EURX Eurand N.V. (MM)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

Form 20-F

 

 

Commission file number 001-33444

 

EURAND N.V.

(Exact name of Registrant as specified in its charter)

 

The Netherlands

(Jurisdiction of incorporation or organization)

 

Olympic Plaza, Fred. Roeskestraat 123, 1076 EE Amsterdam, The Netherlands

(Address of principal executive offices)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

 

SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION

 

PURSUANT TO SECTION 15(d) OF THE ACT:

None

(Title of Class)

 

As of December 31, 2009, there were 47,856,976 Ordinary Shares, par value €0.01 per share, outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o  Yes      þ  No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   o  Yes      þ  No

 

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

 

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

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in the filing

Reporting Standards as issued by the International Accounting Standards Board

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

o  Item 17           o  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes      þ  No

 

 

TABLE OF CONTENTS

 

 

This Annual Report on Form 20-F may include “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, such matters as:

 

 

These forward-looking statements are usually preceded by the words “continue,” “intends,” “will,” “plans,” “expects,” “anticipates,” “estimates,” “believes” or similar expressions. These forward-looking statements represent only our belief regarding future events and rely on assumptions and are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from expectations. The following documents, among others, describe these assumptions, risks, uncertainties, and other factors.

 

You should review factors that could affect our future financial results discussed more fully under “Key Information,” “Information on the Company,” and “Operating and Financial Review and Prospects,” and “Risk Factors,” as well as other information discussed elsewhere in this Annual Report on Form 20-F and in our other filings with the U.S. Securities and Exchange Commission, referred to herein as the SEC.

 

Any forward-looking statement speaks only as to the date on which that statement is made. Except as required by law, we assume no obligation and do not intend, to update any forward-looking statement to reflect events or circumstances that occur after the date on which the forward-looking statement is made.

 

Eurand N.V. is a Netherlands company that is referred to in this Annual Report on Form 20-F, together with its subsidiaries, as “Eurand,” the “Company,” “we,” “us,” or “our.” This Annual Report should be read in conjunction with our consolidated financial statements and the accompanying notes thereto, which are included in Item 18 to this Annual Report.

 

 

Not Applicable.

 

 

Not Applicable.

 

 

Selected Consolidated Financial Data

 

 

 

 

 

 

 

Exchange Rate Information

 

We prepare our consolidated financial statements in euros. This annual report contains translations of euros into U.S. dollars at a specified rate, or convenience rate, solely for the convenience of the reader. The convenience rate is 1.4332 U.S. dollars per euro, defined by the noon buying rate in New York City for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, on December 31, 2009. No representation is made that the euro amounts referred to in this Annual Report on Form 20-F could have been or could be converted into U.S. dollars at any particular rate or at all.

 

Fluctuations in the exchange rates between the euro and the dollar will affect the dollar amounts received by owners of our shares on payment of dividends, if any, paid in euros. Moreover, such fluctuations may also affect the dollar price of our shares on the NASDAQ Global Market.

The following table sets forth information regarding the exchange rates of U.S. dollars per euro for the periods indicated. Average rates are calculated by using the average of the closing noon buying rates on the last day of each month during the periods presented.

 

 

 

Source: Federal Reserve Bank of New York

 

The following table sets forth the high and low noon buying rate for the euro for each of the prior six months. Average rates are calculated by using the average of the closing noon buying rates on each day during the periods presented.

 

 

 

Source: Federal Reserve Bank of New York

 

On March 1, 2010, the closing rate was $1.3524 to €1.00.

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons For the Offer and Use of the Proceeds

 

Not applicable.

Risk Factors

 

An investment in our ordinary shares involves a high degree of risk. You should consider carefully the risks described below, together with the other information contained in this Annual Report on Form 20-F, including in our consolidated financial statements and the related notes appearing at the end of this Annual Report on Form 20-F, before you decide whether to buy our ordinary shares. If any of the following risks actually occur, our business, results of operations and financial condition could suffer significantly. In any of these cases, the market price of our ordinary shares could decline, and you may lose all or part of the money you paid to buy our ordinary shares.

 

Risks Related to Our Financial Condition

 

We have a history of net losses, and we might not achieve or maintain profitability.

 

Except for a net income in 2008 of €13.6 million, which included a gain on settlement of litigation of €24.4 million which is not expected to recur, we have incurred significant net losses since our formation in 1999, when we were established as a company independent of American Home Products, now Wyeth. As of December 31, 2009, we had an accumulated deficit of €44.3 million (or $63.5 million). Our net income (losses) were approximately €(6.7) million, €13.6 million and €(5.9) million (or $(8.5) million), in 2007, 2008 and 2009, respectively. In addition, we have made, and expect to continue to make, investments in our research and development programs. Our selling, general and administrative expenses have been and will continue to be a significant component of our cost structure. We expect to incur increased expenses as we continue our research activities, conduct development of or seek regulatory approvals for our product candidates, and promote our lead product, ZENPEP ^® (pancrelipase) Delayed-Release Capsules, which was launched in November 2009.

 

The commercial launch of ZENPEP in the U.S. commenced in November 2009, but we expect that associated expenses will precede revenues generated by the increased spending. If our launch of ZENPEP is not successful, either because of competition from other PEPs, an inability to build market share, increased selling or other expenses, or other difficulties, we may not generate sufficient revenues from ZENPEP to reach profitability.

 

Even if developing and commercializing one or more of our product candidates is successful, we may not be able to achieve or maintain profitability. Whether we maintain our operating profitability and achieve profitability in the future will depend on our ability to generate revenues that exceed our expenses. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve profitability, the market value of our ordinary shares may decline and you could lose all or part of your investment.

 

Risks Related to ZENPEP ^®

 

We currently have limited internal sales and marketing capabilities. If we are unable to develop our sales and marketing capabilities on our own, or through contract sales forces or acquisition, we will not be able to fully exploit the commercial potential for ZENPEP ^® in the U.S.

 

We have limited sales and marketing experience in the U.S. We anticipate continuing to make significant expenditures to grow our sales force to sell ZENPEP in EPI and expand our marketing capabilities. In order to successfully exploit ZENPEP’s commercial potential, we must successfully market and sell the product against established competitors and work with third-party payors to establish favorable reimbursement for ZENPEP. Any failure to deploy a sales force of sufficient size or inability to effectively operate in the marketplace could adversely impact the commercialization of ZENPEP and there can be no assurance that our marketing efforts will generate significant revenues.

 

We currently do not intend to sell ZENPEP ourselves outside of the U.S. Therefore, we must enter into arrangements with third parties to perform these services outside of the U.S. We may not be able to effectuate these agreements.

Events or factors that may inhibit or hinder our ZENPEP commercialization efforts include:

 

 

PEPs are lifesaving drugs. The FDA may not remove existing unapproved PEPs from the market in April 2010 even if they have not been FDA-approved. This would cause the level of competition in the PEP market to be significantly greater than we anticipate.

 

Existing products to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there are currently marketed PEPs that have not been approved by the FDA. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of EPI drug products file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for exocrine pancreatic insufficiency drug products until April 28, 2010 for those companies who were (a) marketing unapproved pancreatic enzyme products as of April 28, 2004, (b) submitted NDAs on or before April 28, 2009 and (c) who continue diligent pursuit of regulatory approval.

 

Despite the FDA’s announcement, its position is non-binding, and the agency may not pursue regulatory action against companies that fail to meet any applicable deadline. If the FDA does not enforce its stated positions by the applicable deadline, the level of competition that ZENPEP will face will be significantly greater than we anticipate. In addition, the FDA could change its position or suspend enforcement again as it did in October 2007.

 

Although we anticipate, based on the FDA’s announced position, a reduction in the number of marketed products aimed at the treatment of exocrine pancreatic insufficiency, this decline in competition may not occur. The fact that PEPs are lifesaving drugs may influence the FDA’s action for any of our competitors’ product candidates, particularly if it would result in two or fewer products on the market for the treatment of exocrine pancreatic insufficiency.

 

The level of competition that ZENPEP will face from these products in the U.S. will depend on whether and how many manufacturers of these products maintain them on the market after the applicable date, when and whether the FDA requests the withdrawal of unapproved products or simply addresses the manufacture, and whether manufacturers obtain approval for their NDAs by the deadline set by the FDA and, if they are unable to do so, whether the FDA takes regulatory action against these manufacturers if they do not exit the market and the nature of any such action, as the FDA did in 2007.

 

ZENPEP ^® competes with currently marketed products for exocrine pancreatic insufficiency, to the extent such products are either approved or permitted to remain on the market, and our competitors may have more resources available to them than us.

 

ZENPEP competes with currently marketed products for exocrine pancreatic insufficiency. This competition could affect the market acceptance of ZENPEP or require us to lower the price of ZENPEP, which would negatively impact our margin and our ability to achieve profitability. Other companies with existing PEPs include Solvay

Pharmaceuticals acquired by Abbott Laboratories or Solvay/Abbott; Axcan Pharmaceuticals, or Axcan, whose coated product, i.e. a product that has been coated to protect the enzymes from degradation resulting from acids in the stomach, has been licensed from us; and McNeil Consumer Specialty, a subsidiary of Johnson & Johnson. In addition, we understand that other commercial entities have or have had synthetic product candidates in clinical development that could compete with ZENPEP. These and other companies may have greater resources available than we do to support their products.

 

Solvay announced approval in May 2009 for its reformulated PEP, Creon ^® . In December 2007, the FDA accepted and granted priority review for Axcan’s Ultrase NDA. Axcan has not yet received approval for its Ultrase NDA and we are unable to predict whether Axcan will receive approval. The Ultrase product which is currently marketed and awaiting approval has been licensed to Axcan by us. We receive manufacturing fees and royalties based on a percentage of Axcan’s annual net sales of the finished product. The Creon and Ultrase products compete with ZENPEP.

 

If we or our collaboration partners outside of the U.S. are unable to commercialize ZENPEP ^® or experience significant delays in doing so, our growth prospects will be materially harmed.

 

We have invested significant time and financial resources in the development of ZENPEP. We currently intend to out-license commercial rights to ZENPEP outside the U.S., including Europe and Asia. Our ability or that of our collaboration partners, to successfully develop and commercialize ZENPEP will depend on numerous factors, including:

 

 

Any of the foregoing factors would cause us or our licensees to be unable to commercialize ZENPEP in the timeframe anticipated or at all. Any such delay or failure would cause our product revenues to suffer.

 

Even though ZENPEP ^® has received regulatory approval for marketing in the U.S., and we have met significant milestones necessary to achieve marketing authorization in several venues, we may not succeed in obtaining regulatory approval for ZENPEP from other regulatory agencies. Without regulatory approval from other regulatory agencies, we will be unable to commercialize ZENPEP to its full potential and our growth prospects will be materially impaired.

 

ZENPEP is subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, the European Medicines Evaluation Agency, or EMEA, and other applicable regulatory authorities relating to the testing, manufacture, safety, efficacy, record-keeping, labeling, packaging, storage, approval, advertising, marketing, promotion, sale and distribution of drugs. For example, to obtain regulatory approval for our lead product, ZENPEP, a new porcine-derived proprietary enzyme replacement product for the treatment of exocrine pancreatic insufficiency, or EPI, clinical trials must demonstrate that our product is safe and effective for use in humans.

 

We evaluated ZENPEP in patients suffering from EPI secondary to Cystic Fibrosis in two Phase III clinical trials. Our pivotal Phase III clinical trial was completed in November 2006 and evaluated ZENPEP in patients over the age of seven. Our supportive Phase III clinical trial was completed in September 2006 and evaluated ZENPEP in

patients between the ages of 1-6. At the FDA’s request, we completed a bioavailability study, the results of which were included in the submission of our NDA for ZENPEP. We also conducted a Phase II/III Clinical Study comparing the safety and efficacy of two doses of ZENPEP for fat absorption in adult CP patients with EPI. The results of that study were announced in November 2009.

 

With regard to our U.S. regulatory submissions, we completed the rolling submission of our NDA for ZENPEP in December 2007 and the NDA filing was accepted and granted priority review in February 2008. In June 2008 we received an approvable letter from the FDA. We and our raw material supplier, Nordmark Arzneimittel GmbH & Co., responded to the deficiencies identified in the letter in late 2008. We received a complete response letter in January 2009 and were issued a late second quarter 2009 PDUFA date. In June 2009, the FDA notified us that it had extended the June 2009 PDUFA date by three months. On August 27, 2009, the FDA approved ZENPEP for sale in the U.S. for the treatment of EPI.

 

With regard to our European regulatory submissions, we filed with the Pediatric Committee, or PDCO, our Pediatric Investigational Plan, or PIP, for ZENPEP in June 2008 and the PIP was validated in July 2008. In September 2008 we received the PDCO Summary Report with the Request for Modification. We responded to the Request for Modification in March 2009, and we met with EMEA in late 2009 to discuss our submission. We recently received feedback from the EMEA on the clinical and regulatory path forward for ZENPEP in light of the EMEA’s recent guidelines. Based on the recommendation of the EMEA we expect to initiate a Phase III study in Europe in the second half of 2010. Satisfaction of regulatory requirements is costly, time-consuming, uncertain and subject to unanticipated delays. Even though we have completed two Phase III clinical trials and one Phase II/III Clinical Study in the U.S. with respect to ZENPEP, we may never succeed in obtaining approval from the EMEA or any other applicable regulatory authority. Furthermore, since we currently intend to market ZENPEP directly in the U.S. and to out-license commercial rights to ZENPEP in many jurisdictions outside the U.S., we must obtain regulatory approval in each non-U.S. jurisdiction, which vary in their approval procedures, requirements and review. ZENPEP may fail to receive and maintain regulatory approval in certain jurisdictions for many reasons, including:

 

 

If we are unable to obtain adequate reimbursement for ZENPEP ^® from government health administration authorities, private health insurers and other organizations, ZENPEP may be too costly for regular use and our ability to generate revenues would be harmed.

 

ZENPEP was only recently approved by the FDA, and accordingly, we have limited insurance coverage and third-party reimbursement policies for ZENPEP. Our future revenues and profitability will be adversely affected if governmental, private third-party payors and other third-party payors, including Medicare and Medicaid, do not sufficiently defray the cost of ZENPEP to the consumer. If these entities do not provide coverage and reimbursement for ZENPEP or determine to provide an insufficient level of coverage and reimbursement, ZENPEP may be too costly for general use, and physicians may not prescribe it. Many third-party payors cover only selected drugs, making drugs that are not preferred by such payor more expensive for patients, and often require prior authorization or failure on another type of treatment before covering a particular drug.

 

In addition to potential restrictions on coverage, the amount of reimbursement for our products may adversely affect results of operations. In the U.S. and elsewhere, there have been, and we expect there will continue to be,

actions and proposals to control and reduce healthcare costs. Government and other third-party payors are challenging the prices charged for healthcare products and increasingly limiting and attempting to limit both coverage and level of reimbursement for prescription drugs.

