83,068			29,242			23,195			52,437

Other	6,632			37,382			44,014			11,351			35,000			46,351
Total Net Sales	440,418			94,805			535,223			396,938			92,726			489,664
Other Revenues	13,949			240			14,189			8,471			347			8,818
Total External Revenues	454,367			95,045			549,412			$	405,409		$	93,073		$	498,482
Inter-Segment Revenues	5,827			2,251			8,078			3,697			6,609			10,306
Elimination of Inter-Segment Revenues	(5,827		)	(2,251		)	(8,078		)	(3,697		)	(6,609		)	(10,306		)
Total Revenues	$	454,367		$	95,045		$	549,412		$	405,409		$	93,073		$	498,482

Revenues for the nine months ended September 30:

	2009									2008
	United States			Europe			Total			United States			Europe			Total
Net Sales:
PROVIGIL	$	726,313		$	47,111		$	773,424		$	658,777		$	48,428		$	707,205
NUVIGIL	37,777			—			37,777			—			—			—
GABITRIL	37,058			3,871			40,929			37,614			6,669			44,283
CNS	801,148			50,982			852,130			696,391			55,097			751,488

ACTIQ	71,148			38,122			109,270			96,960			40,734			137,694
Generic OTFC	66,834			—			66,834			75,845			—			75,845
FENTORA	99,686			2,438			102,124			116,637			—			116,637
AMRIX	83,807			—			83,807			47,399			—			47,399
Pain	321,475			40,560			362,035			336,841			40,734			377,575

TREANDA	160,549			—			160,549			38,932			—			38,932
Other Oncology	13,529			67,726			81,255			14,259			70,837			85,096
Oncology	174,078			67,726			241,804			53,191			70,837			124,028

Other	26,167			106,474			132,641			37,995			117,517			155,512
Total Net Sales	1,322,868			265,742			1,588,610			1,124,418			284,185			1,408,603
Other Revenues	28,016			567			28,583			24,377			1,436			25,813
Total External Revenues	1,350,884			266,309			1,617,193			$	1,148,795		$	285,621		$	1,434,416
Inter-Segment Revenues	18,511			2,425			20,936			14,364			20,421			34,785
Elimination of Inter-Segment Revenues	(18,511		)	(2,425		)	(20,936		)	(14,364		)	(20,421		)	(34,785		)
Total Revenues	$	1,350,884		$	266,309		$	1,617,193		$	1,148,795		$	285,621		$	1,434,416

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Income (loss) before income taxes for the three and nine months ended September 30:

	Three months ended September 30,					Nine months ended September 30,
	2009		2008*			2009			2008*
United States	$	130,529	$	49,378		$	373,911		$	186,527
Europe	7,241		(9,888		)	(40,333		)	(16,323		)
Total	$	137,770	$	39,490		$	333,578		$	170,204

Total assets:

	September 30, 2009		As adjusted December 31, 2008*
United States	$	3,929,152	$	2,324,694
Europe	729,555		758,248
Total	$	4,658,707	$	3,082,942

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). Certain reclassifications of prior year amounts have been made to conform to current year presentation.

16. SUBSEQUENT EVENTS

BDC Option Agreement

In October 2009, we signed an agreement (the “BDC Option Agreement”) with BioAssets Development Corporation (“BDC”), a privately-held company, that provides us with an option to acquire BDC. Under the terms of the BDC Option Agreement, we will pay BDC an upfront payment of $30 million and, assuming exercise of the option, an additional payment on the closing of the acquisition. BDC stockholders could also receive additional future payments related to regulatory and sales milestones. The BDC Option Agreement is subject to customary closing conditions including the receipt of necessary BDC stockholder approvals. BDC is currently conducting a Phase II placebo-controlled proof of concept study with the tumor necrosis factor (TNF) inhibitor, etanercept, epidurally administered to a minimum of 40 patients with sciatica. Sciatica is a neuropathic inflammatory pain condition that occurs when the sciatic nerve is compressed, injured or irritated. BDC has secured an intellectual property estate around use of TNF inhibitors for sciatic pain in patients with intervertebral disk herniation, as well as other spinal disorders. We may exercise the option at any time during a specified period after receipt of one-month patient response data from the BDC’s Phase II proof of concept study. Data are anticipated to be available in the second half of 2010.

Research Restructuring

In October 2009, we began to restructure our discovery research organization to focus on our pipeline opportunities, primarily in oncology, inflammatory diseases and pain, with an emphasis on our biologic opportunities, wind down our internal research efforts in CNS and reduce our overall cost structure. As part of this restructuring, by the first quarter of 2010, we expect to eliminate approximately 35 jobs at our West Chester, Pennsylvania research center through a combination of voluntary resignations and terminations. We expect to incur certain costs associated with this restructuring. Based on our current expectations, the total estimated pre-tax costs of the restructuring are between $4.0 million and $6.0 million in severance costs.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2008. The 2008 Form 10-K has been supplemented by our Current Report on Form 8-K, filed with the SEC on May 20, 2009, to reflect our adoption, effective January 1, 2009 of the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.

EXECUTIVE SUMMARY

Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of innovative products in four core therapeutic areas: central nervous system (“CNS”), pain, oncology, and our latest area of focus, inflammatory diseases. Cephalon has recently completed certain transactions designed to build a portfolio of potential products targeted to the treatment of inflammatory diseases. In 2009, Cephalon (i) acquired Arana Therapeutics Limited, an Australian company, whose lead domain antibody compound, ART621, is in Phase II development for patients with certain inflammatory diseases; (ii) acquired an exclusive, worldwide license to the ImmuPharma investigational compound, LUPUZOR™, which is in development for the treatment of systemic lupus erythematosus; and (iii) purchased an option to acquire privately-held Ception Therapeutics, Inc., whose lead humanized monoclonal antibody compound, reslizumab, is in development for the treatment of pediatric eosinophilic esophagitis. In addition to conducting an active research and development program, we market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world. Consistent with our core therapeutic areas, we have aligned our approximately 775 person U.S. field sales and sales management teams by area. We have a sales and marketing organization numbering approximately 400 persons that supports our presence in nearly 20 European countries, including France, the United Kingdom, Germany, Italy and Spain, and certain countries in Africa and the Middle East.

Our most significant product is PROVIGIL® (modafinil) Tablets [C-IV], which comprised 49% of our total consolidated net sales for the nine months ended September 30, 2009, of which 94% was in the U.S. market. For the nine months ended September 30, 2009, consolidated net sales of PROVIGIL increased 9% over the nine months ended September 30, 2008. PROVIGIL is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome (“OSA/HS”) and shift work sleep disorder (“SWSD”). In June 2007, we secured final U.S. Food and Drug Administration (the “FDA”) approval of NUVIGIL® (armodafinil) Tablets [C-IV] for the same indications as PROVIGIL. NUVIGIL is a single-isomer formulation of modafinil, the active ingredient in PROVIGIL. The product is protected by a composition of matter patent that will expire on December 18, 2023 and covers a novel polymorphic form of armodafinil, the active pharmaceutical ingredient in NUVIGIL. We launched NUVIGIL on June 1, 2009 and have shifted our CNS marketing efforts from PROVIGIL to NUVIGIL. In March 2009, we announced positive results from a Phase 2 clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder and our plan to advance to Phase 3 trials for this indication. In April 2009, we announced positive results from a Phase 3 clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed a supplemental new drug application (an “sNDA”) for this indication with the FDA in June 2009. The FDA has granted priority review for the jet lag disorder sNDA, and we expect a response from the FDA by December 29, 2009. In May 2009, we announced positive results from a Phase 4 study of NUVIGIL in obstructive sleep apnea and comorbid major depressive disorder requiring ongoing antidepressant therapy.

On a combined basis, our two next most significant products are FENTORA® (fentanyl buccal tablet) [C-II] and ACTIQ® (oral transmucosal fentanyl citrate) [C-II] (including our generic version of ACTIQ (“generic OTFC”)). Together, these products comprised 18% of our total consolidated net sales for the nine months ended September 30, 2009, of which 85% was in the U.S. market. In October 2006, we launched FENTORA in the United States. FENTORA is indicated for the management of breakthrough pain in patients with cancer who are already receiving and are tolerant to opioid therapy for their underlying persistent cancer pain. In April 2008, we received marketing authorization from the European Commission for EFFENTORA™ for the same indication as FENTORA and launched the product in certain European countries in January 2009. We have focused our clinical strategy for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic pain and back pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In May 2008, an FDA Advisory Committee voted not to recommend approval

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of the FENTORA sNDA. In September 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. In December 2008, we also received supplement request letters from the FDA requesting that we submit a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA’s requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program. In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS Programs for FENTORA and ACTIQ and have been engaged in ongoing discussions with the agency. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010. We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA’s requests and possibly to provide a potential avenue for approval of the sNDA. We anticipate initiating the REMS Program upon receipt of approval from the FDA. With respect to ACTIQ, its sales have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson Pharmaceuticals, Inc. We expect this erosion will continue throughout 2009. In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004. We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010.

In March 2008, the FDA granted an orphan drug designation for TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia (“CLL”) and, in April 2008, the product was launched. In October 2008, we received FDA approval of TREANDA for treatment of patients with indolent B-cell non-Hodgkin’s lymphoma (“NHL”) who have progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. TREANDA comprised 10% of our total consolidated net sales for the nine months ended September 30, 2009, all of which were in the U.S. market.

On April 23, 2009, we received approval from the FDA for our sNDA to update the prescribing information for TREANDA. We finalized and implemented the updated prescribing information for TREANDA in May 2009. We have identified two postmarketing cases of Stevens Johnson Syndrome (“SJS”)/toxic epidermal necrolysis (“TEN”) in patients treated concomitantly with TREANDA and allopurinol; one of these cases was fatal. Allopurinol is known to cause SJS/TEN. In the non-fatal case, the patient also received other drugs that can cause SJS. TREANDA’s prescribing information has been updated to include these serious skin reactions. These updates communicate safety warnings when TREANDA is used in combination with allopurinol. Although the relationship between TREANDA and SJS/TEN cannot be determined, there may be an increased risk of severe skin toxicity when TREANDA and allopurinol are administered concomitantly. This update is similar to the labeling that currently exists with certain other agents used to treat indolent NHL and/or CLL, such as RITUXAN® (rituximab), REVLIMID® (lenalidomide) and cyclophosphamide, all of which also reference SJS/TEN in their current respective prescribing information.

In August 2007, we acquired exclusive North American rights to AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) from E. Claiborne Robins Company, Inc., a privately-held company d/b/a ECR Pharmaceuticals (“ECR”). Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the FDA for short-term use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions. We made the product available in the United States in October 2007 and commenced a full U.S. launch in November 2007. In June 2008, the U.S. Patent and Trademark Office (the “PTO”) issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025. In July 2009, the PTO issued a notice of allowance for an additional pharmaceutical formulation patent application for AMRIX. In October 2009, after further review, the PTO rejected that patent application. We intend to appeal that decision.

We are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination, product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract. In particular, as a biopharmaceutical company, our future success is highly dependent on obtaining and maintaining patent protection or regulatory exclusivity for our products and technology. We intend to vigorously defend the validity, and prevent infringement, of our patents. The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or expiration, could materially impact our results of operations. For more information regarding these matters, please see Note 11 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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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, and to successfully develop or acquire and commercialize new product candidates.

RECENT ACQUISITIONS AND TRANSACTIONS

Arana Therapeutics Limited

· Payment of Australian dollar (“A$”) 1.40 cash for each Arana ordinary share less any dividends paid by Arana;

· Upon Cephalon International’s receipt of a relevant interest in 90% of Arana ordinary shares, the offer price would increase by A$0.05 to A$1.45 (the “90% Premium”); and

Ception Therapeutics, Inc.

