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PART I

Forward-Looking Statements

Certain statements in this Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management’s expectations with respect to future financial performance, trends and future events, particularly relating to sales of current products and the development, approval and introduction of new products.  To the extent that any statements made in this Report contain information that is not historical, such statements are essentially forward-looking.  These statements are often, but not always, made using words such as “estimates,” “plans,” “projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “intends,” “believes,” “forecasts” or similar words and phrases.  Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond our control, which could cause actual results and outcomes to differ materially from those expressed in this Report.  Risk factors that might affect such forward-looking statements include those set forth in Item 1A (“Risk Factors”) of this Report and from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and on general industry and economic conditions.  Any forward-looking statements included in this Report are made as of the date of this Report only, and, subject to any applicable law to the contrary,  we assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.  

ITEM 1. Business

GENERAL and RECENT DEVELOPMENTS

Par Pharmaceutical Companies, Inc., incorporated in 1978 as Par Pharmaceutical, Inc., is a Delaware holding company that, principally through its wholly owned operating subsidiary, Par Pharmaceutical, Inc. (collectively referred to herein as “we,” “our,” or “us”), is in the business of developing, licensing, manufacturing, marketing and distributing generic and branded drugs in the United States.  We operate primarily in the United States as two business segments: Par Pharmaceutical (or “Par”), our generic products division, and Strativa Pharmaceuticals (“Strativa”), our branded products division.  See Notes to Consolidated Financial Statements – Note 18 – “Segment Information”.    

Prescription pharmaceutical products are sold as either generic products or branded products.  Since our inception, we have manufactured, licensed and distributed generic pharmaceutical products.  We created a branded products division in 2005.  We shipped our first branded product in the third quarter of 2005 and named our branded products division Strativa Pharmaceuticals in 2007.  At the end of 2005, we divested one of our subsidiaries, FineTech Laboratories, Ltd., to a former officer and director.  As a result of the divestiture, the FineTech business is being reported in our financial statements as a discontinued operation for all periods presented, as applicable.

Our fiscal year ends on December 31 of each year presented.  Our fiscal quarters ended on the Saturday closest to each calendar quarter end for all periods up to and including 2009.  Beginning in 2010, our fiscal quarters end on each calendar quarter end (March 31st, June 30th, and September 30th).  Our electronic filings with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports, are available on our website, free of charge, as soon as reasonably practicable after we electronically file or furnish them to the SEC.  Information on our website is not, and should not be construed to be, part of this Annual Report on Form 10-K.  The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.  

Par Pharmaceutical - Generic Products Division

Generic drugs are the pharmaceutical and therapeutic equivalents of brand name drugs and are usually marketed under their generic (chemical) names rather than by brand names.  Typically, a generic drug may not be marketed until the expiration of applicable patent(s) on the corresponding brand name drug.  Generic drugs must meet the same governmental standards as brand name drugs, but they are sold generally at prices below those of the corresponding brand name drugs.  Generic drugs provide a cost-effective alternative for consumers, while maintaining the safety and effectiveness of the brand name drug.

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Our generic product line as of December 31, 2010, comprised prescription drugs consisting of approximately 50 product names (molecules), each with an associated Abbreviated New Drug Application (“ANDA”) approved by the U.S. Food and Drug Administration (“FDA”), and approximately 175 SKUs (packaging sizes).  Products sold by our generic products division are manufactured principally in the solid oral dosage form (tablet, caplet and two-piece hard shell capsule).  In addition, we market several oral suspension products, injectables, transdermal patches and products in the semi-solid form of a cream.  We manufacture some of our own products, and we have strategic alliances and relationships with several pharmaceutical and chemical companies that provide us with products for sale through various distribution, manufacturing, development and licensing agreements.   

In January 2011, we announced that the key strategy for our generic products division will continue to be to focus on intelligent product selection and entrepreneurial business development.  As a result, our internal research and development is intended to target high-value, “first-to-file” or “first-to-market” generic product opportunities.  A “first-to-file” product opportunity refers to an ANDA containing a Paragraph IV patent challenge to the corresponding brand product, which offers the opportunity for 180 days of generic marketing exclusivity if approved by the FDA and if we are successful in litigating the patent challenge.  See “Competition” below.  A “first-to-market” product opportunity refers to a product that is the first marketed generic equivalent of a brand product for reasons apart from statutory marketing exclusivity, such as the generic equivalent of a brand product that is difficult to formulate or manufacture.  Externally, Par will concentrate on acquiring assets and/or partnership arrangements with technology based companies that can deliver similar product opportunities.  As of December 2010, we had 11 confirmed first-to-file and three potential first-to-market product opportunities.  Additionally, Par Pharmaceutical is committed to high product quality standards and allocates significant capital and resources to quality assurance, quality control and manufacturing excellence.

A practice within the industry is the use of “authorized generics.”  Brand drug companies do not face any regulatory barriers to introducing a generic version of their own brand drugs, and they often license this right to a subsidiary or a generic distributor.  Authorized generics may be sold during (and after) the statutory exclusivity period granted to the developer of a generic equivalent to the brand product.  In the past, we have marketed authorized generics, including metformin ER (Glucophage XRÒ) and glyburide & metformin HCl (GlucovanceÒ) licensed through Bristol-Myers Squibb Company, and fluticasone (FlonaseÒ) and ranitidine HCl syrup (ZantacÒ) licensed from GlaxoSmithKline plc.  We currently market metoprolol succinate ER (Toprol XLÒ) and zafirlukast (AccolateÒ) licensed through AstraZeneca.

Par markets our products primarily to wholesalers, drug store chains, supermarket chains, mass merchandisers, distributors, mail order accounts, and government, principally through its internal staff.  Par also promotes the sales efforts of wholesalers and drug distributors that sell our products to clinics, governmental agencies and other managed health care organizations.

Strativa Pharmaceuticals – Branded Products Division

Brand products usually benefit from patent protection, which greatly reduces competition and provides a significant amount of market exclusivity for the products.  This exclusivity generally allows a brand product to remain profitable for a relatively longer period of time as compared to generic products.  In addition, due to the public awareness of the brand name and resulting consumer and physician loyalty, brand products may remain profitable even after the cessation of their patent related market exclusivity.  We believe that brand products generally have limited competition, longer product life cycles and longer-term profitability than generic products.  Strativa’s products are marketed by its sales force, which communicates the therapeutic, health and economic benefits of our products to healthcare providers and managed care organizations.  

Since its creation in 2005, Strativa has focused on supportive care, marketing four products as of December 31, 2010:  

·      Megace^® ES (megestrol acetate) oral suspension, Strativa’s first brand product, is a NanoCrystal^® Dispersion indicated for the treatment of anorexia, cachexia or any unexplained significant weight loss in patients with a diagnosis of AIDS.  Strativa has promoted Megace^® ES and generated prescription growth from launch following FDA approval in 2005 through 2007.  Net sales growth began to moderate in 2008 and net sales declined in 2009 and 2010, principally due to a more challenging reimbursement environment, which led to lower prescription levels.

·      Nascobal^® (cyanocobalamin, USP) Nasal Spray is a prescription vitamin B12 treatment indicated for maintenance of remission in certain pernicious anemia patients, as well as a supplement for a variety of B12 deficiencies.  We acquired Nascobal^® from QOL Medical, LLC on March 31, 2009.  On October 26, 2010, we entered into an amended and restated license and supply agreement with Swedish Orphan Biovitrum (“Sobi”) covering the European development and commercialization rights of Nascobal^®.  When we acquired the worldwide rights to Nascobal^® from QOL Medical, LLC in March 2009, there was a pre-existing agreement with Sobi.  Under the terms of the amended agreement, Sobi will conduct and pay for all development activities to seek European regulatory approval of Nascobal^®.  Subject to receipt of applicable regulatory approvals, on a country-by-country basis, Sobi will commercialize the product in Europe and pay Strativa a royalty on net sales.

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·      Oravig™ (miconazole) buccal tablets is an antifungal therapy for the treatment of oropharyngeal candidiasis, an opportunistic infection commonly found in immunocompromised patients, including those with HIV and cancer.  In 2007, Strativa acquired an exclusive license to the U.S. commercialization rights to Oravig™ from BioAlliance Pharma S.A.  On April 16, 2010, the FDA approved Oravig^TM and Strativa began to commercialize Oravig^TM, which is supplied by BioAlliance, during the third quarter of 2010.

·      Zuplenz^® (ondansetron) oral soluble film is a novel formulation of ondansetron for the prevention of chemotherapy-induced nausea and vomiting, prevention of nausea and vomiting associated with radiotherapy, and prevention of post-operative nausea and vomiting.  In 2008, we acquired the U.S. commercialization rights to Zuplenz^® under an exclusive licensing agreement with MonoSol Rx.  On July 2, 2010, the FDA approved Zuplenz^®, and Strativa launched Zuplenz^® in the fourth quarter of 2010.  The product is manufactured and supplied by MonoSol.

In December 2010, we terminated our extended-reach agreement with Solvay Pharmaceuticals, Inc. that provided for our branded sales force to co-promote Androgel^®.  The marketing and sales efforts will be redirected toward the four products detailed above.  

In January 2011, we completed a modest reorganization of the Strativa management team (approximately 10 positions eliminated) and refined our sales and marketing plan for each of Strativa’s currently marketed products as part of our on-going efforts to maximize the value and potential of our existing product portfolio.  We announced that the President of Strativa Pharmaceuticals resigned and that effective January 31, 2011, Patrick G. LePore, the Chairman, CEO and President of Par Pharmaceutical Companies, Inc., assumed day-to-day oversight of Strativa on an interim basis.  We have taken steps to further align the Strativa home office sales and marketing team with the objectives of our sales force and to leverage the relevant expertise and experience within our Par Pharmaceutical generics division.  In conjunction with these events, we recalibrated our target sales for certain of our currently marketed products.  Further information regarding such forecasts can be found in our Form 8-K filed January 12, 2011.    

We currently anticipate that the near term growth of Strativa will be based largely on focusing on the sales and marketing efforts of our current brand products.  In the longer term, we will continue to consider strategic product or business acquisitions or licensing arrangements to expand Strativa’s brand product line.  

PRODUCT INFORMATION

We distribute numerous drugs at various dosage strengths, some of which are manufactured by us and some of which are manufactured for us by other companies.  Set forth below is a list of the drugs that we manufactured and/or distributed, including the brand products Megace^® ES, Nascobal^®, and Zuplenz^® for which we hold the NDAs as of December 31, 2010.  The names of all of the drugs under the caption “Competitive Brand Name Drug” are trademarked.  The holders of the trademarks are non-affiliated pharmaceutical companies.  We hold the ANDAs and NDAs for the drugs that we manufacture.  

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* Manufactured by Par

** BioAlliance holds the NDA for Oravig^TM

We seek to introduce new products through our research and development program, and through distribution and other agreements, including licensing of authorized generics and branded products, with pharmaceutical companies located in various parts of the world.  As such, we have pursued and continue to pursue arrangements and relationships that share development costs, generate profits from jointly-developed products and expand distribution channels for new and existing products.  Our more significant distribution and supply agreements are described in the Notes to Consolidated Financial Statements – Note 11 – “Distribution and

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Supply Agreements.”   Our more significant research and development agreements are described in the Notes to Consolidated Financial Statements – Note 10 – “Research and Development Agreements.”

RESEARCH AND DEVELOPMENT

Par Pharmaceutical - Generic Products Division

Our research and development activities for generic products consist principally of (i) identifying and conducting patent and market research on brand name drugs for which patent protection has expired or is expected to expire in the near future, (ii) identifying and conducting patent and market research on brand name drugs for which we believe the patents are invalid or for which we believe we can develop a non-infringing formulation, (iii) researching and developing new product formulations based upon such drugs and (iv) introducing technology to improve production efficiency and enhance product quality.  The scientific process of developing new products and obtaining FDA approval is complex, costly and time-consuming; there can be no assurance that any products will be developed regardless of the amount of time and money spent on research and development.  The development of products may be curtailed at any stage of development due to the introduction of competing generic products or other reasons.

The research and development of our generic pharmaceutical products, including pre-formulation research, process and formulation development, required studies and FDA review and approval, has historically taken approximately two to three years to complete. Accordingly, we typically select products for development that we intend to market several years in the future. However, the length of time necessary to bring a product to market can vary significantly and depends on, among other things, the availability of funding, problems relating to formulation, safety or efficacy and patent issues associated with the product.

We contract with outside laboratories to conduct biostudies, which, in the case of oral solids, generally are required in order to obtain FDA approval.  These biostudies are used to demonstrate that the rate and extent of absorption of a generic drug are not significantly different from the corresponding brand name drug.  Each biostudy can cost from approximately $0.2 million to $1.1 million.  Biostudies are required to be conducted and documented in conformity with FDA standards (see “Government Regulation” below).  During 2010, we spent approximately $8.2 million with outside laboratories to conduct biostudies for 9 potential new products.  We intend to continue to contract for additional biostudies in the future.  

From time to time, we enter into product development and license agreements with various third parties with respect to the development or marketing of new products and technologies.  Our more significant product development agreements are described in Notes to Consolidated Financial Statements – Note 10 – “Research and Development Agreements.”  Pursuant to these agreements, we have advanced funds to several unaffiliated companies for products in various stages of development.  As a result of our product development program, we or our strategic partners currently have approximately 29 ANDAs pending with the FDA.

Strativa Pharmaceuticals – Branded Products Division

The first step in obtaining FDA approval for a drug that has not been previously approved is pre-clinical testing.  Pre-clinical tests are intended to provide a laboratory evaluation of the product to determine its chemistry, formulation and stability.  Toxicology studies are also performed to assess the potential safety and efficacy of the product.  The results of these studies are submitted to the FDA as part of an Investigational New Drug Application (“IND”).  The toxicology studies are analyzed to ensure that clinical trials can safely proceed.  There is a 30-day period in which the FDA can raise concerns regarding the trials proposed in an IND.  If the FDA raises any concerns, the developer must address those concerns before the clinical trials can begin.  An IND becomes effective after such 30 day period if the FDA does not raise any concerns.  Prior to the start of any clinical study, an independent institutional review board must review and approve such study.

There are three main stages of clinical trial development:

·      In Phase I, the drug is tested for safety, absorption, tolerance and metabolism in a small number of subjects.

·      In Phase II, after successful Phase I evaluations, the drug is tested for efficacy in a limited number of patients.  The drug is further tested for safety, absorption, tolerance and metabolism.

·      In Phase III, after successful Phase II evaluations, further tests are done to determine safety and efficacy in a larger number of patients who are to represent the population in which the drug will eventually be used.

The developer then submits an NDA containing the results from the pre-clinical and clinical trials.  The NDA drug development and approval process takes from approximately three to ten years or more.  

Our current strategy for developing the Strativa portfolio over the mid to long term is to bypass the substantial investments associated with the development of drugs through this process, and instead to support continued sales growth of our existing brand products (Megace^® ES, Oravig^TM, Zuplenz^®, and Nascobal^®) and add to our portfolio of branded, single-source prescription drug

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products through in-licensing and the acquisition of late-stage development products or currently marketed products.  Strativa has made strategic investments related to the in-licensing of products, and we expect to spend significant amounts related to royalties, and potentially, sales based milestones, related to these in-licensed products in the future.

In December 2009, MonoSol and Strativa amended the Zuplenz^® agreement to modify the terms of future payments, including milestones.  In December 2009, concurrent with our amendment of the Zuplenz^® agreement, we entered into an agreement for the development rights to MonoSol’s oral soluble film formulation for up to three potential new products.  As of December 31, 2010, only one potential new product that has not yet been identified remains subject to the December 2009 agreement.    

Our more significant product development agreements are described in Notes to Consolidated Financial Statements – Note 10 – “Research and Development Agreements.”  

No assurances can be given that we or any of our strategic partners will successfully complete the development of products under development or proposed for development, that we will obtain regulatory approvals for any such product, or that any approved product can be sold profitably.

MARKETING AND CUSTOMERS

We market our generic products principally to wholesalers, drug store chains, supermarket chains, mass merchandisers, distributors, mail order accounts, and government, principally through our internal staff.  Strativa’s products are marketed by its sales force, which communicates the therapeutic, health and economic benefits of our branded products to healthcare providers and managed care organizations.  Some of our wholesalers and distributors purchase products and warehouse those products for certain retail drug store chains, independent pharmacies and managed health care organizations.  Customers in the managed health care market include health maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers.

We have approximately 110 customers, some of which are part of larger buying groups.  In 2010, our three largest customers in terms of net sales dollars accounted for approximately 51% of our total revenues, as follows: McKesson Drug Co. (20%), Cardinal Health, Inc. (16%), and AmerisourceBergen Corporation (15%).  In 2009, our three largest customers in terms of net sales dollars accounted for approximately 45% of our total revenues, as follows:  McKesson Drug Co. (16%), CVS Caremark (15%), and AmerisourceBergen Corporation (14%).  In 2008, our three largest customers in terms of net sales dollars accounted for approximately 55% of our total revenues, as follows:  McKesson Drug Co. (25%), AmerisourceBergen Corporation (18%), and Cardinal Health, Inc. (12%).  We do not have written agreements that guarantee future business with any of these major customers, and the loss of any one or more of these customers or the substantial reduction in orders from any of such customers could have a material adverse effect on our operating results, prospects and financial condition. 

ORDER BACKLOG

The approximate dollar amount of open orders (net sales basis), believed by management to be firm as of December 31, 2010 was approximately $7.1 million, as compared to approximately $19.0 million at December 31, 2009, and approximately $6.6 million at December 31, 2008.  These orders represent unfilled orders as of December 31, 2010 along with orders that were scheduled to be shipped at December 31, 2010.  Open orders are subject to cancellation without penalty.  

COMPETITION

The pharmaceutical industry is highly competitive.  At times, we may not be able to differentiate our products from our competitors’ products, successfully develop or introduce new products that are less expensive than our competitors’ products, or offer purchasers payment and other commercial terms as favorable as those offered by our competitors.  We believe that our principal generic competitors are Teva Pharmaceutical Industries, Mylan Laboratories, Sandoz Pharmaceuticals, and Watson Pharmaceuticals based upon sales volumes.  Our principal strategy in addressing our generic competition is to offer customers a consistent supply of a broad line of generic drugs at competitive pricing.  There can be no assurance, however, that this strategy will enable us to compete successfully in the industry or that we will be able to develop and implement any new or additional viable strategies.

The Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act provide for a period of 180 days of generic marketing exclusivity for each ANDA applicant that is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to the corresponding brand drug (commonly referred to as a “Paragraph IV” certification).  The holder of an approved ANDA containing a Paragraph IV certification that is successful in challenging the applicable brand drug patent(s) generally enjoys higher market share and revenues during this period of marketing exclusivity.  At the expiration of the exclusivity period, other generic distributors may enter the market, resulting in a significant price decline for the drug.  (In some instances, price declines have exceeded 90%).  As a result of price declines, we may at our discretion provide price adjustments to our customers for the difference between our new (lower) price and the price at which we previously sold the product

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then held in inventory by our customers.  These types of price adjustments are commonly known as shelf stock adjustments.  There are circumstances under which we may decide not to provide price adjustments to certain customers, and consequently, as a matter of business strategy, we may lose future sales volume to competitors rather than reduce our pricing.

Competition in the generic drug industry has also increased due to the advent of authorized generics.  “Authorized generics” are generic pharmaceutical products that are introduced by brand companies, either directly or through partnering arrangements with other generic companies.  Authorized generics are equivalent to the brand companies’ brand name drugs, but are sold at relatively lower prices than the brand name drugs.  This is a significant source of competition for us, because brand companies do not face any regulatory barriers to introducing a generic version of their own brand name drugs.  Further, authorized generics may be sold during any period of generic marketing exclusivity granted to a generic company, which significantly undercuts the profits that a generic company could otherwise receive as an exclusive marketer of a generic product.  Such actions have the effect of reducing the potential market share and profitability of our generic products and may inhibit us from introducing generic products corresponding to certain brand name drugs.  We have also marketed authorized generics in partnership with brand companies, including during the exclusivity periods of our generic competitors.

In addition to competing products, increased price competition has also resulted from consolidation among wholesalers and retailers and the formation of large buying groups, which has caused reductions in sales prices and gross margin.  This competitive environment has led to an increase in customer demand for downward price adjustments from the distributors of generic pharmaceutical products.  Such price reductions are likely to continue, or even increase, which could have a consequential material adverse effect on our revenues and gross margin.

The principal competitive factors in the generic pharmaceutical market include: (i) introduction of other generic drug manufacturers’ products in direct competition with our products, (ii) introduction of authorized generic products in direct competition with our products, particularly during exclusivity periods, (iii) consolidation among distribution outlets through mergers and acquisitions and the formation of buying groups, (iv) ability of generic competitors to quickly enter the market after the expiration of patents or exclusivity periods, diminishing the amount and duration of significant profits, (v) the willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers, (vi) pricing pressures by competitors and customers, (vii) a company’s reputation as a manufacturer and distributor of quality products, (viii) a company’s level of service (including maintaining sufficient inventory levels for timely deliveries), (ix) product appearance and labeling, and (x) a company’s breadth of product offerings.

Just as we compete against companies selling branded products when we sell generic products, we confront the same competitive pressures when we sell our branded products.  Competition from generic equivalents, accordingly, could have an adverse effect on Strativa.  Specifically, after patent protections expire, generic products can be sold in the market at a significantly lower cost than the branded version, and, where available, may be required or encouraged in preference to the branded version under third party reimbursement programs, or substituted by pharmacies for branded versions by law.  Many of our brand competitors have longer operating histories and greater financial, research and development, marketing and other resources than we do.  Consequently, many of our brand competitors may be able to develop products superior to our own.  Furthermore, we may not be able to differentiate our products from those of our brand competitors or offer customers payment and other commercial terms as favorable as those offered by our brand competitors.  The markets in which we compete and intend to compete are undergoing, and are expected to continue to undergo, rapid and significant change.  We expect brand competition to intensify as technological advances and consolidations continue.  

RAW MATERIALS

The raw materials essential to our manufacturing business are purchased primarily from U.S. distributors of bulk pharmaceutical chemicals manufactured by foreign companies.  To date, we have experienced no significant difficulties in obtaining raw materials and expect that raw materials will generally continue to be available in the future.  However, because the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required.  A delay of six months or more in the manufacture and marketing of the drug involved while a new supplier becomes qualified by the FDA and its manufacturing process is determined to meet FDA standards could, depending on the particular product, have a material adverse effect on our results of operations and financial condition.  Generally, we attempt to mitigate the potential effects of any such situation by providing for, where economically and otherwise feasible, two or more suppliers of raw materials for the drugs that we manufacture.  In addition, we may attempt to enter into a contract with a raw material supplier in an effort to ensure adequate supply for our products.  

EMPLOYEES

At December 31, 2010, we had 686 employees.  None of our employees are covered by any collective bargaining agreement.  We consider our employee relations to be good.  

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GOVERNMENT REGULATION

The development, manufacturing, sales, marketing and distribution of our products are subject to extensive governmental regulation by the U.S. federal government, principally the FDA, and, as applicable, the Drug Enforcement Administration, Federal Trade Commission (the “FTC”) and state and local governments.  For both currently marketed and future products, failure to comply with applicable regulatory requirements can, among other things, result in suspension of regulatory approval and possible civil and criminal sanctions.  Regulations, enforcement positions, statutes and legal interpretations applicable to the pharmaceutical industry are constantly evolving and are not always clear.  Significant changes in regulations, enforcement positions, statutes and legal interpretations could have a material adverse effect on our financial condition and results of operation.

The enactment of current U.S. healthcare reform has a significant impact on our business.  As examples, the current legislation includes measures that  (i) significantly increase Medicaid rebates through both the expansion of the program and significant increases in rebates; (ii) substantially expand the Public Health System (340B) program to allow other entities to purchase prescription drugs at substantial discounts; (iii) extend the Medicaid rebate rate to a significant portion of Managed Medicaid enrollees; (iv) assess a 50% rebate on Medicaid Part D spending in the coverage gap for branded and authorized generic prescription drugs; and (v) levy a significant excise tax on the industry to fund the healthcare reform.   The impacts of these provisions are included in our current financial statements.  

Additionally, future healthcare legislation or other legislative proposals at the federal and state levels could bring about major changes in the affected health care systems, including statutory restrictions on the means that can be employed by branded and generic pharmaceutical companies to settle Paragraph IV patent litigations.  We cannot predict the outcome of such initiatives, but such initiatives, if passed, could result in significant costs to us in terms of costs of compliance and penalties associated with failure to comply.

The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations govern the development, testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products.  Non-compliance with applicable regulations can result in judicially and/or administratively imposed sanctions, including the initiation of product seizures, injunctions, fines and criminal prosecutions.  Administrative enforcement measures may involve the recall of products, as well as the refusal of an applicable government authority to enter into supply contracts or to approve new drug applications.  The FDA also has the authority to withdraw its approval of drugs in accordance with its regulatory due process procedures.  

New Drug Applications and Abbreviated New Drug Applications

FDA approval is required before any new drug, including a generic equivalent of a previously approved brand name drug, may be marketed.  To obtain FDA approval for a new drug, a prospective manufacturer must, among other things, as discussed below, demonstrate that its manufacturing facilities comply with the FDA’s current Good Manufacturing Practices (“cGMP”) regulations.  The FDA may inspect the manufacturer’s facilities to ensure such compliance prior to approval or at any other time.  The manufacturer is required to comply with cGMP regulations at all times during the manufacture and processing of drugs.  To comply with the standards set forth in these regulations, we must continue to expend significant time, money and effort in the areas of production, quality control and quality assurance.

In order to obtain FDA approval of a new drug, a manufacturer must demonstrate the drug’s safety and effectiveness.  There currently are two ways to satisfy the FDA’s safety and effectiveness requirements:

1.  New Drug Applications (NDAs): Unless the procedure discussed in paragraph 2 below is permitted under the Federal Food, Drug, and Cosmetic Act, a prospective manufacturer must submit to the FDA an NDA containing complete pre-clinical and clinical safety and efficacy data or a right of reference to such data.  The pre-clinical data must provide an adequate basis for evaluating the safety and scientific rationale for the initiation of clinical trials.  Clinical trials are conducted in three sequential phases and may take up to several years to complete.  At times, the phases may overlap.  Data from pre-clinical testing and clinical trials is submitted to the FDA as an NDA for marketing approval.

2.  Abbreviated New Drug Applications (ANDAs): The Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act established a statutory procedure for submission, FDA review and approval of ANDAs for generic versions of brand name drugs previously approved by the FDA (such previously approved drugs are referred to as “listed drugs”).  Because the safety and efficacy of listed drugs have already been established by the innovator company, the FDA waives the requirement for complete clinical trials.  However, a generic manufacturer is typically required to conduct bioavailability/bioequivalence studies of its test product against the listed drug.  The bioavailability/bioequivalence studies assess the rate and extent of absorption and concentration levels of a drug in the blood stream required to produce a therapeutic effect.  Bioequivalence is established when the rate of absorption and concentration levels of a generic product

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are substantially equivalent to the listed drug.  For some drugs (e.g., topical anti-fungals), other means of demonstrating bioequivalence may be required by the FDA, especially where rate and/or extent of absorption are difficult or impossible to measure.  In addition to the bioequivalence data, an ANDA must contain patent certifications, chemistry, manufacturing, labeling and stability data.

The Hatch-Waxman amendments also established certain statutory protections for listed drugs.  Under the Hatch-Waxman amendments, approval of an ANDA for a generic drug may not be made effective for interstate marketing until all relevant patents for the listed drug have expired or been determined to be invalid or not infringed by the generic drug.  Prior to enactment of the Hatch-Waxman amendments, the FDA did not consider the patent status of a previously approved drug.  In addition, under the Hatch-Waxman amendments, statutory non-patent exclusivity periods are established following approval of certain listed drugs, where specific criteria are met by the drug.  If exclusivity is applicable to a particular listed drug, the effective date of approval of ANDAs for the generic version of the listed drug is usually delayed until the expiration of the exclusivity period, which, for newly approved drugs, can be either three or five years.  The Hatch-Waxman amendments also provide for extensions of up to five years for certain patents covering drugs to compensate the patent holder for the reduction in the effective market life of the patented drug resulting from the time spent in the federal regulatory review process.

During 1995, patent terms for a number of listed drugs were extended when the Uruguay Round Agreements Act (the “URAA”) went into effect in order to implement the General Agreement on Tariffs and Trade (“GATT”) to which the United States became a treaty signatory in 1994.  Under GATT, the term of patents was established as 20 years from the date of patent application.  In the United States, the patent terms historically have been calculated at 17 years from the date of patent grant.  The URAA provided that the term of issued patents be either the existing 17 years from the date of patent grant or 20 years from the date of application, whichever was longer.  The effect generally was to extend the patent life of already issued patents, thus delaying FDA approvals of applications for generic products.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 streamlined the generic drug approval process by limiting a drug company to only one 30-month stay of a generic drug’s entry into the market for resolution of a patent challenge for ANDAs filed after August 18, 2003.  This rule was designed to help maintain a balance between the innovator companies’ intellectual property rights and the desire to allow generic drugs to be brought to the market in a timely fashion.

The FDA issued a final rule on June 18, 2003 (the “final rule”), clarifying the types of patents that innovators must submit for listing and prohibiting the submission of patents claiming packaging, intermediates or metabolite innovations.  Patents claiming a different polymorphic form of the active ingredient described in an NDA must be submitted if the NDA holder has test data demonstrating that the drug product containing the polymorph will perform in the same way as the drug product described in the NDA.  These changes are consistent with concerns raised in 2002 by the FTC in its report on generic drugs.  The final rule also clarifies the type of patent information that is required to be submitted and revises the declaration that NDA applicants must provide regarding their patents to help ensure that NDA applicants submit only appropriate patents.  

The final rule was intended to make the patent submission and listing process more efficient, as well as to enhance the ANDA and 505(b)(2) application (described below) approval process.  The changes were designed to enable consumers to save billions of dollars each year by making it easier for generic drug manufacturers to get safe and effective products on the market when the appropriate patent protection expires.

Section 505(b)(2) was added to the Federal Food, Drug, and Cosmetic Act by the Hatch-Waxman amendments.  This provision permits the FDA to rely, for approval of an NDA, on data not developed by the applicant.  A 505(b)(2) application must include identification of the listed drug for which the FDA has made a finding of safety and effectiveness and on which finding the applicant relies in seeking approval of its proposed drug product.  A 505(b)(2) application may rely on studies published in scientific literature or an FDA finding of safety and/or efficacy for an approved product for support, in addition to clinical studies performed by the applicant.

The approval of a 505(b)(2) application may result in three years of exclusivity under the Hatch-Waxman amendments if one or more of the clinical studies (other than bioavailability/bioequivalence studies) were essential to the approval of the application and was conducted by the applicant.  The approval of a 505(b)(2) application may result in five years of exclusivity if it is for a new chemical entity.  If appropriate under U. S. patent laws, 505(b)(2) NDAs are eligible for the FDA’s patent certification protection.  Such approvals have the potential to be delayed due to patent and exclusivity rights that apply to the listed drug.

Pricing Regulation

Successful commercialization of our products depends, in part, on the availability of governmental and third-party payor reimbursement for the cost of our products.  Government authorities and third-party payors increasingly are challenging the price of

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medical products and services.  On the government side, there is a heightened focus, at both the federal and state levels, on decreasing costs and reimbursement rates in Medicaid, Medicare and other government insurance programs.  This has led to an increase in federal and state legislative initiatives related to drug prices, which could significantly influence the purchase of pharmaceutical products, resulting in lower prices and changes in product demand.  With respect to the Medicaid program, certain proposed provisions of the Deficit Reduction Act of 2005 went into effect January 1, 2007, and a final rule went into effect as of October 1, 2007, that resulted in changes to certain formulas used to calculate pharmacy reimbursement under Medicaid (currently under a stay of execution).  If enacted, these changes could lead to reduced payments to pharmacies.  Many states have also created preferred drug lists and include drugs on those lists only when the manufacturers agree to pay a supplemental rebate.  If our current products or future drug candidates are not included on these preferred drug lists, physicians may not be inclined to prescribe them to their Medicaid patients, thereby diminishing the potential market for our products.

Moreover, government regulations regarding reporting and payment obligations are complex, and we are continually evaluating the methods we use to calculate and report the amounts owed with respect to Medicaid and other government pricing programs.  Our calculations are subject to review and challenge by various government agencies and authorities, and it is possible that any such review could result either in material changes to the method used for calculating the amounts owed to such agency or the amounts themselves.  Because the process for making these calculations, and our judgments supporting these calculations, involve subjective decisions, these calculations are subject to audit.  In the event that a government authority challenges or finds ambiguity with regard to our report of payments, such authority may impose civil and/or criminal sanctions, which could have a material adverse effect on our business.  From time to time we conduct routine reviews of our government pricing calculations.  These reviews may have an impact on government price reporting and rebate calculations used to comply with various government regulations regarding reporting and payment obligations.    

Fraud and Abuse Regulation

Pharmaceutical companies are subject to various federal and state laws relating to sales and marketing practices intended to combat health care fraud and abuse.  These include anti-kickback laws, false claims laws and FDA regulation of advertising and promotion of pharmaceutical products.  We have incurred and will continue to incur costs to comply with these laws.  While we intend to comply in all respects with fraud and abuse laws, there has been an increase in government enforcement efforts at both the federal and state level and, due to the breadth of regulation and the absence of guidance in some cases, it is possible that our practices might be challenged by government authorities.  Violations of fraud and abuse laws may be punishable by civil and/or criminal sanctions including fines, civil monetary penalties, as well as the possibility of exclusion from federal health care programs.  Any such violations could have a material adverse effect on our business.  

AWP Litigation

Many government and third-party payors reimburse the purchase of certain prescription drugs based on a drug’s Average Wholesale Price or “AWP.”  In the past several years, state and federal government agencies have conducted ongoing investigations of manufacturers’ reporting practices with respect to AWP, which they have suggested have led to excessive payments by state and federal government agencies for prescription drugs.  We, as well as numerous other pharmaceutical companies, were named as a defendant in various state and federal court actions alleging improper or fraudulent practices related to the reporting of AWP and additional actions are anticipated.  These actions, if successful, could have a material adverse effect on our business.  Refer to Item 3 – “Legal Proceedings” and Notes to Consolidated Financial Statements - Note 16 – “Commitments, Contingencies and Other Matters” for further information.

Drug Pedigree Laws

State and federal governments have proposed or passed various drug pedigree laws which can require the tracking of all transactions involving prescription drugs from the manufacturer to the pharmacy (or other dispensing) level.  Companies are required to maintain records documenting the chain of custody of prescription drug products beginning with the purchase of such products from the manufacturer.  Compliance with these pedigree laws requires implementation of extensive tracking systems as well as heightened documentation and coordination with customers and manufacturers.  While we fully intend to comply with these laws, there is uncertainty about future changes in legislation and government enforcement of these laws.  Failure to comply could result in fines or penalties, as well as loss of business that could have a material adverse effect on our financial results.

Federal Regulation of Authorized Generic Arrangements

As part of the Medicare Prescription Drug Improvement and Modernization Act of 2003, companies are required to file with the FTC and the Department of Justice certain types of agreements entered into between brand and generic pharmaceutical companies related to the manufacture, marketing and sale of generic versions of brand drugs.  This requirement could affect the manner in which generic drug manufacturers resolve intellectual property litigation and other disputes with brand pharmaceutical companies, and could result generally in an increase in private-party litigation against pharmaceutical companies or additional investigations or proceedings by the FTC or other governmental authorities.  Additionally, provisions in the Affordable Health Care for America Act H.R. 3962 that would limit Hatch-Waxman patent litigation settlements to generic drug entry dates and attorneys’ fees for the litigation parties

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(should it survive reconciliation with the pending Senate Bill, H.R. 3590) could also materially affect the ability for generic drug manufacturers to secure authorized generic agreements and resolve intellectual property litigation and other disputes with brand pharmaceutical companies generally.

Other

In addition to the U.S. federal government, various states and localities have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic drugs for brand name drugs.  Our operations are also subject to regulation, licensing requirements and inspection by the states and localities in which our operations are located and/or in which we conduct business.

Certain of our activities are also subject to FTC enforcement actions.  The FTC enforces a variety of antitrust and consumer protection laws designed to ensure that the nation’s markets function competitively, are vigorous, efficient and free of undue restrictions.    

We also are governed by federal and state laws of general applicability, including laws regulating matters of environmental quality, working conditions, health and safety, and equal employment opportunity.

INFORMATION TECHNOLOGY

Our Information Technology (“IT”) contributes state-of-the-industry infrastructure for reliable and compliant operations, business-driven solutions that align with our objectives for profitable growth and innovative ideas bound to business performance and efficiency goals.  Our IT department is organized into three departments:  Business Applications, Technology Operations, and Scientific Systems.  Each department maintains its own development, implementation and support teams.  