 

If adequate coverage and reimbursement by third-party payors is not achieved, our ability to successfully commercialize ZENPEP may be adversely impacted. While prior to fully establishing reimbursement, we intend to deploy marketing strategies designed to make ZENPEP affordable for patients, this delays revenue. In the event we are not able to successfully deploy such strategies, the market share of ZENPEP, and our revenue may suffer. Any limitation on the use of ZENPEP or any decrease in the price of ZENPEP will have a material adverse effect on our business.

 

Risks Related to Our Business

 

We depend on the success of our existing products. If we are unable to maintain our existing arrangements with our licensees or fail to establish new licensing arrangements, our business and growth prospects will suffer.

 

Product sales and royalties of our top ten products accounted for approximately 68%, 67% and 72% of our total revenues in 2007, 2008 and 2009, respectively. We depend on our arrangements with licensees and marketing collaborators to sell the majority of our products. If our licensees or marketing collaborators discontinue sales of our products, seek alternative or additional suppliers for the same or similar products or fail to satisfy their obligations under their agreements with us, or we are unable to establish new licensee and marketing relationships, our growth prospects would be materially harmed. For example, in 2006, a large customer for one of our cardiovascular products brought in a second supplier of the product, reducing their purchases from us by approximately €2.0 million. In addition, if our licensees and marketing collaborators do not manage their inventory levels successfully, it could negatively impact our business and increase the volatility of our operating results. For example, in 2004, one of our major customers built up inventory levels of a product we supply to them; accordingly, their purchases in 2005 were substantially less than anticipated.

 

In addition, we may develop a proprietary product that competes directly with products that we currently supply to our existing licensees. This may have an adverse effect on our relationship with our licensees. For example, ZENPEP competes directly with existing PEPs that we supply to Axcan in the U.S. Alternatively, a licensee could merge with or be acquired by another company, or experience financial or other setbacks unrelated to our arrangement that could affect such licensee’s ability to perform its obligations under their agreement with us. The loss of licensees could materially adversely affect our business and financial condition.

 

Disputes may arise involving the contractual obligations of our customers, licensees or marketing collaborators to purchase our products or pay royalties on the sale of our products, and such disputes, if not resolved in our favor, could result in decreased revenues and material harm to our business.

 

Disputes may arise between us and a customer, licensee or marketing collaborator and may involve the issue of the obligation of the customer, licensee or marketing collaborator to continue to purchase our products and pay royalties on the sale of our products. Such a dispute could result in expensive arbitration or litigation, which may not be resolved in our favor.

 

We have a few key suppliers and the loss of one of these suppliers could interrupt the manufacturing of one or more of our products. Some of such suppliers are our sole source for key materials.

 

The FDA, EMEA and other applicable regulatory agencies each require us to identify to them any supplier of materials used in our products. We currently have a non-exclusive supply agreement with Nordmark Arzneimittel GmbH & Co, or Nordmark, under which Nordmark manufactures and supplies us with the pancreatin used in our ZENPEP formulation. Nordmark is currently our sole source for the pancreatin used in ZENPEP. We also rely on a sole source for two coating materials, Ethocel and Shellac, used in our Diffucaps and Microcaps technologies. We have short term contractual agreements with these sole source suppliers. In the event that we are unable to obtain these materials from our current suppliers on acceptable terms, and are required to replace these products with alternatives, if such exist, the FDA or the EMEA may require additional testing and prior review and approval

before they permit us to use the new supplier. It would typically take one year or more to identify and approve a new supplier. The loss of one of our current suppliers or any significant decrease or interruption in supply could interrupt the manufacture of our products. Furthermore, the FDA or the EMEA could extend these delays in situations where it requires approval of an alternative supplier. The loss of one of these sole suppliers could have a material adverse effect on our business.

 

Any difficulties with, or interruptions of, our manufacturing could delay our output of products and harm our relationships with our collaborators. If we are unable to continue to manufacture our existing products, our results of operations and future prospects will suffer.

 

Any difficulties with or interruptions of our manufacturing could delay our output of products and harm our relationships with our collaborators. We manufacture most of our products at our facilities in Milan, Italy and Dayton, Ohio. Due to regulatory and technical requirements, we have limited ability to shift production among our facilities or to outsource any part of our manufacturing to third parties. Damage to any of our manufacturing facilities caused by human error, physical or electronic security breaches, power loss or other failures or circumstances beyond our control, including acts of God, fire, explosion, flood, war, insurrection or civil disorder, acts of, or authorized by, any government, terrorism, accident, labor trouble or shortage, or inability to obtain material, equipment or transportation, could interrupt or delay our manufacturing or other operations. Furthermore, all of our employees in Europe, except our Chief Executive Officer, are subject to collective bargaining agreements, and national labor disputes could result in a work stoppage or strike by employees that could delay or interrupt our output of products. Due to the nature of these collective bargaining agreements, we have no control over such work stoppages or strikes by our employees in Europe, and a strike may occur even if our employees do not have any grievances against us. Any interruption in manufacturing, whether due to limitations in manufacturing capacity or arising from factors outside our control, could result in delays in meeting contractual obligations and could have a material adverse effect on our relationships with our collaborators and on our revenues.

 

The FDA, the EMEA and other applicable authorities periodically inspect our facilities to ensure compliance with various regulations, including those relating to current good manufacturing practice, or cGMP. In addition, the U.S. Drug Enforcement Agency, or DEA, applicable E.U. authorities and other applicable regulatory authorities must approve our facilities and processes for handling controlled substances. Those agencies may monitor our use of controlled substances and we may be subject to inspections evaluating our compliance with the use and handling of controlled substances. Our failure to comply with such requirements and standards of these agencies could result in the suspension of our manufacturing or closure of our facilities, which could have a material adverse effect on our business.

 

Development of pharmaceutical products is expensive, time-consuming and subject to uncertainties, and we may not realize a return on our investment in product development for a significant period of time, if at all.

 

Developing pharmaceutical products is expensive, and there is typically a significant amount of time prior to realizing a return on an investment in product development, if a return is realized at all. In 2007, 2008 and 2009, our research and development expenses were €17.1 million, or approximately 20% of our total revenues, and €20.3 million, or approximately 21% of our total revenues and €23.6 million (or $33.8 million), or approximately 20% of our total revenues, respectively.

 

To obtain regulatory approval for the sale of any product candidates, extensive clinical trials must demonstrate that our products are safe and effective for use in humans. Clinical trial costs are included in our research and development expenses and may take years to complete. We cannot be sure that we or our collaboration partners will complete clinical testing within the time we anticipate or that we or they will be able to do so without requiring significant resources or expertise in excess of what we anticipate. Completion of clinical trials depends on various factors, including the indication and size of the patient population and its proximity to clinical sites, the nature of the clinical protocol, the eligibility of the criteria for trial, competition for trial patients, availability of sufficient quantities of a product candidate, the assistance of third parties, regulatory compliance and adequate financial resources.

Our future plans include significant investments in research and development, including clinical trials, and related product opportunities. We believe that we must continue to dedicate a significant amount of financial and operational resources to our research and development efforts to grow our business and maintain our competitive position. However, we do not expect to receive significant revenues from these investments for several years, if at all.

 

We rely on third parties to conduct, supervise and monitor our clinical trials, and those third parties may perform in an unsatisfactory manner, such as by failing to meet established deadlines for the completion of such trials.

 

We rely in large part on third parties such as contract research organizations, or CROs, medical institutions and clinical investigators to enroll qualified patients and conduct, supervise and monitor our clinical trials. For example, we used CROs to monitor, supervise and compile data on our clinical trials for ZENPEP. Our reliance on these third parties for clinical development activities reduces our control over these activities. Our reliance on these third parties, however, does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with good clinical practice regulations, or GCP, and the investigational plan and protocols contained in the relevant regulatory application, such as the investigational new drug application. In addition, they may not complete activities on schedule, or may not conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for, and to commercialize, our product candidates may be delayed or prevented.

 

There is a high risk that our product candidates will not have successful clinical trial results and will not advance to the regulatory approval stage.

 

We will only receive regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA, the EMEA, or other applicable regulatory authorities, in adequate, well-designed and properly conducted clinical trials, that the product candidate is safe and effective and otherwise meets the appropriate standards required for approval for a particular indication. Clinical trials are lengthy, complex and extremely expensive processes with uncertain results. A failure or delay of one or more of our or our collaborators’ clinical trials may occur at any stage of testing. Historically, favorable results from preclinical studies and early clinical trials have often not been confirmed in later clinical trials. Many companies in the pharmaceutical industry have experienced significant setbacks in advanced clinical trials or during the regulatory approval process, despite promising results. The effects of our product candidates may be different than expected or may include undesirable side effects that delay, extend or preclude regulatory approval or limit their commercial use if approved.

 

A number of events or factors, including any of the following, could delay the completion of our and our collaborators’ ongoing and planned clinical trials and negatively impact our ability to market and sell, a particular product or product candidate, including the recently approved ZENPEP:

 

 

 

Our clinical trials may not begin as planned, may need to be redesigned, and may not be completed on schedule, if at all. Delays in our clinical trials may result in increased development costs for our product candidates, which would cause the market price of our shares to decline and limit our ability to obtain additional financing. In addition, if one or more of our clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.

 

Even if we complete our clinical trials, we may never succeed in obtaining regulatory approval for any of our product candidates. Without regulatory approval, we will be unable to commercialize our product candidates, and our growth prospects will be materially impaired.

 

All of our product candidates must successfully complete development and gain regulatory approval before we or our collaborators can market them. Of the large number of products in development, only a small percentage result in the submission of a new drug application, or NDA, to the FDA or EMEA, and even fewer are approved for commercialization. If the safety and efficacy of our product candidates is not demonstrated, the required regulatory approvals to commercialize these product candidates will not be obtained. Any product candidate that we or our collaborators seek to commercialize is subject to extensive regulation by the FDA, EMEA and other applicable regulatory authorities relating to the testing, manufacture, safety, efficacy, record-keeping, labeling, packaging, storage, approval, advertising, marketing, promotion, sale and distribution of drugs. In the U.S. and in many other jurisdictions, rigorous preclinical studies and clinical trials and an extensive regulatory review process must be successfully completed before a new drug can be sold. Satisfaction of these and other regulatory requirements is costly, time-consuming, uncertain and subject to unanticipated delays.

 

The time required to obtain approval by the FDA, the EMEA or other applicable regulatory authorities is unpredictable but typically it takes many years following the commencement of clinical trials, depending upon numerous factors, including the complexity of the product candidate. Our product candidates may fail to receive regulatory approval for many reasons, including:

 

 

The FDA, or the EMEA or other applicable regulatory authorities, might decide that our findings are insufficient for approval and thus might require additional clinical trials or other studies. It is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain the appropriate regulatory approvals necessary for us or our collaborators to begin selling them. Furthermore, since we intend for our products to be commercialized in many jurisdictions, regulatory approval in each such jurisdiction must be obtained. The approval procedures vary among countries and can involve additional and costly preclinical studies and clinical testing and review. The time required to obtain approval in various jurisdictions may differ from

that required to obtain FDA or EMEA approval, and approval by one regulatory authority, such as the FDA or EMEA, does not ensure approval by regulatory authorities elsewhere. The failure to obtain these approvals could harm our business and result in decreased revenues from lost sales, milestone payments or royalties in our co-development agreements.

 

Regulatory approval of a product candidate is limited to specific uses identified in the approval. Certain material changes to an approved product, such as manufacturing changes or additional label claims, are subject to further regulatory review and approval. Approval of a product candidate could also be contingent on post-marketing studies. In addition, any marketed drug and its manufacturer continue to be subject to strict regulation after approval, and any governmental approval can be withdrawn. Any problems with an approved drug or any violation of regulations could result in restrictions on the drug, including withdrawal from the market. In particular, drug manufacturers are subject to strict requirements governing their manufacturing practices and regular inspections to assess compliance with these and other requirements. Failure to comply with governmental requirements could lead to sanctions.

 

Regulatory approval of a product candidate in any jurisdiction is unpredictable. Despite guidance from the FDA, EMEA or other applicable regulatory agencies, there is no guarantee of obtaining approval. In addition, standards enunciated by regulatory agencies are constantly subject to change as a result of factors outside of our control. Our growth prospects will be materially impaired as a result of any delay in, or failure to receive, required regulatory approval for some or all of our product candidates.

 

Failure to obtain regulatory approval for our products in our markets and to retain approvals already granted will prevent us from marketing or licensing our products in these markets.

 

Sales of our products outside the U.S. and any of our product candidates that are commercialized are subject to the regulatory requirements of each country in which the products are sold. Accordingly, the introduction of our products and product candidates in markets outside the U.S. will be subject to regulatory clearances in those jurisdictions.

 

Approval and other regulatory requirements vary by jurisdiction and may differ from the U.S. requirements. We may be required to perform additional preclinical or clinical studies even if FDA approval has been obtained. In addition, failures in European preclinical or clinical studies could impact our filings in the U.S. Many countries also impose product standards, packaging and labeling requirements and import restrictions on our products. The approval by government authorities outside of the U.S. is unpredictable and uncertain and can be expensive. Our ability to market our approved products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances.

 

In addition, changes in regulatory requirements can affect the commercial success of our existing products. For example, we are currently the exclusive supplier of coated PEPs to Axcan in the U.S. In 2009, revenues from product sales and royalties to Axcan in the U.S. accounted for 31% of our total revenues. In April 2004, the FDA mandated that all manufacturers of EPI drug products file a NDA and receive approval for their products by April 2008 or be subject to regulatory action. In addition, the FDA has indicated that it will continue to exercise enforcement discretion with respect to unapproved pancreatic enzyme drug products until April 2010, if the manufacturers have INDs on active status on or before April 2008, and have submitted NDAs on or before April 2009. We are unable to predict whether Axcan will receive approval of a NDA for their products by the deadline set by the FDA. Axcan has filed a NDA with the FDA in respect of the PEP we supply to them and, if such product is approved for sale in the U.S., we would supply such product to them. If Axcan is unable to meet the FDA’s requirements by the applicable deadline, and the FDA enforces removal of unapproved PEPs from the U.S. market, we will no longer have PEP sales to this company in the U.S.

 

Even if our product candidates receive regulatory approval or do not require regulatory approval, they may not become commercially viable products.

 

Even if our product candidates are approved for commercialization, or our products do not require approval for commercialization, they may not become commercially viable products. For example, even if we or our collaborators receive regulatory approval to market a commercial product, any such approval may be subject to limitations

on the indicated uses for which we or our collaborators may market the product. In addition, a new product may appear promising at an early stage of development or after clinical trials but never reach the market, or it may reach the market and not result in product sales. A product or product candidate may not result in commercial success for various reasons, including:

 

 

If we are unable to develop commercially viable products, our business, results of operations and financial condition will be adversely affected.

 

Our existing products and our product candidates, if they receive regulatory approval for marketing, remain subject to ongoing regulatory requirements and, if we fail to comply with these requirements, we could lose these approvals, and the sales of any approved commercial products could be suspended.