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Ception and paid Ception stockholders an aggregate of $50.0 million. We also agreed to provide up to $25.0 million of financing to Ception during the Option Period. As of September 30, 2009, we have advanced $3.5 million to Ception under the financing agreement. In October 2009, we advanced an additional $2.5 million to Ception under the financing agreement. We, in our sole discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and including the date that (i) is fifteen business days after our receipt of the final study report for Ception’s ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis (“Res-5-0002 EE Study”) indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our receipt of the final study report for Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the “Option Period”). The Res-5-0002 EE Study is fully enrolled, and we anticipate completion of the study in the fourth quarter of 2009 or the first quarter of 2010. If the data are positive and we exercise the Ception Option, we intend to file a Biologics License Application for reslizumab with the FDA in 2010. If we exercise the Ception Option, we have agreed to pay a total of $250.0 million less any third party debt payable by Ception in exchange for all the outstanding capital stock of Ception on a fully-diluted basis. Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception’s program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.

Acusphere, Inc.

LUPUZOR License

In November 2008, we entered into an option agreement (the “ImmuPharma Option Agreement”) with ImmuPharma plc (“ImmuPharma”) providing us with an option to obtain an exclusive, worldwide license to the investigational medication LUPUZOR™ for the treatment of systemic lupus erythematosus. In January 2009, we exercised the option and entered into a Development and Commercialization Agreement with ImmuPharma based on a review of interim results of a Phase IIb study for LUPUZOR. Under the terms of the ImmuPharma Option Agreement, we paid ImmuPharma a $15.0 million upfront option payment upon execution and a one-time $30.0 million license fee in February 2009. We expect to announce final results from the Phase IIb study by the end of 2009 and commence a large Phase IIb study in early 2010.

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RESULTS OF OPERATIONS

(In thousands)

Three months ended September 30, 2009 compared to three months ended September 30, 2008:

	Three months ended
	September 30,
	2009						2008						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Net Sales:
PROVIGIL	$	241,301	$	16,693	$	257,994	$	241,366	$	17,793	$	259,159	—	%	(6	)%	—	%
NUVIGIL	20,991		—		20,991		—		—		—		—		—		—
GABITRIL	11,560		1,340		12,900		12,176		2,337		14,513		(5	)	(43	)	(11	)
CNS	273,852		18,033		291,885		253,542		20,130		273,672		8		(10	)	7

ACTIQ	19,578		13,663		33,241		21,392		14,401		35,793		(8	)	(5	)	(7	)
Generic OTFC	19,332		—		19,332		19,569		—		19,569		(1	)	—		(1	)
FENTORA	35,779		1,201		36,980		41,330		—		41,330		(13	)	—		(11	)
AMRIX	26,703		—		26,703		20,512		—		20,512		30		—		30
Pain	101,392		14,864		116,256		102,803		14,401		117,204		(1	)	3		(1	)

TREANDA	54,532		—		54,532		24,551		—		24,551		122		—		122
Other Oncology	4,010		24,526		28,536		4,691		23,195		27,886		(15	)	6		2
Oncology	58,542		24,526		83,068		29,242		23,195		52,437		100		6		58

Other	6,632		37,382		44,014		11,351		35,000		46,351		(42	)	7		(5	)
Total Net Sales	440,418		94,805		535,223		396,938		92,726		489,664		11		2		9
Other Revenues	13,949		240		14,189		8,471		347		8,818		65		(31	)	61
Total Revenues	$	454,367	$	95,045	$	549,412	$	405,409	$	93,073	$	498,482	12	%	2	%	10	%

Net Sales- In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 75% of our total consolidated gross sales for the three months ended September 30, 2009. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the amount of product they purchase from us) can materially affect the level of our sales in any particular period and thus may not necessarily correlate to the number of prescriptions written for our products as reported by IMS Health Incorporated.

We have distribution service agreements with our major wholesaler customers. These agreements obligate the wholesalers to provide us with periodic retail demand information and current inventory levels for our products held at their warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits based on product demand. Various factors can impact the decisions made by wholesalers and retailers regarding the levels of inventory they hold, including, among other factors, their assessment of anticipated demand for products, timing of sales made by them, their review of historical product usage trends, and their purchasing patterns.

As of September 30, 2009, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products. Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products at our current sales levels. While wholesalers maintained greater than three weeks supply of NUVIGIL as a result of the launch, total NUVIGIL inventory held by wholesalers has decreased during the quarter. Based on a retail inventory survey in June 2009, we believe that our generic OTFC inventory held at wholesalers and retailers is approximately three months. We do not expect that potential future fluctuations in inventory levels of generic OTFC held by retailers will have a significant impact on our financial position and results of operations.

For the three months ended September 30, 2009, in addition to the factors addressed below, net sales were also impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. Declines in foreign exchange rates versus

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the U.S. dollar caused a 9% decrease in European net sales. The other key factors that contributed to the increase in net sales, period to period, are summarized by product as indicated below.

· In CNS, net sales increased 7%. Net sales of NUVIGIL, launched in June 2009, contributed to an 8% increase in CNS sales in the U. S., while PROVIGIL net sales in the U.S. maintained their prior year levels due to price increases in 2008 and 2009, offset by a decline in unit sales due to the introduction of NUVIGIL and the transition of our marketing support from PROVIGIL to NUVIGIL. For the three months ended September 30, 2009, NUVIGIL represents 15% of the combined NUVIGIL/PROVIGIL prescriptions. European net sales of PROVIGIL decreased 6% due to the unfavorable effect of exchange rates, partially offset by increases in unit sales. Net sales of GABITRIL, a non-promoted product, decreased 5% in the U.S and 43% in Europe. In the US, the decrease in prescriptions was partially offset by a 15% price increase in August 2008, while in Europe, sales were impacted by the unfavorable effect of exchange rate changes.

· In Pain, net sales decreased 1 percent. Net sales of our pain products have been negatively impacted by an overall decline in the rapid onset opioid market. Net sales of FENTORA decreased 11%, due to decreased volume, partially offset by domestic price increases in 2008 and 2009 and the introduction of FENTORA in Europe during 2009. Net sales of ACTIQ in the U.S. decreased by 8% due to loss of market share to generic competition, partially offset by price increases in 2008. Net sales of our own generic OTFC and shipments of our generic OTFC to Barr decreased 1%. In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004. Net sales of ACTIQ in Europe decreased 5%, as the impact of unfavorable exchange rate changes exceeded the increase in unit sales. The decreases in net sales of FENTORA, ACTIQ and generic OTFC were largely offset by a 30% increase in AMRIX net sales as AMRIX, launched in late 2007, gained market share over prior year levels. Current period sales also benefited from an 8% price increase in February 2009. These increases were partially offset by increases in gross to net sales deductions for AMRIX.

· In Oncology, net sales increased 58 percent. This increase was attributable to the growth of TREANDA, which launched in April 2008. Net sales of our European oncology products increased 6%, due primarily to increases in unit sales of MYOCET, offset by the unfavorable effect of exchange rate changes. Throughout 2009, we expect Oncology net sales to exceed prior year amounts due to the increased sales levels of TREANDA.

· Other net sales, which consist primarily of net sales of other products and certain third party products, decreased 5 percent, primarily due to the November 2008 termination of our agreement with Alkermes, Inc.

Other Revenues—The increase of 61% from period to period is primarily due to revenues from Arana.

Analysis of gross sales to net sales—The following table presents the product sales allowances deducted from gross sales to arrive at a net sales figure:

	Three months ended
	September 30,
	2009			2008			Change			% Change
Gross sales	$	614,010		$	562,074		$	51,936		9	%
Product sales allowances:
Prompt payment discounts	10,354			9,378			976			10
Wholesaler discounts	8,246			(10		)	8,256			100
Returns	16,836			16,687			149			1
Coupons	3,532			5,194			(1,662		)	(32	)
Medicaid discounts	11,829			11,493			336			3
Managed care and governmental contracts	27,990			29,668			(1,678		)	(6	)
	78,787			72,410			6,377			9
Net sales	$	535,223		$	489,664		$	45,559		9	%
Product sales allowances as a percentage of gross sales	12.8		%	12.9		%

Prompt payment discounts increased for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 due to the increase in sales. Wholesaler discounts increased period over period as fewer discounts were required for the third quarter of 2008 as a result of price increases. Returns remained consistent as a decrease in the

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returns provision for ACTIQ was offset by increased returns provisions for FENTORA, PROVIGIL, AMRIX and generic OTFC and the recognition of estimated returns due to the launch of NUVIGIL. Coupons decreased as a result of the termination of the PROVIGIL coupon program, partially offset by the effect of NUVIGIL coupon programs.

Medicaid discounts increased slightly for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 due to price increases, offset by the lower Medicaid utilization of our CNS and Pain products. Managed care and governmental contracts decreased for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 due to decreases in rebates for certain managed care and governmental programs, particularly with respect to sales of our pain products. In the future, we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of potential future price increases on Medicaid discounts and potential increases related to Medicaid, managed care and governmental contracts sales.

	Three months ended
	September 30,
	2009		2008		Change			% Change
Costs and expenses:
Cost of sales	$	90,456	$	121,477	$	(31,021	)	(26	)%
Research and development	99,157		88,325		10,832			12
Selling, general and administrative	194,068		222,948		(28,880		)	(13	)
Settlement reserve	—		7,450		(7,450		)	(100	)
Restructuring charges	1,062		1,497		(435		)	(29	)
Acquired in-process research and development	6,000		—		6,000			—
	$	390,743	$	441,697	$	(50,954	)	(12	)%

Cost of Sales—The cost of sales was 16.9% of net sales for the three months ended September 30, 2009 and 24.8% of net sales for the three months ended September 30, 2008. Cost of sales decreased in 2009 by 26% due a $9.5 million gain during the third quarter of 2009 in connection with our agreement with one of our modafinil suppliers to reduce our excess modafinil purchase commitments. In 2008, we recorded a reserve for excess modafinil purchase commitments of $26.0 million. In the third quarter of 2009, royalties paid to TEVA decreased by $5.4 million, as we fully satisfied any and all royalty contractual commitments. For the three months ended September 30, 2009 and 2008, we recognized $26.4 million and $24.0 million of amortization expense included in cost of sales, respectively. Amortization expense increased due to inclusion of amortization for Arana, offset by a reduction in amortization related to VIVITROL. We recorded accelerated depreciation charges of $5.0 million and $4.5 million in the third quarter of 2009 and 2008, respectively.

Research and Development Expenses—Research and development expenses increased $10.8 million, or 12%, for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. This increase is primarily attributable to R&D charges related to our variable interest entity (“VIE”) of $6.3 million and Arana of $7.6 million, for which there were no equivalent amounts in the prior year. Clinical activity decreased in the third quarter of 2009, as compared to the third quarter of 2008, primarily related to NUVIGIL. For the three months ended September 30, 2009 and 2008, we recognized $7.3 million and $7.3 million of depreciation expense included in research and development expenses, respectively.

Selling, General and Administrative Expenses—Selling, general and administrative expenses decreased $28.9 million, or 13% for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. In the third quarter of 2008, we recognized $27.2 million of estimated Sunset Payments due to Takeda Pharmaceuticals North America, Inc. (“TPNA”). In the third quarter of 2009, expenses decreased due to reduced selling expenses related to PROVIGIL and reduced promotional expense resulting from the termination of the TPNA contract. This was offset by increased promotional expenses associated with the launch of NUVIGIL and with AMRIX. In the third quarter of 2009, we incurred $0.8 million of selling, general and administrative charges related to our VIE and $0.9 million related to Arana. For the three months ended September 30, 2009 and 2008, we recognized $6.1 million and $5.3 million of depreciation expense included in selling, general and administrative expenses, respectively.

Acquired in-process research and development—For the three months ended September 30, 2009, we incurred expense of $6.0 million in exchange for license rights to certain of XOMA Ltd.’s proprietary antibody library materials.

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Settlement reserve— For the three months ended September 30, 2008, we recognized $7.4 million for the charges relating to the settlement of investigations by the states of Connecticut and Massachusetts, and for our estimate of attorneys’ fees for the Relators as part of the U.S. Attorney’s Office settlement.