The Business Applications department purchases, develops, and maintains business applications systems jointly with internal departments.  This department follows industry best practices in project management, systems development life cycle, change management, account management, computer systems validation, and data archiving.  The major Business Applications systems are as follow:

· Oracle JDEdwards Enterprise Resource Planning, including Financials, Supply Chain / Logistics and Manufacturing

· Hyperion Financials

· Model N Revenue Management

· IBM Sterling GIS Electronic Data Interchange

The Technology Operations department purchases, develops, and maintains technical infrastructure systems that enable reliable and efficient business operations.  This department follows industry best practices in capacity planning, configuration management, incident/problem prevention and management, disaster recovery, data backup and restoration, data center operations, and security management.  The major Technology Operations areas are as follow:

· Electronic mail and messaging

· Multiple data centers, network and telecommunications operations

· Authentication, network security and anti-virus measures

· Personal computer and device management

· Internet portals, SharePoint and Web services

· Document management and eDiscovery

The Scientific Systems department purchases, develops, and maintains systems that support Quality Control, Regulatory, and Manufacturing operations.  This department follows industry best practices in GxP compliance, project management, systems development life cycle, change management, computer systems validation, and data archiving.  The major Scientific Systems are as follow:

· IBM SCORE Electronic Submissions

· Waters Empower Data Acquisition

· Labware LIMS

· TrackWise Compliance Tracking 

· Human Resources – PeopleSoft system

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COMPANY STRENGTHS AND STRATEGIES

Our goal is to successfully manage both our generic and branded businesses for the long term.  We are striving to achieve sustainable long-term growth with enhanced profitability and improved cash flow.  

Par Pharmaceutical:  Developing and Marketing Higher-Margin Generic Pharmaceuticals

Our generic pipeline included approximately 29 products awaiting FDA approval, which include 11 confirmed first-to-file and three potential first-to-market product opportunities as of December 31, 2010.  In recent years, we introduced generic versions of several major pharmaceutical products, including Toprol-XL^®, Flonase^®, Imitrex^®, Inderal LA^®, Ultram^® ER and Catapres TTS^®.  

Par Pharmaceutical is focused on developing products with limited competition, significant barriers to entry and longer life cycles.  Our success is also predicated on business development, including in-licensing, alliances and acquisitions, and cost efficiencies derived from global sourcing initiatives and operations.  

Strativa Pharmaceuticals:  Building a Branded Pharmaceutical Business Focused on Specialty Markets

In 2005, we received approval for and introduced Megace^® ES, our first branded pharmaceutical product.  On March 31, 2009, we acquired the rights to Nascobal^® and began marketing Nascobal^® in the second quarter of 2009.  On April 16, 2010, the FDA approved Oravig^TM and we launched the product in the third quarter of 2010.  On July 2, 2010, the FDA approved Zuplenz^® and we launched the product in the fourth quarter of 2010.  We currently anticipate that the near term growth of Strativa will be based largely on focusing on the sales and marketing efforts behind our current brand products.  In the longer term, we will continue to consider strategic product or business acquisitions or licensing arrangements to expand Strativa’s brand product line in supportive care and adjacent commercial areas.  

ITEM 1A.  Risk Factors

The pharmaceutical industry is a fast-paced, highly competitive environment with many factors that influence the ability of a company to successfully commercialize a product.  Many of these factors are beyond our control and are, therefore, difficult to predict.  The following section sets forth the principal risks to our business activities and condition (financial or otherwise) and prospects.  These risks, along with others, have the potential to materially and adversely affect our business, financial position, results of operations and prospects.

Risks Related to Our Business

If we are unable to successfully develop or commercialize new products, our operating results will suffer.

Developing and commercializing a new product is time consuming, costly and subject to numerous factors that may delay or prevent development and commercialization.  Our future results of operations will depend to a significant extent upon our ability to successfully commercialize new brand and generic products in a timely manner.  There are numerous difficulties in developing and commercializing new products, including:

• the ability to develop and manufacture products in compliance with regulatory standards in a timely manner;

•  the success of the clinical testing process to assure that new products are safe and effective;

•  the risk that any of our products presently under development, if and when fully developed and tested, will not perform as expected;

•  the ability to obtain requisite regulatory approvals for such products in a timely manner;

•  the availability, on commercially reasonable terms, of raw materials, including active pharmaceutical ingredients and other key ingredients;

•  legal actions against our generic products brought by brand competitors, and legal challenges to our intellectual property rights brought against our brand products by generic competitors;

•  delays or unanticipated costs, including delays associated with the FDA listing and/or approval process; and

•  our ability to avoid infringing our competitors’ intellectual property rights.

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As a result of these and other difficulties, products currently in development may or may not receive necessary regulatory approvals on a timely basis or at all.  This risk exists particularly with respect to the development of branded products because of the uncertainties, higher costs and lengthy time frames associated with research and development of such products and the inherent unproven market acceptance of such products.  If any of our products, when acquired or developed and approved, cannot be successfully or timely commercialized, our operating results could be adversely affected.  We cannot guarantee that any investment we make in developing products will be recouped, even if we are successful in commercializing those products.

If we fail to obtain exclusive marketing rights for our generic pharmaceutical products or fail to introduce these generic products on a timely basis, our revenues, gross margin and operating results may decline significantly.

The Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act provide for a period of 180 days of generic marketing exclusivity for any applicant that is first to file an abbreviated new drug application (“ANDA”) containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to the corresponding brand drug (commonly referred to as a “Paragraph IV certification”).   The holder of an approved ANDA containing a Paragraph IV certification that is successful in challenging the applicable brand drug patent(s) is often able to price the applicable generic drug to yield relatively high gross margins during this 180-day marketing exclusivity period.  At various times in the past, a large portion of our revenues have been derived from the sales of generic drugs during such 180-day marketing exclusivity period and from the sale of other generic products for which there otherwise is limited competition.  ANDAs that contain Paragraph IV certifications challenging patents, however, generally become the subject of patent litigation that can be both lengthy and costly.  In addition, there is no certainty that we will prevail in any such litigation or that we will be the first to file and granted the 180-day marketing exclusivity period, and even where we are awarded marketing exclusivity, we may be required to share our exclusivity period with other ANDA applicants who submit Paragraph IV certifications.  Furthermore, timely commencement of the litigation by the patent owner imposes an automatic stay of ANDA approval by the FDA for up to 30 months, unless the case is decided in the ANDA applicant’s favor during that period.  Finally, if the court decision is adverse to the ANDA applicant, the ANDA approval will be delayed until the challenged patent expires, and the applicant will not be granted the 180-day marketing exclusivity.

The majority of our revenues are generated by our generic products division.  Our future profitability depends, to a significant extent, upon our ability to introduce, on a timely basis, new generic products that are either the first to market (or among the first to market) or that otherwise can gain significant market share.  The timeliness of our products is dependent upon, among other things, the timing of regulatory approval of our products, which to a large extent is outside of our control, as well as the timing of competing products.  As additional distributors introduce comparable generic pharmaceutical products, price competition intensifies, market access narrows, and product sales prices and gross margins decline, often significantly and rapidly.  Accordingly, our revenues and future profitability are dependent, in large part, upon our ability or the ability of our development partners to file ANDAs with the FDA timely and effectively or to enter into contractual relationships with other parties that have obtained marketing exclusivity.  No assurances can be given that we will be able to develop and introduce successful products in the future within the time constraints necessary to be successful.  If we or our development partners are unable to continue to timely and effectively file ANDAs with the FDA or to partner with other parties that have obtained marketing exclusivity, our revenues, gross margin and operating results may decline significantly, and our prospects and business may be materially adversely affected.

We face intense competition in the pharmaceutical industry from brand name and generic distributors, which could significantly limit our growth and materially adversely affect our financial results.

The pharmaceutical industry is highly competitive.  Many of our competitors have longer operating histories and greater financial, research and development, marketing and other resources than we do.  Consequently, many of our competitors may be able to develop products and/or processes competitive with, or superior to, our own.  Furthermore, we may not be able to differentiate our products from those of our competitors; to successfully develop or introduce new products – on a timely basis or at all – that are less costly than those of our competitors; or to offer customers payment and other commercial terms as favorable as those offered by our competitors.  The markets in which we compete and intend to compete are undergoing, and are expected to continue to undergo, rapid and significant change.  We expect competition to intensify as technological advances and consolidations continue.  New developments by other manufacturers and distributors could render our products uncompetitive or obsolete.

We believe that our principal generic competitors are Teva Pharmaceutical Industries, Mylan Laboratories, Sandoz Pharmaceuticals, and Watson Pharmaceuticals.  These companies, among others, collectively compete with the majority of our products.  We also face price competition generally as other generic manufacturers enter the market, and as a result of consolidation among wholesalers and retailers and the formation of large buying groups.  Any of these factors, in turn, could result in reductions in our sales prices and gross margin.  This price competition has led to an increase in customer demands for downward price adjustments by generic pharmaceutical distributors.  Our principal strategy in addressing our competition is to offer customers a consistent supply of a broad line of generic drugs.  There can be no assurance, however, that this strategy will enable us to compete successfully in the industry or that we will be able to develop and implement any new or additional viable strategies.

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Competition in the generic drug industry has also increased due to the proliferation of authorized generic pharmaceutical products.  “Authorized generics” are generic pharmaceutical products that are introduced by brand companies, either directly or through partnering arrangements with other generic companies.  Authorized generics are equivalent to the brand companies’ brand name drugs, but are sold at relatively lower prices than the brand name drugs.  An authorized generic product is not prohibited from sale during the 180-day marketing exclusivity period granted to the first generic manufacturer to receive regulatory approval with a Paragraph IV certification in respect to the applicable brand product.  The sale of authorized generics adversely impacts the market share of a generic product that has been granted 180 days of marketing exclusivity.  This is a significant source of competition for us, because brand-name companies do not face any regulatory barriers to introducing a generic version of their brand products.  Because authorized generics may be sold during our marketing exclusivity period, they can materially decrease the profits that we could receive as an otherwise exclusive marketer of a product.  Such actions have the effect of reducing the potential market share and profitability of our generic products and may inhibit us from developing and introducing generic pharmaceutical products corresponding to certain brand name drugs.

As our competitors introduce their own generic equivalents of our generic pharmaceutical products, our revenues and gross margin from such products generally decline, often rapidly.

Revenues and gross margin derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that we believe are unique to the generic pharmaceutical industry.  As the patent(s) for a brand name product and the statutory marketing exclusivity period (if any) expires, the first generic manufacturer to receive regulatory approval for a generic equivalent of the product often is able to capture a substantial share of the market.  However, as other generic manufacturers receive regulatory approvals for competing products, that market share, and the price of that product, will typically decline depending on several factors, including the number of competitors, the price of the brand product and the pricing strategy of the new competitors.   We cannot provide assurance that we will be able to continue to develop such products or that the number of competitors with such products will not increase to such an extent that we may stop marketing a product for which we previously obtained approval, which will have a material adverse impact on our revenues and gross margin.

The use of legal, regulatory and legislative strategies by brand name competitors, including authorized generics and citizen’s petitions, as well as the potential impact of proposed legislation, may increase our costs associated with the introduction or marketing of our generic products, delay or prevent such introduction and/or significantly reduce the profit potential of our products.

Our brand name competitors often pursue strategies that may serve to prevent or delay competition from generic alternatives to their brand products.  These strategies include, but are not limited to:

•      entering into agreements with our generic competitors to begin marketing an authorized generic version of a brand name product at the same time that we introduce a generic equivalent of that product;

•      filing “citizen’s petitions” with the FDA, including timing the filings so as to thwart generic competition by causing delays of our product approvals;

•      seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate a generic product’s bioequivalence and/or “sameness” to the related brand name product;

•     initiating legislative and administrative efforts in various states to limit the substitution of generic versions of brand pharmaceutical products for the related brand name products;

•      filing suits for patent infringement that automatically delay FDA approval of generic products;

•      introducing “next-generation” products prior to the expiration of market exclusivity for the brand name product, which often materially reduces the demand for the generic product for which we may be seeking FDA approval;

•      obtaining extensions of market exclusivity by conducting clinical trials of brand drugs in pediatric populations or by other potential methods as discussed below;

•      persuading the FDA to withdraw the approval of brand name drugs for which the patents are about to expire, thus allowing the brand name company to develop and launch new patented products serving as substitutes for the withdrawn products;

•      seeking to obtain new patents on drugs for which patent protection is about to expire;

•     seeking temporary restraining orders and injunctions against a generic company that has received final FDA approval for a product and is attempting to launch “at risk” prior to resolution of related patent litigation;

•      reducing the marketing of the brand product to healthcare providers, thereby reducing the brand drug's commercial exposure and market size, which in turn adversely affects the market potential of the equivalent generic product; and

•      converting brand prescription drugs that are facing potential generic competition to over-the-counter products, thereby significantly impeding the growth of the generic market for the drugs.

The Food and Drug Modernization Act of 1997 includes a pediatric exclusivity provision that may provide an additional six months of market exclusivity for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed

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by the applicant.  Brand companies are utilizing this provision to extend periods of market exclusivity.  Some companies have lobbied Congress for amendments to the Hatch-Waxman legislation that would give them additional advantages over generic competitors.  For example, although the term of a company’s drug patent can be extended to reflect a portion of the time an NDA is under regulatory review, some companies have proposed extending the patent term by a full year for each year spent in clinical trials, rather than the one-half year that is currently permitted.  If proposals like these were to become effective, our entry into the market and our ability to generate revenues associated with new generic products may be delayed, reduced or eliminated, which could have a material adverse effect on our business.

FDA policy and guidance may result in our generic products not being able to utilize fully the 180-day marketing exclusivity period, which would adversely affect our results of operations.

In March 2000, the FDA issued a new policy and guidance document regarding the timing of approval of ANDAs following court decisions on patent infringement and validity and the start of the 180-day marketing exclusivity period described above.  As a result of this FDA policy and guidance document and other relevant litigation, we may not be able to utilize all or any portion of any 180-day marketing exclusivity period on ANDA products on which we were first to file with a Paragraph IV certification, depending on the timing and results of court decisions in patent litigation (either our litigation or another ANDA applicant’s litigation), which could adversely affect our results of operations and future profitability.  The Medicare Prescription Drug Improvement and Modernization Act of 2003 also changed the scope and timing of some ANDA approvals and the start of the 180-day marketing exclusivity period after a court decision.  We are presently unable to predict the magnitude of the impact, if any, the FDA’s current policy may have on our business, prospects or financial condition.  Any inability to use fully the 180-day marketing exclusivity period for any of our products, however, will adversely affect our results of operations.

Due to our dependence on a limited number of products, our business will be materially adversely affected if these products do not perform as well as expected.

We generate a significant portion of our total revenues and gross margin from the sale of a limited number of products.  For the year ended December 31, 2010, our top selling products, metoprolol, meclizine hydrochloride, clonidine, sumatriptan succinate injection, dronabinol, tramadol ER, omeprazole, cabergoline, Nascobal^® and Megace^® ES, accounted for approximately 79% of our total net revenues and a significant portion of our gross margin.  Any material adverse developments, including increased competition and supply shortages, with respect to the sale or use of these products, or our failure to successfully introduce other key products, could have a material adverse effect on our revenues and gross margin.

Our profitability depends on our major customers.  If these relationships do not continue as expected, our business, condition (financial and otherwise), prospects and results of operation could materially suffer.

We have approximately 110 customers, some of which are part of larger buying groups.  In 2010, our three largest customers in terms of net sales dollars accounted for approximately 51% of our total revenues, as follows: McKesson Drug Co. (20%), Cardinal Health, Inc. (16%), and AmerisourceBergen Corporation (15%).  In 2009, our three largest customers in terms of net sales dollars accounted for approximately 45% of our total revenues, as follows: McKesson Drug Co. (16%), CVS Caremark (15%), and AmerisourceBergen Corporation (14%).  The loss of any one or more of these customers or the substantial reduction in orders from any one or more of a major customer could have a material adverse effect upon our future operating results and financial condition.

Our ability to market successfully any product depends, in large part, upon the acceptance of the product by third parties over which we have no control.

Our ability to market successfully any generic or branded pharmaceutical product depends, in large part, upon the acceptance of the product by third parties, including physicians, pharmacies, government formularies and other retailers, and patients.  Therefore, our success will depend in large part on third-party acceptance of our branded products, and on our ability to convince such third parties that our generic versions of brand name products are manufactured as safely and with the same efficacy as their brand name counterparts or other generic equivalents.  In addition, because some of our generic products are manufactured in different forms than their brand name counterparts (e.g., tablet versus capsule), we sometimes must also convince third parties to accept a product in a form different from what they are accustomed to.

We depend on distribution and marketing agreements, and any failure to maintain these arrangements or enter into similar arrangements with new partners could result in a material adverse effect.

We have broadened our product line by entering into distribution and marketing agreements, as well as contract manufacturing agreements, through which we distribute generic pharmaceutical products manufactured by others.  We have entered into distribution agreements with several companies to develop, distribute and promote such generic pharmaceutical products.  For the

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year ended December 31, 2010, approximately 71% of our total net product sales were generated from products manufactured under contract or under license.  We cannot provide assurance that the manufacturing efforts of our contractual partners will continue to be successful, that we will be able to renew such agreements or that we will be able to enter into new agreements for additional products.  Any alteration to or termination of our current material distribution and marketing agreements, any failure to enter into new and similar agreements, or interruption of our product supply under the distribution and marketing agreements, could materially adversely affect our business, condition (financial and otherwise), prospects or results of operations.  

Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions.  Any determination that we have failed to comply with those obligations could subject us to penalties and sanctions, which could have a material adverse effect.

The regulations regarding reporting and payment obligations with respect to Medicaid reimbursement and rebates and other governmental programs are complex and, as discussed elsewhere in this Annual Report on Form 10-K, we and other pharmaceutical companies are defendants in a number of suits filed by state attorneys general and have been notified of an investigation by the U.S. Department of Justice with respect to Medicaid reimbursement and rebates.  Our calculations and methodologies are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in material changes.  In addition, because our processes for these calculations and the judgments involved in making these calculations involve, and will continue to involve, subjective decisions and complex methodologies, these calculations are subject to the risk of errors.  

Any governmental agencies that have commenced (or that may commence) an investigation of our company could impose, based on a claim of violation of fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties and possible exclusion from federal health care programs (including Medicaid and Medicare).  Some of the applicable laws may impose liability even in the absence of specific intent to defraud.  Furthermore, should there be ambiguity with regard to how to properly calculate and report payments, and even in the absence of any such ambiguity, a governmental authority may take a position contrary to a position that we have taken and may impose civil and/or criminal sanctions on us.  Any such penalties or sanctions could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

From time to time we conduct routine reviews of our government pricing calculations.  These reviews may have an impact on government price reporting and rebate calculations used to comply with various government regulations regarding reporting and payment obligations.

Healthcare reform and a reduction in the reimbursement levels by governmental authorities, HMOs, MCOs or other third-party payers may adversely affect our business.