 

After receipt of initial regulatory approval, each of our products remains subject to extensive post-approval regulatory requirements, including requirements relating to manufacturing, labeling, packaging, post-approval clinical requirements, adverse event reporting, Risk Evaluation & Mitigation Strategies (REMS), storage, advertising, promotion, distribution and record-keeping. Furthermore, if we receive regulatory approval to market a particular product candidate, the product will also remain subject to the same extensive regulatory requirements. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the uses for which the product may be marketed or the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product, which could reduce our revenues, increase our expenses and render the approved product candidate not commercially viable. In addition, as clinical experience with a drug expands after approval because it is typically used by a greater number and more diverse group of patients after approval than during clinical trials, side effects and other problems may be observed after approval that were not seen or anticipated during pre-approval clinical trials or other studies. Any adverse effects observed after the approval and marketing of a product candidate could result in limitations on the use of such approved product or its withdrawal from the marketplace. Absence of long-term safety data may also limit the approved uses of our products, if any. If we or our collaborators fail to comply with the regulatory requirements of the FDA, the EMEA and other applicable regulatory authorities, or if previously unknown problems with any approved commercial products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks, including:

 

 

 

If we or our collaborators are slow or unable to adapt to changes in existing regulatory requirements or the promulgation of new regulatory requirements or policies, we or our collaborators or licensees may lose marketing approval for our products, resulting in decreased revenue from milestone payments, product sales or royalties and may potentially impact our ability to conduct business in the future.

 

If we fail to comply with the laws governing the marketing and sale of our products, regulatory agencies may take action against us, which could significantly harm our business.

 

As a pharmaceutical company, we are subject to a large body of legal and regulatory requirements. In particular, there are many federal, state and local laws that we need to comply with now that we are engaged in the marketing, promoting, distribution and sale of pharmaceutical products. The FDA extensively regulates, among other things, promotions and advertising of prescription drugs. In addition, the marketing and sale of prescription drugs must comply with the Federal fraud and abuse laws, which are enforced by the Office of the Inspector General of the Division, or OIG, of the Department of Health and Human Services. These laws make it illegal for anyone to give or receive anything of value in exchange for a referral for a product or service that is paid for, in whole or in part, by any federal health program. The federal government can pursue fines and penalties under the Federal False Claims Act which makes it illegal to file, or induce or assist another person in filing, a fraudulent claim for payment to any governmental agency.

 

Because, as part of our commercialization efforts, we provide physicians with samples we must comply with the Prescription Drug Marketing Act, or PDMA, which governs the distribution of prescription drug samples to healthcare practitioners. Among other things, the PDMA prohibits the sale, purchase or trade of prescription drug samples. It also sets out record keeping and other requirements for distributing samples to licensed healthcare providers.

 

In addition, we must comply with the body of laws comprised of the Medicaid Rebate Program, the Veterans’ Health Care Act of 1992 and the Deficit Reduction Act of 2005. This body of law governs product pricing for government reimbursement and sets forth detailed formulas for how we must calculate and report the pricing of our products so as to ensure that the federally funded programs will get the best price.

 

Moreover, many states have enacted laws dealing with fraud and abuse, false claims, the distribution of prescription drug, drug samples and gifts, and the calculation of best price. These laws typically mirror the federal laws but in some cases, the state laws are more stringent than the federal laws and often differ from state to state, making compliance more difficult. We expect more states to enact similar laws, thus increasing the number and complexity of requirements with which we would need to comply.

 

Compliance with this body of laws is complicated, time consuming and expensive. We are a relatively small company that only recently began directly commercializing pharmaceutical products. As such, we have very limited experience in developing and managing, and training our employees regarding, a comprehensive healthcare compliance program. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Even minor, inadvertent irregularities can potentially give rise to claims that the law has been violated. Failure to comply with all potentially applicable laws and regulations could lead to penalties such as the imposition of significant fines, debarment from participating in drug development and marketing and the exclusion from government-funded healthcare programs. The imposition of one or more of these penalties could adversely affect our revenues and our ability to conduct our business as planned.

In addition, the Federal False Claims Act, which allows any person to bring suit alleging the submission or the causing of submission of false or fraudulent claims for payment under federal programs and other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that companies like us may have to defend a false claim action. We could also become subject to similar false claims litigation under state statutes. If we are unsuccessful in defending any such action, such action may have a material adverse effect on our business, financial condition and results of operations.

 

Rapid technological change could make our products, product candidates or technologies obsolete.

 

Pharmaceutical technologies and products are subject to rapid and significant technological change. We expect our competitors will develop new technologies and products that may render our products and pharmaceutical technologies uncompetitive or obsolete. The products and technologies of our competitors may be more effective than the products, product candidates and technologies developed by us. As a result, our products and product candidates may become obsolete before we recover expenses incurred in connection with their development or realize revenues from any commercialized product. We are aware of other pharmaceutical companies that are developing competing technologies, which could render ZENPEP obsolete. For example, other pharmaceutical companies, including Biovitrum, Meristem and Solvay/Abbott, have or had been developing microbial or synthetic enzyme products for the treatment of EPI. Altus announced in a November 2006 press release that it planned to initiate a Phase III clinical trial for its PEP in the second quarter of 2007. In late 2008, Altus announced it was suspending development of its synthetic enzyme product for the treatment of EPI. In mid 2009 Alnara Pharmaceuticals Inc. announced that it had acquired the Altus synthetic enzyme product from the Cystic Fibrosis Foundation and was preceding with additional clinical development. Biovitrum announced in its full year report for 2006 that its PEP was in Phase II. Meristem announced on its website that the Phase I safety study and two Phase II studies for its PEP were complete and that the product was currently undergoing formulation optimization testing. If successful, such competing products could limit the potential success of ZENPEP, and our growth prospects will be materially impaired.

 

We depend on our senior management and other key personnel to manage the growth of our business, and if we fail to attract and retain additional key personnel, we may not be able to expand our business or manage our growth effectively.

 

Our success depends significantly upon the continued service and performance of our senior management and other key personnel. High demand exists for senior management and other key personnel in the pharmaceutical industry. The loss of any of these people may negatively impact our ability to manage our company effectively and to carry out our business plan. In particular, we rely on the contributions of our senior management team, which consists of Gearóid Faherty, our Chief Executive Officer and Chairman, Mario Crovetto, our Chief Financial Officer, John Fraher, our Chief Commercial Officer, and Manya S. Deehr, our Chief Legal Officer and Corporate Secretary, and their continued service is critical to our success. Our senior management team is responsible for the development and implementation of our business strategy. Other key personnel include Michael Walters, Executive Vice President, Ruth Thieroff-Ekerdt, M.D., Chief Medical Officer and Robert Becker, M.D., Chief Research Officer. The loss of service of any member of our senior management team or key personnel could delay or prevent the successful completion of our planned clinical trials or the commercialization of our product candidates. Of our senior management team, only Mr. Faherty and Mr. Walters have employment agreements. Notwithstanding his employment agreement, Mr. Faherty may resign at any time.

 

As we advance our product candidates through clinical trials to commercialization, we will need to expand our marketing and sales capabilities. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

In addition, our growth and success depend on our ability to attract and retain additional highly qualified scientific, technical, clinical, sales, managerial and finance personnel. Intense competition exists among other companies and research and academic institutions for qualified personnel. If we cannot attract and retain sufficiently qualified technical employees on acceptable terms, we may not be able to develop and commercialize competitive products.

 

The failure to maintain our existing co-development relationships on acceptable terms could adversely affect our ability to develop and commercialize our product candidates and our future growth prospects.

 

We frequently enter into co-development agreements to create relationships for the purpose of exploring development opportunities with collaboration partners. In 2009, we entered into four co-development agreements with various collaborators and we continue to negotiate additional co-development agreements. In general, our co-development agreements involve feasibility studies and early-stage development activities whereby we receive an hourly service fee for research and development and, in some instances, may receive additional milestone payments based on the achievement of certain development goals within specified timeframes. Accordingly, our receipt of revenue in a given period during the development phase is dictated in part by the speed at which development goals are met and the time and resources that a collaboration partner wishes to dedicate to development in such period. In some instances, we and our collaboration partner decide to negotiate and include provisions in a co-development agreement that will govern our relationship from development through commercialization. In other instances, we and our collaboration partner elect to define our relationship for the development phases and, if development is promising, may elect to enter into a subsequent agreement that further defines our relationship for subsequent periods of a product’s or product candidate’s life. The likelihood of completing development or progressing past development is highly uncertain notwithstanding the inclusion of provisions that govern the relationship through commercialization. Thus, the existence of such provisions, which could provide for the payment of royalties and sales milestones based on the success of the product, is not indicative of the likelihood that we will receive such payments. We believe we are not substantially dependent on any of our co-development agreements individually; however, the maintenance of such relationships is important to our growth prospects because of the potential that a co-development relationship could evolve into a licensing and supply relationship that could generate significant revenue from licensing fees, product sales, sales milestone payments and/or royalties.

 

Our obligations under our co-development agreements can include performance of development activities, such as feasibility studies, formulation optimization, stability testing and scale-up of the manufacturing process, supply of the product to the collaborator for clinical testing, assistance in the preparation of regulatory filings by our collaborator and supply of the product for sale by our collaborator. If we fail to meet certain of these obligations, we may lose our rights to certain development fees and future royalty and milestone payments, and our collaboration partners may have the right to terminate the agreement. In addition, many of our agreements allow for the collaboration partner to terminate the agreement with limited notice and without penalty or in the event the collaborator reasonably determines that the product does not justify continued development or commercialization. We have completed work under some of these agreements without developing a commercial product and, based on past experience, it is likely that a number of these agreements will not progress to the stage where the product is actually commercialized. In addition, even if our collaborators choose not to terminate an agreement, the risk still remains that the collaborator could decide not to launch a particular product. The loss of a collaboration partner, as a result of either our failure to meet our obligations or early termination by the collaboration partner could affect our results of operations and future growth prospects.

 

Furthermore, our success is in part based upon a reputation that we are an attractive collaborator for leading pharmaceutical companies seeking to enhance existing products or to develop new products. For example, one of our co-development products, EUR-1000, is being developed in collaboration with GlaxoSmithKline, or GSK (acquired Reliant Pharmaceuticals in December 2007), and Amrix ^® is being commercialized in collaboration with Cephalon, Inc. (acquired Amrix from ECR Pharmaceuticals in August 2007). If we fail to meet our obligations under these and other existing co-development agreements, we may diminish our reputation and decrease our potential future co-development opportunities.

If we are not successful in establishing and maintaining additional co-development relationships, our growth prospects will be materially harmed.

 

An important element of our business strategy is to establish co-development relationships with third parties to co-develop particular products or to accelerate the development of some of our early-stage product candidates. The process of establishing new co-development relationships is difficult, time-consuming and involves significant uncertainty. We face, and will continue to face, significant competition in seeking appropriate collaboration partners. Moreover, if we do establish co-development relationships, our collaborators may fail to fulfill their responsibilities or may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical results, a change in business strategy, a change of control or other reasons. In many cases, our collaborators may terminate their relationships with us with limited notice and without penalty or in the event the collaborator reasonably determines that the product does not justify continued development or commercialization. If we are unable to establish and maintain co-development arrangements on acceptable terms, we may have to delay or discontinue further development of one or more of our product candidates, seek regulatory approval or undertake commercialization activities at our own expense or find alternative sources of funding, and our growth prospects will be materially harmed.

 

We rely on our collaboration partners and licensees to successfully commercialize products using certain of our technologies, and we cannot control the actions of such collaborators and licensees. If we, our collaboration partners or licensees are unable to commercialize our co-development product candidates or if we, our collaboration partners or licensees experience significant delays in such commercialization, our growth prospects will be materially harmed.

 

Our arrangements with collaboration partners and licensees are critical to our success in bringing certain of our products and product candidates to market. In particular, we have invested and expect to continue investing significant time and financial resources in the development of our co-development products. We depend on our collaboration partners to conduct preclinical studies and clinical trials, as may be necessary, and to provide funding for our development of these product candidates. Furthermore, in most instances we rely on collaborators to commercialize our co-development products. If we or a significant number of our collaborators are unable to commercialize our co-development products or experience significant delays in such commercialization, our growth prospects will be materially harmed. The successful commercialization of a product or product candidate will depend on numerous events or factors, including:

 

 

We cannot control our collaborators’ or licensees’ performance or the resources they devote to our projects, and some of our collaborators can terminate their agreements with us for no reason and on limited notice. If a collaborator fails to perform as expected, we may have to use funds, personnel, laboratories and other resources that we have not budgeted for, or we may not be able to continue the particular project affected.

 

We generally expect a number of the new co-development agreements we enter into to terminate without significant development activity. A collaboration partner may choose to use its own or one of our competitors’ technologies to develop a way to reformulate its drug and thus withdraw its support of our product candidate. Alternatively, we may develop a proprietary product candidate that competes directly with products that we currently manufacture for a collaboration partner. In addition, a collaboration partner could merge with or be acquired by another company, or experience financial or other setbacks unrelated to our collaboration that could jeopardize the co-development project. The loss of collaborators or projects could materially adversely affect our business, growth prospects and financial condition.

 

In addition, we currently manufacture for commercial distribution a number of drugs that are the subject of NDAs that have been approved or other applicable regulatory approval held by our collaborators and licensees. We

also manufacture products for distribution and sales by our collaborators and licensees that we believe are exempt from the requirements for FDA approval, generally because the FDA has determined that the product does not need such approval. We also use third-party suppliers to provide bulk active drugs used in our products. Because our customers and suppliers are also subject to FDA regulation, our continued development and manufacturing of these products depends not only on our own compliance with FDA requirements but also on the compliance of customers and suppliers over whom we have no control.

 

Acquisitions are part of our growth strategy, and we may fail to execute this aspect of our strategy or to successfully integrate any acquired business.

 

As part of our growth strategy, we evaluate and pursue acquisitions of other businesses, technologies or products. We may not identify appropriate acquisition candidates or successfully consummate any of these acquisitions. To consummate any acquisition, we may need to incur additional debt or issue additional equity securities that dilute your interest. Depending on market conditions, we may not be able to obtain necessary financing for any acquisitions on terms acceptable to us, or at all. In addition, we may be required to pay external costs such as legal advisory, market research consultancy and due diligence fees related to our pursuit and evaluation of potential acquisitions, even if the acquisitions are never consummated. For example, in 2005 we recorded a charge of €973,000 for such external costs related to two potential acquisitions that were not consummated.

 

Even if we are successful in completing one or more acquisitions, the failure to adequately address the financial, operational or legal risks of these transactions could harm our business. Accounting for acquisitions can require impairment losses or restructuring charges, large write-offs of in-process research and development expenses and ongoing amortization expenses related to other intangible assets. We also may incur unexpected or contingent liabilities in connection with acquisitions. In addition, integrating acquisitions can be difficult, and could disrupt our business and divert management resources. If we are unable to manage the integration of any acquisitions successfully, our ability to develop new products and continue to expand our product pipeline may be impaired.

 

We are exposed to political, economic and other risks that arise from operating a multinational business.