Restructuring charges—For the three months ended September 30, 2009 and 2008, we recorded $1.1 million and $1.5 million, respectively, related to our restructuring plan to consolidate certain manufacturing and research and development activities within our U.S. locations. These charges primarily consist of severance payments and accruals for employees who have or are expected to be terminated as a result of this restructuring plan. For additional information, see Note 3 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

	Three months ended
	September 30,
	2009			As adjusted 2008*			Change			% Change
Other income (expense):
Interest income	$	1,821		$	4,002		$	(2,181	)	(54	)%
Interest expense	(26,495		)	(19,013		)	(7,482		)	39
Other income (expense), net	3,775			(2,284		)	6,059			265
	$	(20,899	)	$	(17,295	)	$	(3,604	)	(21	)%

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

Other Income (Expense)—Other income (expense) increased $3.6 million, or 21%, for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. The increase was attributable to the following factors:

· a $2.2 million decrease in interest income due to lower average interest rates, partially offset by higher average investment balances;

· a $7.5 million increase in interest expense due to interest and debt discount on our 2.5% convertible notes issued in May 2009, partially offset by the elimination of $3.8 million of interest expense related to the agreement in principle with the U.S. Attorney’s Office that we incurred in 2008; and

· a $6.1 million increase in other income (expense) primarily due to fluctuations in foreign currency gains and losses in the comparable periods.

For additional information on our Arana transaction, see Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

	Three months ended
	September 30,
	2009		As adjusted 2008*			Change		% Change
Income tax expense	$	42,673	$	(66,108	)	$	108,781	(165	)%

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

Income Taxes—For the three months ended September 30, 2009, we recognized $42.7 million of income tax expense on income before income taxes of $137.8 million, resulting in an overall effective tax rate of 31.0%. We have not recognized tax benefit for losses attributable to non-controlling interest of $7.6 million. In August 2009 we recognized an additional tax benefit of $13.8 million over the benefits recorded at December 31, 2008, due to our closing agreement with the IRS in which both parties agreed that the nondeductible punitive portion of the Settlement Agreement is $152.3 million. This compared to income tax benefit for the three months ended September 30, 2008 of $66.1 million on income before income taxes of $39.5 million. This includes a tax benefit of $84.5 million, of which $82.3 million related to the settlement with the U.S. Attorney’s Office, for which the related expense was recorded in 2007, and $2.2 million related to the settlements with Connecticut and Massachusetts, for which the related expense was recorded in the third quarter of 2008.

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	Three months ended
	September 30,
	2009		2008		Change		% Change
Net loss attributable to noncontrolling interest	$	7,625	$	—	$	7,625	—	%

Noncontrolling Interest— For the three months ended September 30, 2009, we recorded a loss attributable to noncontrolling interest of $7.6 million, related to our investment in Ception and Arana. Arana became a wholly owned subsidiary on August 8, 2009. For additional information, see Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Nine months ended September 30, 2009 compared to nine months ended September 30, 2008:

	Nine months ended September 30,
	2009						2008						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Net Sales:
PROVIGIL	$	726,313	$	47,111	$	773,424	$	658,777	$	48,428	$	707,205	10	%	(3	)%	9	%
NUVIGIL*	37,777		—		37,777		—		—		—		—		—		—
GABITRIL	37,058		3,871		40,929		37,614		6,669		44,283		(1	)	(42	)	(8	)
CNS	801,148		50,982		852,130		696,391		55,097		751,488		15		(7	)	13

ACTIQ	71,148		38,122		109,270		96,960		40,734		137,694		(27	)	(6	)	(21	)
Generic OTFC	66,834		—		66,834		75,845		—		75,845		(12	)	—		(12	)
FENTORA	99,686		2,438		102,124		116,637		—		116,637		(15	)	—		(12	)
AMRIX	83,807		—		83,807		47,399		—		47,399		77		—		77
Pain	321,475		40,560		362,035		336,841		40,734		377,575		(5	)	—		(4	)

TREANDA	160,549		—		160,549		38,932		—		38,932		312		—		312
Other Oncology	13,529		67,726		81,255		14,259		70,837		85,096		(5	)	(4	)	(5	)
Oncology	174,078		67,726		241,804		53,191		70,837		124,028		227		(4	)	95

Other	26,167		106,474		132,641		37,995		117,517		155,512		(31	)	(9	)	(15	)
Total Net Sales	1,322,868		265,742		1,588,610		1,124,418		284,185		1,408,603		18		(6	)	13
Other Revenues	28,016		567		28,583		24,377		1,436		25,813		15		(61	)	11
Total Revenues	$	1,350,884	$	266,309	$	1,617,193	$	1,148,795	$	285,621	$	1,434,416	18	%	(7	)%	13	%

* Net Sales since June 1, 2009 launch date.

Net Sales—For the nine months ended September 30, 2009, in addition to the factors addressed below, net sales were also impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. Declines in foreign exchange rates versus the U.S. dollar caused a 13% decrease in European net sales. The other key factors that contributed to the increase in net sales, period to period, are summarized by product as indicated below. All references to prescription trends are based on information obtained from IMS Health.

· In CNS, net sales increased 13%. Net sales of NUVIGIL, launched in June 2009, contributed to a 15% increase in CNS sales in the U.S., while PROVIGIL net sales in the U.S. increased by 10% due to price increases in 2008 and 2009, partially offset by a decline in unit sales due to the introduction of NUVIGIL and the transition of our marketing support from PROVIGIL to NUVIGIL. European net sales of PROVIGIL decreased 3% due to the unfavorable effect of exchange rates, partially offset by increases in unit sales. Net sales of GABITRIL, a non-promoted product, decreased 42% in Europe due to a decrease in unit sales and the unfavorable effect of exchange rate changes.

· In Pain, net sales decreased 4 percent. Net sales of our pain products have been negatively impacted by an overall decline in the rapid onset opioid market. Net sales of FENTORA decreased 12%, due to decreased volume, partially offset by domestic price increases in 2008 and 2009 and the introduction of FENTORA in Europe during 2009. Net sales of ACTIQ in the U.S. decreased by 27% due to loss of market share to generic

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competition, partially offset by price increases during 2008. Net sales of our own generic OTFC and shipments of our generic OTFC to Barr decreased 12%. In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004. Net sales of ACTIQ in Europe decreased 6%, as the unfavorable effect of exchange rate changes exceeded the increase in unit sales. The decreases in net sales of FENTORA, ACTIQ and generic OTFC were largely offset by a 77% increase in AMRIX net sales. AMRIX, launched in late 2007, gained market share over prior year levels. Current period sales also benefited from an 8% price increase in February 2009. These increases were partially offset by increases in gross to net sales deductions for AMRIX.

· In Oncology, net sales increased 95 percent. This increase was attributable to the growth of TREANDA, which launched in April 2008. Net sales of our European oncology products decreased 4% as the unfavorable effect of exchange rate changes exceeded the increase in unit sales. Throughout 2009, we expect Oncology net sales to exceed prior year amounts due to the increased sales levels of TREANDA.

· Other net sales, which consist primarily of net sales of other products and certain third party products, decreased 15 percent, primarily due to the November 2008 termination of our agreement with Alkermes, Inc.

Other Revenues—The increase of 11% from period to period is primarily due to revenues from Arana, offset by a decrease in revenues from our collaborators including royalties, milestone payments and fees.

Analysis of gross sales to net sales—The following table presents the product sales allowances deducted from gross sales to arrive at a net sales figure:

	Nine months ended September 30,
	2009			2008			Change			% Change
Gross sales	$	1,828,105		$	1,600,034		$	228,071		14	%
Product sales allowances:
Prompt payment discounts	31,873			26,176			5,697			22
Wholesaler discounts	21,388			5,910			15,478			262
Returns	48,556			26,842			21,714			81
Coupons	22,863			16,370			6,493			40
Medicaid discounts	32,421			29,314			3,107			11
Managed care and governmental contracts	82,394			86,819			(4,425		)	(5	)
	239,495			191,431			48,064			25
Net sales	$	1,588,610		$	1,408,603		$	180,007		13	%
Product sales allowances as a percentage of gross sales	13.1		%	12.0		%

Prompt payment discounts increased for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 due to the increase in sales, the timing of discounts granted and level of discounts taken; prompt payment discounts are generally granted at 2.0% of gross sales. Wholesaler discounts increased period over period because fewer discounts were required for early 2008 as a result of price increases. Returns increased as a result of increased returns percentages related to ACTIQ, PROVIGIL and FENTORA sales, compared to prior year, and the recognition of estimated returns due to the launch of NUVIGIL. Coupons increased as a result of the effect of NUVIGIL coupon programs, partially offset by the termination of the PROVIGIL coupon program in the third quarter of 2009.

Medicaid discounts increased slightly for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 due to price increases, offset by the lower Medicaid utilization of our CNS and Pain products. Managed care and governmental contracts decreased for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 due to decreases in rebates for certain managed care and governmental programs, particularly with respect to sales of our Pain products. In the future, we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of potential future price increases on Medicaid discounts and potential increases related to Medicaid, Medicare Part D, managed care and governmental contracts sales.

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	Nine months ended September 30,
	2009		2008		Change			% Change
Costs and expenses:
Cost of sales	$	293,633	$	312,711	$	(19,078	)	(6	)%
Research and development	304,266		250,169		54,097			22
Selling, general and administrative	618,314		631,832		(13,518		)	(2	)
Settlement reserve	—		7,450		(7,450		)	(100	)
Restructuring charge	3,944		6,973		(3,029		)	(43	)
Acquired in-process research and development	46,118		10,000		36,118			361
	$	1,266,275	$	1,219,135	$	47,140		4	%

Cost of Sales—The cost of sales was 18.5% of net sales for the nine months ended September 30, 2009 and 22.2% of net sales for the nine months ended September 30, 2008. Cost of sales decreased by 6%, due a $9.5 million gain during the third quarter of 2009 in connection with our agreement with one of our modafinil suppliers to reduce our excess modafinil purchase commitments. In 2008, we recorded a reserve for excess modafinil purchase commitments of $26.0 million based on our third quarter 2008 analysis of estimated future requirements. This is offset by an addition to the reserve of $3.0 million, recorded in the second quarter of 2009. In 2009, royalties paid to TEVA decreased by $5.4 million, as we fully satisfied royalty contractual commitments during July 2009. For the nine months ended September 30, 2009 and 2008, we recognized $70.6 million and $77.0 million of amortization expense included in cost of sales, respectively. Amortization expense decreased by $5.6 million due to the increase in estimated useful life for AMRIX from 5 to 18 years and by $5.5 million due to the elimination of amortization for VIVITROL, partially offset by increases in amortization for TREANDA and Arana. We recorded accelerated depreciation charges of $14.0 million and $8.4 million in the first nine months of 2009 and 2008, respectively.

Research and Development Expenses—Research and development expenses increased $54.1 million, or 22%, for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. For the nine months ended September 30, 2009, we recognized increased clinical activity and medical affairs expenses related to NUVIGIL and FENTORA and recognized R&D charges related to our VIE’s of $25.5 million and Arana of $10.9 million, for which there was no equivalent amount in the prior year. For the nine months ended September 30, 2009 and 2008, we recognized $20.4 million and $17.4 million, respectively, of depreciation expense included in research and development expenses.

Selling, General and Administrative Expenses—Selling, general and administrative expenses decreased $13.5 million, or 2%, for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. In the third quarter of 2008, we recognized $27.2 million of estimated Sunset Payments due to TPNA. For the nine months ended September 30, 2009, expenses decreased due to reduced selling expenses related to PROVIGIL and reduced promotional expense resulting from the termination of the TPNA contract. This was offset by increased promotional expenses associated with the launch of NUVIGIL and with AMRIX and $7.4 million related to our VIE’s and $3.6 million related to Arana, for which there was no equivalent amount in the prior year. For the nine months ended September 30, 2009 and 2008, we recognized $18.3 million and $15.0 million, respectively, of depreciation expense included in selling general and administrative expenses.