In order to assist us in commercializing products, we have obtained from governmental authorities and private health insurers and other organizations, such as health maintenance organizations (HMOs) and managed care organizations (MCOs), authorization to receive reimbursement at varying levels for the cost of certain products and related treatments.  Third party payers increasingly challenge pricing of pharmaceutical products.  The trend toward managed healthcare in the United States, the growth of organizations such as HMOs and MCOs, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand.  

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law on March 23, 2010 and March 30, 2010, respectively.  These laws are referred to herein as “healthcare reform.”  A number of provisions of the healthcare reform laws will have a negative impact on the price of our products sold to U.S. government entities.  As examples, the current legislation include measures that would (i) significantly increase Medicaid rebates through both the expansion of the program and significant increases in rebates; (ii) substantially expand the Public Health System (340B) program to allow other entities to purchase prescription drugs at substantial discounts; (iii)  extend the Medicaid rebate rate to a significant portion of Managed Medicaid enrollees; (iv) assess a 50% rebate on Medicaid Part D spending in the coverage gap for branded and authorized generic prescription drugs; and (v) levy a significant excise tax on the industry to fund the healthcare reform.  Such cost containment measures and healthcare reform could affect our ability to sell our products and may have a material adverse effect on our business, results of operations and financial condition.  

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Most state Medicaid programs have established preferred drug lists, and the process, criteria and timeframe for obtaining placement on the preferred drug list varies from state to state.  Under the Medicaid drug rebate program, a manufacturer must pay a rebate for Medicaid utilization of a product.  The rebate for single source products (including authorized generics) is based on the greater of (i) a specified percentage of the product’s average manufacturer price or (ii) the difference between the product’s average manufacturer price and the best price offered by the manufacturer.  The rebate for multiple source products is a specified percentage of the product’s average manufacturer price.  In addition, many states have established supplemental rebate programs as a condition for including a drug product on a preferred drug list.  The profitability of our products may depend on the extent to which they appear on the preferred drug lists of a significant number of state Medicaid programs and the amount of the rebates that must be paid to such states.  In addition, there is significant fiscal pressure on the Medicaid program, and amendments to lower the pharmaceutical costs of the program are possible.  Such amendments could materially adversely affect our anticipated revenues and results of operations.

Due to the uncertainties regarding the outcome of future healthcare reform initiatives and their enactment and implementation, we cannot predict which, if any, of the future reform proposals will be adopted or the effect such adoption may have on us.  Additionally, future healthcare legislation could also have a significant impact on our business.  

Implementation of healthcare reform and changes in the health care regulatory environment may adversely affect our business.

A number of the provisions of the healthcare reform laws require rulemaking action by governmental agencies to be implemented, which has not yet occurred.  The laws change access to health care products and services and create new fees for the pharmaceutical and medical device industries, some of which are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Overview – Healthcare Reform Impacts.”  Future rulemaking could increase rebates, reduce prices or the rate of price increases for health care products and services, or require additional reporting and disclosure.  We cannot predict the timing or impact of any future rulemaking.

Due to extensive regulation and enforcement in the pharmaceutical industry, we face significant uncertainties and potentially significant costs associated with our efforts to comply with applicable regulations.  Failure to comply could result in material adverse effects to our business, financial position and results of operations, and the market value of our common stock could decline.

The pharmaceutical industry is subject to regulation by various governmental authorities at the federal, state and local levels with respect to the development, manufacture, labeling, sale, distribution, marketing, advertising and promotion of pharmaceutical products.  Failure to comply with governmental regulations can result in fines, disgorgement of profits, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of NDAs or ANDAs, enforcement actions, injunctions and criminal prosecution.  Although we have developed compliance programs to address the regulatory environment, there is no guarantee that these programs will meet regulatory agency standards now or in the future.  Additionally, despite our efforts at compliance, there is no guarantee that we may not be deemed to be deficient in some manner in the future.  If we are deemed to be deficient in any significant way, our business, financial position and results of operations could be materially affected, and the market value of our common stock could decline.

Our brand pharmaceutical expenditures may not result in commercially successful products.

Commercializing brand pharmaceutical products is more costly than generic products.  We have made significant investments in the development of the brand segment of our business, Strativa Pharmaceuticals.  This has led to increased infrastructure costs.  We cannot be certain that these business expenditures will result in the successful development or launch of brand products that will prove to be commercially successful or will improve the long-term profitability of our business.  

Just as we compete against companies selling branded products when we sell generic products, we will confront the same competitive pressures from other generic pharmaceutical companies when we sell our branded products.  Specifically, generic

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products are generally sold at a significantly lower cost than the branded version, and, where available, may be required or encouraged in preference to the branded version under third party reimbursement programs, or substituted by pharmacies for branded versions by law.  Competition from generic equivalents, accordingly, could have an adverse effect on our Strativa segment.

We continue to consider product or business acquisitions or licensing arrangements to expand our brand product line.  Any growth of the Strativa segment will be based largely on the successful commercialization of our existing products and the acquisition or in-licensing of new product opportunities.  Our current and future investments in acquisition or license arrangements may not lead to expected, adequate or any returns on investment.  For example, in 2007 and 2008, we invested in license arrangements for five products under development, and the development programs for two of the five have been terminated unsuccessfully (pafuramidine maleate as of February 2008 and Onconase^® as of September 2009).  Additionally, a third product under development (Zensana^TM) did not achieve bioequivalence to the reference drug in all studies in 2009.  In addition, we also may not be able to execute future license agreements on reasonable or favorable terms in order to continue to grow or sustain our brand business segment.  

Strativa relaunched Nascobal^® in the second quarter of 2009, launched Oravig^TM in the third quarter of 2010 and launched Zuplenz^® in the fourth quarter of 2010.  We cannot be certain that our brand product expenditures will result in commercially successful launches of these products or will improve the long-term profitability of Strativa.  To the extent that any of these launches do not meet current expectations, we may be required to write-down assets specifically related to these products.  

We expend a significant amount of resources on research and development, including milestones on in-licensed products, which may not lead to successful product introductions.  

Much of our development effort is focused on technically difficult-to-formulate products and/or products that require advanced manufacturing technology.  We expend resources on research and development primarily to enable us to manufacture and market FDA-approved pharmaceuticals in accordance with FDA regulations.  Typically, research expenses related to the development of innovative compounds and the filing of NDAs are significantly greater than those expenses associated with ANDAs.  We have entered into, and may in the future enter into, additional agreements that require us to make significant milestone payments upon achievement of various research and development events and regulatory approvals.  As we continue to develop and in-license new products, we will likely incur increased research and licensing expenses.  

Because of the inherent risk associated with research and development efforts in the industry, particularly with respect to new drugs, our research and development expenditures may not result in the successful introduction of FDA-approved new pharmaceutical products.  Also, after we or our development partners submit an ANDA or NDA, the FDA may request that we conduct additional studies.  As a result, we may be unable to reasonably determine the total research and development costs required to develop a particular product.  Finally, we cannot be certain that any investment made in developing products will be recovered, even if we are successful in commercialization.  To the extent that we expend significant resources on research and development efforts and are not ultimately able to introduce successful new products as a result of those efforts, our business, financial position and results of operations may be materially adversely affected, and the market value of our common stock could decline.

The testing required for the regulatory approval of our products is conducted by independent third parties.  Any failure by any of these third parties to perform this testing properly and in a timely manner may have an adverse effect upon our ability to obtain regulatory approvals.

Our applications for the regulatory approval of our products, including in-licensed products, incorporate the results of testing and other information that is conducted or gathered by independent third parties (including, for example, manufacturers of raw materials, testing laboratories, contract research organizations or independent research facilities).  Our ability to obtain regulatory approval of the products being tested is dependent upon the quality of the work performed by these third parties, the quality of the third parties’ facilities, and the accuracy of the information provided by third parties.  We have little or no control over any of these factors.  If this testing is not performed properly, our ability to obtain regulatory approvals could be restricted or delayed.

We may make acquisitions of, or investments in, complementary businesses or products, which may be on terms that are not commercially advantageous, may require additional debt or equity financing, and may involve numerous risks, including the risks that we may be unable to integrate the acquired business successfully and that we may assume liabilities that adversely affect us.

We regularly review the potential acquisition of technologies, products, product rights and complementary businesses.  We may choose to enter into such transactions at any time.  Nonetheless, we cannot provide assurance that we will be able to identify suitable acquisition or investment candidates.  To the extent that we do identify candidates that we believe to be suitable, we cannot provide assurance that we will be able to make such acquisitions or investments on commercially advantageous terms or at all.  

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If we make any acquisitions or investments, we may finance such acquisitions or investments through our cash reserves, debt financing, or by issuing additional equity securities, which could dilute the holdings of our then-existing stockholders.  If we require financing, we cannot provide assurance that we will be able to obtain required financing when needed on acceptable terms or at all.  Any such acquisitions or investments could also result in an increase in goodwill, intangible assets and amortization expenses that could ultimately negatively impact our profitability.   If the fair value of our goodwill or intangible assets is determined at some future date to be less than its recorded value, a charge to earnings may be required.  Such a charge could be in an amount that is material to our results of operations and net worth.

Additionally, acquisitions involve numerous risks, including difficulties in assimilating the personnel, operations and products of the acquired companies, the diversion of management’s attention from other business concerns, risks of entering markets in which we have limited or no prior experience, and the potential loss of key employees of the acquired company.  There may be overlap between our products or customers and those of an acquired entity that may create conflicts in relationships or other commitments detrimental to the integrated businesses.  As a result of acquiring businesses, we may incur significant transaction costs, including substantial fees for investment bankers, attorneys, accountants and financial printing.  Any acquisition could result in our assumption of unknown and/or unexpected, perhaps material liabilities.  Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect us, and liabilities resulting from any breaches could exceed negotiated indemnity limitations.

A significant number of our products are produced at one location that could experience business interruptions, which could have a material adverse effect on our business, financial position and results of operations.  

We produce all of our internally manufactured products at a single manufacturing facility.  A significant disruption at that facility, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.  

We may experience declines in the sales volume and prices of our products as a result of the continuing trend of consolidation of certain customer groups, which could have a material adverse effect on our business, financial position and results of operations.

We make a significant amount of our sales to a relatively small number of drug wholesalers and retail drug chains.  These customers represent an essential part of the distribution chain of our pharmaceutical products.  Drug wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation.  This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business.  Additionally, the emergence of large buying groups representing independent retail pharmacies and other drug distributors, and the prevalence and influence of managed care organizations and similar institutions, potentially enable those groups to demand larger price discounts on our products.  The result of these developments may have a material adverse effect on our business, financial position and results of operations.

We may experience significant inventory losses related to “at risk” product launches, which could have a material adverse effect on our business, financial position and results of operations.

There are situations in which we may make business and legal judgments to market and sell products that are subject to claims of alleged patent infringement prior to final resolution of those claims by the courts, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our marketing and sale of such products.  This is referred to in the pharmaceutical industry as an “at risk” launch.  The risk involved in an at risk launch can be substantial because, if a patent holder ultimately prevails against us, the remedies available to such holder may include, among other things, damages measured by the profits lost by the patent holder, which can be significantly higher than the profits we make from selling the generic version of the product.  We could face substantial damages from such adverse court decisions.  We could also be at risk for the value of such inventory that we are unable to market or sell.  

Our operating results are affected by many factors and may fluctuate significantly on a quarterly basis.

Our operating results may vary substantially from quarter to quarter.  Revenues for any given period may be greater or less than revenues in the immediately preceding period or in the comparable period of the prior year.  Factors that may cause quarterly results to vary include, but are not limited to, the following:

•  the amount of new product introductions;

• losses related to inventory write-offs prior to product launch;

•  marketing exclusivity, if any, which may be obtained on certain new products;

•  the level of competition in the marketplace for certain products;

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•    our ability to create demand in the marketplace for our branded products;

•    availability of raw materials and finished products from suppliers;

•    our ability to internally manufacture products at our manufacturing facility;

•    the scope and outcome of governmental regulatory actions;

•    the dependence on a small number of products for a significant portion of net revenue or income;

•    legal actions against our generic products brought by brand competitors, and legal challenges to our intellectual property rights brought against our brand products by generic competitors;

•    price erosion and customer consolidation; and

•    significant payments (such as milestones) payable by us under collaboration, licensing, and development agreements to our partners before the related product has received FDA approval.

The profitability of our product sales is also dependent upon the prices we are able to charge for our products, the costs to purchase products from third parties, and our ability to manufacture our products in a cost-effective manner.  If our revenues decline or do not grow as anticipated, we may not be able to reduce our operating expenses to offset such declines.  Failure to achieve anticipated levels of revenues could, therefore, significantly harm our operating results for a particular fiscal period.

In certain circumstances, we issue price adjustments and other sales allowances to our customers.  Although we establish reserves based on our estimates of these amounts, if estimates are incorrect and the reserves are inadequate, it may result in adjustments to these reserves that may have a material adverse effect on our financial position and results of operations.

As described above, the first company to file an ANDA containing a Paragraph IV certification that successfully challenges the patent(s) on a brand product may be granted 180 days of generic market exclusivity by the FDA for that generic product.  At the expiration of such exclusivity period, other generic distributors may enter the market, resulting in a significant price decline for the drug (in some instances, price declines have exceeded 90%).  When we experience price declines following a period of generic marketing exclusivity, we may at our discretion provide price adjustments to our customers for the difference between our new (lower) price and the price at which we previously sold the product which is still held in inventory by our customers.  There are also circumstances under which we may decide not to provide price adjustments to certain customers, and consequently, as a matter of business strategy, we may risk a greater level of sale returns of products in the customer’s existing inventory and lose future sales volume to competitors rather than reduce our pricing.

We establish reserves for chargebacks, rebates and incentives, other sales allowances, and product returns at the time of sale, based on estimates.  Although we believe our reserves are adequate as of the date of this report, we cannot provide assurances that our reserves will ultimately prove to be adequate.  Increases in sales allowances may exceed our estimates due to a variety of reasons, including unanticipated competition or an unexpected change in one or more of our contractual relationships.  We will continue to evaluate the effects of competition and will record a price adjustment reserve if and when we deem it necessary.  Any failure to establish adequate reserves with respect to sales allowances may result in a material adverse effect on our financial position and results of operations.

We are subject to pending litigations in connection with the restatement of certain of our financial statements for prior periods that will likely divert substantial amounts of management time from our operations and could result in significant expense and liabilities.

We and certain of our former executive officers have been named as defendants in several purported stockholder class action lawsuits filed on behalf of purchasers of our common stock between April 29, 2004 and July 5, 2006.  The lawsuits followed our July 5, 2006 announcement regarding the restatement of certain of our financial statements and allege that we and certain members of our then management engaged in violations of the Securities Exchange Act of 1934, as amended, by issuing false and misleading statements concerning our financial condition and results of operations.  We intend, and each of the individuals named as a defendant has stated an intention, to vigorously defend against these allegations.  The outcome and consequences of these actions are inherently uncertain.  Such litigation is often costly and time-consuming, and could result in an adverse impact on our business, results of operations, financial position and cash flows.  The defense of any such action or investigation will likely cause the diversion of management’s attention and resources, and we may be required to pay damages if any such proceedings are not resolved in our favor.  Further, any litigation or regulatory proceedings, even if resolved in our favor, could cause us to incur significant legal and other expenses, including modifying or adopting new controls and procedures.  Such events could harm our business, affect our ability to raise capital, and adversely affect the trading price of our securities.

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If we fail to maintain our internal controls over financial reporting, current stockholders and potential investors could lose confidence in our financial reporting, which would harm our business prospects and the trading price of our stock.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of each fiscal reporting period.  Management concluded that our internal controls over financial reporting were effective as of December 31, 2010.  However, failure to maintain the existing effective control structure could impact our evaluations in future periods.

We have had a recent history of material weaknesses in our internal controls over financial reporting as identified in 2006 and 2007 Annual Reports on Form 10-K.  If we fail to maintain our improvements in internal controls over financial reporting, we could fail to meet our reporting obligations, including by issuing financial statements in future periods that contain errors.  The failure to maintain our improvements in internal controls over financial reporting also could cause investors to lose confidence in our reported financial information and possibly have a negative impact on the trading price of our securities and could lead to additional litigation claims and/or regulatory proceedings against us.  The defense of any such claims or proceedings may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor.  Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses.  Such events could harm our business, negatively affect our ability to raise capital and adversely affect the trading price of our securities.

Risks Common to Our Industry

Litigation is common in our industry, can be protracted and expensive, and could delay and/or prevent entry of our products into the market, which could have a material adverse effect on our business.

Litigation concerning patents and branded rights can be protracted and expensive.  Pharmaceutical companies with patented brand products frequently sue companies that produce generic equivalents of their patented brand name products for alleged patent infringement or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the market.  Generally, a generic drug may not be marketed until the applicable patents on the brand name drug expire or is held to be not infringed, invalid, or unenforceable.  When we or our development partners submit an ANDA to the FDA for approval of a generic drug, we and/or our development partners must certify either (1) that there is no patent listed by the FDA as covering the relevant brand product, (2) that any patent listed as covering the brand product has expired, (3) that the patent listed as covering the brand product will expire prior to the marketing of the generic product, in which case the ANDA will not be finally approved by the FDA until the expiration of such patent, or (4) that any patent listed as covering the brand drug is invalid or will not be infringed by the manufacture, sale or use of the generic product for which the ANDA is submitted.  Under any circumstance in which an act of infringement is alleged to occur, there is a risk that a brand pharmaceutical company may sue us for alleged patent infringement or other violations of intellectual property rights.  Also, competing pharmaceutical companies may file lawsuits against us or our strategic partners alleging patent infringement or may file declaratory judgment actions of non-infringement, invalidity, or unenforceability against us relating to our own patents.  Because substantially all of our current business involves the marketing and development of products that are either subject to the protection of our own patents or the potential assertion of claims by third parties, the threat of litigation, the outcome of which is inherently uncertain, is always present.  Such litigation is often costly and time-consuming and could result in a substantial delay in, or prevent, the introduction and/or marketing of our products, which could have a material adverse effect on our business, condition (financial and other), prospects and results of operations.  Our development partners are also parties to several lawsuits, the outcome of which may have a material impact on our business.  For more information on our material pending litigation, please see Item 3 – “Legal Proceedings” of this Annual Report on Form 10-K.

We are susceptible to product liability claims that may not be covered by insurance, which, if successful, could require us to pay substantial sums.