 

We have operations in several different countries. For the years ended December 31, 2007, 2008 and 2009, approximately 60%, 52% and 39% of our total revenues, respectively, were derived from sources outside the U.S. We are therefore exposed to risks inherent in international operations. These risks include, but are not limited to:

 

 

Our business success depends in part on our ability to anticipate and effectively manage these and other regulatory, economic, social and political risks inherent in multinational business. We cannot assure you that we will be able to effectively manage these risks or that they will not have a material adverse effect on our multinational business or on our business as a whole.

Currency exchange rate fluctuations may have a negative effect on our financial condition.

 

We are exposed to fluctuations in currency from purchases of goods, services and equipment and investments in other countries and funding denominated in the currencies of other countries. In particular, we are exposed to the fluctuations in the exchange rate between the U.S. dollar and the euro. During 2009, approximately 70% of our total revenues were denominated in U.S. dollars, while the remainder was denominated in euros. We anticipate that the majority of revenue from commercialization of our products and product candidates will be in U.S. dollars and euros. Fluctuations in currency exchange rates may affect our results of operations and the value of our assets and revenues, and increase our liabilities and costs, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. For example, in 2009, we experienced a positive foreign exchange effect on revenues of approximately 3.5%. Changes in currency exchange rates may affect the relative prices at which we and our competitors sell products in the same market. Changes in the value of the relevant currencies also may affect the cost of goods, services and equipment required in our operations.

 

In addition, due to the constantly changing currency exposures and the potential substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations on our future results and, because we do not currently hedge fully against all currency risks and fluctuations between the U.S. dollar and the euro, such fluctuations may result in currency exchange rate losses. Fluctuations in exchange rates could result in our realizing a lower profit margin on sales of our product candidates than we anticipate at the time of entering into commercial agreements. Adverse movements in exchange rates could have a material adverse effect on our financial condition and results of operations.

 

Our competitors may develop products that are less expensive, safer or more effective than, and may diminish or prevent the commercial success of, any product candidates that we may bring to market. In addition, our proprietary products may compete with products we develop and manufacture for our collaborators or with our collaborators’ other products.

 

We face intense competition from pharmaceutical and biotechnology companies, including other drug formulation companies, contract research organizations, academic institutions and government agencies. Some of these competitors are also our collaboration partners.

 

Our competitors may be able to use alternative technologies that do not infringe upon our patents to formulate the active materials in our product; for example, alternative orally disintegrating tablets, particle-coating or controlled-release drug formulation technologies. They may, therefore, bring to market products that are able to compete with ZENPEP, EUR-1025, Amrix ^® , Lamictal ^® ODT ^tm , co-development products such as EUR-1000, or other products that we have developed or may in the future develop. For example, in 2007 Par Pharmaceuticals Companies, Inc. and Mylan Pharmaceuticals, Inc. each received approval from the FDA for a generic form of Inderal LA that would compete with EUR-1000. If successful, products derived from alternative technologies will compete against our products and product candidates. Competing technologies include the multiple-particle systems of Watson, Biovail and Elan; the controlled-release tablet technologies of Penwest and SkyePharma; and the solubility- enhancement technologies of Elan, SkyePharma and Soliqs, a division of Solvay/Abbott. The products derived from these technologies may be safer or more efficacious than our products and product candidates.

 

Potential products being tested in the U.S. and Europe of which we are not currently aware may also compete with product candidates using our drug formulation systems. Our collaboration partners could choose a competing drug formulation system to use with their drugs instead of ours. In addition, our collaboration partners themselves face competition with other major pharmaceutical companies on products using our drug formulation technologies, which could adversely impact the potential for our technologies and co-development products, as well as our royalty revenues and business and financial condition.

 

Many of our competitors have greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than we have. Many of them also have more experience than we do in preclinical studies and clinical trials of new drugs and in obtaining FDA, EMEA and other applicable regulatory approvals or, as with some competitors, are already established in the market. In addition, their success in obtaining patents may make it difficult or impossible for us to compete with them.

Major technological changes can happen quickly in the drug formulation and pharmaceutical industries. Our competitors’ development of technologically improved or different products may make our technologies and product candidates obsolete or noncompetitive.

 

In addition, our proprietary products may compete with products we develop and manufacture for our collaborators or with our collaborators’ other products. Some of these products may target the same diseases and conditions that are the focus of our drug development programs. For example, Axcan, whose coated PEP product has been licensed from us, has filed an NDA for the product with the FDA. If approved, Ultrase would compete with ZENPEP.

 

Our revenue is currently dependent upon a small number of customers, the loss of any one of which could have a material adverse impact on our business, financial condition and results of operations.

 

Our revenue is currently dependent upon a small number of customers. Our top two customers together accounted for 27%, 29% and 38% of total revenues in 2007, 2008 and 2009, respectively, and 11%, 16% and 43% of the accounts receivable balance as of December 31, 2007, 2008 and 2009, respectively. Our largest customer, Axcan, accounted for 17%, 23% and 31% of total revenues in 2007, 2008 and 2009, respectively, and 8%, 7% and 37% of the accounts receivable balance as of December 31, 2007, 2008 and 2009, respectively. Our second largest customer in 2007 was GSK, and Cephalon in both 2008 and 2009, and each accounted for 10%, 7% and 8% of our total revenues, respectively. The loss of either of our top two customers could have a material adverse effect on our business, financial condition and results of operations. For example, we are currently the exclusive supplier of coated PEPs to Axcan in the U.S. The FDA has indicated that it will require the removal from the U.S. market by April 2010 of PEPs that do not have approved NDAs under its recently published guidance. We are unable to predict whether Axcan will receive approval of a NDA for its product by the April 2010 deadline set by the FDA. If Axcan is unable to meet the FDA’s requirements by April 2010, and the FDA enforces removal of unapproved PEPs from the U.S. market, we will no longer have PEP sales to this customer in the U.S. Additionally, our recently approved product ZENPEP will compete with Axcan’s product.

 

Approximately 61% of employees are represented by collective bargaining or other labor agreements or arrangements, and we could face labor disruptions that would interfere with our operations.

 

Approximately 61% of our employees are represented by collective bargaining or other labor agreements or arrangements that provide greater bargaining or other rights to employees than do the laws of the U.S. Such employment rights require us to expend greater time and expense in making changes to employees’ terms of employment or carrying out staff reductions. In addition, many of our employees are located in Italy and France, where national strikes occur, and our employees may strike even if they do not have a grievance against us. While we believe that our relations with our employees are satisfactory, worker disruption on a local or national level or a significant dispute with our employees could have a material adverse effect on our business, financial position, results of operations and cash flows.

 

Risks Related to Intellectual Property

 

Patent protection for our products is important and uncertain.

 

Our success will depend, in part, on our ability and the ability of our licensees and collaboration partners to obtain patent protection for our technologies and product candidates, maintain the confidentiality of our trade secrets and know how, operate without infringing on the proprietary rights of others and prevent others from infringing our proprietary rights.

 

We try to protect our proprietary position by, among other things, filing U.S., European and other patent applications related to our proprietary products, technologies, inventions and improvements that may be important to the continuing development of our technology portfolio. Currently, our patent portfolio consists of over 390 issued patents and nearly 310 pending applications, and it includes patents which protect our Diffucaps ^® , Microcaps ^® , AdvaTab ^® , Biorise ^tm bioavailability enhancement, and polymer conjugation technologies. In addition, we believe features of EUR-1025 and our co-development products and product candidates are specifically covered by certain patents or patent applications in our portfolio.

Because the patent position of biopharmaceutical companies involves complex legal and factual questions, we cannot predict the validity and enforceability of patents with certainty. Our issued patents and the issued patents of our licensees or collaboration partners may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future or those we may license from third parties may not result in patents being issued. If these patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. The degree of future protection to be afforded by our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.

 

Patent rights are territorial; thus, the patent protection we do have will only extend to those countries in which we have issued patents. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the U.S. and various European countries. Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Additionally, the nature of claims contained in unpublished patent filings around the world is unknown to us and it is not possible to know which countries patent holders may choose for the extension of their filings under the Patent Cooperation Treaty, or other mechanisms. Furthermore, it is not possible to know the scope of claims that will be allowed in published applications and it is also not possible to know which claims of granted patents, if any, will be deemed enforceable in a court of law.

 

Although we have sought to enhance our proprietary position for ZENPEP ^® , particularly our regulatory exclusivity and patent position, we may not ultimately receive additional issued patents or related patent rights.

 

We have five years of regulatory exclusivity until August 2014 for ZENPEP in the U.S. In addition, we have filed a number of patent applications that include claims intended to provide market exclusivity for certain commercial aspects of ZENPEP and, on February 9, 2010, the U.S. Patent and Trademark Office granted U.S. Patent No. 7,658,918, entitled “STABLE DIGESTIVE ENZYME COMPOSITIONS”. This patent should provide us with coverage on ZENPEP until at least February 20, 2028. We also have four pending patent applications in the U.S. as well as an international application under the Patent Cooperation Treaty, or PCT, and national patent applications in Argentina, Chile and Taiwan with claims related to ZENPEP. The PCT will provide priority for any foreign applications designated under the PCT upon which we may file for inventions. The applications include claims intended to provide market exclusivity for certain commercial aspects of the product, including the formulation, the methods of making, the methods of using and the commercial packaging of the product. We also maintain as trade secrets or know-how certain of the technology used in developing or manufacturing ZENPEP.

 

Regardless of our efforts to enhance our proprietary position for ZENPEP, we may not ultimately receive any additional issued patents or related patent rights, and even if we do, such patent protection may not prevent our competitors from developing similar products that are not covered by such patent(s). The disclosure to, or independent development by, a competitor of certain trade secrets or know-how could materially adversely affect any competitive advantage we may have over any such competitor.

 

If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.

 

We rely on a combination of patents, trade secrets, know-how, technology, trademarks and regulatory exclusivity to maintain our competitive position. For example, while we have filed for patent protection for commercial aspects of ZENPEP in the U.S. and abroad, we also currently maintain as trade secrets or know-how certain of the technology used in developing or manufacturing ZENPEP. We generally try to protect trade secrets, know-how and technology by entering into confidentiality or non-disclosure agreements with parties that have access to it, such as our collaboration partners, licensees, employees and consultants. Any of these parties may breach the confidentiality agreements and willfully or unintentionally disclose our confidential information, or our competitors might learn of the information in some other way. The disclosure to, or independent development by, a

competitor of any trade secret, know-how or other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.

 

Legal proceedings or third-party claims of intellectual property infringement may require us to spend substantial time and money and could prevent us from developing or commercializing products.

 

The manufacture, use, offer for sale, sale or importation of our product candidates might infringe on the claims of third-party patents. A party might file an infringement action against us. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation or defense of a patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time. Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale, sell or import our product candidates in the event of an infringement action. At present, we are not aware of pending or threatened patent infringement actions against us.

 

As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly. At present, we have not received any written demands from third parties that we take a license under their patents.

 

In addition, a number of our contracts with our collaboration partners contain indemnity provisions that purport to indemnify us against any losses that arise from third-party claims that are brought in connection with the use of our products. Similarly, a number of our contracts with our licensors also contain indemnity provisions. In some instances, such provisions may not provide sufficient protection from such claims, if at all.

 

We may be subject to other patent-related litigation or proceedings that could be costly to defend and uncertain in their outcome.

 

In addition to infringement claims against us, we have been and may in the future become a party to other patent litigation or proceedings, including interference or re-examination proceedings filed with the U.S. Patent and Trademark Office or opposition proceedings in the European Patent Office regarding intellectual property rights with respect to our products and technology, as well as other disputes regarding intellectual property rights with licensees, licensors or others with whom we have contractual or other business relationships.

 

We are involved in four patent infringement actions filed in response to four Paragraph IV Certification Notice Letters received in October and November 2008 and June 2009 regarding an Abbreviated New Drug Application (ANDA) submitted to the FDA by Mylan Pharmaceuticals, Inc., Barr Pharmaceuticals, IMPAX Pharmaceuticals, Inc. and Anchen Pharmaceuticals, Inc. requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of Amrix ^® (Cyclobenzaprine Hydrochloride Extended-Release Capsules). Each of the companies alleged in their respective notice letters that the U.S. Patent Number 7,387,793, entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants,” issued to us is invalid, unenforceable and/or will not be infringed by the respective company’s manufacture, use or sale of the product described in its ANDA submission. The Eurand patent covers extended-release formulations containing the muscle relaxant cyclobenzaprine and expires on February 26, 2025. In the event that Cephalon and Eurand are unable to maintain the patent against the four infringers, Cephalon has a three-year period of marketing exclusivity for Amrix ^® that extends until February 2010. However, thereafter, Amrix ^® could be subject to generic competition which would significantly reduce our royalty stream from the product.

The following issued European patents are currently subject to opposition procedures before the European Patent Office:

 

 

In a recent opposition procedure before the European Patent Office, European patent 0914818 for Intraorally Rapidly Disintegrable Tablet was recently revoked. An appeal of that decision is in process.

 

Post-issuance oppositions are not uncommon. We and our collaborator are defending our interests in these opposition procedures, and are prepared to appeal adverse decisions. We also believe our freedom to operate or our ability to commercialize any products will not be adversely affected if we or our collaborator are unsuccessful in any of our defenses.

 

Risks Related to Our Industry

 

We must comply with the laws, regulations and rules of many jurisdictions relating to the healthcare business, and if we are unable to fully comply with such laws, regulations and other rules, we could face substantial penalties. In addition, there are substantial healthcare regulatory reform proposals under consideration in the U.S. which, if approved, could significantly affect our business.

 

We are or will be, directly or indirectly through our customers, subject to extensive regulation by the various jurisdictions in which we may conduct our business, including the U.S. and the European Union. The laws that directly or indirectly affect our ability to operate our business include the following:

 

 

If our operations are found to be in violation of any of the laws, regulations, rules or policies described above or any other law or governmental regulation to which we or our customers are or will be subject, or if the interpretation of such laws, regulations, rules or policies changes, we may be subject to civil and criminal penalties, damages, fines, disbarment, exclusion from the Medicare and Medicaid programs and curtailment or restructuring of our operations. Similarly, if our customers are found noncompliant with applicable laws, they may be subject to sanctions, which could negatively impact us. Any penalties, damages, fines, curtailment or restructuring of our operations would harm our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many such laws have not been fully interpreted by the regulatory authorities or the courts, and their provisions may be open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert management resources from the operation of our business and damage our reputation.

If the government or third-party payors fail to provide coverage and adequate payment rates for our products, the products of our collaboration partners or our future products, if any, our revenues and our prospects for profitability will be harmed.

 

Third-party payors, which include governments and private health insurers, increasingly are challenging the prices charged for medical products and services. In their attempts to reduce health care costs, they have also limited their coverage and reimbursement levels for new pharmaceutical products. In some cases, they refuse to cover the costs of drugs that are not new but are being used for newly approved purposes. Patients who use a product that we may develop might not be reimbursed for its cost. If third-party payors do not provide adequate coverage and reimbursement for our products, or those of our collaboration partners, or for our future products, doctors may not prescribe these products or patients may not use them. In addition, many third-party payors have implemented other drug cost-containment efforts that include drug utilization review, or prior authorization, for drug formularies and comparative effectiveness studies as well as increases in patient out-of-pocket expenses for more expensive and non-preferred drugs, and such measures may potentially impact the commercial viability or delay the launch of one of our products or those of our customers.