Settlement reserve—For the nine months ended September 30, 2008, we recognized $7.4 million for the charges relating to the settlement of investigations by the states of Connecticut and Massachusetts, and for our estimate of attorneys’ fees for the Relators as part of the U.S. Attorney’s Office settlement.

Restructuring charges—For the nine months ended September 30, 2009 and 2008, we recorded $3.9 million and $7.0 million, respectively, related to our restructuring plan to consolidate certain manufacturing and research and development activities within our U.S. locations. These charges primarily consist of severance payments and accruals for employees who have or are expected to be terminated as a result of this restructuring plan. For additional information, see Note 3 of the Consolidated Financial Statements included in Part I, Item I of this Report.

Acquired in-process research and development—For the nine months ended September 30, 2009, we incurred expense of:

· $9.4 million in connection with Acusphere for the elimination of the $15 million milestone and royalty payments associated with the celecoxib license agreement and patent rights relating to their HDDS technology;

· $30.0 million in exchange for the exclusive, worldwide license rights to LUPUZOR, acquired from ImmuPharma plc.;

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· $0.8 million in exchange for the exclusive sublicense to bendamustine hydrochloride in China and Hong Kong, acquired from SymBio Pharmaceuticals Limited (“SymBio”); and

· $6.0 million in exchange for license rights to certain of XOMA Ltd.’s proprietary antibody library materials.

For the nine months ended September 30, 2008, we recorded acquired in-process research and development expense of $10.0 million related to our license of Acusphere HDDS technology for use in oncology therapeutics.

	Nine months ended September 30,
	2009			As adjusted 2008*			Change			% Change
Other income (expense):
Interest income	$	3,455		$	15,515		$	(12,060	)	(78	)%
Interest expense	(63,213		)	(62,080		)	(1,133		)	2
Other income (expense), net	42,418			1,488			40,930			2,751
	$	(17,340	)	$	(45,077	)	$	27,737		(62	)%

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

Other Income (Expense)—Other income (expense) decreased $27.7 million for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. The decrease was attributable to the following factors:

· a $12.1 million decrease in interest income due to lower investment returns, partially offset by higher average investment balances;

· a $1.1 million increase in interest expense due to interest and debt discount on our 2.5% convertible notes issued in May 2009, our investments in our VIE’s and interest associated with the TPNA sunset payment, partially offset by $11.3 million of estimated accrued interest related to the agreement with the U.S. Attorney’s Office that we incurred in 2008 for which there is no comparative amount in 2009.

· a $40.9 million increase in other income (expense), net due to the following:

· $6.6 million gain on pre-bid Arana holdings;

· $2.8 million loss on Arana contingent consideration (90% ownership incentive payment);

· $10.0 million gain on the excess of Arana net assets over consideration;

· $19.0 million gains on foreign exchange derivative instruments; and

· $8.1 million increase in foreign exchange gains primarily associated with holding Australian dollars in connection with our Arana transaction.

For additional information, see Note 2 of the Consolidated Financial Statements included in Part I, Item I of this Report.

	Nine months ended September 30,
	2009		As adjusted 2008*			Change		% Change
Income tax expense (benefit)	$	122,659	$	(17,727	)	$	140,386	(792	)%

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

Income Taxes— For the nine months ended September 30, 2009 we recognized $122.7 million of income tax expense on income before income taxes of $333.6 million, resulting in an overall effective tax rate of 36.8%. We have not recognized tax benefits for losses attributable to non-controlling interest of $35.2 million. In August 2009 we recognized an additional tax benefit of $13.8 million over the benefits recorded at December 31, 2008, due to our closing agreement with the IRS in which both parties agreed that the nondeductible punitive portion of the Settlement Agreement is $152.3 million. This compared to income tax benefit for the nine months ended September 30, 2008 of $17.7 million on income before income taxes of $170.2 million. This includes a tax benefit of $84.5 million, of which $82.3 million related to the settlement with the U.S. Attorney’s Office, for which the related expense was recorded in 2007, and $2.2 million related to the settlements with Connecticut and Massachusetts, for which the related expense was recorded in the third quarter of 2008. The nine months

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ended September 30, 2008 also included an additional tax expense of $5.2 million return to provision adjustment for the 2007 federal tax returns timely filed in September 2008 and a release of $4.4 million in tax reserve for tax contingencies which were previously under audit by tax authorities.

	Nine months ended
	September 30,
	2009		As adjusted 2008		Change		% Change
Net loss attributable to noncontrolling interest	$	35,150	$	—	$	35,150	—	%

Noncontrolling Interest— For the nine months ended September 30, 2009, we recorded a loss attributable to noncontrolling interest of $35.2 million, related to our investment in Ception, Acusphere and Arana. Arana became a wholly owned subsidiary on August 8, 2009. For additional information, see Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

(In thousands)

	As of
	September 30, 2009			As adjusted December 31, 2008*
Financial assets:
Cash and cash equivalents	$	1,453,814		$	524,459
Short-term investments	131,403			—
Total cash, cash equivalents and short-term investments	$	1,585,217		$	524,459

Debt and Redeemable Equity:
Current portion of long-term debt- convertible notes	$	1,019,945		$	1,019,888
Current portion of long-term debt discount- convertible notes	(217,861		)	(248,403		)
Current portion of long-term debt- other debt	7,997			10,133
Long-term debt	357,555			3,692
Redeemable equity	217,861			248,403
Total debt and redeemable equity	$	1,385,497		$	1,033,713

Select measures of liquidity and capital resources:
Working capital surplus	$	1,163,321		$	156,410
Total cash, cash equivalents and short-term investments as a percentage of total assets	34		%	17		%

	Nine months ended September 30,
	2009			As adjusted 2008*
Change in cash and cash equivalents
Net cash provided by operating activities	$	517,131		$	282,777
Net cash used for investing activities	(276,075		)	(79,910		)
Net cash provided by (used for) financing activities	686,004			(174,340		)
Effect of exchange rate changes on cash and cash equivalents	2,295			(601		)
Net increase in cash and cash equivalents	$	929,355		$	27,926

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

Our working capital surplus is calculated as current assets less current liabilities. Our convertible notes contain conversion terms that will impact whether these notes are classified as current or long-term liabilities and consequently affect our working capital position.

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Net Cash Provided by Operating Activities

Cash provided by operating activities is primarily driven by income from sales of our products offset by the timing of receipts and payments in the ordinary course of business.

Included within cash used for operating activities are payments recorded as in-process research and development including a payment of $30.0 million in 2009 in exchange for the exclusive, worldwide license rights to LUPUZOR, acquired from ImmuPharma and a payment of $10.0 million in 2008 related to our license of Acusphere HDDS technology for use in oncology therapeutics.

The change in receivables in 2009 is due to a federal tax refund of $67.3 million received in 2009 for previously paid 2008 estimated federal taxes. This refund was principally due to the tax benefit relating to the termination of our collaboration with Alkermes for the marketing and sale of VIVITROL and the settlement with the U.S. Attorney’s Office. In 2008, receivables increased due to increases in net sales and taxes receivable.

In 2009, other assets decreased due to the application of a $25.0 million deposit paid in 2008 towards the Ception Option Agreement entered into during the first quarter of 2009. In 2008, other assets increased due to increases in prepaid taxes and NUVIGIL inventory.

The increase in accounts payable, accrued expenses, and deferred revenues was higher in 2009 than in 2008 due to larger increases in accrued taxes and sales reserves. In 2009, other liabilities decreased due to the reduction of the modafinil purchase commitments reserve in the third quarter of 2009. In 2008, other liabilities increased due to the increase in the modafinil purchase commitments reserve recognized in the third quarter of 2008 and the recognition of the liability for Sunset Payments due to TPNA.

Net Cash Used for Investing Activities

Cash used in investing activities primarily relates to acquisitions of business, technologies, products and product rights and funds used for capital expenditures in property and equipment.

Net cash used for investing activities was $276.1 million in 2009 as compared to $79.9 million in 2008. The increase in cash used between periods is primarily attributable to:

· $232.5 million paid in 2009 in conjunction with our acquisition of Arana, net of cash acquired; and

· $75.0 million paid in 2009 as consideration for an option to purchase Ception; offset by

· a $52.6 million increase in cash flow due to the initial consolidation of Ception in 2009 as a variable interest entity;

· an increase in cash flows due to proceeds of $26.8 million received in 2009 upon settlement of a foreign exchange contracts; and

· a decrease in cash used on intangible asset expenditures as 2008 included a payment of a $25.0 million milestone paid upon the initial FDA approval of TREANDA.

Net Cash Provided by (Used for) Financing Activities

Cash provided by financing activities during 2009 primarily relates to proceeds received from the issuance of common stock and convertible debt. On May 27, 2009, we issued an aggregate of 5,000,000 shares of common stock, resulting in net cash proceeds of $288.0 million. Also on May 27, 2009, we issued through a public offering $500 million aggregate principal amount of 2.5% convertible senior subordinated notes due May 1, 2014 (the “2.5% Notes”). Concurrent with the offering of the 2.5% Notes in May 2009, we purchased a convertible note hedge from Deutsche Bank AG (“DB”) at a cost of $121.0 million and sold to DB warrants to purchase an aggregate of 7,246,377 shares of our common stock and received net proceeds from the sale of these warrants of $37.6 million. For more information, see Note 10 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Cash used for financing activities in 2008 is primarily due to $213.1 million paid upon the conversion or redemption of our 2008 Zero Coupon Convertible Notes.

Both periods presented also reflect proceeds received from the exercise of stock options which will vary from period to period primarily due to fluctuations in the market value of our stock relative to the exercise price of such options.

Noncontrolling Interest

Although our VIE’s are included in our consolidated financial statements, our interest in our VIE’s assets are limited to those accorded to us in the agreements with our VIE’s as described in Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. For example, Ception’s cash and cash equivalents balance includes $50.0 million of Ception Option Agreement proceeds; Ception has retained the right to distribute those cash proceeds to its current stockholders. The creditors of our VIE’s have no recourse to the general credit of Cephalon.

Commitments and Contingencies

-Other Commitments and Contingencies

There has been a material change to the convertible notes line of our Contractual Obligations Table, presented in our Annual Report on Form 10-K for the year ended December 31, 2008. Our contractual obligations related to convertible notes total $1.5 billion as of September 30, 2009, due to the issuance of our 2.5% Notes. As of September 30, 2009, our 2.0% Notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes and our Zero Coupon Notes are current based on maturity date. As a result, the associated $1.0 billion in convertible notes have been classified as current liabilities and redeemable equity on our consolidated balance sheet as of September 30, 2009 and are therefore considered payable within one year. The remaining $0.5 billion of convertible notes are due during 2014 and thereafter. There have been no other material changes to the Contractual Obligations Table. The table excludes unrecognized tax benefits, which totaled $62.6 million as of January 1, 2009 and $73.7 million as of September 30, 2009. During the twelve months ending September 30, 2010, we do not expect to make any significant cash tax payments related to unrecognized tax benefits recorded at September 30, 2009.

Outlook

We expect to use our cash, cash equivalents, credit facility and investments on working capital and general corporate purposes, the acquisition of businesses, products, product rights, technologies, property, plant and equipment, the payment of contractual obligations, including scheduled interest payments on our convertible notes and regulatory or sales milestones that may become due, and/or the purchase, redemption or retirement of our convertible notes. However, we expect that sales of our currently marketed products should allow us to continue to generate positive operating cash flow in 2009. At this time, we cannot accurately predict the effect of certain developments on our anticipated rate of sales growth in 2009 and beyond, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates and new indications for existing products.

Based on our current level of operations, projected sales of our existing products, proceeds from our May 2009 financings, and estimated sales from our product candidates, if approved, combined with other revenues and interest income, we also believe that we will be able to service our existing debt and meet our capital expenditure and working capital requirements in the near term. We do not expect any material changes in our capital expenditure spending during 2009. However, we cannot be sure that our anticipated revenue growth will be realized or that we will continue to generate significant positive cash flow from operations. We may need to obtain additional funding for future significant strategic transactions, to repay our outstanding indebtedness, particularly if such indebtedness is presented for conversion by holders (see “—Indebtedness” below), or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs or closure costs.