Like all pharmaceutical companies, we face the risk of loss resulting from, and the adverse publicity associated with, product liability lawsuits, whether or not such claims are valid.  We likely cannot avoid such claims.  Unanticipated side effects or unfavorable publicity concerning any of our products would likely have an adverse effect on our ability to achieve acceptance by prescribing physicians, managed care providers, pharmacies and other retailers, customers and patients.  Even unsuccessful product liability claims could require us to spend money on litigation, divert management’s time, damage our reputation and impair the marketability of our products.  In addition, although we believe that we have adequate product liability insurance coverage, we cannot be certain that our insurance will, in fact, be sufficient to cover such claims or that we will be able to obtain or maintain adequate insurance coverage in the future at acceptable prices.  A successful product liability claim that is excluded from coverage or exceeds our policy limits could require us to pay substantial sums.  In addition, insurance coverage for product liability may become prohibitively expensive in the future, and as a result we may not be able to maintain adequate product liability insurance coverage to mitigate the risk of large claims, or we may be required to maintain a larger self-insured retention than we would otherwise choose to.

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We are subject to extensive governmental regulation, and any non-compliance may result in fines and/or other sanctions, including product seizures, product recalls, injunctive actions and criminal prosecutions.

As a pharmaceutical manufacturer and distributor, we are subject to extensive regulation by the federal government, principally the FDA and the Drug Enforcement Administration, as well as by state governments.  The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, the Generic Drug Enforcement Act of 1992 (the “Generic Drug Act”), and other federal statutes and regulations govern the testing, manufacture, safety, labeling, storage, recordkeeping, approval, advertising and promotion (including to the healthcare community) of our products.  The Generic Drug Act, a result of legislative hearings and investigations into the generic drug approval process, is particularly relevant to our business.  Under the Generic Drug Act, the FDA is authorized to impose debarment and other penalties on individuals and companies that commit illegal acts relating to the generic drug approval process.  In some situations, the Generic Drug Act requires the FDA not to accept or review for a period of time any ANDAs submitted by a company that has committed certain violations and provides for temporary denial of approval of such ANDAs during its investigation.  Additionally, non-compliance with other applicable regulatory requirements may result in fines, perhaps significant in amount, and other sanctions imposed by courts and/or regulatory bodies, including the initiation of product seizures, product recalls, injunctive actions and criminal prosecutions.  From time to time, we have voluntarily recalled our products.  In addition, administrative remedies may involve the refusal of the government to enter into supply contracts with, and/or to approve new drug applications of, a non-complying entity.  The FDA also has the authority to withdraw its approval of drugs in accordance with statutory procedures.

Because of the chemical ingredients of pharmaceutical products and the nature of the manufacturing process, the pharmaceutical industry is subject to extensive environmental regulation and the risk of incurring liability for damages and/or the costs of remedying environmental problems.  In the future, we may be required to increase expenditures in order to remedy environmental problems and/or comply with applicable regulations.  Additionally, if we fail to comply with environmental regulations to use, discharge or dispose of hazardous materials appropriately or otherwise to comply with the provisions of our operating licenses, the licenses could be revoked, and we could be subject to criminal sanctions and/or substantial civil liability or be required to suspend or modify our manufacturing operations.  We operate in New Jersey and New York, which are states often recognized for having very aggressive public health and environmental protection laws.

Finally, as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, companies are now required to file with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) certain types of agreements entered into between brand and generic pharmaceutical companies related to the manufacture, marketing and sale of generic versions of brand drugs.  This requirement could affect the manner in which generic drug manufacturers resolve intellectual property litigation and other disputes with brand pharmaceutical companies and could result generally in an increase in private-party litigation against pharmaceutical companies or additional investigations or proceedings by the FTC or other governmental authorities.  The impact of this requirement, and the potential private-party lawsuits associated with arrangements between brand name and generic drug manufacturers, is uncertain and could adversely affect our business.  For example, on January 30, 2009, the FTC filed a lawsuit against us alleging violations of antitrust laws stemming from our court-approved settlement of a patent litigation with Solvay Pharmaceuticals.  On February 23, 2010, the court granted our motion to dismiss the FTC’s claims.  We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to continue to vigorously defend this action.  For more information on our material pending litigation, please see Item 3 – “Legal Proceedings” of this Annual Report on Form 10-K.

Investigations of the calculation of average wholesale prices may adversely affect our business.

Many government and third-party payors, including Medicare, Medicaid, HMOs and others, reimburse doctors and others for the purchase of certain prescription drugs based on a drug’s average wholesale price (“AWP”).  In the past several years, state and federal government agencies have conducted ongoing investigations of manufacturers’ reporting practices with respect to AWP, in which the agencies have suggested that reporting of inflated AWPs by manufacturers have led to excessive payments for prescription drugs.  For example, beginning in September 2003, we, along with numerous other pharmaceutical companies, have been named as a defendant in actions brought by state Attorneys General and a number of municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. (“Ven-A-Care”) alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting AWP and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs.  To date, we have been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care.  During 2010, we settled the Hawaii suit for $2.3 million and the Massachusetts suit for $0.5 million; in January 2011, we settled the Alabama suit for $2.5 million.  In addition, at various times between 2006 and 2010, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management issued subpoenas to us, and the Attorneys General of Michigan, Tennessee, Texas, and Utah issued civil investigative demands to us.  Certain of the

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other pharmaceutical companies named in these suits have entered into settlements with various jurisdictions for amounts ranging up to tens of millions of dollars.  These actions, if successful, could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our future success depends on our ability to attract and retain key employees and consultants.

Our future success depends, to a substantial degree, upon the continued service of the key members of our management team.  The loss of the services of key members of our management team, or their inability to perform services on our behalf, could have a material adverse effect on our business, condition (financial and other), prospects and results of operations.

Our success also depends, to a large extent, upon the contributions of our sales, marketing, scientific and quality assurance staff.  We compete for qualified personnel against other brand pharmaceutical manufacturers, as well as other generic pharmaceutical manufacturers, who may offer more favorable employment opportunities.  If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we could experience constraints that would adversely affect our ability to sell and market our products effectively, to meet the demands of our strategic partners in a timely fashion, and to support research and development programs.  In particular, sales and marketing efforts depend on the ability to attract and retain skilled and experienced sales, marketing and quality assurance representatives.  Although we believe that we have been successful in attracting and retaining skilled personnel in all areas of our business, we cannot provide assurance that we can continue to attract, train and retain such personnel.  Any failure in this regard could limit the rates at which we generate sales and develop or acquire new products.

The raw materials essential to our manufacturing business are purchased primarily from distributors of bulk pharmaceutical chemicals manufactured by foreign companies.  Any significant supply interruption could have a material adverse effect on our business, condition (financial and other), prospects and results of operation.

The raw materials essential to our manufacturing business are purchased primarily from U.S. distributors of bulk pharmaceutical chemicals manufactured by foreign companies.  If we experience supply interruptions or delays, we may have to obtain substitute materials or products, which in turn would require us to obtain amended or additional regulatory approvals, subjecting us to additional expenditures of time and resources.  In addition, changes in our raw material suppliers could result in significant delays in production, higher raw material costs and loss of sales and customers, because regulatory authorities must generally approve raw material sources for pharmaceutical products, which may be time consuming.  Any significant supply interruption could have a material adverse effect on our business, condition (financial and other), prospects and results of operation.

We depend on our ability to protect our intellectual property and proprietary rights.  We cannot be certain of our ability to keep confidential and protect such rights.

Our success depends on our ability to protect and defend the intellectual property rights associated with our current and future products.  If we fail to protect our intellectual property adequately, competitors may manufacture and market products similar to, or that may be confused with, our products, and our generic competitors may obtain regulatory approval to make and distribute generic versions of our branded products.  

Some patent applications in the United States are maintained in secrecy or not published until the resulting patents issue.  Because the publication of discoveries or inventions tends to follow their actual discovery or invention by several months, we cannot be certain that we were the first to invent and reduce to practice any of our discoveries or inventions.  We also cannot be certain that patents will be issued with respect to any of our patent applications or that any existing or future patents issued to or licensed by us will provide competitive advantages for our products or will not be challenged, invalidated, circumvented or held unenforceable in proceedings commenced by our competitors.  Furthermore, our patent rights may not prevent or limit our present and future competitors from developing, making, importing, using or commercializing products that are functionally similar to our products.

We rely particularly on trade secrets, trademarks, unpatented proprietary expertise and continuing innovation that we seek to protect, in part, by registering and using marks, and, with regard to other intellectual property, by entering into confidentiality agreements with licensees, suppliers, employees, consultants and other parties.  This is done in large part because few of our products are protected by patents.  We cannot provide assurance that these agreements will not be breached or circumvented.  We also cannot be certain that we will have recourse to adequate remedies in the event of a breach.  Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements.  We cannot be sure that our trade secrets and proprietary technology will not be independently developed or otherwise become known by our competitors or, if patents are not issued with respect to internally-developed products, that we will be able to maintain the confidentiality of information relating to these products.  In addition, efforts to ensure our intellectual property rights can be costly, time-consuming and/or ultimately unsuccessful.

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Our stock price is volatile, and the value of your investment could decline.

The market prices for securities of pharmaceutical companies like ours have been and are likely to continue to be highly volatile.  As a result, investors in these companies often buy at high prices only to see the prices drop substantially later, resulting in an extreme drop in value in the holdings of these investors.  Factors such as announcements of fluctuations in our or our competitors’ operating results, changes in our prospects, and general market conditions for pharmaceutical stocks, could have a significant impact on the future trading prices of our common stock.  In particular, the trading price of the common stock of many pharmaceutical companies, including ours, has experienced extreme price and volume fluctuations, which have at times been unrelated to the operating performance of the companies whose stocks were affected.  Some of the factors that may cause volatility in the price of our securities include:

· the timing of new product introductions,

· quarterly variations in results,

· clinical trial results and outcomes of other product development activities,

· regulatory developments,

· competition, including both brand and generic,

· business and product market cycles,

· changes in governmental regulations or legislation affecting our industry,

· fluctuations in customer requirements,

· the availability and utilization of manufacturing capacity,

· the timing and amounts of royalties paid to us by, or owed by us to, third parties,

· the availability of working capital,

· the outcomes of audits by regulatory agencies like the IRS or the outcomes of investigations by federal authorities like the Department of Justice,

· issues with the safety or effectiveness of our products, and

· developments in pending litigation matters or new litigation matters.

The price of our common stock may also be adversely affected by the estimates and projections of the investment community, general economic and market conditions, and the cost of operations in our product markets.  These factors, individually or in the aggregate, could result in significant variations in the trading prices of our common stock.  Volatility in the trading prices of our common stock could result in additional securities class action litigations.  Any litigation would likely result in substantial costs and divert our management’s attention and resources.

ITEM 2.  Properties    

We believe that our owned and leased properties are sufficient in size, scope and nature to meet our anticipated needs for the reasonably foreseeable future.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition” and Notes to Consolidated Financial Statements — Note 16 — “Commitments, Contingencies and Other Matters.”

ITEM 3.  Legal Proceedings   

Unless otherwise indicated in the details provided below, we cannot predict with certainty the outcome or the effects of the litigations described below.  The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties, and injunctive or administrative remedies; however, unless otherwise indicated below, at this time we are not able to estimate the possible loss or range of loss, if any, associated with these legal proceedings.  From time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in the best interests of the Company.  Resolution of any or all claims, investigations, and legal proceedings, individually or in the aggregate, could have a material adverse effect on our results of operations, cash flows or financial condition.  

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Corporate Litigation

We and certain of our former executive officers have been named as defendants in consolidated class action lawsuits filed on behalf of purchasers of our common stock between July 23, 2001 and July 5, 2006. The lawsuits followed our July 5, 2006 announcement regarding the restatement of certain of our financial statements and allege that we and certain members of our then management engaged in violations of the Exchange Act, by issuing false and misleading statements concerning our financial condition and results of operations.  The class actions are pending in the U.S. District Court for the District of New Jersey.  On July 23, 2008, co-lead plaintiffs filed a Second Consolidated Amended complaint.  On September 30, 2009, the Court granted a motion to dismiss all claims as against Kenneth Sawyer but denied the motion as to the Company, Dennis O’Connor, and Scott Tarriff.  We and Messrs. O’Connor and Tarriff have answered the Amended complaint and intend to vigorously defend the consolidated class action. Plaintiffs have filed a motion for class certification which we and the other defendants intend to oppose.

Patent Related Matters

On April 28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”) filed separate lawsuits against us in the U.S. District Court for the District of New Jersey.  CIMA and Schwarz Pharma each have alleged that we infringed U.S. Patent Nos. 6,024,981 (the “’981 patent”) and 6,221,392 (the “’392 patent”) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets.  CIMA owns the ’981 and ’392 patents and Schwarz Pharma is CIMA’s exclusive licensee.  The two lawsuits were consolidated on January 29, 2007.  In response to the lawsuit, we have answered and counterclaimed denying CIMA’s and Schwarz Pharma’s infringement allegations, asserting that the ’981 and ’392 patents are not infringed and are invalid and/or unenforceable.  All 40 claims in the ’981 patent were rejected in two non-final office actions in a reexamination proceeding at the United States Patent and Trademark Office (“USPTO”) on February 24, 2006 and on February 24, 2007.  The ‘392 patent is also the subject of a reexamination proceeding.  On July 10, 2008, the USPTO rejected with finality all claims pending in both the ‘392 and ‘981 patents.  On September 28, 2009, the USPTO Board of Appeals affirmed the Examiner’s rejection of all claims in the ‘981 patent; however, the Board of Appeals has yet to render an opinion on the claims of the ‘392 patent.  On November 25, 2009, plaintiffs requested a rehearing before the USPTO regarding the ’981 patent.  We intend to vigorously defend this lawsuit and pursue our counterclaims.

We entered into a licensing agreement with developer Paddock Laboratories, Inc. (“Paddock”) to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.’s (“Unimed”) product Androgel^®.  As a result of the filing of an ANDA, Unimed and Laboratories Besins Iscovesco (“Besins”), co-assignees of the patent-in-suit, filed a lawsuit on August 22, 2003 against Paddock in the U.S. District Court for the Northern District of Georgia alleging patent infringement (the “Paddock litigation”).  On September 13, 2006, we acquired from Paddock all rights to the ANDA for the testosterone 1% gel, and the Paddock litigation was resolved by a settlement and license agreement that terminates all on-going litigation and permits us to launch the generic version of the product no earlier than August 31, 2015, and no later than February 28, 2016, assuring our ability to market a generic version of Androgel^® well before the expiration of the patents at issue.  On March 7, 2007, we were issued a Civil Investigative Demand seeking information and documents in connection with the court-approved settlement in 2006 of the patent dispute.  On January 30, 2009, the Bureau of Competition for the Federal Trade Commission (“FTC”) filed a lawsuit against us in the U.S. District Court for the Central District of California alleging violations of antitrust laws stemming from our court-approved settlement in the Paddock litigation, and several distributors and retailers followed suit with a number of private plaintiffs’ complaints beginning in February 2009.  On April 9, 2009, the U.S. District Court for the Central District of California granted Par’s motion to transfer the FTC lawsuit and the private plaintiffs’ complaints to the U.S. District Court for the Northern District of Georgia.  On July 20, 2009, we filed a motion to dismiss the FTC’s case and on September 1, 2009, we filed a motion to dismiss the private plaintiffs’ cases in the U.S. District Court for the Northern District of Georgia, and on February 23, 2010, the Court granted our motion to dismiss the FTC’s claims and granted in part and denied in part our motion to dismiss the claims of the private plaintiffs.  On June 10, 2010, the FTC appealed the District Court’s dismissal of the FTC’s claims to the U.S. Court of Appeals for the 11th Circuit.  We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to continue to vigorously defend these actions.

On May 9, 2007, Purdue Pharma Products L.P. (“Purdue”), Napp Pharmaceutical Group Ltd. (“Napp”), Biovail Laboratories International SRL (“Biovail”), and Ortho-McNeil, Inc. (“Ortho-McNeil”) filed a lawsuit against us in the U.S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent No. 6,254,887 (the “’887 patent”) because we submitted a Paragraph IV certification to the FDA for approval of 200 mg extended release tablets containing tramadol hydrochloride.  On May 30, 2007 and October 24, 2007, the complaint was amended to include claims of infringement of the ‘887 patent by our 100 mg and 300 mg extended release tablets containing tramadol hydrochloride, respectively.  On August 14, 2009, after our bench trial in the District Court, the Court ruled in our favor on the issue of invalidity, while ruling in favor of plaintiffs on the issues of infringement and inequitable conduct.  Both parties appealed to the U.S. Court of Appeals for the Federal Circuit and, on June 3, 2010, the Court of Appeals ruled in our favor, affirming the District Court’s decision of invalidity of the patents in suit, while also affirming the District Court’s decision in favor of the plaintiffs on inequitable conduct.

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On July 6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against us and our development partner, MN Pharmaceuticals ("MN"), in the U.S. District Court for the District of New Jersey.  The complaint alleges infringement of U.S. Patent Nos. 5,338,874 (the “’874 patent”) and 5,716,988 (the “’988 patent”) after we and MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection.  On January 14, 2008, following MN's amendment of its ANDA to include oxaliplatin injectable 5 mg/ml, 40 ml vial, Sanofi-Aventis filed a complaint asserting infringement of the '874 and the '988 patents.  MN and we filed our Answer and Counterclaim on February 20, 2008.  On June 18, 2009, the District Court granted summary judgment of non-infringement to several defendants, including us, on the ’874 patent, but to date has not rendered a summary judgment decision regarding the ’988 patent.  On September 10, 2009, the U.S. Court of Appeals for the Federal Circuit reversed the District Court and remanded the case for further proceedings.  On September 24, 2009, Sanofi-Aventis filed a motion for preliminary injunction against defendants who entered the market following the District Court’s summary judgment ruling.  On November 19, 2009, the District Court dismissed all pending motions for summary judgment with possibility of the motions being renewed upon letter request to the Court.  On April 14, 2010, the District Court entered a consent judgment and order agreed to by us, MN, and the plaintiffs, which agreement settled the pending litigation.  In view of this agreement, MN and we will enter the market with generic Eloxatin on August 9, 2012, or earlier in certain circumstances.

 On October 1, 2007, Elan Corporation, PLC (“Elan”) filed a lawsuit against us and our development partners, IntelliPharmaCeutics Corp. and IntelliPharmaCeutics Ltd. ("IPC"), in the U.S. District Court for the District of Delaware.  On October 5, 2007, Celgene Corporation (“Celgene”) and Novartis filed a lawsuit against IPC in the U.S. District Court for the District of New Jersey.  The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 15 mg, and 20 mg dexmethylphenidate hydrochloride extended release capsules.  The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 15 mg, and 20 mg dexmethylphenidate extended release capsules.  On March 5, 2010 and March 15, 2010, the U. S. District Courts for the Districts of New Jersey and Delaware, respectively, entered stays of the litigation between plaintiffs and us and IPC in view of settlement agreements reached by the parties.  The settlement agreement terms are confidential.