 

In some countries, particularly those of the European Economic Area, or EEA, the pricing of prescription pharmaceuticals can be subject to government control, often resulting in lower pricing or reimbursement rates than in the U.S. market. For the years ended December 31, 2007, 2008 and 2009, approximately 47%, 40% and 29% of our revenues were derived in EEA countries, respectively, and those derived Germany represented 21%, 17% and 9% and the United Kingdom represented 12%, 10% and 8%, of our revenues, in the same periods, respectively. In these countries, pricing negotiations with governmental authorities can take considerable time and delay the placing of a product on the market. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares cost-effectiveness of our product candidate with other available products. If reimbursement of our product is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

 

Government authorities in many of our target markets have, from time to time, proposed legislation that would permit re-importation of drugs into those markets, including from countries where the drugs are sold at lower prices. This and other regulatory changes of a similar nature could force us to lower the prices at which we sell our products and impair our ability to derive revenues from these products.

 

Government authorities in many of our target markets have, from time to time, proposed legislation that would permit more widespread re-importation of drugs into jurisdictions in which we sell our products. This could include re-importation from countries where the drugs are sold at lower prices than in jurisdictions in which we sell our products. Such legislation, or regulatory changes of a similar nature, could lead to a decrease in the price we receive for any approved products, which, in turn, could impair our ability to generate revenues. Alternatively, in response to such legislation and to minimize the risk of re-importation, we might elect not to seek approval for or market our products in certain jurisdictions, which could also reduce the revenue we generate from our product sales. For example, the Medicare Prescription Drug legislation, which became law in December 2003, requires the Secretary of Health and Human Services to promulgate regulations for drug re-importation from Canada into the U.S. under some circumstances, including when the drugs are sold at a lower price than in the U.S. The Secretary retains the discretion not to implement a drug re-importation plan if he finds that the benefits do not outweigh the cost. Proponents of drug re-importation may attempt to pass legislation that would directly allow re-importation under certain circumstances. If legislation or regulations were passed allowing for the re-importation of drugs, the existence of lower cost alternatives could affect the prices we receive for any products that we may develop, thereby affecting our anticipated revenues and prospects for profitability.

 

We may be exposed to product liability claims, which could result in financial loss.

 

The use of product candidates in clinical trials and the commercial sale of products may expose us to product liability claims. Our collaboration partners, parties selling the products or consumers may bring these claims, which

could result in financial losses. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. Regardless of merit or eventual outcome, liability claims may result in:

 

 

We currently carry liability insurance for claims arising from the use of our product candidates during clinical trials, as specifically endorsed, and the commercial sale of our products, but we cannot be certain that this coverage will be sufficient to satisfy any liabilities that may arise. The limit for our group product liability insurance is €20.0 million (or $28.7 million), per occurrence or annual aggregate, with a deductible of €200,000 (or $286,640). As our development activities progress, this coverage may be inadequate and we may be unable to get adequate coverage at an acceptable cost or at all. This could prevent or limit the commercialization of our product candidates.

 

In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely impact or eliminate the prospects for commercialization of a product candidate or sale of a product subject to any such claim. Off-label use of our product may occur. While we do not promote off-label use, off-label uses of products are common and the FDA does not regulate a physician’s choice of treatment. Off-label use or misuse of our product may subject us to additional liability.

 

We deal with hazardous materials and must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business and/or give rise to significant liabilities.

 

We are subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials and wastes, and the cleanup of contaminated sites. The cost of compliance with these laws and regulations could be significant. In the event of a violation of these requirements, including from accidental contamination or injury, we could be held liable for damages exceeding our available financial resources. We could be subject to monetary fines, penalties or third- party damage claims as a result of violations of such laws and regulations or noncompliance with environmental permits required at our facilities. As an owner and operator of real property and a generator of hazardous materials and wastes, we also could be subject to environmental cleanup liability, in some cases without regard to fault or whether we were aware of the conditions giving rise to such liability. In addition, we may be subject to liability and may be required to comply with new or existing environmental laws regulating pharmaceuticals in the environment. Environmental laws or regulations (or their interpretation) may become more stringent in the future. If any such future revisions require significant changes in our operations, or if we engage in the development and manufacturing of new products or otherwise expand our operations requiring new or different environmental controls, we will have to dedicate additional management resources and incur additional expenses to comply with such laws and regulations.

 

In the event of an accident, applicable authorities may curtail our use of hazardous materials and interrupt our business operations. In addition, with respect to our manufacturing facilities, we may incur substantial costs to comply with environmental regulations and may become subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process.

 

We do not maintain a separate insurance policy for any of the foregoing types of risks. In the event of environmental discharge or contamination or an accident, we may be held liable for any resulting damages, and any liability could exceed our resources.

If we or others identify side effects after any of our products are on the market, we or our collaborators or licensees may be required to withdraw our products from the market, perform lengthy additional clinical trials or change the labeling of our products, any of which would hinder or preclude our ability to generate revenues.

 

If we or others identify adverse side effects after any of our products are on the market:

 

 

Any of these events could harm or prevent sales of the affected products or could substantially increase the costs and expenses of commercializing or marketing these products.

 

If the FDA, EMEA or other applicable regulatory agencies approve generic products that compete with any of our products, sales of those products may be adversely affected.

 

The FDCA, FDA regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes. These manufacturers might only be required to conduct a relatively inexpensive study to show that its product has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use, or labeling, as our product and that the generic product is bioequivalent to ours, meaning it is absorbed in the body and to the same extent as our product. These generic equivalents, which must meet the same quality standards as branded pharmaceuticals, would be significantly less costly than ours to bring to market and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of a branded product is typically lost to the generic product. Accordingly, competition from generic equivalents could materially adversely impact our revenues, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those products.

 

Our development of formulations with generic drugs may expose us to litigation.

 

There has been substantial litigation in the pharmaceutical, biomedical and biotechnology industries with respect to the manufacture, use and sale of new products that are the subject of patent rights. Under the Drug Price Competition and Patent Restoration Act of 1984, when a drug developer files an ANDA for a generic drug, it must certify to the FDA that it believes its product will not infringe on any unexpired patent that a patent holder has listed with the FDA as covering that brand-name product, or that any such patent is invalid or unenforceable. The drug developer must also provide such certification to the patent holder, who may challenge the developer’s certification of non-infringement, invalidity or unenforceability by filing a suit for patent infringement. Such a patent challenge within the first 45 days of notice of the ANDA certification can result in a 30 month stay of approval by FDA of the ANDA. Certain of our collaboration partners may have or develop generic versions of existing or then existing drugs. Our development of any such generic versions of drugs will be subject to this process. Should a patent holder commence a lawsuit against us with respect to alleged patent infringement, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. Litigation over patents could result in delays in obtaining FDA approval to market our product candidates and diversion of management resources and the costs

resulting therefrom. Similar risks of the delay in obtaining approvals in other applicable jurisdictions could result from patent related litigation.

 

We are currently unable to accurately predict what our short-term and long-term effective tax rates will be in the future.

 

We are subject to income taxes in the U.S. and the various other jurisdictions in which we operate. Significant judgment is required in determining our worldwide provision for income taxes and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by changes in the mix of earnings (losses) in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or changes in tax laws, as well as other factors. Our judgments may be subject to audits or reviews by local tax authorities in each of these jurisdictions, which could adversely affect our income tax provisions. Furthermore, we have had a limited historical profitability upon which to base our estimate of future short-term and long-term effective tax rates.

 

Risks Related to Our Ordinary Shares

 

We are a “controlled company” under the NASDAQ Stock Market rules, and as such we are entitled to exemption from certain NASDAQ corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements.

 

We are a “controlled company” within the meaning of the NASDAQ Stock Market corporate governance standards. Under the NASDAQ Stock Market rules, a company of which more than 50% of the voting power is held by an individual, another company or a group is a “controlled company” and may elect not to comply with certain NASDAQ Stock Market corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the nominating committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities. We may utilize these exemptions. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Stock Market corporate governance requirements.

 

Our ordinary share price could be highly volatile.

 

The realization of any of the risks described in these “Risk Factors” or other unforeseen risks could have a dramatic and adverse effect on the market price of our ordinary shares. In particular, and in addition to circumstances described elsewhere in these “Risk Factors,” the following events or factors can adversely affect the market price of our ordinary shares:

 

 

Additionally, market prices for securities of biotechnology and pharmaceutical companies historically have been very volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons unrelated to the operating performance of any one company. The trading price of our ordinary shares has been, and could continue to be, subject to fluctuations in response to these factors, including the sale or attempted sale of a large amount of our ordinary shares into the market. From May 16, 2007, when our ordinary shares began trading on The NASDAQ Global Market, through December 31, 2009, the high and low sales prices of our ordinary shares ranged from $19.60 to $6.17. Broad market fluctuations may also adversely affect the market price of our ordinary shares. As a result of this volatility, investors may not be able to sell their ordinary shares at or above the price paid for them. In the past, following periods of market volatility, shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and attention of management from our business.

 

Sales of substantial amounts of our ordinary shares in the public market could depress our share price.

 

Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P. and their affiliates, or Warburg Pincus, in the aggregate, beneficially own approximately 54.8% of our outstanding ordinary shares. Any sales of substantial amounts of our ordinary shares in the public market, including sales or distributions of shares by Warburg Pincus, or the perception that such sales might occur, could harm the market price of our ordinary shares and could impair our ability to raise capital through the sale of additional equity securities.

 

Raising additional capital by issuing securities may cause dilution to existing shares.

 

We may need to raise substantial future capital to continue to complete clinical development and commercialize our products and product candidates and to conduct the research and development and clinical and regulatory activities necessary to bring our product candidates to market. Our future capital requirements will depend on many factors, including:

 

 

Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance technology or services, or otherwise respond to competitive pressures would be significantly limited. In addition, we may be required to terminate or delay preclinical studies, clinical trials or other development activities for one or more of our product candidates, or delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our products or product candidates.

If we raise additional funds through co-development and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If we raise additional funds by issuing equity or convertible debt securities, we will reduce the percentage ownership of our then-existing shareholders, and these securities may have rights, preferences or privileges senior to those of our existing shareholders. Further, shareholders’ ownership will be diluted if we raise additional capital by issuing equity securities.

 

Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P. and their affiliates, our major shareholders, control approximately 54.8% of our ordinary shares, and this concentration of ownership may deter a change in control or other transaction that is favorable to our shareholders.

 

Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P. and their affiliates, or Warburg Pincus, in the aggregate, beneficially own approximately 54.8% of our outstanding ordinary shares. These shareholders could effectively control all matters requiring our shareholders’ approval, including the election of directors. This concentration of ownership may also cause, delay, deter or prevent a change in control, and may make some transactions more difficult or impossible to complete without the support of these shareholders, regardless of the impact of this transaction on our other shareholders.

 

We are a Netherlands public limited liability company (naamloze vennootschap) and it may be difficult for you to obtain or enforce judgments against us, our executive officers, our directors or some of our named experts in the U.S.

 

We were formed under the laws of The Netherlands and, as such, the rights of holders of our ordinary shares and the civil liability of our directors will be governed by the laws of The Netherlands and our articles of association. The rights of shareholders under the laws of The Netherlands may differ from the rights of shareholders of companies incorporated in other jurisdictions. Most of our directors and our executive officers and most of our assets and the assets of our directors are located outside the U.S. In addition, under our articles of association, all lawsuits against us and our directors and executive officers shall be governed by the laws of The Netherlands and must be brought exclusively before the Courts of Amsterdam, The Netherlands. As a result, you may not be able to serve process on us or on such persons in the U.S. or obtain or enforce judgments from U.S. courts against them or us based on the civil liability provisions of the securities laws of the U.S. There is doubt as to whether Netherlands courts would enforce certain civil liabilities under U.S. securities laws in original actions and/or enforce claims for punitive damages. See “Service of Process and Enforceability of Civil Liabilities.”

 

Under our articles of association, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions. Under our articles of association, to the extent allowed by law, the rights and obligations among or between us, any of our current or former directors, officers and employees and any current or former shareholder shall be governed exclusively by the laws of The Netherlands and subject to the jurisdiction of The Netherlands courts, unless such rights or obligations do not relate to or arise out of their capacities listed above. Although there is doubt as to whether U.S. courts would enforce such provision in an action brought in the U.S. under U.S. securities laws, such provision could make enforcing judgments obtained outside of The Netherlands more difficult to enforce against our assets in The Netherlands or jurisdictions that would apply Netherlands law.

 

We do not anticipate paying dividends on our ordinary shares, which could reduce the return on your investment.

 

We have not paid cash dividends on our ordinary shares and do not expect to do so in the foreseeable future. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, terms of any existing or future debt agreements may preclude us from paying dividends. Accordingly, any return on your investment must come from appreciation of our ordinary shares.

Your rights as a holder of ordinary shares will be governed by Dutch law and will differ from the rights of shareholders under U.S. law.

 

We are a limited liability company incorporated under the laws of The Netherlands. The rights of holders of ordinary shares are governed by Dutch law and our articles of association. These rights differ from the typical rights of shareholders in U.S. corporations. For example, Dutch law significantly limits the circumstances under which shareholders of Dutch companies may bring an action on behalf of a company.

 

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

 

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Global Market, have imposed requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have resulted in substantial legal and financial compliance costs and make some activities more time-consuming and costly.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, as we are now a public company, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses.

 

Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group. If we are not able to comply with the requirements of Section 404, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our ordinary shares could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Recent adverse changes in U.S., global, or regional economic conditions could have a continuing adverse effect on the profitability of some or all of our businesses.

 

Recent turmoil in the financial markets has adversely affected economic activity in the U.S. and other regions of the world in which we do business. Although we believe that based on our current cash, cash equivalents and short term investments balances and expected operating cash flows, the current lack of liquidity in the credit markets will not have a material impact on our liquidity, cash flow, or financial flexibility, continued deterioration of the credit and capital markets could cause additional impairments to our investment portfolio, which could negatively impact our financial condition and reported earnings. The continued decline in economic activity could adversely affect demand for our products, thus reducing our revenue and earnings as well as have an adverse impact on our customers, distributors, collaboration partners, suppliers, service providers and ability to develop outlicensing relationships.

 

 

History and Development of the Company

 

We are a holding company formerly known as Eurand B.V., and before that, Eurand Pharmaceuticals Holdings B.V., that was incorporated in The Netherlands as a private company with limited liability in 1984. We were established as a company independent of American Home Products, now Wyeth, in 1999 when affiliates of Warburg Pincus LLC and Gearoid Faherty, our Chairman and Chief Executive Officer, acquired the drug delivery business. We converted into a Dutch public limited liability company by notarial deed of conversion executed November 30,

2006. In May 2007, we completed an initial public offering of our ordinary shares in the U.S. and our ordinary shares began trading on the NASDAQ Global Market. In October 2009, we completed an underwritten secondary public offering of 9,775,000 of our ordinary shares. The Company offered 2,000,000 newly issued shares and Warburg Pincus Equity Partners L.P. and Warburg Pincus Ventures International, L.P. (our major shareholders) offered 7,775,000 shares for re-sale. For further information, see “Item 7. Major Shareholders and Related Party Transactions.”