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Marketed Products and Product Candidates

Sales growth of our wakefulness products depends, in part, on the continued effectiveness of the various settlement agreements we entered into in late 2005 and early 2006, as well as our maintenance of protection in the United States and abroad of the modafinil particle-size patent through its expiration beginning in 2014 and our NUVIGIL polymorph patent through its expiration beginning in 2023. For more information, see Note 11 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the first nine months of 2009, we experienced an 8% decline in prescriptions of PROVIGIL. Growth of our wakefulness product sales in the future may depend in part on our ability to build upon the launch of NUVIGIL in the U.S. We have shifted our CNS marketing efforts from PROVIGIL to NUVIGIL.

Our future growth depends in large part on our ability to achieve continued sales growth with AMRIX and TREANDA, which we launched in October 2007 and April 2008, respectively. Growth of AMRIX sales will depend in part on the strength of the patent covering the product, particularly in light of the ANDAs filed by Barr, Mylan, Impax and Anchen.

Our future growth also depends, in part, on our ability to successfully market FENTORA within its current indication and to secure FDA approval of a broader labeled indication for the product outside of breakthrough cancer pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In May 2008, an FDA Advisory Committee voted not to recommend approval of the FENTORA sNDA. In September 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. In December 2008, we also received supplement request letters from the FDA requesting that we submit a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA’s requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program. In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS Programs for FENTORA and ACTIQ and have been engaged in ongoing discussions with the agency. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010. We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA’s requests and possibly to provide a potential avenue for approval of the sNDA. We anticipate initiating the REMS Program upon receipt of approval from the FDA. With respect to ACTIQ, its sales have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson Pharmaceuticals, Inc. We expect this erosion will continue throughout 2009. In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004. We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010.

Clinical Studies

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and to explore the utility of our existing products in treating disorders beyond those currently approved in their respective labels. In 2009 and 2010, we expect to continue to incur significant levels of research and development expenditures. We also expect to continue or begin a number of significant clinical programs including: studies of TREANDA as a front-line treatment for NHL; a Phase II program evaluating CEP-701 for the treatment of myeloproliferative disorder; clinical studies evaluating LUPUZOR for the treatment of systemic lupus erythematosus; clinical programs at Arana with respect to certain inflammatory diseases and clinical programs with NUVIGIL focused on adjunctive treatment to atypical anti-psychotics in schizophrenia patients, adjunctive treatment for bi-polar depression and excessive sleepiness associated with traumatic brain injury.

Manufacturing, Selling and Marketing Efforts

In 2009, we expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. We expect to continue in 2009 a capital expenditure project related to the transfer of manufacturing activities from our facility in Eden Prairie, Minnesota to our facility in Salt Lake City, Utah; we expect this phased transfer to be completed in 2011. The aggregate amount of our sales and marketing expenses in 2009 is expected to be higher than that incurred in 2008, primarily as a result of higher expenses associated with our promotional efforts related to AMRIX and TREANDA and launch expenses and other promotional efforts associated with NUVIGIL.

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Over the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil. As a result of our plan to manufacture armodafinil in the future using this new process coupled with the launch of NUVIGIL on June 1, 2009, we assessed the potential impact of these items on certain of our existing agreements to purchase modafinil. Under these contracts, we have agreed to purchase minimum amounts of modafinil through 2012, with aggregate future purchase commitments totaling $19.5 million as of September 30, 2009. Based on our current assessment, we have recorded a reserve of $6.0 million for purchase commitments for modafinil raw materials not expected to be utilized. For additional information, see Note 6 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We also are initiating a search for a potential acquiror of our manufacturing facility in Mitry-Mory, France where we produce modafinil. As of September 30, 2009, we had $24.7 million of property and equipment related to the Mitry-Mory facility included on our balance sheet. The resolution of these assessments could have a negative impact on our results of operations in future periods.

Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our most significant convertible subordinated notes outstanding as of September 30, 2009:

Security	Outstanding		Conversion Price			Redemption Rights and Obligations
	(in millions)

2.5% Convertible Senior Subordinated Notes due May 2014 (the “2.5% Notes”)	$	500.0	$	69.00	*	Generally not redeemable by the holder prior to November 2013.

2.0% Convertible Senior Subordinated Notes due June 2015 (the “2.0% Notes”)	$	820.0	$	46.70	**	Generally not redeemable by the holder prior to December 2014.

Zero Coupon Convertible Notes due June 2033, first putable June 15, 2010 (the “2010 Zero Coupon Notes”)	$	199.5	$	56.50	**	Redeemable on June 15, 2010 at either option of holder or us at a redemption price of 100.25% of the principal amount redeemed.

* Stated conversion price as per the terms of the notes; subject to adjustment (equivalent to a conversion rate of approximately 14.4928 shares per $1,000 principal amount of Notes.) However, each convertible note contains certain terms restricting a holder’s ability to convert the notes, including that a holder may only convert if the closing sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price per share ($89.70 based on the initial conversion price) of the notes in effect on that last trading day; (2) during the 10 consecutive trading-day period that follows any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then current conversion rate; or (3) if we make certain significant distributions to holders of our common stock, we enter into specified corporate transactions or our common stock is not listed on a U.S. national securities exchange.

** Stated conversion prices as per the terms of the notes. However, each convertible note contains certain terms restricting a holder’s ability to convert the notes, including that a holder may only convert if the closing price of our stock on the day prior to conversion is higher than $56.04 or $67.80 with respect to the 2.0% Notes or the 2010 Zero Coupon Notes, respectively. For a more complete description of these notes, including the associated convertible note hedge, see Note 11 to our Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.

As of September 30, 2009, our stock price was $58.24, and therefore the 2.0% Notes and 2010 Zero Coupon Notes were convertible as of September 30, 2009. Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. If the notes were converted, we may not have available cash, cash equivalents and investment sufficient to repay all of the convertible notes. In addition, other than the restrictive covenants contained in our credit agreement, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay any principal balance of notes presented for conversion, we will be required to raise additional funds. Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not

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have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the market price for our securities.

As of September 30, 2009, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated balance sheet. We believe that the share price of our common stock would have to significantly increase over the market price as of the filing date of this report before the fair value of the convertible notes would be less than the value of the common stock shares underlying the notes and, as such, we believe it is highly unlikely that holders of the 2.0% Notes or the 2010 Zero Coupon Notes will present significant amounts of such notes for conversion under the current terms. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal amounts due through a combination of utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

The annual interest payments on our 2.0% Notes as of September 30, 2009 are $16.4 million, payable semi-annually on June 1 and December 1. The annual interest payments on our 2.5% Notes as of June 30, 2009 are $12.5 million, payable semi-annually on May 1 and November 1. In the future, we may agree to exchanges of the notes for shares of our common stock or debt, or may determine to use a portion of our existing cash on hand to purchase or retire all or a portion of the outstanding convertible notes.

Our 2.0% Notes, 2.5% Notes and 2010 Zero Coupon Notes each are included in the dilutive earnings per share calculation using the treasury stock method. Under the treasury stock method, we must calculate the number of shares issuable under the terms of these notes based on the average market price of our common stock during the period, and include that number in the total diluted shares figure for the period. At the time we sold our 2.0% Notes, 2.5% and 2010 Zero Coupon Notes we entered into convertible note hedge and warrant agreements that together are intended to have the economic effect of reducing the net number of shares that will be issued upon conversion of the notes by increasing the effective conversion price for these notes, from our perspective, to $67.92, $100.00 and $72.08, respectively. However, from an accounting principles generally accepted in the United States of America (“U.S. GAAP”) perspective, since the impact of the convertible note hedge agreements is always anti-dilutive we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.

Under the treasury stock method, changes in the share price of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation. The following table provides examples of how changes in our stock price will require the inclusion of additional shares in the denominator of the fully diluted earnings per share calculation (“Total Treasury Stock Method Incremental Shares”). The table also reflects the impact on the number of shares we could expect to issue upon concurrent settlement of the convertible notes, the warrant and the convertible note hedge (“Incremental Shares Issued by Cephalon upon Conversion”):

Share Price		Convertible Notes Shares	Warrant Shares	Total Treasury Stock Method Incremental Shares(1)	Shares Due to Cephalon under Note Hedge		Incremental Shares Issued by Cephalon upon Conversion(2)
$	55.00	2,650	—	2,650	(2,650	)	—
$	65.00	5,406	—	5,406	(5,406	)	—
$	75.00	8,077	1,796	9,873	(8,077	)	1,796
$	85.00	10,460	4,065	14,525	(10,460	)	4,065
$	95.00	12,341	5,857	18,198	(12,341	)	5,857
$	105.00	13,864	7,653	21,517	(13,864	)	7,653

(1) Represents the number of incremental shares that must be included in the calculation of fully diluted shares under U.S. GAAP.

(2) Represents the number of incremental shares to be issued by us upon conversion of the convertible notes, assuming concurrent settlement of the convertible note hedges and warrants.

On May 18, 2009, in association with our equity offering, we exchanged 2.1 million warrants associated with our 2.0% Notes for 776,361 shares of common stock.

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On August 15, 2008, we established a $200 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders. The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries. The credit agreement contains customary borrowing conditions and covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the credit agreement), senior debt to Consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of the date of this filing, we have not drawn any amounts under the credit facility.

Acquisition Strategy

Other

We may experience significant fluctuations in quarterly results based primarily on the level and timing of:

· cost of product sales;

· achievement and timing of research and development milestones;

· collaboration revenues;

· cost and timing of clinical trials, regulatory approvals and product launches;

· marketing and other expenses;

· manufacturing or supply disruptions;

· unanticipated conversions of our convertible notes; and

· costs associated with the operations of recently-acquired businesses and technologies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

(In thousands)

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. In preparing these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008 in the “Critical Accounting Policies and Estimates” section and the “Recent Accounting Pronouncements” section.

Product Sales Allowances—We record product sales net of the following significant categories of product sales allowances, each of which is described in more detail included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008: prompt payment discounts, wholesaler discounts, returns, coupons, Medicaid discounts, Medicare Part D discounts and managed care and governmental contracts. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources. In certain of the product sales allowance categories, we have calculated the impact of changes in our estimates, which we believe represent reasonably likely changes to these estimates based on historical data adjusted for certain unusual items such as changes in government contract rules.

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The following table summarizes activity in each of the above categories for the nine months ended September 30, 2009:

(In thousands)	Prompt Payment Discounts			Wholesaler Discounts			Returns*			Coupons			Medicaid Discounts			Managed Care & Governmental Contracts			Total
Balance at January 1, 2009	$	(4,437	)	$	(7,988	)	$	(36,423	)	$	(6,098	)	$	(22,030	)	$	(48,641	)	$	(125,617	)

Provision:
Current period	(31,873		)	(21,514		)	(24,826		)	(23,451		)	(32,399		)	(81,395		)	(215,458		)
Prior periods	—			126			(23,730		)	588			(22		)	(999		)	(24,037		)
Total	(31,873		)	(21,388		)	(48,556		)	(22,863		)	(32,421		)	(82,394		)	(239,495		)

Actual:
Current period	27,843			13,264			—			11,065			7,566			44,835			104,573
Prior periods	4,437			7,862			26,674			5,509			21,320			34,890			100,692
Total	32,280			21,126			26,674			16,574			28,886			79,725			205,265
Balance at September 30, 2009	$	(4,030	)	$	(8,250	)	$	(58,305	)	$	(12,387	)	$	(25,565	)	$	(51,310	)	$	(159,847	)

* Given our return goods policy, we assume that all actual returns in a current year relate to prior period sales.