On September 13, 2007, Santarus, Inc. (“Santarus”) and The Curators of the University of Missouri (“Missouri”) filed a lawsuit against us in the U.S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules.  On December 20, 2007, Santarus and Missouri filed a second lawsuit against us in the U.S. District Court for the District of Delaware alleging infringement of the patents because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension.  On March 4, 2008, the cases pertaining to our ANDAs for omeprazole capsules and omeprazole oral suspension were consolidated for all purposes.  The District Court conducted a bench trial from July 13-17, 2009, and found for Santarus only on the issue of infringement, while not rendering an opinion on the issues of invalidity and unenforceability.  On April 14, 2010, the District Court ruled in our favor, finding that plaintiffs’ patents were invalid as being obvious and without adequate written description.  On May 17, 2010, Santarus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit, appealing the District Court’s decision of invalidity of the plaintiffs’ patents.  On May 27, 2010, we filed our notice of cross-appeal to the Court of Appeals, appealing the District Court’s decision of enforceability of plaintiffs’ patents.  On July 1, 2010, we launched our generic Omeprazole/Sodium Bicarbonate product.  We will continue to vigorously defend the appeal. 

On December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit against us in the U.S. District Court for the District of Delaware.  The complaint alleges patent infringement because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 20 mg and 40 mg rosuvastatin calcium tablets.  On June 29, 2010, after an eight day bench trial, the District Court ruled in favor of the plaintiffs and against us, stating that the plaintiffs’ patents were infringed, and not invalid or unenforceable.  On August 11, 2010, we filed our notice of appeal to the Court of Appeals for the Federal Circuit, appealing the District Court’s decision. On December 15, 2010, the District Court granted our motion to dismiss a case brought by AstraZeneca asserting we infringed its rosuvastatin process patents.  We intend to defend all of these actions vigorously.

On November 14, 2008, Pozen, Inc. (“Pozen”) filed a lawsuit against us in the U.S. District Court for the Eastern District of Texas.  The complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183, because we submitted a Paragraph IV certification to the FDA for approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets.  We joined GlaxoSmithKline (“GSK”) as a counterclaim defendant in this litigation.  On April 28, 2009, GSK was dismissed from the case by the Court, but will be bound by the Court’s decision and will be required to produce witnesses and materials during discovery.  A four day bench trial was held from October 12 through October 15, 2010, and we are now waiting for a decision.   

On April 29, 2009, Pronova BioPharma ASA (“Pronova”) filed a lawsuit against us in the U.S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because we submitted a Paragraph IV certification to the FDA for approval of omega-3-acid ethyl esters oral capsules.  On June 8, 2010, a new patent, U.S. 7,732,488,

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which was later listed in the Orange Book, was issued to Pronova.  The court scheduled a Markman hearing and pre-trial conference for March 15, 2011, and a two-week trial for March 28, 2011.  A second case, involving the claims of the ’488 patent and two other patents not listed in the Orange Book and asserted by the plaintiffs, has a trial date set for January 3, 2012; however, the schedule in this second case will not affect the hearing and trial dates set forth above.  We intend to defend this action vigorously and pursue our defenses and counterclaims against Pronova.   

On July 1, 2009, Alcon Research Ltd. (“Alcon”) filed a lawsuit against us in the U. S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497; and 6,849,253 because we submitted a Paragraph IV certification to the FDA for approval of 0.004% travoprost ophthalmic solutions and 0.004% travoprost ophthalmic solutions (preserved).  We filed an Answer on August 21, 2009.  The Court rescheduled the end of fact discovery for December 31, 2010 and the end of expert discovery for May 9, 2011.  Trial has yet to be rescheduled.  The Court has set June 9, 2011 as the due date for the pre-trial order.  We intend to defend this action vigorously and pursue our defenses and counterclaims against Alcon.

On August 5, 2010, Warner Chilcott and Medeva Pharma filed a lawsuit against us and our partner EMET Pharmaceuticals in the U.S. District Court for the District of New Jersey.  The complaint alleges infringement of U.S. Patent No. 5,541,170 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of a 400 mg delayed-release oral tablet of mesalamine.  We filed an answer and counterclaims on August 25, 2010, and an initial Rule 16 conference was held on November 10, 2010.  We intend to defend this action vigorously and pursue all of our defenses and counterclaims against Warner Chilcott and Medeva Pharma.

On September 20, 2010, Schering-Plough HealthCare Products (“Schering-Plough”), Santarus, Inc. (“Santarus”), and the Curators of the University of Missouri filed a lawsuit against us in the U.S. District Court for the District of New Jersey.  The complaint alleges infringement of U.S. Patent Nos., 6,699,885; 6,489,346; 6,645,988; and 7,399,772 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of a 20mg/1100 mg omeprazole/sodium bicarbonate capsule, a version of Schering-Plough’s Zegerid OTC^®.  We have previously received a decision of invalidity with respect to all of these patents in our case against Santarus and Missouri with respect to the prescription version of this product, which decision is presently on appeal.  On November 9, 2010, we entered into a stipulation with the plaintiffs to stay litigation on the OTC product pending the decision by the U.S. Court of Appeals for the Federal Circuit on the prescription product appeal, and the parties have agreed to be bound by such decision for purposes of the OTC product litigation. We intend to pursue our appeal and defend this action vigorously.

On September 22, 2010, Biovail Laboratories filed a lawsuit against us in the U.S. District Court for the Southern District of New York.  The complaint alleges infringement of U.S. Patent Nos. 7,569,610; 7,572,935; 7,649,019; 7,553,992; 7,671,094; 7,241,805; 7,645,802; 7,662,407; and 7,645,901 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of extended-release tablets of 174 mg and 348 mg bupropion hydrobromide.  On November 10, 2010, we filed our answer to the complaint.  On November 22, 2010, the Court set a March 31, 2011 deadline for all discovery.   We intend to defend this action vigorously.

On October 4, 2010, UCB Manufacturing, Inc. (“UCB”) filed a verified complaint in the Superior Court of New Jersey, Chancery Division, Middlesex, naming us, our development partner Tris Pharma, and Tris Pharma’s head of research and development, Yu-Hsing Tu.  The complaint alleges that Tris and Tu misappropriated UCB’s trade secrets and, by their actions, breached contracts and agreements to which UCB, Tris, and Tu were bound.  The complaint further alleges unfair competition against Tris, Tu, and us relating to the parties’ manufacture and marketing of generic Tussionex^®.  On October 6, 2010, the Court denied UCB’s petition for a temporary restraining order against us and Tris and set a schedule for discovery during which UCB must substantiate its claims. On December 23, 2010, the Court denied UCB’s motion for a preliminary injunction, ruling that UCB’s alleged trade secrets were known to the public and not misappropriated.  We intend to vigorously defend any appeal by plaintiffs, should one be filed.

On February 2, 2011, Somaxon Pharmaceuticals filed a lawsuit against us in the U.S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent No. 6,211,229 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of oral tablets of 3 mg equivalent and 6 mg equivalent doxepin hydrochloride.  We intend to defend this action vigorously.

Industry Related Matters

Beginning in September 2003, we, along with numerous other pharmaceutical companies, have been named as a defendant in actions brought by a number of state Attorneys General and municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. ("Ven-A-Care") alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting “Average Wholesale Prices” (“AWP”) and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs.  To date, we have

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been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, Oklahoma, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care.  These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pre-trial proceedings.  The case brought by the state of Mississippi will be litigated in the Chancery Court of Rankin County, Mississippi and the federal case brought by Ven-A-Care will be litigated in the U. S. District Court for the District of Massachusetts.  The other cases will likely be litigated in the state or federal courts in which they were filed.  To date, several of the cases in which we have been named a defendant have been scheduled for trial, including the civil law suits filed by the state Attorneys General of Texas, Kentucky, Idaho and Alaska, with trials commencing on or about May 2, 2011, July 11, 2011, September 26, 2011 and May 7, 2012, respectively.   In the Utah suit, the time for responding to the complaint has not yet elapsed.   The Hawaii suit was settled on August 25, 2010 for $2.3 million.   The Massachusetts suit was settled on December 17, 2010 for $0.5 million.  The Alabama suit was settled on January 5, 2011 for $2.5 million.  In each of the remaining matters, we have either moved to dismiss the complaints or answered the complaints denying liability.  We will continue to explore settlement opportunities in other jurisdictions.  At this time we are not able to estimate the possible loss or range of loss associated with these legal proceedings.  Certain of the other pharmaceutical companies named in these suits have entered into settlements with various jurisdictions for amounts ranging up to tens of millions of dollars per jurisdiction.  We intend to defend each of these actions vigorously.

In the civil lawsuit brought by the City of New York and certain counties within the State of New York, the U.S. District Court for the District of Massachusetts entered an order on January 27, 2010, denying the defendants’ motion for summary judgment on plaintiffs’ claims related to the federal upper limit ("FUL") and granting the plaintiffs’ motion for partial summary judgment on FUL-based claims under New York Social Services Law § 145-b for nine drugs manufactured by thirteen defendants, including us.  The Court has reserved judgment regarding damages until after further briefing.  On February 8, 2010, we and certain defendants filed a motion to amend the order for certification for immediate appeal, and such motion to amend was opposed by the plaintiffs on February 22, 2010.

In addition, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the “USOPM”) have issued subpoenas, and the Attorneys General of Michigan, Tennessee, Texas, and Utah have issued civil investigative demands, to us.  The demands generally request documents and information pertaining to allegations that certain of our sales and marketing practices caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules, and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet, under circumstances in which some state Medicaid programs at various times reimbursed the new dosage form at a higher rate than the dosage form being substituted.  We have provided, or are in the process of providing, documents in response to these subpoenas to the respective Attorneys General and the USOPM.  During the fourth quarter of 2010, we continued to engage the respective Attorneys General, the USOPM and the Department of Justice, led by the U.S. Attorneys in the Northern District of Illinois, in discussions concerning these allegations, and we will continue to cooperate if called upon to do so.

Department of Justice Matter

On March 19, 2009, we were served with a subpoena by the Department of Justice requesting documents related to Strativa’s marketing of Megace^® ES.  The subpoena indicated that the Department of Justice is currently investigating promotional practices in the sales and marketing of Megace^® ES.  We have provided, or are in the process of providing, documents in response to this subpoena to the Department of Justice and will continue to cooperate with the Department of Justice in this inquiry if called upon to do so.

Other

We are, from time to time, a party to certain other litigations, including product liability litigations.  We believe that these litigations are part of the ordinary course of our business and that their ultimate resolution will not have a material adverse effect on our financial condition, results of operations or liquidity. We intend to defend or, in cases where we are the plaintiff, to prosecute these litigations vigorously.

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Contingency

In December 2010, we reached a settlement in principal related to the routine post-award contract review of our contract with the Department of Veterans Affairs for the periods 2004 to 2007 with the Office of Inspector General of the Department of Veterans Affairs.  The settlement and release agreement is currently under review by the Department of Veterans Affairs.  We had previously accrued a loss contingency of approximately $5.2 million, including interest, in accrued expenses and other current liabilities and payables due to distribution agreement partners on our consolidated balance sheet as of September 30, 2010, related to this matter.  Based upon the best information currently available to us, we have reduced this accrual to $1.1 million, which represents our best estimate of loss related to this matter.  Accordingly, we recognized $4.1 million of income in the fourth quarter of 2010 as a change in estimate.  Refer to Note 5 - “Accounts Receivable” for more information.    

In December 2010, we submitted to the Texas Health and Human Services Commission $6.5 million resulting from a procedural error relating to pharmacy reimbursement between 1999 and 2006.  

PART II

ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market information.  Our Common Stock is traded on the New York Stock Exchange (the “NYSE”) (ticker symbol: PRX). The following table shows the range of the closing prices for the Common Stock, as reported by the NYSE, for each fiscal quarter during our two most recent years.

(b)  Holders.  As of February 16, 2011, there were 1,494 holders of record of our common stock.  

(c)  Dividends.  During 2010, 2009 and 2008, we did not pay any cash dividends on our common stock. The payment of future dividends on our common stock is subject to the discretion of the Board and is dependent upon many factors, including our earnings, our capital needs, the terms of any financing agreements and our financial condition. In certain circumstances, our ability to pay dividends is restricted by the various customary covenants contained in our unsecured credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Bank National Association as Syndication Agent.  Refer to Notes to Consolidated Financial Statements - Note 12 – “Debt and Unsecured Credit Facility” contained elsewhere in this Form 10-K for further details.  

(d) Securities authorized for issuance under equity compensation plans.

(1) The 2004 Plan totals include prior authorizations under the 2001 Plan.  The maximum number of stock options available for future issuance is 4,545,000.  Of the total number of shares available for future grant 478,000 shares are available for the issuance of restricted stock and/or restricted stock units.  

(2) For the 1997 Plan, the indicated total number of securities remaining available for future issuance may be any combination of stock options and restricted stock units.  

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(3) The remaining shares in the 2000 Plan expired on March 22, 2010.  

(e) Performance graph

The following graph compares the total cumulative stockholder return on our Common Stock for the period December 31, 2005 through December 31, 2010, with the cumulative total return of (a) the S&P 400 Mid-Cap Index (b) the S&P 600 SmallCap Index and (c) the Dow Jones US Pharmaceuticals Index.  The comparison assumes that $100 was invested on December 31, 2005, in our Common Stock and in each of the comparison indices.  

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN AMONG PAR PHARMACEUTICAL COMPANIES, INC.,

S&P 400 MID-CAP INDEX, S&P 600 SmallCap INDEX AND DOW JONES US PHARMACEUTICALS INDEX

(f) Issuer Purchases of Equity Securities ⁽¹⁾

Quarter Ended December 31, 2010

(1)            In April 2004, the Board authorized the repurchase of up to $50.0 million of our common stock.  Repurchases are made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions, whenever it appears prudent to do so. Shares of common stock acquired through the repurchase program are available for reissuance for general corporate purposes.  In September 2007, we announced that the Board approved an expansion of our share repurchase program allowing for the repurchase of up to $75 million of our common stock, inclusive of the $17.8 million remaining from the April 2004 authorization.  The authorized amount remaining for stock repurchases under the repurchase program was $43.6 million, as of December 31, 2010.  The repurchase program has no expiration date.

(2)           The total number of shares purchased represents 69,306 shares surrendered to us to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

(3)           Based on the closing price of our common stock on the New York Stock Exchange of $38.51 at December 31, 2010.

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ITEM 6.  Selected Financial Data

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements contained elsewhere in this Form 10-K.  

OVERVIEW

The introduction of new products at selling prices that generate adequate gross margins is critical to our ability to generate economic value and ultimately the creation of adequate returns for our stockholders.  Par Pharmaceutical, our generic products division, creates economic value by optimizing our current generic product portfolio and our pipeline of potential high-value first-to-file and first-to-market generic products.  Par Pharmaceutical is an attractive business partner because of its strong commercialization track record and presence in the generic trade.  Par’s 2010 achievements included several launches (generic versions of Zegerid^®, Tussionex^®, Accolate^®), the filing of eight ANDAs in conjunction with its development partners, and execution of several collaboration agreements to sustain the future generic pipeline.  As a result, we believe we are well positioned to compete in the generic marketplace over the long term.  Our internal research and development targets high-value, first-to-file Paragraph IVs or first–to-market product opportunities.  Externally, we intend to concentrate on acquiring assets and/or partnering with technology based companies that can deliver similar product opportunities.  As of December 2010, we had 11 confirmed first-to-files and three potential first-to-market product opportunities.  Generally, products that we have developed internally contribute higher gross margin percentages than products that we sell under supply and distribution agreements, because under such agreements, we typically pay a percentage of the gross or net profits (or a percentage of sales) to our strategic partners.  

To continue the development of our branded products division, Strativa Pharmaceuticals, we acquired the worldwide rights to Nascobal^® on March 31, 2009.  Nascobal^® is an FDA-approved prescription vitamin B12 treatment indicated for maintenance of remission in certain pernicious anemia patients, as well as a supplement for a variety of B12 deficiencies.  It is the first and currently only once-weekly, self-administered alternative to B12 injections.  Strativa also launched two products in 2010: Zuplenz^®, which is an oral soluble film formulation of ondansetron for the prevention of chemotherapy-induced nausea and vomiting, prevention of nausea and vomiting associated with radiotherapy, and prevention of post-operative nausea and vomiting, and Oravig^TM, which is an antifungal therapy for the treatment of oropharyngeal candidiasis, an opportunistic infection commonly found in immunocompromised patients, including those with HIV and cancer.

Sales and gross margins of our products depend principally on (i) the introduction of other generic and brand products in direct competition with our products; (ii) the ability of generic competitors to quickly enter the market after our relevant patent or exclusivity periods expire, or during our exclusivity periods with authorized generic products, diminishing the amount and duration of significant profits we generate from any one product; (iii) the pricing practices of competitors and the removal of competing products from the market; (iv) the continuation of our existing license, supply and distribution agreements and our ability to enter into new agreements; (v) the consolidation among distribution outlets through mergers, acquisitions and the formation of buying groups; (vi) the willingness of generic drug customers, including wholesale and retail customers, to switch among drugs of different generic pharmaceutical manufacturers; (vii) our ability to procure approval of ANDAs and NDAs and the timing and success of our future new product launches; (viii) our ability to obtain marketing exclusivity periods for our generic products; (ix) our ability to maintain patent protection of our brand products; (x) the extent of market penetration for our existing product line; (xi) customer satisfaction with the level, quality and amount of our customer service; and (xii) the market acceptance of our recently introduced branded products (Nascobal^®, Oravig^TM, Zuplenz^®) and the successful development and commercialization of our future in-licensed branded product pipeline.

Net sales and gross margins derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that we believe to be unique to the generic pharmaceutical industry.  As the patent(s) for a brand name product and the related exclusivity period(s) expire, the first generic manufacturer to receive regulatory approval from the FDA for a generic equivalent of the product is often able to capture a substantial share of the market.  At that time, however, the branded company may license the right to distribute an “authorized generic” product to a competing generic company.  As additional generic manufacturers receive regulatory approvals for competing products, the market share and the price of those products have typically declined - often significantly - depending on several factors, including the number of competitors, the price of the brand product and the pricing strategy of the new competitors.

Net sales and gross margins derived from brand pharmaceutical products typically follow a different pattern.  Sellers of brand pharmaceutical products benefit from years of being the exclusive supplier to the market due to patent protections for the brand products.  The benefits include significantly higher gross margins relative to sellers of generic pharmaceutical products.  However, commercializing brand pharmaceutical products is more costly than generic pharmaceutical products.  Sellers of brand pharmaceutical products often have increased infrastructure costs relative to sellers of generic pharmaceutical products and make significant investments in the development and/or licensing of these products without a guarantee that these expenditures will result in the successful development or launch of brand products that will prove to be commercially successful.  Selling brand products also tends to require greater sales and marketing expenses to create a market for the products than is necessary with respect to the sale of generic

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products.  Just as we compete against companies selling branded products when we sell generic products, we confront the same competitive pressures when we sell our branded products.  Specifically, after patent protections expire, generic products can be sold in the market at a significantly lower price than the branded version, and, where available, may be required or encouraged in preference to the branded version under third party reimbursement programs, or substituted by pharmacies for branded versions by law.  