 

Our principal executive offices are located at Olympic Plaza, Fred. Roeskestraat 123, 1076 EE Amsterdam, The Netherlands, telephone +31 20-673 2744, with operating subsidiaries organized in the U.S., Italy, France and Ireland. A list of our subsidiaries as of December 31, 2009 is set forth in Exhibit 8 to this Annual Report on Form 20-F.

 

Our website address is www.eurand.com . The information on our website is not incorporated into this Form 20-F and should not be considered to be a part of this Form 20-F. We have included our website address as an inactive textual reference only.

 

Business Overview

 

We are a specialty pharmaceutical company that develops, manufactures and commercializes pharmaceutical and biopharmaceutical products. We utilize our proprietary pharmaceutical technologies to develop novel products that we believe will have advantages over existing products or will address unmet medical needs. Through our collaboration arrangements, we have successfully applied our technologies to drug products in a diverse range of therapeutic areas, including cardiovascular, gastrointestinal, pain, nutrition and respiratory. We are simultaneously developing and commercializing our own portfolio of therapeutic products to address conditions associated with cystic fibrosis and gastrointestinal disorders.

 

Using our own sales and marketing team, we are currently commercializing a portfolio of products for cystic fibrosis (CF) and gastrointestinal (GI) patients in the U.S. On August 27, 2009, the U.S. Food and Drug Administration, or FDA, approved our lead product EUR-1008, or ZENPEP ^® , for sale in the U.S. for the treatment of exocrine pancreatic insufficiency, or EPI, due to CF or other conditions. Other conditions that result in EPI frequently include gastrointestinal surgery, chronic pancreatitis and pancreatic cancer. We launched ZENPEP ^® (pancrelipase) Delayed-Release Capsules in the U.S. late in the fourth quarter of 2009 and expanded and supplemented our sales force immediately prior to launch to address both the GI and CF communities. We also currently have two late-stage proprietary product candidates, EUR-1073 (beclomethasone) and EUR-1025 (ondansetron) in development in our own portfolio, as well as a number of other products currently in development with collaboration partners, including EUR-1000, which is partnered with GlaxoSmithKline, or GSK, which we currently expect to be approved by the FDA in 2010. We continue to advance and develop additional products using our pharmaceutical technologies.

 

We currently have manufacturing and research facilities in the U.S., Italy and France. In 2009, we had approximately €120.6 million (or $172.8 million) in total revenues. We manufacture and supply over 40 different products for sale in many of the world’s largest pharmaceutical markets. These products generated €99.0 million (or $141.9 million) in product sales in 2009. The remainder of our revenues generally consists of royalties and development fees.

 

EUR-1008 or ZENPEP ^® (pancrelipase) Delayed-Release Capsules

 

FDA-approved ZENPEP is a proprietary porcine-derived pancreatic enzyme replacement product, or PEP, developed to address the 2004 FDA guidance on pancreatic enzyme products (PEPs). It has been approved for the treatment of EPI due to cystic fibrosis or other conditions. Patients suffering from EPI are unable to produce or secrete pancreatic enzymes necessary for digestion, resulting in the malabsorption of nutrients and overall malnutrition. EPI patients typically require PEPs which break down fats, proteins and complex carbohydrates for proper absorption into the body. PEPs are a daily requirement for patients with EPI and are considered necessary for survival of many patients with CF. According to data from IMS Health, PEPs generated approximately $1.3 billion in worldwide sales and approximately $403 million in U.S. sales in 2009.

PEPs had been commercialized in the U.S. without the benefit of FDA approval for more than 70 years. In 2004, after significant adverse event reports, the FDA conducted a review of PEPs and found that none demonstrated “consistent bioactivity that results in predictable safety and effectiveness,” primarily as a result of lack of product stability and overfill. As a result of these findings, the FDA mandated that all PEPs be subject to FDA review and approval and established criteria to ensure consistent quality, potency and stability of PEPs. The FDA initially allowed certain manufacturers to continue to manufacture and sell unapproved PEPs until April 28 ^th 2008. However, in October 2007 the FDA extended the deadline to April 28 ^th 2010. Based on publicly available materials and our industry knowledge, we are aware of three other PEP manufacturers that filed and have pending NDAs for a PEP, and one (Solvay/Abbott) who has received FDA approval. In 2009 two PEPs received FDA approval (Creon ^® and ZENPEP).

 

ZENPEP was one of the first FDA-approved PEPs and was deemed to be safe and effective in both adults and children. It is currently the only FDA-approved PEP that has been clinically proven to be safe and effective in children ages 1-6 years. It has been clinically evaluated in patients with CF and chronic pancreatitis (CP) and was found to significantly improve the coefficient of fat absorption (CFA) and reduce GI symptoms. It was designed to provide consistent dosing at label strength and is available in four strengths providing for ease of dose titration and suitable doses for patient segments. The average dose of ZENPEP used in clinical studies was half the Cystic Fibrosis Foundation (CFF) maximum recommended dose. Patients in clinical studies who were switched from unapproved branded products to ZENPEP experienced enhanced symptom control.

 

In addition to receiving five years of regulatory exclusivity as a new chemical entity (NCE), we have filed a number of patent applications that include claims intended to provide market exclusivity for certain commercial aspects of ZENPEP. On February 9, 2010, the U.S. Patent and Trademark Office issued U.S. Patent No. 7,658,918, entitled “STABLE DIGESTIVE ENZYME COMPOSITIONS”. We expect that this patent will provide Eurand with patent coverage on ZENPEP until at least February 20, 2028.

 

Prior to ZENPEP’s commercial launch in November 2009, we marketed an unapproved PEP under the tradename Pancrelipase, distributed by X-GEN Pharmaceuticals, Inc. (X-GEN). Pancrelipase accounted for approximately 21% of the prescriptions filled of the U.S. enteric-coated PEP market as of the week ended October 28, 2009, making it the second-most dispensed enteric coated PEP in the U.S. and the market leader in the low-dose segment. In accordance with the FDA agreed-upon transition plan, shipments of Pancrelipase ceased with the first shipment of ZENPEP. As part of our program to target all segments of the market, we retained our distribution arrangement with X-GEN and granted them the right to distribute the low dosage strength of ZENPEP as an authorized generic. This product is currently marketed by X-GEN under the tradename PANCRELIPASE ^tm (pancrelipase) Delayed-Release Capsules.

 

Eurand is marketing ZENPEP to the approximately 120 CF Centers across the U.S. through our own sales force of 16 sales representatives and to the GI market segment primarily through a contract sales organization of 49 sales representatives.

 

SourceCF Product Portfolio

 

We use the same U.S.-based commercial group of highly experienced sales and sales support professionals that promotes sales of ZENPEP, to also provide our SourceCF product and service portfolio to the CF community (patients, physicians and care givers). The SourceCF product portfolio most notably includes a portfolio of vitamins, designed specifically for CF patients, and the TRIO ^® (formerly marketed under the name eFlow ^® ) electronic nebulizer, a device frequently prescribed by physicians for CF patients who are required to administer therapies via nebulization. Our sales professionals promoting the SourceCF product portfolio currently call on the Cystic Fibrosis Treatment Centers, as well as selected office-based gastroenterologists and pulmonologists, throughout the U.S. The SourceCF business generated revenues of approximately $5.0 million in 2007, $4.7 million in 2008 and $4.3 million in 2009.

 

EUR-1002 or Amrix ^®

 

Amrix ^® , developed with ECR Pharmaceuticals using our Diffucaps ^® technology and acquired by Cephalon, Inc., or Cephalon, in late 2007, is a once-a-day, or OAD, sustained-release formulation of cyclobenzaprine

hydrochloride, with FDA-approved use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions. Amrix is currently the only FDA-approved OAD skeletal muscle relaxant in the U.S. In 2000, we entered into a co-development, license and contract manufacturing agreement with ECR to develop a once-a-day extended release formulation of cyclobenzaprine, and in 2003, we signed an addendum to that agreement to develop an additional formulation. Under the co-development agreement, we performed feasibility studies, formulation optimization and scale-up, provided clinical supply and validated the manufacturing process. Furthermore, pursuant to the co-development agreement, Cephalon is obligated to purchase from us and, subject to certain exceptions, we are obligated to supply Cephalon with, Cephalon’s total requirements of the product for the U.S., and Cephalon must provide us with certain forecasts and firm orders prior to the desired date of shipment.

 

We may elect to terminate our obligation to supply the product to Cephalon, in certain circumstances, in the event that annual net sales of the product are less than specified amounts; provided, however, that in such event, we continue to manufacture and supply the product to Cephalon for a period of two years thereafter. In the event of such termination, if Cephalon manufactures the product (or has it manufactured), we would be entitled to receive royalties on Cephalon’s net sales of the product for so long as Cephalon sells the product. Pursuant to the co-development agreement, Cephalon was responsible for regulatory filings and is granted an exclusive license to sell the product in the U.S., Canada and Mexico. In addition to development payments and manufacturing fees, we are entitled to receive royalties based on a percentage of Cephalon’s net sales of the product. The agreement provides for a term of 12 years following the date Cephalon begins selling the product in the U.S. and is subject to a two-year automatic renewal.

 

ECR submitted a NDA through the FDA’s 505(b)(2) procedure and received approval of the NDA in February 2007. In August 2007, Anesta Inc. (a company affiliated with Cephalon) acquired Amrix from ECR and Cephalon undertook all of the incumbent obligations of the co-development agreement, subject to an amendment. As the licensor and exclusive manufacturer of the product, we now work with Cephalon to support the commercialization of the product in the U.S. Cephalon began promotion of Amrix in the U.S. in November 2007. Cephalon reported 2008 revenues from Amrix at $73.6 million and 2009 revenues from Amrix at $114 million.

 

In addition to the U.S. marketing efforts by Cephalon, we have partnered this product in 21 countries outside of the U.S.

 

EUR-1048 or Lamictal ^® ODT ^tm

 

EUR-1048 or Lamictal ^® ODT ^tm is a taste-masked, orally disintegrating tablet formulation of lamotrigine, that we developed using our AdvaTab ^® and Microcaps ^® technologies. On May 11, 2009, the FDA approved Lamictal ^® ODT ^tm for sale in the U.S. for the long-term treatment of Bipolar I Disorder. GSK launched Lamictal ^® ODT ^tm in late June 2009. This product was developed in 2006 pursuant to a co-development agreement with GSK under which we were responsible for performing feasibility studies, formulation optimization and scale-up, and providing clinical supply for the proposed product. GSK was responsible for certain regulatory filings and is granted an exclusive license to sell the product in the U.S. GSK is obligated to purchase from us and, subject to certain exceptions, we are obligated to supply GSK with, GSK’s total requirements of EUR-1048 for the U.S. We retain certain rights to the product outside the U.S. In addition to development payments, milestone payments ($12 million of which we have already received and an additional $30 million that we could potentially receive) and manufacturing fees, we are entitled to receive royalties based on a percentage of GSK’s net sales of the product. The agreement provides for a term of 15 years following the date GSK begins selling the product in the U.S.

 

EUR-1037 or Unisom ^® Sleepmelts

 

EUR-1037 is an orally disintegrating tablet formulation of Diphenhydramine citrate that we developed using our AdvaTab ^® and Microcaps ^® technologies. The product is sold as an over-the-counter, or OTC, sleep-aid product by Chattem Inc. in the U.S. under the brand name Unisom ^® Sleepmelts. The product was launched in April 2008.

Proprietary Pipeline Products

 

In addition to ZENPEP ^® and the SourceCF product portfolio, we are also developing a pipeline of novel products in our proprietary portfolio. Currently, the most advanced of our proprietary product candidates are:

 

 

We also have several other co-development and proprietary products that are in various earlier stages of research and development.

 

Continued R&D and Product Development

 

We have a broad portfolio of proprietary pharmaceutical technologies, including three primary technology platforms with eight distinct technologies. All of our primary technology platforms are currently being utilized in marketed products. We use these technologies to develop and expand our own internal pipeline of product candidates and to secure additional co-development agreements with pharmaceutical and biopharmaceutical companies. These technologies can be used to improve or develop enhanced formulations that have improved efficacy and safety profiles or that are more convenient for patients, leading to improved patient compliance. In 2009, based upon a strategic review of our technology platforms, we decided to discontinue investment in our Drug Conjugation platform and we may seek to out-license the technology and its associated intellectual property. Our three primary technology platforms include:

 

 

Our Strategy

 

Our objective is to be a leader in the development, manufacturing and commercialization of innovative specialty pharmaceutical and biopharmaceutical products. The primary components of our strategy include the following:

 

 

 

Our Commercialized Product — EUR-1008 or ZENPEP ^® (pancrelipase) Delayed-Release Capsules

 

FDA-approved ZENPEP ^® (pancrelipase) Delayed-Release Capsules is a porcine-derived proprietary enzyme replacement product (PEP) we launched for sale in the U.S. in November 2009. ZENPEP is indicated for the treatment of exocrine pancreatic insufficiency, or EPI, due to cystic fibrosis or other conditions. ZENPEP is the only FDA-approved PEP that has been evaluated in clinical studies in adults and children from ages 1-6 years and offers four dosage strengths to meet the varied needs of infants, toddlers, adolescents and adults with EPI. ZENPEP was one of the first PEPs to be FDA-approved under the FDA guidelines. Based on publicly available materials and our industry knowledge, we are aware of three PEP manufacturers that filed and have pending NDAs for a PEP, and other than ourselves, one (Solvay/Abbott), who has received approval.

 

Exocrine Pancreatic Insufficiency: Overview and Market Opportunity

 

EPI is caused by a deficiency of digestive enzymes normally produced by the pancreas and secreted into the digestive track. Pancreatic secretions primarily consist of three enzymes — lipases for the digestion of fat, proteases for the digestion of proteins and amylases for the digestion of sugars. A normally functioning human pancreas secretes eight enzymes that are required for the effective and efficient digestion and absorption of food. Scientific

evidence indicates that, in addition to these eight key digestive enzymes, several coenzymes and cofactors are also required for absorption of essential nutrients. Porcine-derived PEPs are comparable in composition to human pancreatic secretions and apparently contain the key enzymes, coenzymes and cofactors necessary for proper digestion. If the pancreas is not able to produce and secrete sufficient amounts of these enzymes, food cannot be digested and the appropriate levels of nutrients cannot be absorbed into the bloodstream. Maldigestion and malabsorption associated with pancreatic insufficiency cause malnutrition, which can lead to impaired growth, impaired immune response and shortened life expectancy.