Valuation of Property and Equipment, Acquired Intangible Assets and Goodwill— We have acquired intangible assets that consist of developed product technology and core technologies associated with intellectual property and rights thereon, as well as goodwill. When significant identifiable intangible assets are acquired, we determine the fair values of these assets as of the acquisition date using valuation techniques such as discounted cash flow models. These models require the use of significant estimates and judgments made by management and, for significant items, we typically consider, in part, the reports of third party valuation specialists. Assumptions used in valuing the intangibles include determining the timing and expected costs to complete the in-process projects, projecting regulatory approvals, estimating future net cash flows from product sales resulting from completed products and in-process projects, and developing appropriate discount rates and probability rates by project.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in European and Australian subsidiaries that have transactions, assets, and liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes. For the nine months ended September 30, 2009 an average 10% weakening of the U.S. dollar relative to the currencies in which our non-U.S. subsidiaries operate would have resulted in an increase of $27.5 million in reported total revenues and a corresponding increase in reported expenses. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not assume any changes in the level of operations of our foreign subsidiaries.

Our exposure to market risk for a change in interest rates relates to our investment portfolio, since all of our outstanding debt is fixed rate. Our investments are classified as short-term and as “available for sale.” We do not believe that short-term fluctuations in interest rates would materially affect the value of our securities.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives

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of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Change in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is incorporated by reference to Note 11 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

A significant portion of our revenue is derived from five products, and our future success will depend on the aggregate growth of NUVIGIL and PROVIGIL, the continued acceptance of FENTORA, and the growth of AMRIX and TREANDA.

For the nine months ended September 30, 2009, approximately 51%, 11% and 10% of our total consolidated net sales were derived from sales of PROVIGIL and NUVIGIL, ACTIQ (including our generic OTFC product) and TREANDA, respectively. With respect to PROVIGIL, we cannot be certain that it will continue to be accepted in its market. With respect to our newly launched product, NUVIGIL, we cannot be sure that our sales and marketing efforts will be successful or that it will be accepted in the market. We have shifted our CNS marketing efforts from PROVIGIL to NUVIGIL. While currently we do not believe 2009 CNS net sales will be adversely impacted as compared to 2008, it is possible that CNS net sales could decrease in the future as a result of the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL. NUVIGIL is currently selling at a price below that of PROVIGIL. As a result, it is possible that CNS net sales could decline if we are unable to achieve sufficient prescription growth for PROVIGIL and NUVIGIL in the aggregate. With respect to AMRIX and TREANDA, we cannot be certain that they will continue to be accepted in their markets or that we will be able to achieve projected levels of sales growth.

To counter the impact from existing and potential generic competition for ACTIQ, we need FENTORA to continue to be accepted in the market. We expect to initiate a REMS Program for FENTORA to mitigate serious risks associated with the use of FENTORA. We submitted our REMS Program to the FDA in early April 2009. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010. It is possible that the REMS Program could have a negative impact on sales of FENTORA.

With respect to ACTIQ, in September 2006, Barr entered the market with generic OTFC. Since that time, we have experienced meaningful erosion of branded ACTIQ sales in the United States and we expect this erosion will continue throughout 2009. In addition, sales of our own generic OTFC product could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time. The FDA has notified us that we must implement a Risk Evaluation and Mitigation Strategy (a “REMS Program”) for ACTIQ and generic OTFC. We submitted our REMS Program to the FDA in early April 2009. Subject to the nature and timing of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010. It is possible that the REMS Program could have a negative impact on sales of ACTIQ and generic OTFC.

For consolidated net sales to grow over the next several years, we will need our three newest products, NUVIGIL, AMRIX and TREANDA, to achieve projected levels of growth. Specifically, the following factors, among others, could affect the level of market acceptance of these products, as well as PROVIGIL, FENTORA, and ACTIQ:

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· a change in the perception of the healthcare community of the safety and efficacy of the products, both in an absolute sense and relative to that of competing products;

· the level and effectiveness of our sales and marketing efforts;

· the extent to which the products are studied in clinical trials in the future and the results of any such studies;

· any unfavorable publicity regarding these or similar products;

· the price of the products relative to the benefits they convey and to other competing drugs or treatments, including the impact of the availability of generic versions of our products on the market acceptance of those products;

· any changes in government and other third-party payer reimbursement policies and practices; and

· regulatory developments affecting the manufacture, marketing or use of these products.

Any adverse developments with respect to the sale or use of these products could significantly reduce our product revenues and have a material adverse effect on our ability to generate net income and positive net cash flow from operations.

We may be unsuccessful in our efforts to obtain regulatory approval for new products or for new formulations or expanded indications of our existing products, which would significantly hamper future sales and earnings growth.

Our long-term prospects, particularly with respect to the growth of our future sales and earnings, depend to a large extent on our ability to obtain FDA approvals of new product candidates or of expanded indications of our existing products such as FENTORA and NUVIGIL.

In May 2008, an FDA Advisory Committee voted not to recommend approval of the FENTORA sNDA. In September 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. In December 2008, we also received supplement request letters from the FDA requesting that we submit a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA’s requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program. In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS Program for FENTORA and have been engaged in ongoing discussions with the agency. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by or in the first quarter of 2010. We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA’s requests and possibly to provide a potential avenue for approval of the sNDA. While we plan to initiate the REMS Program upon receipt of approval from the FDA, we may be unsuccessful, ultimately, in designing and implementing a REMS Program acceptable to the FDA.

In March 2009, we announced positive results from a Phase 2 clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder and our plan to advance to Phase 3 trials for this indication. In April 2009, we announced positive results from a Phase 3 clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed an sNDA for this indication with the FDA in June 2009. The FDA has granted priority review for the jet lag disorder sNDA, and we expect a response from the FDA by December 29, 2009. In May 2009, we announced positive results from a Phase 4 study of NUVIGIL in obstructive sleep apnea and comorbid major depressive disorder requiring ongoing antidepressant therapy.

There can be no assurance that our applications to market for these new indications or for product candidates will be submitted or reviewed in a timely manner or that the FDA will approve the new indications or product candidates on the basis of the data contained in the applications. Even if approval is granted to market a new indication or a product candidate, there can be no assurance that we will be able to successfully commercialize the product in the marketplace or achieve a profitable level of sales.

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We may not be able to maintain adequate protection for our intellectual property or market exclusivity for our key products and, therefore, competitors may develop competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully and limit our commercial success.

We place considerable importance on obtaining patent protection for new technologies, products and processes. To that end, we file applications for patents covering the compositions or uses of our drug candidates or our proprietary processes. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology. Patent disputes in our industry are frequent and can preclude commercialization of products. If we ultimately engage in and lose any such disputes, we could be subject to competition or significant liabilities, we could be required to enter into third party licenses or we could be required to cease using the technology or product in dispute. In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.

Competition from generic manufacturers is a particularly significant risk to our business. Upon the expiration of, or successful challenge to, our patents covering a product, generic competitors may introduce a generic version of that product at a lower price. Some generic manufacturers have also demonstrated a willingness to launch generic versions of branded products before the final resolution of related patent litigation (known as an “at-risk launch”). A launch of a generic version of one of our products could have a material adverse effect on our business and we could suffer a significant loss of sales and market share in a short period of time.

We also rely on trade secrets, know-how and continuing technological advancements to support our competitive position. Although we have entered into confidentiality and invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, others could independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in areas similar to those that we now pursue. As a result, we could be subject to allegations of trade secret violations and other claims.

PROVIGIL / NUVIGIL

The U.S. composition of matter patent for modafinil expired in 2001. 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 of PROVIGIL. With respect to NUVIGIL, we successfully obtained issuance of a U.S. patent in November 2006 claiming the Form I polymorph of armodafinil, the active drug substance in NUVIGIL. This patent is currently set to expire in 2023. Foreign patent applications directed to the Form I polymorph of armodafinil and its use in treating sleep disorders are pending in Europe and elsewhere. Ultimately, these patents might be found invalid as the result of a challenge by a third party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents. While we intend to vigorously defend the validity of these patents and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful. The loss of patent protection for our modafinil-based products would significantly and negatively impact future sales.

As of the filing date of this Quarterly Report on Form 10-Q, we are aware of seven ANDAs on file with the FDA for pharmaceutical products containing modafinil. Each of these ANDAs contains a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size modafinil patent covering PROVIGIL either is invalid or will not be infringed by the ANDA product. In March 2003, we filed a patent infringement lawsuit against four companies—Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the abbreviated new drug applications (“ANDA”) filed by each of these firms with the FDA seeking approval to market a generic form of modafinil. The lawsuit claimed infringement of our U.S. Patent No. RE37,516 (the “‘516 Patent”) which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL and which expires on April 6, 2015. We believe that these four companies were the first to file ANDAs with Paragraph IV certifications and thus are eligible for the 180-day period of marketing exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act. In early 2005, we also filed a patent infringement lawsuit against Carlsbad Technology, Inc. (“Carlsbad”) based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

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launched its generic modafinil tablets in Canada, and in April 2009 we filed a patent infringement lawsuit against Apotex in Canada. We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust and declaratory judgment complaints are without merit. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

While we intend to vigorously defend ourselves, our intellectual property and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

DURASOLV

In the third quarter of 2007, the U.S. Patent and Trademark Office (“PTO”) notified us that, in response to re-examination petitions filed by a third party, the Examiner rejected the claims in the two U.S. patents for our DURASOLV ODT technology. We disagree with the Examiner’s position, and we filed notices of appeal to the Board of Patent Appeals of the PTO’s decisions in the fourth quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. In September 2009, the Board affirmed the Examiner’s position with respect to one of the DURASOLV patents. We have the right to appeal this rejection and, as of the filing date of this report, we are awaiting a hearing and a determination with respect to our appeal regarding the other patent. These efforts will be both expensive and time consuming and, ultimately, due to the nature of patent appeals, there can be no assurance that these efforts will be successful. The invalidity of the DURASOLV patents could have a material adverse impact on revenues from our drug delivery business.

NUVIGIL PARAGRAPH IV CERTIFICATION LETTER

In October, 2009, we received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Teva requesting approval to market and sell a generic version of the 50 mg, 100 mg, 150 mg, 200 mg and 250 mg strengths of NUVIGIL. Teva alleges that our U.S. Patent Numbers 7,132,570 (the “‘570 Patent”), 7,297,346 (the “‘346 Patent”) and RE37,516 (the “‘516 Patent”) are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of the product described in Teva’s ANDA submission. We have a three-year period of marketing exclusivity for NUVIGIL that extends until June 15, 2010. In addition, including the six-month pediatric extension, the ‘516 Patent, the ‘346 Patent, and the ‘570 Patent expire on April 6, 2015, May 29, 2024, and June 18, 2024, respectively. Teva’s letter does not challenge our Orange Book-listed U.S. Patent Number 4,927,855 (the “‘855 Patent”), which provides additional protection until October 22, 2010, the expiration date of the ‘855 Patent. Under the provisions of the Hatch-Waxman Act, if we initiate a patent infringement lawsuit against Teva within 45 days of our receipt of Teva’s letter, then the FDA would be automatically precluded from approving the Teva ANDA until the earlier of entry of a district court judgment in favor of Teva or 30 months from the date of our receipt of Teva’s letter. We intend to vigorously defend our NUVIGIL intellectual property rights.

FENTORA

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lawsuits stays any FDA approval of each ANDA until the earlier of entry of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.

AMRIX

Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply.

We currently have a number of products that have been approved for sale in the United States, foreign countries or both. All of our approved products are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion. The failure to comply with any rules and regulations of the FDA or any foreign medical authority, or the post-approval discovery of previously unknown problems relating to our products, could result in, among other things:

· fines, recalls or seizures of products;

· total or partial suspension of manufacturing or commercial activities;

· non-approval of product license applications;

· restrictions on our ability to enter into strategic relationships; and

· criminal prosecution.

Over the past few years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities, including the DOJ and various U.S. Attorney’s Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the FTC and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with off-label promotion of products, pricing and Medicare and/or Medicaid reimbursement.