Healthcare Reform Impacts

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) and on March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act, which includes a number of changes to the PPACA.  These laws are hereafter referred to as “healthcare reform” or the “Acts.”  

A number of provisions of healthcare reform have had and will continue to have a negative impact on the price of our products sold to U.S. government entities.  The significant provisions that impacted our 2010 net revenues, gross margin and net income include, but are not limited to the following (all items were effective January 1, 2010 unless otherwise noted):

·      Increase in the Medicaid rebate rate.  The base rebate rate on sales of branded drugs (Strativa) and authorized generics (Par) into the Medicaid channel was retroactively increased from 15.1% of AMP (average manufacturer price) to 23.1% of AMP.  The base rebate on sales of multisource generic products (Par) into the Medicaid channel was retroactively increased from 11% of AMP to 13% of AMP.  The base rebate is one component of the calculation for branded drugs and authorized generics, and may or may not result in an increase in rebates for a particular product.

·      Effective March 23, 2010, there was an extension of Medicaid rebates to drugs consumed by patients enrolled in Medicaid Managed Care Organizations (MMCOs).  Prior to healthcare reform, MMCOs were not entitled to Medicaid rebates, as the drug benefit was independently managed by the commercial managed care entity.  Given our current product portfolio, which is weighted more toward generic products, our exposure to commercial rebates for patients enrolled in MMCOs was low prior to March 23, 2010.

·      Increased Medicaid rebates for products defined as a line extension through application of an inflation penalty back to the original formulation price.

·      Expansion of the number of entities qualifying for Public Health System (PHS) status and therefore eligible to receive PHS pricing, which is typically equal to the net Medicaid price after rebates.

·      Revisions to the AMP calculation, effective October 1, 2010.  This provision had a negligible effect on 2010 net revenues and gross margins.

·      Change in the Federal Upper Limit as it relates to the pharmacy reimbursement of multisource drugs. This provision is expected to reduce the Medicaid funding from the federal government.  While it is impractical to quantify the impact of the provision, it is expected to result in increased pressure at the state level to drive Medicaid utilization to low cost alternatives such as generic products.

For the year ended December 31, 2010, the impact of healthcare reform resulted in a decrease of approximately $6.1 million of net revenues and approximately $3.5 million of gross margin.  The gross margin impact of these provisions is highly dependent upon product sales mix between products that are partnered with third parties and non-partnered products.

In 2011, the following provisions will go into effect:

·      An annual, non tax deductible, pharmaceutical fee to be assessed by the Secretary of the Treasury on any manufacturer or importer with gross receipts from the sale of branded prescription and authorized generic drugs to the following government programs and entities: Medicare Part D, Medicare Part B, Medicaid, Department of Veterans Affairs, Department of Defense, and Tricare.  The total pharmaceutical fee, which is set at $2.5 billion for 2011, will be allocated across the pharmaceutical industry based upon relative market share into these programs.  The total fee increases each year thereafter, reaching $4.1 billion in 2018.

The market share calculation utilized to allocate the fee is to be calculated utilizing prior years sales statistics.  Based upon internal estimates of total industry sales into specified government programs, we currently estimate the impact of the pharmaceutical fee on our 2011 net income to be between $1.5 million and $3.5 million.  In addition, the year to year impact of this provision of healthcare reform will be highly variable depending on:

o     the volume of Par’s sales of authorized generics, which can vary dramatically based upon our ability to continue to secure authorized generic business development opportunities, and

o     the volume of Strativa’s sales of branded products.  

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·      A new 50% discount on cost for certain Medicare Part D beneficiaries for certain drugs, including branded and authorized generic pharmaceuticals, purchased during the Part D Medicare coverage gap (commonly referred to as the “donut hole”).   The 2011 impact of this provision on the gross margin of Par is estimated to be approximately $2 million to $3 million and Strativa is estimated to be less than $0.5 million.  

·     Additionally, the publication of monthly weighted average AMP by therapeutic class and retail price surveys could occur during 2011.   It is not practical to forecast the impact of this provision on 2011 net revenues or gross margin.  

Any potential impact of healthcare reform on the future demand for our products is not determinable at this time.  Any potential future impact on demand could differ between our Par and Strativa divisions, as well as between individual products within each division.

Par Pharmaceutical - Generic Products Division

Our strategy for our generic products division is to continue to differentiate ourselves by carefully choosing opportunities with minimal competition (e.g., first-to-file and first-to-market products).  By leveraging our expertise in research and development, manufacturing and distribution, we are able to effectively and efficiently pursue these opportunities and support our partners.

During the year ended December 31, 2010, our generic business net revenues and gross margin were concentrated in a few products.  The top 12 generic products (metoprolol succinate ER (metoprolol), sumatriptan, clonidine, meclizine, dronabinol, tramadol ER, omeprazole, chlorpheniramine/hydrocodone, nateglinide, cholestyramine powder and cabergoline) accounted for approximately 77% of total consolidated revenues and approximately 61% of total consolidated gross margins in the year ended December 31, 2010.

We began selling metoprolol in the fourth quarter of 2006 as the authorized generic distributor pursuant to a supply and distribution agreement with AstraZeneca.  There had been two competitors marketing generic metoprolol until the fourth quarter of 2008, when those two companies stopped selling metoprolol due to violations of the FDA’s current Good Manufacturing Practices.  Throughout the first two quarters of 2009, we did not have competition for sales of the four SKUs (packaging sizes) of metoprolol that we sell, which resulted in increased volume of units sold coupled with a price increase commensurate with being the sole generic distributor.  Watson Pharmaceuticals announced in August 2009, however, that the FDA had approved two of its ANDAs for metoprolol, and accordingly, we were no longer the sole distributor for those two SKUs (25mg and 50mg).  On April 15, 2010, Watson announced that the FDA had approved its two other ANDAs for metoprolol, and Par was no longer the sole distributor for the 100mg and 200mg SKUs.  Our sales volume and unit price for metoprolol were adversely impacted subsequent to each of Watson’s entries into the market. In addition, Wockhardt, an India-based pharmaceutical company, announced that it received FDA approval for all four strengths of metoprolol on July 23, 2010.  Our sales volume and unit price for metoprolol were adversely impacted by this second generic competitor.  Additional competitors on any or all of the four SKUs will result in significant additional declines in sales volume and unit price, which would negatively impact our revenues and gross margins (including possible inventory writedowns) as compared to 2009 and 2010.  As the authorized generic distributor for metoprolol, we do not control the manufacturing of the product, and any disruption in supply due to manufacturing or transportation issues could also have a negative effect on our revenues and gross margins.

In the fourth quarter of 2008, we launched generic versions of Imitrex^® (sumatriptan) injection 4mg and 6mg starter kits and 4mg and 6mg prefilled syringe cartridges pursuant to a supply and distribution agreement with GlaxoSmithKline plc.  From the beginning of 2009 to December 31, 2010, we remained the sole generic distributor of three SKUs with one competitor for a single SKU. The remaining net book value of the associated intangible asset was approximately $0.7 million at December 31, 2010 and will be amortized over approximately one year.      

In August 2009, we launched clonidine TDS, the generic version of Boehringer Ingelheim’s Catapres TTS^®.  The product is manufactured by a third party development partner with whom we have a profit sharing arrangement.  From launch to July 15, 2010, we were the sole generic distributor of this product.  On July 16, 2010, Mylan received FDA approval for its generic version of clonidine TDS, therefore we were no longer the sole generic distributor.  Our sales and related gross margins for clonidine TDS were negatively impacted due to Mylan’s receipt of FDA approval and subsequent launch.  Any additional competition could result in significant additional declines in sales volume and unit price, which may negatively impact our revenues and gross margins (including possible provisions for inventory to cost of goods sold) as compared to 2009 and 2010.  In May 2010, our third party partner received a Warning Letter from the FDA that cited conditions at the facility where clonidine TDS is manufactured that the FDA investigators believe may violate current Good Manufacturing Practices, based on their observations made between October and December of 2009.  Our third party partner has responded to the Warning Letter and is working with the FDA to conclude this matter, but we cannot guarantee that our partner will not be subject to additional regulatory action by the FDA.  This product has a long manufacturing lead time, and any disruption in supply at our third party partner could also have a negative effect on our revenues and gross margins.  We will continue to monitor this matter to assess any potential future negative impact on our sales of clonidine TDS and related gross margins.  

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We marketed meclizine until the supplier of our active pharmaceutical ingredient (“API”) experienced an explosion at its manufacturing facility in early 2008.  Subsequently, we qualified a new API source and received the appropriate approval from the FDA of our ANDA to manufacture and market meclizine utilizing our new supplier.  We reintroduced meclizine HCl tablets in 12.5mg and 25mg strengths in the latter half of 2008.  From the beginning of 2009 to May 2010, we believe we were the exclusive supplier of this generic product.  In June 2010, a competitor entered this market.   This new competition negatively impacted our sales and gross margins for meclizine.  Any additional competition could result in significant additional declines in sales volume and unit price, which may negatively impact our revenues and gross margins (including possible inventory writedowns) as compared to 2009 and 2010.  

In the third quarter of 2008, we launched dronabinol in 2.5mg, 5mg and 10mg strengths in soft gel capsules.  We believe we are one of two generic distributors of dronabinol.  We share net product margin, as contractually defined, on sales of dronabinol with SVC Pharma LP, an affiliate of Rhodes Technologies.  The remaining net book value of the associated intangible asset was $1.2 million at December 31, 2010 and will be amortized over approximately three years.

In November 2009, we launched tramadol ER, the generic version of Ultram® ER, after a favorable court ruling in the related patent matter.  We are one of two competitors in this market, with the other competitor being the authorized generic.  We manufacture and distribute this product.  

In July 2010, we launched two strengths of omeprazole/sodium bicarbonate capsules.  Omeprazole/sodium bicarbonate capsules are the generic version of Zegerid®.  We were awarded 180 days of marketing exclusivity for being the first to file an ANDA containing a paragraph IV certification for these two strengths of the product.  We are now one of two competitors in this market, with the other competitor being the authorized generic.  Omeprazole/sodium bicarbonate capsules had been the subject of litigation in the U.S. District Court for the District of Delaware, but in April 2010, the Court ruled in our favor, finding that the related patents were invalid as being obvious and without adequate written description.  The case is currently on appeal to the U.S. Court of Appeals for the Federal Circuit.  We will continue to vigorously defend the appeal.  

In addition, our investments in generic product development, including projects with development partners, are expected to yield approximately 5 to 7 new ANDA filings during each of 2011, 2012 and 2013.  These ANDA filings are expected to lead to product launches based on one or more of the following: expiry of the relevant 30-month stay period; patent expiry date; and expiry of regulatory exclusivity.  However, such potential product launches may be delayed or may not occur due to various circumstances, including extended litigation, outstanding citizens petitions, other regulatory requirements set forth by the FDA, and stays of litigation.  These ANDA filings would be significant mileposts for us, as we expect many of these potential products to be first-to-file/first-to-market opportunities with gross margins in excess of the average of our current portfolio.  We or our strategic partners currently have approximately 29 ANDAs pending with the FDA, which include 11 first-to-file and three first-to-market opportunities.  No assurances can be given that we or any of our strategic partners will successfully complete the development of any of these potential products either under development or proposed for development, that regulatory approvals will be granted for any such product, that any approved product will be produced in commercial quantities or sold profitably.  

Strativa Pharmaceuticals - Branded Products Division

For Strativa, in the near term we will continue to invest in the marketing and sales of our existing product portfolio.  In addition, in the longer term, we will continue to consider strategic new licenses and acquisitions to expand Strativa’s presence in supportive care and adjacent commercial areas.   

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In July 2005, we received FDA approval for our first NDA, and immediately began marketing Megace^® ES (megestrol acetate) oral suspension.  Megace^® ES is indicated for the treatment of anorexia, cachexia or any unexplained significant weight loss in patients with a diagnosis of AIDS and utilizes the Megace^® brand name that we have licensed from Bristol-Myers Squibb Company.  The remaining net book value of the trademark was $2.6 million at December 31, 2010, and will be amortized over approximately two years.  We promoted Megace^® ES as our primary brand product from 2005 through March 2009.  With the acquisition of Nascobal^® in March 2009 and the FDA approvals of Oravig^TM and Zuplenz^® in 2010, Strativa increased its sales force and turned its focus on marketing the full portfolio of products.       

In September 2006, we entered into an extended-reach agreement with Solvay Pharmaceuticals, Inc. (which was subsequently acquired by Abbott Laboratories) that provided for our branded sales force to co-promote Androgel^® for a period of six years.  As compensation for our marketing and sales efforts, we were receiving up to $10 million annually.  In December 2010, we terminated this agreement and received a $2 million early termination payment.  The marketing and sales efforts will be redirected toward the four products currently in the portfolio.  

In June 2008, we entered into an exclusive licensing agreement with MonoSol Rx to acquire the U.S. commercialization rights to MonoSol’s Zuplenz^® (ondansetron) oral soluble film.  On July 2, 2010, the FDA approved Zuplenz^®, which is offered in 4mg and 8mg dosage strengths, and Strativa launched Zuplenz^® in the fourth quarter of 2010.  We paid MonoSol additional milestone payments totaling $6.0 million in July 2010.  The product is manufactured and supplied by MonoSol.  In addition to royalties on net sales, MonoSol may receive milestone payments if commercial sales achieve specified sales targets.  The remaining net book value of the related intangible asset was $5.9 million at December 31, 2010, and will be amortized over approximately 12 years.

On March 31, 2009, we acquired the worldwide rights to Nascobal^® (cyanocobalamin, USP) Nasal Spray from QOL Medical, LLC.  Under the terms of the all cash transaction, we paid QOL Medical $54.5 million for the worldwide rights to Nascobal^®.  We manufacture Nascobal^® with assets acquired on March 31, 2009 from MDRNA, Inc.  The remaining net book value of the related intangible asset was $46.7 million at December 31, 2010, and will be amortized over approximately 10 years.  

In January 2011, we completed a modest reorganization of the Strativa management team (approximately 10 positions eliminated) and refined our sales and marketing plan for each of Strativa’s currently marketed products as part of our on-going efforts to maximize the value and potential of our existing product portfolio.  We announced that the President of Strativa Pharmaceuticals resigned and that effective January 31, 2011, Patrick G. LePore, the Chairman, CEO and President of Par Pharmaceutical Companies, Inc., assumed day-to-day oversight of Strativa on an interim basis.  We have taken steps to further align the Strativa home office sales and marketing team with the objectives of our sales force and to leverage the relevant expertise and experience within our Par Pharmaceutical generics division.  In conjunction with these events, we recalibrated our target sales for certain of our currently marketed products.  Further information regarding such forecasts can be found in our Form 8-K filed January 12, 2011.  

OTHER CONSIDERATIONS

In addition to the substantial costs of product development, we may incur significant legal costs in bringing certain products to market.  Litigation concerning patents and proprietary rights is often protracted and expensive.  Pharmaceutical companies with patented brand products increasingly are suing companies that produce generic forms of their products for alleged patent infringement or other violations of intellectual property rights, which could delay or prevent the entry of such generic products into the market.  Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expires.  When an ANDA is filed with the FDA for approval of a generic drug, the filer may certify either that any patent listed by the FDA as covering the branded product is about to expire, in which case the ANDA will not become effective until the expiration of such patent, or that the patent listed as covering the branded drug is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the ANDA is filed.  In either case, there is a risk that a branded pharmaceutical company may sue the filer for alleged patent infringement or other violations of intellectual property rights.  Because a substantial portion of our current business involves the marketing and development of generic versions of brand products, the threat of litigation, the outcome of which is inherently uncertain, is always present.  Such litigation is often costly and time-consuming, and could result in a substantial delay in, or prevent, the introduction and/or marketing of products, which could have a material adverse effect on our business, financial condition, prospects and results of operations.

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RESULTS OF OPERATIONS

Results of operations, including segment net revenues, segment gross margin and segment operating income (loss) information for our Par Pharmaceutical - Generic Products segment and our Strativa Branded Products segment, consisted of the following:

Revenues (2010 compared to 2009)

Total revenues of our top selling products were as follows ($ amounts in thousands):

The decrease in generic segment revenues in 2010 was primarily due to:

·      Additional competition on all SKUs (packaging sizes) of metoprolol succinate ER.  The dollar amount decrease of metoprolol revenues for 2010 can be attributed to volume of units sold (approximately 65% of total dollar decrease) with the remainder of the dollar amount decrease due to price.  We expect additional declines in metoprolol revenues in the future as more competitors enter this market.  

·      Competition for meclizine beginning in June 2010.  

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·      Lower “Other” generic revenues, which were primarily driven by termination of supply and distribution agreements and/or increased competition affecting both price and volume, including fluticasone, various amoxicillin products, tramadol HCl and acetaminophen, ibuprofen, and propranolol HCl ER caps.  

The decreases above in 2010 were tempered by;

·      The launch of clonidine TDS in August 2009 as the sole generic distributor, and we remained the exclusive supplier to this market on all strengths through August 2010.  Therefore, 2010 had 12 months of sales as compared to five months in 2009.  On July 16, 2010, Mylan received FDA approval for clonidine and subsequently launched its product; therefore we were no longer the sole generic distributor.  Our sales and related gross margins for clonidine TDS were negatively impacted.  Any additional competition will result in significant additional declines in sales volume and unit price which may negatively impact our revenues and gross margins in future periods.

·      The launch of omeprazole in late June 2010, the launch of chlorpheniramine/hydrocodone in October 2010 and tramadol ER, which launched in the fourth quarter of 2009 with the authorized generic as our only generic competitor.  

·      The increase of net sales of dronabinol, mainly due to increased volume.  Our only competitor in the generic dronabinol market continues to be Watson as the authorized generic.  

·      Improved royalties from the sales of fenofibrate, which was launched by our strategic partner in the fourth quarter 2009, and diazepam, which launched by our strategic partner in September 2010.   

Net sales of contract-manufactured products (which are manufactured for us by third-parties under contract) and licensed products (which are licensed to us from third-party development partners and also are generally manufactured by third parties) were approximately 71% of our total product revenues for 2010 and approximately 79% of our total product revenues for 2009.  The decrease in the percentage is primarily driven by the launch of omeprazole in 2010 and tramadol ER, which launched in the fourth quarter of 2009, combined with decreased revenues of metoprolol and clonidine.  We are substantially dependent upon contract-manufactured and licensed products for our overall sales, and any inability by our suppliers to meet demand could adversely affect our future sales.  