 

EPI is a condition resulting from various diseases, such as cystic fibrosis, chronic pancreatitis, pancreatic cancer, cytomegalovirus infection and HIV/AIDS. In addition, EPI can result from surgical procedures, including open gastric bypass, extensive small bowel resection and pancreatectomy. The primary users of PEPs are patients with pancreatic insufficiency secondary to cystic fibrosis and chronic pancreatitis.

 

Cystic Fibrosis.   Cystic fibrosis is a life-threatening genetic disease that, because of a defective gene, causes the body to produce a faulty protein that leads to abnormally thick, sticky mucus that clogs the lungs and obstructs ducts in the pancreas. When cystic fibrosis affects the pancreas, as it does in the majority of cystic fibrosis patients, the body does not absorb sufficient nutrients to grow and thrive. Cystic fibrosis is one of the most prevalent genetic diseases among Caucasians in the U.S. The disease affects an estimated 30,000 adults and children in the U.S. and some 100,000 patients worldwide, an estimated 85% to 90% of whom suffer from pancreatic insufficiency.

 

Chronic Pancreatitis.   Chronic pancreatitis (CP) is a slow, clinically silent disease that gradually destroys the pancreas and is most often caused by excessive alcohol consumption, but may also result from other conditions such as hyperlipidemia, hyperparathyroidism, injuries or obstructions. Because CP is not necessarily characterized by inflammation or pain, it often goes undiagnosed and therefore its exact prevalence is unknown. Based on survey data reported in Medscape General Medicine, we believe chronic pancreatitis results in more than 500,000 physician visits per year in the U.S. See “Risk Factors — Risks Related to ZENPEP ^®  — Even though ZENPEP has received regulatory approval for marketing in the U.S., and we have met significant milestones necessary to achieve marketing authorization in several venues, we may not succeed in obtaining regulatory approval for ZENPEP from other regulatory agencies. Without regulatory approval from other regulatory agencies, we will be unable to commercialize ZENPEP to its full potential and our growth prospects will be materially impaired.”

 

FDA Guidelines to Improve Existing Pancreatic Enzyme Products

 

PEPs have been available in the U.S. as prescription and over-the-counter products for the treatment of EPI since before the enactment of the Food and Drug Cosmetic Act (FDCA) in 1938. With the exception of a single PEP that received marketing approval in 1996 and, which is no longer being commercialized, PEPs have been marketed in the U.S. without the requirement of regulatory approval.

 

In April 2004, the FDA issued a guidance addressing, among other matters, the elimination of overfill, the nature of clinical trials to be conducted to obtain FDA approval for a NDA, the formulation requirements for the product and the need for manufacturers to provide viral inactivation results and full characterization of the enzymes in the product. The FDA required the submission of an NDA for PEPs, but allowed companies that met certain criteria to continue to market existing PEPs until April 2008 without the benefit of FDA approval. The guidance set forth the primary requirements for PEPs including:

 

 

 

In October 2007, the FDA published a notice in the Federal Register extending the deadline for obtaining marketing approval for exocrine pancreatic insufficiency drug products until April 28, 2010 for those companies that were marketing unapproved pancreatic enzyme products as of April 28, 2004 and that continue diligent pursuit of regulatory approval. The notice reiterated the concerns raised in guidelines issued in 2004, namely that the formulation, dosage and manufacturing process of pancreatic enzyme drug products have a critical effect on the safe and effective use of these drugs and that variations between manufacturers raised concerns of safety and efficacy resulting in a need for FDA review and NDA approval to ensure standardized enzyme activity. According to the notice, the extension was requested by a number of manufacturers of pancreatic extract drug products because “[t]he manufacturers contend that additional time is needed because of numerous problems encountered during the drug development process, predominantly manufacturing issues and difficulty conducting all of the required studies needed for NDA filing and approval.” We were not one of the manufacturers that requested an extension from the FDA.

 

The FDA indicated that “[t]he justification for this extension is based upon chemistry, manufacturing, and control (CMC) issues that previously have not been well-understood and have been found to be particularly challenging for these enzyme preparations derived from porcine pancreas.” The FDA identifies the primary CMC issues as including the following: (a) control and evaluation of variability of pancreatic source materials used in drug substance manufacture; (b) measurement of viral loads and inactivation; (c) development and implementation of validated purity and identity drug substance and product release and stability testing methodologies; (d) required modification and validation of the traditional lipase potency assay methodology; and (e) maintenance and confirmation of drug product stability without the use of overages to increase the dating period.

 

The FDA has also stated that developers of PEPs will be unable to utilize the ANDA process to receive approval of generic PEPs. For a product to be approved pursuant to an ANDA, the proposed drug must be shown to be bioequivalent to an approved reference drug. Because of the complexity of PEPs, it is unlikely that currently available physiochemical and biological analytical tools would be able to demonstrate that the active ingredients in PEPs from two different manufactures are the same. Consequently, we believe it is unlikely that ZENPEP, will face generic competition in the near term. In mid-2009, the FDA approved ZENPEP as a new chemical entity, granting it five years of regulatory exclusivity.

 

Characteristics of EUR-1008 or ZENPEP ^® (pancrelipase) Delayed-Release Capsules

 

ZENPEP is a proprietary porcine-derived PEP specifically formulated to address the 2004 FDA guidance and regulations for pancreatic enzyme products (PEPs), as follows:

 

 

 

 

 

 

 

Overview of Our Completed Pivotal and Supportive Phase II/III Clinical Trials for ZENPEP ^®

 

Phase III Clinical Trials in Patients with EPI due to CF

 

We evaluated ZENPEP in cystic fibrosis patients suffering from EPI in two Phase III clinical trials conducted in the U.S. We designed these Phase III trials for ZENPEP in collaboration with the Therapeutic Development Network of the Cystic Fibrosis Foundation. In addition, we had numerous conversations and received input from the FDA regarding the trial design, number of patients and primary endpoints of our Phase III trials for ZENPEP. Because of the extensive use of the currently marketed PEPs, the FDA has waived the need for long-term toxicology and pharmacology studies and, therefore no such additional studies are required.

 

Our pivotal Phase III clinical trial, evaluating patients aged seven or older in 14 Cystic Fibrosis Treatment Centers in the U.S., was completed in November 2006. This trial was a multicenter, double-blind, placebo-controlled crossover trial completed in 31 patients with EPI and cystic fibrosis (CF). The study design involved a screening period, a dose titration and stabilization period, a randomized treatment period during which patients were given either a placebo or ZENPEP, an open-label normalization period, a crossover treatment period, and finally a second open-label normalization period. The starting dose was 1,000 lipase units per kilogram of body weight per meal, titrated by the treating physicians to a total dose less than or equal to 10,000 lipase units per kilogram of body weight per day. Patients were administered combinations of 5,000, 10,000, 15,000, or 20,000 lipase units per capsule. The primary endpoint of this trial was to compare the coefficient of fat absorption following oral administration of ZENPEP versus placebo in patients with EPI. The coefficient of fat absorption, or CFA, was based on stool collections obtained in a hospital environment and under controlled diet. The trial’s secondary objectives were to compare changes in the coefficient of nitrogen absorption, or CNA, cholesterol, fat-soluble vitamins, weight, body mass index and symptoms of EPI after the oral administration of ZENPEP versus placebo. The safety of the product in this patient population was also assessed.

 

Patients receiving ZENPEP in our pivotal Phase III clinical trial showed a statistically significant increase in the coefficient of fat absorption and the coefficient of nitrogen absorption as compared to patients who received a placebo, thus meeting the trial’s primary and secondary endpoints. Moreover, ZENPEP increased CFA and CNA to levels close to those seen in normal subjects, irrespective of the levels of CFA and CNA observed in these same patients while receiving placebo treatment. We believe this suggests that ZENPEP is capable of providing the level of enzyme supplementation required by patients with different levels of EPI.

 

Patients receiving ZENPEP also had better consistency of stools with no diarrhea and less frequent stools per day and demonstrated less bloating, flatulence, pain and evidence of fat in stools as compared to patients who received a placebo. In addition, safety and quality of life results indicate that ZENPEP was well-tolerated with no serious drug related adverse effects observed, and only two serious non drug-related adverse effects observed. No patient discontinued the trial for drug related reasons.

 

A clinical trial result is statistically significant if it is unlikely to have occurred by chance. The statistical significance of clinical trial results is determined by a widely used statistical method that establishes the p-value of the results. Under this method, a p-value of 0.05 or less represents statistical significance. If a p-value is above 0.05, the result is not statistically significant.

 

Our supportive Phase III clinical trial, evaluating patients between the ages of 1-6, was completed in September 2006. This Phase III trial was a multicenter, open-label trial in 19 patients with EPI and CF, and was conducted in 11 Cystic Fibrosis Treatment Centers in the U.S. We believe this was the first trial of this size conducted in young children with EPI evaluating a pancreatic replacement therapy. The supportive Phase III clinical trial was open label primarily because of the risks associated with conducting clinical trials with very young children with CF that would require the child to forego treatment in order to administer placebo. Similarly, we did not use CFA as an endpoint because of the risks to very young children involved in a 72-hour stool collection in a hospital environment. Patients were administered 5,000 lipase units per capsule, sprinkled on food. The study design involved a seven-day dose-stabilization period followed by a seven-day treatment period, and patients were evaluated at the beginning and end of a stabilization period and at the end of the treatment period. The primary endpoint of this trial was the percentage of “responders,” defined as those patients without the presence of excess fat in stools, or steatorrhea, and without signs and symptoms of malabsorption after one and two weeks of treatment. Secondary efficacy endpoints included weight change, nutritional status, stool frequency and consistency, and incidences of bloating, pain and flatulence, along with the physician’s and parent’s or legal guardian’s judgment of improvement of clinical symptoms. The safety of the product in this patient population was also assessed.

 

The percentage of responders to ZENPEP in our supportive Phase III clinical trial was consistent over the treatment periods, thus meeting the trial’s primary endpoint. ZENPEP also achieved a consistent result with respect to fecal fat absorption, effect on body weight, stool consistency and frequency, bloating, flatulence and pain in patients. In addition, patients had no blood and reduced fat in their stools and realized a statistically significant increase in the levels of fat-soluble vitamin K. Physicians and caregivers reported either stable or improved patient condition while on ZENPEP which was well-tolerated with adverse events consistent with those seen in CF patients.

 

 

Based on the results from our completed Phase III clinical trials, we believe CF patients with EPI had a clinically meaningful response to ZENPEP. We believe the studies demonstrate that ZENPEP produced a clinically relevant increase in the absorption of fat, protein and other nutrients, which is maintained over time. In addition, we believe the trials indicated that ZENPEP improves some signs and symptoms of malabsorption associated with EPI and is safe and well tolerated in this patient population.

 

Bioavailability Study

 

In November 2007, at the FDA’s request, we completed a gastrointestinal (GI) bioavailability study of ZENPEP in CP patients suffering from EPI. The bioavailability of ZENPEP was estimated by comparing the recovery of lipase, amylase and chymotrypsin in the two treatment groups (Liquid meal alone and liquid meal with ZENPEP) after administration of the test meal. Overall, the study demonstrated a statistically significant ability for ZENPEP formulations to release lipase, amylase and chymotrypsin into the gastrointestinal tract of chronic pancreatitis patients suffering from EPI. ZENPEP was found to be well tolerated by the patients and no clinically significant safety issues were associated with its use in the study.

 

Phase II/III Clinical Study in Patients with EPI due to CP

 

The double-blind, randomized, dose-response control, crossover study conducted in 19 sites in the U.S., Italy and Ukraine examined the safety and efficacy of two doses of ZENPEP in CP patients with EPI. The study enrolled 82 patients, 72 of whom were included in the efficacy analysis. Patients over 18 years of age with a documented diagnosis of CP and EPI indicated by fecal elastase £ 100 µg/g of stool were admitted into the study. Patients had to discontinue any drugs affecting gastric acid, including antacids, H2 antagonists and PPIs, as well as motility agents and octreotide.

After washout for 7-9 days and determination of baseline CFA, eligible patients were randomized to receive ZENPEP at a higher (140000U lipase/day) or lower (35000 U lipase/day) dose, distributed throughout the day with meals. Patients took ZENPEP for 6 days at home, followed by a hospitalization of 3 to 5 days to undergo a 72-hour CFA determination using a controlled diet, and were crossed over to receive the alternative dose following the same treatment schedule. The primary endpoint was the difference between the mean CFA with ZENPEP 140,000 (seven capsules of 20,000) or 35,000 (seven capsules of 5,000) USP lipase units per day.

 

Although all patients met the inclusion criteria intended to identify patients with severe EPI, the average baseline CFA was 82%, indicating only mild-to-moderate EPI. Despite this limitation to detect robust treatment effects, both daily doses of ZENPEP led to a significant increase (p<0.001) in CFA compared to the placebo baseline period. The mean CFA was 88.9% and 89.9% with the ZENPEP low and high dose, respectively. The comparison between the two ZENPEP daily doses (primary endpoint) did not show statistically significant differences (p=0.228). In a subgroup of patients with more severe EPI, ZENPEP 140,000 units per day demonstrated significantly greater improvement than ZENPEP 35,000 units per day. A post-hoc analysis revealed that the lower the CFA at baseline (i.e., the more severe the steatorrhea), the larger was the effect, with the higher dose being more effective than the lower dose. For patients with CFA below 65%, the increase was 36.8% and 27.2% for the high and low dose, respectively.

 

Statistically significant increases in CNA, body weight and BMI from the placebo baseline period were observed with both ZENPEP dose levels, without differences between them. The symptoms of EPI such as gastrointestinal pain, flatulence, bloating, stool frequency and stool consistency also improved following treatment with ZENPEP at both doses.

 

Both ZENPEP daily doses were safe and well tolerated. The rate of patients with drug-related adverse events was higher during the placebo baseline period than during the randomized treatment period with ZENPEP at both doses. Gastrointestinal complaints were the most common adverse events (flatulence and abdominal pain were predominant). No significant differences were observed between the placebo baseline period and treatment with ZENPEP at both doses in the rate of patients with serious adverse events or with adverse events that caused early study withdrawal or the discontinuation of study drug.

 

Clinical Development of ZENPEP ^® in Europe

 

The European Medicines Evaluation Agency (EMEA) finalized its draft guidelines on the clinical development of products for treating CF in the fourth quarter of 2009. We recently received feedback from the EMEA on the clinical and regulatory path forward for ZENPEP in light of those guidelines. Based on the recommendation of the EMEA, we expect to initiate a Phase III study in Europe in the second half of 2010.

 

Proprietary Position of ZENPEP ^®

 

ZENPEP is protected by a combination of trade secret, regulatory exclusivity and patent protection. In 2009, the FDA deemed ZENPEP a new chemical entity for the purpose of granting regulatory exclusivity, bestowing data exclusivity for the product until August 2014 in the U.S. In addition, we have filed a number of patent applications that include claims intended to provide market exclusivity for certain commercial aspects of ZENPEP and, on February 9, 2010, the U.S. Patent and Trademark Office granted U.S. Patent No. 7,658,918, entitled “STABLE DIGESTIVE ENZYME COMPOSITIONS”. This patent should provide us with coverage on ZENPEP until at least February 20, 2028.