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Because of the broad scope and complexity of these laws and regulations, the high degree of prosecutorial resources and attention being devoted to the sales practices of pharmaceutical companies by law enforcement authorities, and the risk of potential exclusion from federal government reimbursement programs, numerous companies have determined that it is highly advisable that they enter into settlement agreements in these matters, particularly those brought by federal authorities. Companies that have chosen to settle these alleged violations have typically paid multi-million dollar fines to the government and agreed to abide by corporate integrity agreements.

Although we have resolved the previously outstanding federal and state government investigations into our sales and promotional practices, there can be no assurance that there will not be regulatory or other actions brought by governmental entities who are not party to the settlement agreements we have entered. We may also become subject to claims by private parties with respect to the alleged conduct which was the subject of our settlements with the federal and state governmental entities. In addition, while we intend to comply fully with the terms of the settlement agreements, the settlement agreements provide for sanctions and penalties for violations of specific provisions therein. We cannot predict when or if any such actions may occur or reasonably estimate the amount of any fines, penalties, or other payments or the possible effect of any non-monetary restrictions that might result from either settlement of, or an adverse outcome from, any such actions. Further, while we have initiated, and will initiate, compliance programs to prevent conduct similar to the alleged conduct subject to these agreements, we cannot provide complete assurance that conduct similar to the alleged conduct will not occur in the future, subjecting us to future claims and actions. Failure to comply with the terms of the CIA could result in, among other things, substantial civil penalties and/or our exclusion from government health care programs, which could materially reduce our sales and adversely affect our financial condition and results of operations.

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violations of RICO and conspiracy to violate RICO. The RICO allegations were dismissed with prejudice in May 2009. In February 2009, we were served with an additional putative class action complaint filed on behalf of two health and welfare trust funds that claim to have reimbursed for prescriptions of GABITRIL and PROVIGIL for uses outside the products approved labels. The complaint alleges violations of RICO and the common law of unjust enrichment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. We believe the allegations in the complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future. These efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In May 2009, we were served with a putative class action complaint filed in New Jersey state court. The complaint alleged violations of the New Jersey consumer fraud act and the common law of fraud and fraudulent concealment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. The complaint seeks to establish a class of government entities that reimbursed for certain products marketed by Cephalon for uses outside of the products’ approved labels. In July 2009, we removed the complaint to the U.S. District Court for the District of New Jersey and, in October 2009, the court granted our motion to dismiss the complaint.

It is both costly and time-consuming for us to comply with these inquiries and with the extensive regulations to which we are subject. Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

With respect to our product candidates, we conduct research, preclinical testing and clinical trials, each of which requires us to comply with extensive government regulations. We cannot market these product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority. The approval process is highly uncertain and requires substantial time, effort and financial resources. Ultimately, we may never obtain approval in a timely manner, or at all. Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected.

In addition, because PROVIGIL, NUVIGIL, FENTORA, EFFENTORA, ACTIQ and generic OTFC contain active ingredients that are controlled substances, we are subject to regulation by the U.S. Drug Enforcement Agency (“DEA”) and analogous foreign organizations relating to the manufacture, shipment, sale and use of the applicable products. These regulations also are imposed on prescribing physicians and other third parties, making the storage, transport and use of such products relatively complicated and expensive. With the increased concern for safety by the FDA and the DEA with respect to products containing controlled substances and the heightened level of media attention given to this issue, it is possible that these regulatory agencies could impose additional restrictions on marketing or even withdraw regulatory approval for such products. In addition, adverse publicity may bring about a rejection of the product by the medical community. If the DEA, FDA or analogous foreign authorities withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our ability to promote our products and product sales could be substantially affected.

We rely on third parties for the timely supply of specified raw materials, equipment, contract manufacturing, formulation or packaging services, product distribution services, customer service activities and product returns processing. Although we actively manage these third party relationships to ensure continuity and quality, some events beyond our control could result in the complete or partial failure of these goods and services. Any such failure could have a material adverse effect on our financial condition and result of operations.

Manufacturing, supply and distribution problems may create supply disruptions that could result in a reduction of product sales revenue and an increase in costs of sales, and damage commercial prospects for our products.

The manufacture, supply and distribution of pharmaceutical products, both inside and outside the United States, is highly regulated and complex. We, and the third parties we rely upon for the manufacturing and distribution of our products, must comply with all applicable regulatory requirements of the FDA and foreign authorities, including current Good Manufacturing Practice regulations.

We also must comply with all applicable regulatory requirements of the DEA and analogous foreign authorities for certain of our products that contain controlled substances. The DEA also has authority to grant or deny requests for quota of controlled substances such as the fentanyl that is the active ingredient in FENTORA and EFFENTORA or the fentanyl citrate that is the active ingredient in ACTIQ and generic OTFC. Under our license and supply agreement with Barr, we are

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obligated to sell generic OTFC to Barr for its resale in the United States. Depending on sales volumes and our ability to obtain additional quota from the DEA, we could face shortages of quota in the future that could negatively impact our ability to supply product to Barr or to produce ACTIQ or our generic OTFC product. If we are unable to provide product to Barr, it is possible that either Barr or the FTC could claim that such a failure would constitute a breach of our agreements with these parties.

The facilities used to manufacture, store and distribute our products also are subject to inspection by regulatory authorities at any time to determine compliance with regulations. These regulations are complex, and any failure to comply with them could lead to remedial action, civil and criminal penalties and delays in production or distribution of material.

For certain of our products in the United States and abroad, we depend upon single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies. The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or analogous foreign medical authority approval and is very time-consuming. If we are unable to manage this process effectively or if an unforeseen event occurs at any facility, we could face supply disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, damage commercial prospects for our products and adversely affect operating results.

As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls, changes to product labeling, adverse publicity and reduced sales of our products.

During research and development, the use of pharmaceutical products, such as ours, is limited principally to clinical trial patients under controlled conditions and under the care of expert physicians. The widespread commercial use of our products could identify undesirable or unintended side effects that have not been evident in our clinical trials or the commercial use as of the filing date of this report. For example, in September 2007, we issued a letter to healthcare professionals to clarify the appropriate patient selection, design and administration for FENTORA, following reports of serious adverse events in connection with the use of the product. Likewise, 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 patients without epilepsy. As described above, we are also in process of developing REMS Programs for certain of our products to mitigate serious risks associated with the use of certain of our products. In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict. Additionally, incidents of product misuse, product diversion or theft may occur, particularly with respect to products such as FENTORA, EFFENTORA, ACTIQ, generic OTFC, NUVIGIL and PROVIGIL, which contain controlled substances.

In April 2009, we received approval from the FDA for our sNDA to update the prescribing information for TREANDA. We finalized and implemented the updated prescribing information for TREANDA in May 2009. We identified two postmarketing cases of Stevens Johnson Syndrome (“SJS”)/toxic epidermal necrolysis (“TEN”) in patients treated concomitantly with TREANDA and allopurinol; one of these cases was fatal. Allopurinol is known to cause SJS/TEN. In the non-fatal case, the patient also received other drugs that can cause SJS. TREANDA’s prescribing information has been updated to include these serious skin reactions. These updates communicate safety warnings when TREANDA is used in combination with allopurinol. Although the relationship between TREANDA and SJS/TEN cannot be determined, there may be an increased risk of severe skin toxicity when TREANDA and allopurinol are administered concomitantly. This update is similar to the labeling that currently exists with certain other agents used to treat indolent non-Hodgkin’s lymphoma and/or chronic lymphocytic leukemia, such as RITUXAN® (rituximab), REVLIMID® (lenalidomide) and cyclophosphamide, all of which also reference SJS/TEN in their current respective prescribing information.

These events, among others, could result in adverse publicity that harms the commercial prospects of our products or lead to additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market. In particular, FENTORA and ACTIQ have been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use.

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Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market.

We face significant product liability risks, which may have a negative effect on our financial performance.

The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance. The cost of product liability insurance has increased in recent years, and the availability of coverage has decreased. Nevertheless, we maintain product liability insurance and significant self-insurance retentions held by our wholly owned Bermuda based insurance captive in amounts we believe to be commercially reasonable but which would be unlikely to cover the potential liability associated with a significant unforeseen safety issue. Product liability coverage maintained by our captive is reserved for, based on Cephalon’s historical claims as well as historical claims within the industry. Reserves held by the captive are fully funded. Any claims could easily exceed our current coverage limits. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.

Our product sales and related financial results will fluctuate, and these fluctuations may cause our stock price to fall, especially if investors do not anticipate them.

A number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and expenses, and have established earnings expectations based upon those models. These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly. Forecasting future revenues is difficult, especially when the level of market acceptance of our products is changing rapidly. As a result, it is reasonably likely that our product sales will fluctuate to an extent that may not meet with market expectations and that also may adversely affect our stock price. There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including:

· cost of product sales;

· achievement and timing of research and development milestones;

· collaboration revenues;

· cost and timing of clinical trials, regulatory approvals and product launches;

· marketing and other expenses;

· manufacturing or supply disruptions;

· unanticipated conversion of our convertible notes; and

· costs associated with the operations of recently-acquired businesses and technologies.

We may be unable to repay our substantial indebtedness and other obligations.

All of our convertible notes outstanding contain restricted conversion prices. As of September 30, 2009, our 2.0% Notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes and our 2010 Zero Coupon Notes are convertible based on maturity date. As a result, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated balance sheet as of September 30, 2009. Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this report, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, other than the restrictive covenants contained in our credit agreement, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay the principal balance of notes presented for conversion, we will be required to raise additional funds. Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not

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have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the market price for our securities.

The restrictive covenants contained in our credit agreement may limit our activities.

With respect to our $200 million, three-year revolving credit facility, the credit agreement contains restrictive covenants which affect, and in many respects could limit or prohibit, among other things, our ability to:

· incur indebtedness;

· create liens;

· make investments or loans;

· engage in transactions with affiliates;

· pay dividends or make other distributions on, or redeem or repurchase, our capital stock;

· enter into various types of swap contracts or hedging agreements;

· make capital contributions;

· sell assets; or

· pursue mergers or acquisitions.

Failure to comply with the restrictive covenants in our credit agreement could preclude our ability to borrow or accelerate the repayment of any debt outstanding under the credit agreement. Additionally, as a result of these restrictive covenants, we may be at a disadvantage compared to our competitors that have greater operating and financing flexibility than we do.

Our research and development and marketing efforts are often dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to develop and market potential products.

To maximize our growth opportunities, we have entered into a number of collaboration agreements with third parties. In certain countries outside the United States, we have entered into agreements with a number of partners with respect to the development, manufacturing and marketing of our products. In some cases, our collaboration agreements call for our partners to control:

· the supply of bulk or formulated drugs for use in clinical trials or for commercial use;

· the design and execution of clinical studies;

· the process of obtaining regulatory approval to market the product; and/or

· marketing and selling of an approved product.

In each of these areas, our partners may not support fully our research and commercial interests because our program may compete for time, attention and resources with the internal programs of our corporate collaborators. As such, our program may not move forward as effectively, or advance as rapidly, as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. We also rely on some of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical products. Additionally, we may find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we ultimately might not be successful in establishing any such new or additional relationships.

The efforts of government entities and third party payers to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products.

In certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control, including the control over the amount of reimbursements provided to the patient who is prescribed specific pharmaceutical products. For example, we are aware of governmental efforts in France to limit or

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eliminate reimbursement for some of our products, particularly FONZYLANE, which could impact revenues from our French operations.

In the United States, there have been, and we expect there will continue to be, various proposals to implement similar controls. For example, President Obama has made healthcare reform a top priority for his administration. The commercial success of our products could be limited if federal or state governments adopt any such proposals. In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. These third party payers are increasingly utilizing their significant purchasing power to challenge the prices charged for pharmaceutical products and seek to limit reimbursement levels offered to consumers for such products. Moreover, many governments and private insurance plans have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the United States in particular, generic substitution statutes have been enacted in virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug. These third party payers are focusing their cost control efforts on our products, especially with respect to prices of and reimbursement levels for products prescribed outside their labeled indications. In these cases, their efforts may negatively impact our product sales and profitability.