The increase in the Strativa segment revenues in 2010 was primarily due to the continued growth of Nascobal^®, which was relaunched in the second quarter of 2009, coupled with the launches of Oravig^TM and Zuplenz^® and the $2 million termination payment associated with the discontinuation of the extended-reach agreement with Solvay Pharmaceuticals, Inc.  This increase was offset somewhat by the decrease of Megace^® ES, primarily due to lower prescription levels, tempered by a single digit increase in average net selling price.      

Strativa launched Oravig^TM in the third quarter of 2010 and Zuplenz^® in the fourth quarter of 2010.  In connection with the launches, our direct customers ordered, and we shipped, Oravig^TM and Zuplenz^® units at a level commensurate with initial forecasted demand for the product.  Due to our relatively limited history in the branded pharmaceutical marketplace, it is impractical to predict with reasonable certainty the rate of Oravig^TM’s and Zuplenz^®’s prescription demand uptake and ultimate acceptance in the marketplace.  Therefore, during the initial launch phase of Oravig^TM and Zuplenz^®, we will recognize revenue and all associated cost of sales as the product is prescribed to patients based on an analysis of third party market prescription data, third party wholesaler inventory data, order refill rates, and all substantive quantitative and qualitative data available to us at the time.  Accordingly, for the year ended December 31, 2010, we have recognized $1.1 million of revenues for Oravig^TM and $0.2 million of revenues for Zuplenz^® and deferred revenues of $1.2 million for Oravig^TM and deferred revenues of $0.3 million for Zuplenz^®, related to product that has been shipped to customers but not yet been prescribed to patients.  Deferred revenue is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet as of December 31, 2010.  We will modify our revenue recognition for Oravig^TM and Zuplenz^® at the time that we have sufficient data and history to reliably estimate trade inventory levels in relation to forward looking demand.

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Revenues (2009 compared to 2008)

Total revenues of our top selling products were as follows ($ amounts in thousands):

The increase in generic segment revenues for the year ended December 31, 2009 was primarily due to the continued exclusivity on two SKUs  (packaging sizes of 100mg and 200mg) of metoprolol succinate ER and reduced competition for sales of two other SKUs (25mg and 50mg) of metoprolol succinate ER relative to the prior year.  The dollar amount increase of metoprolol revenues for 2009 can be attributed to volume of units sold (approximately 18% of total dollar increase) with the remainder of the dollar amount increase due to price.  We launched clonidine in August 2009 as the sole generic distributor.  Previously, we launched various sumatriptan SKUs in the fourth quarter of 2008.  Throughout 2009, we remained the sole distributor of three sumatriptan SKUs with one competitor for a single SKU.  In the third quarter of 2008, we launched multiple strengths of dronabinol.  We also commenced shipment of meclizine HCl tablets in 12.5mg and 25mg strengths in the third quarter of 2008.  Other notable launches in 2009 were tramadol ER, which launched in the fourth quarter of 2009, risperidone ODT, which launched in the second quarter of 2009, and alprazolam, which launched in the first quarter of 2009.  These three products are included in “Other” above.  

Tempering these increases of 2009 net sales were lower generic revenues of certain existing products primarily driven by termination of supply and distribution agreements and/or increased competition affecting both price and volume, including fluticasone, various amoxicillin products, cabergoline, ibuprofen, and propranolol HCl ER caps.  In addition, we experienced declines in many of our other generic products due to volume and pricing pressures, and/or product discontinuation as a result of the fourth quarter 2008 restructuring of the generic business to trim our generic product portfolio in an effort to retain only those products that deliver acceptable profit.  Net sales of contract-manufactured products (which are manufactured for us by third-parties under contract)

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and licensed products (which are licensed to us from third-party development partners and also are generally manufactured by third parties) were approximately 79% of our total revenues in 2009 and approximately 57% of our total revenues in 2008.  The increase in the percentage is driven by the increased sales of metoprolol, dronabinol and sumatriptan coupled with the 2009 launch of clonidine.  We are substantially dependent upon contract-manufactured and licensed products for our overall sales, and any inability by our suppliers to meet demand could adversely affect our future sales.  

The increase in the Strativa segment revenues in 2009 was primarily due to the acquisition of Nascobal^® and the associated relaunch of the product in the second quarter of 2009 by Strativa.  The net sales decline of Megace^® ES in 2009 is primarily attributed to the timing of trade buying patterns.  In December 2007, the trade delayed its Megace^® ES purchases until after the holidays to the benefit of 2008.  In December 2008, the trade accelerated its Megace^® ES purchases before the holidays to the detriment of our 2009 revenue.  Megace^® ES also experienced higher returns during 2009 as compared to the prior year.  We expect that the Megace^® ES product returns rate for 2010 will approximate the 2009 returns rate.   

Gross Revenues to Total Revenues Deductions

Generic drug pricing at the wholesale level can create significant differences between our invoice price and net selling price.  Wholesale customers purchase product from us at invoice price, then resell the product to specific healthcare providers on the basis of prices negotiated between us and the providers, and the wholesaler submits a chargeback credit to us for the difference.  We record estimates for these chargebacks as well as sales returns, rebates and incentive programs, and the sales allowances for all our customers at the time of sale as deductions from gross revenues, with corresponding adjustments to our accounts receivable reserves and allowances.

We have the experience and the access to relevant information that we believe necessary to reasonably estimate the amounts of such deductions from gross revenues.  Some of the assumptions we use for certain of our estimates are based on information received from third parties, such as wholesale customer inventory data and market data, or other market factors beyond our control.  The estimates that are most critical to the establishment of these reserves, and therefore would have the largest impact if these estimates were not accurate, are estimates related to expected contract sales volumes, average contract pricing, customer inventories and return levels.  We regularly review the information related to these estimates and adjust our reserves accordingly if and when actual experience differs from previous estimates.  With the exception of the product returns allowance, the ending balances of account receivable reserves and allowances generally are eliminated during a two-month to four-month period, on average.

We recognize revenue for product sales when title and risk of loss have transferred to our customers and when collectability is reasonably assured.  This is generally at the time that products are received by the customers.  Upon recognizing revenue from a sale, we record estimates for chargebacks, rebates and incentives, returns, cash discounts and other sales reserves that reduce accounts receivable.  

Our gross revenues for the years ended December 31, 2010, December 31, 2009 and December 31, 2008 before deductions for chargebacks, rebates and incentive programs (including rebates paid under federal and state government Medicaid drug reimbursement programs), sales returns and other sales allowances were as follows:

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The total gross-to-net adjustments as a percentage of sales increased for 2010 compared to 2009 primarily due to an increase in chargebacks, cash discounts and other, and Medicaid rebates and rebates due under other U.S. Government pricing programs.

·      Chargebacks: the increase in the percentage of gross revenues was primarily driven by a significant decrease in sales of products that carry lower than average chargeback rates , mainly metoprolol , coupled with a decrease in the percentage of non-wholesaler sales (mainly related to metoprolol), and we also experienced higher chargeback rates for certain products that had additional competition in 2010.    

·      Cash discounts and other: the increase is primarily due to price adjustments given major customers to retain metoprolol business and other products that faced additional competition in 2010, coupled with customer mix.  

·      Rebates and incentive programs: the increase in percentage of gross revenues primarily driven by product and customer mix as a result of the increased competition of key products.

·      Medicaid rebates and rebates due under other U.S. Government pricing programs: expense increase was due to higher Tri C are rebates that were effective January 1, 2010.  This was coupled with the impact of the March 2010 health care reform acts which led to higher Medicaid rebates rates and additional patients eligible for managed Medicaid benefits.  These increases were tempered by the favorable settlement with the Office of Inspector General of the Department of Veterans Affairs regarding a routine post award contract review of our contract for the periods 2004 to 2007.  

Gross-to-net deductions are discussed in the “Critical Accounting Policies and Use of Estimates” section below.      

Gross Margin (2010 compared to 2009)

The increase in Par Pharmaceutical gross margin dollars for 2010 is primarily due to the launches of clonidine, omeprazole, and tramadol ER, coupled with royalties from the sales of fenofibrate, which launched in the fourth quarter 2009, and diazepam, which launched in September 2010, and tempered by lower sales of metoprolol.  The top 12 sales volume Par products (metoprolol, sumatriptan, clonidine, meclizine, dronabinol, tramadol ER, omeprazole, chlorpheniramine/hydrocodone, nateglinide, cholestyramine powder, cabergoline and methimazole) accounted for approximately $230 million gross margin dollars and a margin percentage of approximately 30% for 2010.  For 2009, these top net revenue products totaled approximately $198 million gross margin dollars with a margin percentage of approximately 21%.  The increase is primarily due to lower amortization of the sumatriptan related intangible asset as it nears the end of its original estimated useful life, and the launches of clonidine, tramadol ER, nateglinide, chlorpheniramine/hydrocodone and omeprazole tempered by the metoprolol and meclizine declines.

Gross margin dollars related to all other Par generic revenues totaled approximately $76 million with a margin percentage of approximately 55% for 2010.  For 2009, gross margin dollars for all other generic revenues totaled approximately $70 million with a margin percentage of approximately 49%.  Gross margin dollars for this group of products were positively impacted by increased royalties (from the sales of fenofibrate, which launched in the fourth quarter 2009, and diazepam, which launched in September 2010), the benefit associated with a settlement of a routine post award contract review of our contract with the Department of Veterans Affairs for the periods 2004 to 2007 with the Office of Inspector General of the Department of Veterans Affairs, and increased risperidone gross margin dollars tempered by lower revenues primarily driven by termination of supply and distribution agreements and/or increased competition affecting both price and volume, including propranolol and ranitidine syrup.    

Strativa gross margin dollars increased for 2010, primarily due to the acquisition of Nascobal^® and the associated relaunch of the product in mid-2009 coupled with the $2 million termination payment associated with the discontinuation of the extended-reach agreement with Solvay Pharmaceuticals, Inc., tempered by the lower Megace^® ES revenues.     

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Gross Margin (2009 compared to 2008)

Our increase in generic gross margin dollars in 2009 is primarily due to higher sales of metoprolol coupled with a full year of sumatriptan sales (launched in November 2008), the launch of clonidine in August 2009, a full year of dronabinol sales (launched in July 2008), a full year of meclizine sales (commenced shipment in the third quarter of 2008), and the launch of tramadol ER (generic Ultram ER^®) in November 2009.  These six products along with cabergoline and propranolol totaled approximately $194 million gross margin dollars and totaled a gross margin percentage of approximately 20% for 2009.  These products (excluding clonidine and tramadol ER, which both launched in 2009) totaled approximately $85 million gross margin dollars and a gross margin percentage of approximately 31% for 2008.  Gross margin related to all other revenue sources (e.g., products and royalties) totaled approximately $74 million and a gross margin percentage of approximately 47% for 2009 as compared to 2008 gross margin dollars of $24 million with a gross margin percentage of approximately 11%.  Gross margin related to all other revenue sources benefited from the generic segment’s resizing which began in the fourth quarter of 2008 and included the trimming of the generic product portfolio to retain only those marketed products that deliver acceptable gross margins, the non-recurrence of an impairment charge for nabumetone in the prior year, the first quarter 2009 launch of alprazolam that has a high gross margin percentage and additional tramadol HCl and acetaminophen (generic Ultracet^®) business due to loss of a competitor that had to exit the market during the second quarter of 2009.     

Strativa gross margin dollars decreased for 2009, primarily due to lower sales of Megace^® ES.  The gross margin percentage of Nascobal^® was negatively impacted by purchase price adjustments associated with inventory fair value adjustments upon acquisition and sold in the second quarter of 2009.  

Research and Development (2010 compared to 2009)

Par Pharmaceutical:

The increase in Par Pharmaceutical research and development expense for the year ended December 31, 2010 is principally driven by:

·      Higher outside development costs, up $14.1 million, due to the following business development activity:

o      In the second quarter of 2010, Par acquired an ANDA from a third party for an up-front payment of $11.0 million which was expensed as incurred.  The agreement provides for an additional milestone payment contingent upon certain regulatory events.  Par will retain all profit from the commercial sale of the product if approved by the FDA and launched.  The ANDA is currently under review by the FDA.   

o      In the second quarter of 2010, Par acquired from Eagle Pharmaceuticals the rights and obligations of a collaboration arrangement with EMET Pharmaceuticals for mesalamine 400mg delayed release tablet currently in development, for an up-front payment of $5.5 million dollars.  The arrangement provides for additional milestone payments based upon certain development activities, FDA approval and sales.  The first and second of such milestones were achieved during the second quarter and fourth quarter and the resultant $0.5 million payments were each expensed as incurred.  Par will participate in a profit sharing arrangement with EMET Pharmaceuticals based on the commercial sale of the product, if the product is approved by the FDA and launched.  The ANDA is currently under review by the FDA. Refer to “Legal Proceedings” in Note 16 to the Consolidated Financial Statements, “Commitments, Contingencies and Other Matters,” contained elsewhere in this Form 10-K, for a description of related litigation.   

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o      In 2009, Par paid $4.0 million to enter a supply and distribution agreement with Tris Pharma, Inc., our licensing partner, for the development of generic Tussionex^®, for which Tris is the holder of the ANDA.  In the third quarter of 2010, Par paid a $2.0 million development milestone payment to Tris, and in the fourth quarter of 2010 Par commenced a limited launch of generic Tussionex^®.  Under the terms of the agreement, Tris manufactures and Par markets generic Tussionex^® and the parties participate in a profit sharing arrangement based on the commercial sale of the product.  Refer to “Legal Proceedings” in Note 16 to the Consolidated Financial Statements, “Commitments, Contingencies and Other Matters,” contained elsewhere in this Form 10-K, for a description of related litigation.   

·      Higher biostudy and material costs, combined worth $4.0 million, related to the development of generic products.

Strativa:

The decrease in Strativa’s research and development expense in 2010 principally reflects the non-recurrence of a $1.0 million milestone payment to MonoSol in the first quarter of 2009 that was triggered by the successful completion of bioequivalence reports for Zuplenz^® and an additional $6.5 million paid and expensed in the fourth quarter of 2009 to MonoSol Rx under the terms of an amendment to the original License, Development and Supply Agreement for Zuplenz^® and a new Development and Commercialization Agreement related to other oral soluble film products.  In July 2010, the FDA approved Zuplenz^®.  The approval triggered $6.0 million of milestone payments to MonoSol, which was paid and capitalized in the third quarter of 2010 as an intangible asset to be expensed to cost of goods sold over the estimated life of the product.

Research and Development (2009 compared to 2008)

Par Pharmaceutical – Generic Products Division:

In October 2008, we announced plans to resize our generic unit as part of an ongoing strategic assessment of our businesses.  In conjunction with this action, we began to significantly reduce our internal generic products research and development effort in the first quarter of 2009.  These actions led to reduced full year expenditures of $18.5 million driven by an $8.4 million reduction in employment related costs on headcount reductions of approximately 65 employees.  The remainder of the savings was the result of lower biostudy costs, down $6.2 million, and lower depreciation, supplies, maintenance, and corporate overhead allocations, combined costs of $8.1 million, as we concentrated our efforts on completing a more focused portfolio of generic products.  These reductions were somewhat tempered by higher outside development costs, up $3.9 million, driven by increased activity with third party partners related to new product development and licensing opportunities.  

Strativa Pharmaceuticals – Branded Products Division:

The decrease in Strativa research and development for the year ended December 31, 2009 principally reflects:

·      the non-recurrence of a $5 million initial cash payment made to Alfacell Corporation in the first quarter of 2008 under an exclusive licensing agreement with Alfacell to acquire the U.S. commercialization rights to Onconase^®.  On September 8, 2009, we entered into a termination and mutual release agreement with Alfacell, which terminated our commercial rights and obligations under the licensing agreement, in exchange for a 2% royalty on U.S. sales of any Onconase^® product commercialized by or on behalf of Alfacell in the field of cancer;   

·      the non-recurrence of approximately $2.9 million of costs related to the development of Zensana^TM, an oral spray formulation of ondansetron, to which we acquired certain development rights in the latter half of 2007; and  

·      lower net milestone payments to MonoSol Rx relating to Zuplenz^® as a $1.0 million milestone payment triggered by MonoSol Rx in January 2009 upon successful completion of bioequivalence reports for Zuplenz^®  was more than offset by the non-recurrence of $2.5 million of development milestones that were paid during the first nine months of 2008.

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These reductions were tempered by:

·      an additional $6.5 million paid and expensed in the fourth quarter of 2009 to MonoSol Rx under the terms of an amendment to the original License, Development and Supply Agreement for Zuplenz^®  and a new Development and Commercialization Agreement for up to three potential oral soluble film products; and

·      higher year over year FDA filing fees due to the NDA for Zuplenz^® and our second quarter 2009 acquisition of Nascobal^®.  

Selling, General and Administrative (2010 compared to 2009)

The net increase in SG&A expenditures for the year ended December 31, 2010 principally reflects:

·      an increase of $15.6 million related to our on-going direct expenditures in support of Strativa sales and marketing, driven by the annualization of the 2009 field force expansion of approximately 70 additional employees related to the second quarter of 2009 relaunch of Nascobal^®, the 2010 field force expansion of approximately 60 employees related to the late August launch of Oravig^TM and October launch of Zuplenz^® coupled with the associated launch meeting and pre-commercialization and post-commercialization marketing activities;

·      $4.3 million of one-time severance charges related to the 2010 termination of three executives as compared to $0.5 million in 2009;

·      higher legal fees of approximately $9.0 million;

·      higher depreciation of approximately $1.0 million;

·      higher share-based compensation of approximately $0.8 million, principally due to mark-to-market accounting for cash settled restricted stock units;

tempered by,

·      lower general bonus expenditures of $1.0 million, and

·      lower consulting costs of approximately $3.7 million.  

Selling, General and Administrative (2009 compared to 2008)

The net increase in SG&A expenditures for the year ended December 31, 2009 principally reflects:

·      an increase of $24.9 million related to our on-going expenditures supporting Strativa sales and marketing, driven primarily by an increase in the field force of approximately 60 additional employees and other expenses and activities related to the relaunch of Nascobal^®, as well as development costs for other pipeline products, principally Zuplenz^® and Oravig^TM;

·      higher bonus costs of $6.7 million due to our 2009 annual operating results being significantly better than the 2008 operating results;

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·      approximately $1.8 million of increased allocations of stock based compensation costs driven by the significant downsizing of the Research and Development organization (total company stock based compensation costs are up approximately $0.7 million on a comparative basis to the prior year, exclusive of prior year amounts for severance charges); and

·      lower legal, accounting and consulting fees, of approximately $4.9 million.

Settlements and Loss Contingencies, Net (2010 compared to 2009 and 2009 compared to 2008)