We experience intense competition in our fields of interest, which may adversely affect our business.

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.

The conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with many drugs, several of which have been available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL and NUVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy in the United States, including methylphenidate products, and in our other territories, many of which have been available for a number of years and are available in inexpensive generic forms. With respect to AMRIX, we face significant competition from SKELAXIN®, FLEXERIL® and other inexpensive generic forms of muscle relaxants. With respect to FENTORA, we face competition from numerous short-and long-acting opioid products, including three products—Johnson & Johnson’s DURAGESIC® and Purdue Pharmaceutical’s OXYCONTIN® and MS-CONTIN®—that dominate the market. In addition, we are aware of numerous other companies developing other technologies for rapidly delivering opioids to treat breakthrough pain that will compete against FENTORA in the market for breakthrough cancer pain in opioid-tolerant patients. ONSOLIS® is approved for this indication. It also is possible that the existence of generic OTFC could negatively impact the growth of FENTORA. With respect to ACTIQ, generic competition from Barr has meaningfully eroded branded ACTIQ sales and impacted sales of our own generic OTFC through Watson. Our generic sales also could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time. With respect to TREANDA, we face competition from LEUKERAN®, CAMPATH® and the combination therapy of fludarabine, cyclophosphamide and rituximab. With respect to TRISENOX, the pharmaceutical market for the treatment of patients with relapsed or refractory APL is served by a number of available therapeutics, such as VESANOID® by Roche in combination with chemotherapy.

For all of our products, we need to demonstrate to physicians, patients and third party payers 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.

Many of our competitors have substantially greater capital resources, research and 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. 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, including advances in current treatment methods, could potentially affect sales of our products negatively or make our products obsolete. Furthermore, 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.

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We plan to consider and, as appropriate, make acquisitions of technologies, products and businesses, which may subject us to a number of risks and/or result in us experiencing significant charges to earnings that may adversely affect our stock price, operating results and financial condition.

As part of our efforts to acquire businesses or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realize the intended advantages of the acquisition. If we fail to realize the expected benefits from acquisitions we have consummated or may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected. In connection with an acquisition, we must estimate the value of the transaction by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved products and the market potential for marketed products and/or product candidates. Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of a transaction.

In addition, we have experienced, and will likely continue to experience, significant charges to earnings related to our efforts to consummate acquisitions. For transactions that ultimately are not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts. We have also entered into agreements pursuant to which we have purchased, for cash, an option to acquire another company. If we do not exercise these options or if we are unable to exercise these options, we would lose our initial investment in these companies. Even if our efforts are successful, we may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process research and development charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

We may be unable to successfully consolidate and integrate the operations of businesses we acquire, which may adversely affect our stock price, operating results and financial condition.

We must consolidate and integrate the operations of acquired businesses with our business. Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and financial resources and could prove to be more difficult and expensive than we predicted. The diversion of our management’s attention and any delays or difficulties encountered in connection with these recent acquisitions, and any future acquisitions we may consummate, could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings.

The results and timing of our research and development activities, including future clinical trials, are difficult to predict, subject to potential future setbacks and, ultimately, may not result in viable pharmaceutical products, which may adversely affect our business.

In order to sustain our business, we focus substantial resources on the search for new pharmaceutical products. These activities include engaging in discovery research and process development, conducting preclinical and clinical studies and the development of new indications for our existing products and seeking regulatory approval in the United States and abroad. In all of these areas, we have relatively limited resources and compete against larger, multinational pharmaceutical companies. Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of compounds discovered do not enter clinical studies and the majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization.

In the pharmaceutical business, the research and development process generally takes 12 years or longer, from discovery to commercial product launch. During each stage of this process, there is a substantial risk of failure. Preclinical testing and clinical trials must demonstrate that a product candidate is safe and efficacious. The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and these clinical trials may not demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. For ethical reasons, certain clinical trials are conducted with patients having the most advanced stages of disease and who have failed treatment with alternative therapies. During the course of

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treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested. Such events can have a negative impact on the statistical analysis of clinical trial results.

The completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients. Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product candidates to be completed in a timely manner or at all. In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for one or more of our product candidates. Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals. Any significant delays in, or termination of, clinical trials of our product candidates could impact our ability to generate product sales from these product candidates in the future.

The price of our common stock has been and may continue to be highly volatile, which may make it difficult for stockholders to sell our common stock when desired or at attractive prices.

The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future. For example, from January 1, 2008 through October 26, 2009 our common stock traded at a high price of $81.35 and a low price of $52.55. Negative announcements, including, among others:

· adverse regulatory decisions;

· disappointing clinical trial results;

· legal challenges, disputes and/or other adverse developments impacting our patents or other proprietary products; or

· sales or operating results that fall below the market’s expectations

could trigger significant declines in the price of our common stock. In addition, external events, such as news concerning economic conditions, our competitors or our customers, changes in government regulations impacting the biotechnology or pharmaceutical industries or the movement of capital into or out of our industry, also are likely to affect the price of our common stock, regardless of our operating performance.

Our internal controls over financial reporting may not be considered effective, which could result in possible regulatory sanctions and a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to furnish annually a report on our internal controls over financial reporting and to maintain effective disclosure controls and procedures and internal controls over financial reporting. In order for management to evaluate our internal controls, we must regularly review and document our internal control processes and procedures and test such controls. Ultimately, we or our independent auditors could conclude that our internal control over financial reporting may not be effective if, among others things:

· any material weakness in our internal controls over financial reporting exist; or

· we fail to remediate assessed deficiencies.

We have implemented a number of information technology systems, including SAP®, to assist us to meet our internal controls for financial reporting. While we believe our systems are effective for that purpose, we cannot be certain that they will continue to be effective in the future or adaptable for future needs. Due to the number of controls to be examined, the complexity of our processes, the subjectivity involved in determining the effectiveness of controls, and, more generally, the laws and regulations to which we are subject as a global company, we cannot be certain that, in the future, all of our controls will continue to be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment.

If, in the future, we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal control over financial reporting, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our securities.

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A portion of our revenues and expenses is subject to exchange rate fluctuations in the normal course of business, which could adversely affect our reported results of operations.

Historically, a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the U.S. dollar. For the nine months ended September 30, 2009, 17.0% of our revenues were denominated in currencies other than the U.S. dollar. We translate revenues earned and expenses incurred into U.S. dollars at the average exchange rate applicable during the relevant period. A weakening of the U.S. dollar would, therefore, increase both our revenues and expenses. Fluctuations in the rate of exchange between the U.S. dollar and the euro and other currencies may affect period-to-period comparisons of our operating results. Historically, we have not hedged our exposure to these fluctuations in exchange rates.

Our customer base is highly concentrated.

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for pharmaceutical products 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 75% of our total consolidated gross sales for the nine months ended September 30, 2009. Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decisions 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.

We are involved, or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition.

As a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination, product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact results of operations and financial condition. We currently are vigorously defending ourselves against those matters specifically described in Note 10 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as numerous other litigation matters. While we currently do not believe that the settlement or adverse adjudication of these other litigation matters would materially impact our results of operations or financial condition, the final resolution of these matters and the impact, if any, on our results of operations, financial condition or cash flows is unknown but could be material.

Unfavorable general economic conditions could adversely affect our business.

Our business, financial condition and results of operations may be affected by various general economic factors and conditions. Periods of economic slowdown or recession in any of the countries in which we operate could lead to a decline in the use of our products and therefore could have an adverse effect on our business. In addition, if we are unable to access the capital markets due to general economic conditions, we may not have the cash available or be able to obtain funding to permit us to meet our business requirements and objectives, thus adversely affecting our business and the market price for our securities.

Our dependence on key executives and scientists could impact the development and management of our business.

We are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain the qualified personnel necessary for the development and management of our business. Although we do not believe the loss of one individual would materially harm our business, our business might be harmed by the loss of the services of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner. Much of the know-how we have developed resides in our scientific and technical personnel and is not readily transferable to other personnel. While we have employment agreements with our key executives, we do not ordinarily enter into employment agreements with our other key scientific, technical and managerial employees. We do not maintain “key man” life insurance on any of our employees.

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We may be required to incur significant costs to comply with environmental laws and regulations, and our related compliance may limit any future profitability.

Our research and development activities involve the controlled use of hazardous, infectious and radioactive materials that could be hazardous to human health and safety or the environment. We store these materials, and various wastes resulting from their use, at our facilities pending ultimate use and disposal. We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with related existing and future environmental laws and regulations.

While we believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial costs. These damages could require payment by us of significant amounts over a number of years, which could adversely affect our results of operations and financial condition.

Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders’ ability to profit from such a transaction.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock, $0.01 par value, of which 1,000,000 have been reserved for issuance in connection with our stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. Our stockholder rights plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon. Section 203, the rights plan, and certain provisions of our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of our management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

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ITEM 5. OTHER INFORMATION

Computation of Ratios of Earnings to Fixed Charges

														Nine months ended
	Year Ended December 31,													September 30,
	As adjusted 2004*			As adjusted 2005*			As adjusted 2006*		As adjusted 2007*			As adjusted 2008*		2009
Determination of earnings:
Income (loss) before income taxes	$	(33,808	)	$	(264,506	)	$	192,166	$	(123,276	)	$	134,070	$	333,578
Add:
Amortization of interest capitalized in current or prior periods	—			—			52		98			250		199
Fixed charges	29,918			81,007			97,054		79,993			84,762		69,907
Total earnings	$	(3,890	)	$	(183,499	)	$	289,272	$	(43,185	)	$	219,082	$	403,684

Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	26,481			75,257			87,805		70,866			75,233		63,213
Appropriate portion of rentals	3,437			5,750			9,249		9,127			9,529		6,694
Fixed charges	29,918			81,007			97,054		79,993			84,762		69,907

Capitalized interest	—			1,044			1,766		768			77		—

Total fixed charges	$	29,918		$	82,051		$	98,820	$	80,761		$	84,839	$	69,907

Ratio of earnings to fixed charges(1)	—			—			2.93		—			2.58		5.77

Deficiency of earnings to fixed charges	33,808			265,550			—		123,946			—		—

*As adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).

(1) For the years ended December 31, 2004, 2005 and 2007, no ratios are provided because earnings were insufficient to cover fixed charges.

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ITEM 6. EXHIBITS

Exhibit No.		Description
10.1(1)*		Development and Commercialization Option Agreement dated November 21, 2008 between Cephalon, Inc., Anesta AG, ImmuPharma (France) S.A. and ImmuPharmaAG (Switzerland).
10.2(1)*		Development and Commercialization Agreement dated as of February 25, 2009 between ImmuPharma (France) S.A. and Anesta AG.
10.3 (1)*		Trademark License Agreement dated as of February 25, 2009 between ImmuPharma AG. and Anesta AG.
31.1*		Certification of Frank Baldino, Jr., Ph.D., Chairman and Chief Executive Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of J. Kevin Buchi, Executive Vice President and Chief Financial Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1#		Certification of Frank Baldino, Jr., Ph.D., Chairman and Chief Executive Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2#		Certification of J. Kevin Buchi, Executive Vice President and Chief Financial Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.

†	Compensation plans and arrangements for executive officers and others.

#	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference in any document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

(1)	The exhibits and schedules to the agreement have been omitted from this filing pursuant to Item 601(b) (2) of Regulation S-K. The Company will furnish copies of any of the exhibits and schedules to the Securities and Exchange Commission upon request. Portions of the exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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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.

	CEPHALON, INC.
	(Registrant)


October 28, 2009	By	/s/ FRANK BALDINO, JR.
		Frank Baldino, Jr., Ph.D.
		Chairman and Chief Executive Officer
		(Principal executive officer)


	By	/s/ J. KEVIN BUCHI
		J. Kevin Buchi
		Executive Vice President and Chief Financial Officer
		(Principal financial and accounting officer)

CEPHALON INC - FORM 10-Q - October 28, 2009

Attached files

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)