 

Commercialization of EUR-1008 or ZENPEP ^®

 

Commercialization of ZENPEP outside the U.S.

 

While we are marketing ZENPEP in the U.S. ourselves, we have also out-licensed ZENPEP in South Korea and Israel. We expect to out-license commercial rights to ZENPEP in a number of additional territories, including Europe and other parts of Asia. We have been seeking marketing authorization for ZENPEP in Europe through a centralized review process in parallel with seeking a distributor and are progressing on both fronts.

Commercialization of ZENPEP in the U.S.

 

According to IMS data, the PEP category generated approximately $1.3 billion in the world-wide sales in 2009. In the U.S., the category consists of both branded and unbranded products and includes prescription enteric-coated PEPs ($351 million) which are primarily used to treat malabsorption, prescription uncoated PEPs ($28 million), where malabsorption is associated with pain and OTC supplements ($24 million). Based on the IMS data, in the U.S. the branded coated PEP prescriptions account for 66% of total prescription volume and about 82% of the market value.

 

On November 30, 2007, Eurand Pharmaceuticals, Inc. (“EPI”) acquired all of the outstanding shares of the SourceCF family of companies (“SourceCF”). As a subsidiary of EPI, SourceCF continues to focus on serving the special needs of CF patients, physicians and care givers. The aggregate purchase price for SourceCF was $8.5 million. Approximately $7 million, including direct costs of acquisition, was paid at the date of acquisition, and an additional $1.5 million was paid in 2009.

 

The acquisition of SourceCF represented a significant step towards establishing Eurand’s U.S.-based marketing and specialty sales force infrastructure. Subsequently, the marketing and sales support has expanded to service therapeutic areas beyond CF. To support the ZENPEP launch, our complete commercial team includes an internal cystic fibrosis sales force of 16 sales representatives and a contract sales organization of 49 sales representatives targeting the GI market, and several key management positions within sales and marketing, such as trade and government operations and national accounts.

 

AG Strategy

 

Late in the fourth quarter 2009, after we had stopped shipping Pancrelipase, we introduced PANCRELIPASE ^tm (pancrelipase) Delayed-Release Capsules, an authorized generic, or AG, to the 5000 unit dose of ZENPEP. The AG, which is distributed into the trade by X-GEN, the same distributor for Pancrelipase, complements our-direct selling efforts in the CF and CP segments of the PEP market. Both the 5000 unit dose of ZENPEP and the AG are available to physicians, patients and pharmacies. We introduced the AG because of differences in prescribing in the PEP market, specifically among physicians in the GI area. The AG is priced to provide a low-cost alternative within the PEP market and does not replace the 5000 unit dose of ZENPEP. Today, the AG is priced higher than unapproved Pancrelipase but lower than the 5000 unit dose of ZENPEP.

 

CF Specialty Sales Force

 

The specialty sales and marketing organization is initially targeting approximately 120 Cystic Fibrosis Treatment Centers across the U.S. and select office-based pulmonologists who care for CF patients. In addition to ZENPEP the CF sales organization continues to sell products specifically designed to serve the special needs of patients with CF such as the SourceCF line of specialty vitamins and the Trio ^® electronic nebulizer. The SourceCF vitamin line was specifically designed to meet the established nutritional supplement guidelines for patients with CF. The line includes: softgels for adults, chewables for children and pediatric drops for infants and toddlers. The Trio ^® electronic nebulizer was cleared by the FDA in 2004 as a general use device for delivering medications approved for nebulization to both adults and children. The Trio ^® addresses a critical need in CF community by potentially providing patients with significantly reduced treatment times for inhaled pharmaceutical products. These products are also available to patients through our Z-POINTS ^® program which has been designed to support the commercialization of ZENPEP. With each prescription for a one month supply of ZENPEP capsules, eligible patients earn points that can be applied toward products and equipment they use daily. As the final FDA deadline for PEP approval approaches, significant sales focus remains on capturing patients who must be switched from unapproved PEPs to approved PEPs.

 

GI Sales Force

 

The GI Sales Force will initially target other high prescribers of PEP products such as: gastroenterologists, internal medicine and family practice physicians. The key activity in these promotionally sensitive offices has been to drive awareness of the evolving FDA environment and capture patients who also require a switch from unapproved products to FDA-approved products, such as ZENPEP. To support the switching discussion, we have

designed a series of unique promotional items and programs which highlight the importance of achieving symptom control and the lack thereof, today, in these HCPs patients’ and which also provide a means for HCPs to receive direct feedback on their patients’ experience while taking ZENPEP.

 

Established Business

 

We were formed in 1999 when affiliates of Warburg Pincus LLC and Gearóid Faherty, our chairman and chief executive officer, acquired the pharmaceutical technology business of American Home Products Corporation, now Wyeth. Since our formation, we have evolved into an integrated specialty pharmaceutical company that develops, manufactures and commercializes enhanced pharmaceutical and biopharmaceutical products. Traditionally, we have developed new pharmaceutical formulations and entered into agreements whereby we manufactured and supplied the resultant product and our collaboration partners or licensee commercialized the product, frequently subject to royalty and milestone obligations. Pursuant to these types of arrangements, we currently generate revenues through three primary sources: the manufacture and supply of products, development and sales of out-licensed products, and fees related to our formulation and product development work. We plan on continuing to build this business while in the process of establishing and growing our own commercialization capabilities.

 

We refer to agreements that involve formulating a new product for a collaboration partner or licensee using our proprietary technologies as “co-development agreements”. In 2009, we entered into four co-development agreements with various collaboration partners and we continue to negotiate additional co-development agreements. Co-development agreements govern a wide range of arrangements from determining the feasibility of using a particular drug with a particular technology to contract services to formulate and supply a product. We believe we are not substantially dependent on any one of them individually. We have completed work on some of these co-development agreements, and, based on past experience and for a variety of reasons, it is likely that a number of our co-development agreements will not result in a commercialized product.

 

The cash flow generated by our co-development agreements, including cash flows from product sales, provides us with a significant element of the financial resources to internally fund our development and commercialization programs and maintain our research and manufacturing capabilities.

 

We have successfully applied our proprietary technologies to formulate products in a diverse range of therapeutic areas, including gastrointestinal, cardiovascular, pain, nutrition, and respiratory, which represented 51%, 16%, 12%, 13% and 3% of our 2009 revenues from product sales, respectively. Our ability to meet the goals of our collaboration partners coupled with our broad technology platforms and research infrastructure has allowed us to attract many of the leading pharmaceutical and biotechnology companies as collaboration partners and licensees, including Eisai, GSK, Cephalon, Novartis, and Sanofi-Aventis. Since 2001, five of our partnered drug products, KCl 20mEq, Innopran XL ^® , Metadate CD ^® , Amrix ^® and Lamictal ^® ODT ^tm have received FDA approval. Our collaboration partners and licensees market over 40 different products using our technologies in many of the world’s largest pharmaceutical markets, including:

 

 

Our largest collaboration product, in terms of revenue, is pancreatin, a PEP which we developed and manufacture and supply to licensees in both the U.S. and Europe. For the years ended 2007, 2008 and 2009 revenues attributable to pancreatin supplied to our licensees accounted for 23%, 26% and 33% of our total revenues, respectively. For the year ended December 31, 2009, approximately 93% of our revenues from pancreatin supplied to our licensees were generated in the U.S. Among others, we are the exclusive supplier to Axcan for coated pancreatin, i.e. pancreatin that has been coated to protect the enzymes from degradation resulting from acids in the stomach, in the U.S. and revenues generated from this relationship for the years ended December 31, 2007, 2008 and 2009 accounted for 17%, 23% and 31% respectively. We have developed, manufactured and supplied products to Axcan since 1991. Under our current licensing and supply agreement, entered into in 2000, in addition to receiving manufacturing fees, we are also entitled to receive royalties based on a percentage of Axcan’s annual net sales of the finished pancreatin product, including the product sold as Ultrase ^® . On March 23, 2007, we executed an

amendment with Axcan, which, among other things, expanded the agreement to additional countries, allowed for the provision of alternative dosage strengths and addressed certain regulatory requirements not originally contemplated. The agreement, as amended, expires in 2015 and is subject to a two-year automatic renewal.

 

Multinational Operations.   We have research, development and manufacturing facilities in the U.S., Italy and France that position us well to supply the global pharmaceutical market. We generate revenues in Europe, North America, Asia, South America and Africa. In 2009, based on the country in which the recipient of the product or service is resident, Europe and North America accounted for approximately 31% and 63%, respectively, of our revenues. For more information on the geographic breakdown of our revenues, see Note 19 of our 2009 consolidated financial statements, included elsewhere in this Form 20-F.

 

Proprietary Pharmaceutical Technology Products Marketed and in Development

 

In addition to the application of our proprietary pharmaceutical technologies to develop our own products, such as ZENPEP ^® , our technologies have been successfully applied to a number of products currently marketed by our collaboration partners including, among others, Amrix ^® and Unisom ^® Sleepmelts. We continue to develop a pipeline of products both with our collaboration partners as well as for our own proprietary portfolio.

 

EUR-1025

 

EUR-1025 is a once-a-day oral formulation of ondansetron, an anti-emetic, or agent to prevent post-operative nausea and vomiting, and nausea and vomiting in cancer patients undergoing chemotherapy or radiotherapy. EUR-1025 achieved positive results in two pivotal pharmacokinetic studies. Single and multiple dose oral administrations of 24 mg of the product resulted in a similar rate and extension of exposure as 8 mg of the branded product dosed three times a day. We recently met with the FDA to review the data on EUR-1025, and we are currently working on the protocol for a single Phase III study in post-operative nausea and vomiting, that we expect to submit in the first half of 2010.

 

EUR-1073

 

EUR-1073 is an enteric coated, controlled release formulation of beclomethasone diproprionate currently marketed in certain European countries under the tradename Clipper ^tm , where it is indicated for the treatment of inflammatory bowel disease (IBD) and ulcerative colitis and for which we may be seeking marketing authorization in the U.S. The sustained release technology targets the lower gastrointestinal tract and potentially reduces side effects. We acquired the exclusive North American rights to market EUR-1073 from Chiesi Pharmaceutici SpA in April 2008. We received an orphan drug designation for this product candidate in the first quarter of 2009 for intended use in pediatric ulcerative colitis. Chiesi has completed a Phase IIIb clinical trial for this product in Europe and the data show that Clipper ^tm met the primary efficacy endpoint of non-inferiority to prednisolone, the current standard of care in ulcerative colitis. We are currently evaluating the results to decide whether to take this product forward in development.

 

EUR-1002 or Amrix ^®

 

Amrix ^® , developed with ECR Pharmaceuticals using our Diffucaps ^® technology and acquired by Cephalon, Inc. in 2007, is a once-a-day (OAD) sustained-release formulation of cyclobenzaprine hydrochloride, with FDA approved use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions. Amrix ^® is currently the only FDA-approved OAD skeletal muscle relaxant in the U.S. In 2000, we entered into a development, license and contract manufacturing agreement with ECR to develop a once-a-day extended-release formulation of cyclobenzaprine, and in 2003, we signed an addendum to that agreement to develop an additional formulation. Under the co-development agreement, we performed feasibility studies, formulation optimization and scale-up, provided clinical supply and validated the manufacturing process. Furthermore, pursuant to the co-development agreement, Cephalon is obligated to purchase from us and, subject to certain exceptions, we are obligated to supply Cephalon with, Cephalon’s total requirements of the product for the U.S., and Cephalon must provide us with certain forecasts and firm orders prior to the desired date of shipment.

We may elect to terminate our obligation to supply the product to Cephalon, in certain circumstances, in the event that annual net sales of the product are less than specified amounts, provided, however, that in such event, we continue to manufacture and supply the product to Cephalon for a period of two years thereafter. In the event of such termination, if Cephalon manufactures the product (or has it manufactured), we would be entitled to receive royalties on Cephalon ’s net sales of the product for so long as Cephalon sells the product. Pursuant to the co-development agreement, Cephalon was responsible for regulatory filings and is granted an exclusive license to sell the product in the U.S., Canada and Mexico. In addition to development payments and manufacturing fees, we are entitled to receive royalties based on a percentage of Cephalon’s net sales of the product. The agreement provides for a term of 12 years following the date Cephalon begins selling the product in the U.S. and is subject to a two-year automatic renewal.

 

ECR submitted a NDA through the FDA’s 505(b)(2) procedure and received approval of the NDA in February 2007. In August 2007, Anesta Inc. acquired Amrix from ECR and Cephalon undertook all of the incumbent obligations of the co-development agreement, subject to an amendment. As the licensor and exclusive manufacturer of the product, we now work with Cephalon to support the commercialization of the product in the U.S. Cephalon began promotion of Amrix ^® in the U.S. in November 2007. Cephalon reported 2008 revenues from Amrix ^® of $73.6 million and revenues of $114 million for 2009.

 

In addition to the U.S. marketing efforts by Cephalon, we have partnered this product in 21 countries outside of the U.S.

 

In October 2008, Eurand and Cephalon received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan Pharmaceuticals, Inc. and Barr Laboratories, Inc., each requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of Amrix. In November 2008, we received a similar certification letter from Impax Laboratories, Inc. Mylan and Impax each allege that the U.S. Patent Number 7,387,793 (the “Patent”), entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants,” issued to Eurand, will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserve the right to challenge the validity and/or enforceability of the Patent. Barr alleges that the Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. The Patent does not expire until February 26, 2025. In late November 2008, we filed a lawsuit with Cephalon, in U.S. District Court in Delaware against Mylan (and its parent) and Barr (and its parent) for infringement of the Patent. In January 2009, we filed a lawsuit with Cephalon in U.S. District Court in Delaware against Impax for infringement of the Patent. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter. Cephalon is bearing the bulk of the expenses associated with the litigation. We intend to work with Cephalon to defend the Amrix intellectual property rights, but there can be no assurance that these efforts will be successful.

 

EUR-1037 or Unisom ^® Sleepmelts

 

EUR-1037 is an orally disintegrating tablet formulation of Diphenhydramine citrate, that we developed using our AdvaTab ^® and Microcaps ^® technologies. The product is sold as an over-the-counter (OTC) sleep-aid product by Chattem Inc. in the U.S. under the brand name Unisom ^® Sleepmelts. The product was launched in April 2008.

 

EUR-1048 or Lamictal ^® ODT ^tm

 

EUR-1048 or Lamictal ^® ODT ^tm , is a taste-masked, orally disintegrating tablet formulation of lamotrigine that we developed using our AdvaTab ^® and Microcaps ^® technologies. On May 11, 2009, the FDA approved Lamictal ^® ODT ^tm for sale in the U.S. for the long-term treatment of Bipolar I Disorder. GSK launched Lamictal ^® ODT ^tm in late June 2009. This product was developed in 2006 pursuant to a co-development agreement with GSK under which we were responsible for performing feasibility studies, formulation optimization and scale-up, and providing clinical supply for the proposed product. GSK was responsible for certain regulatory filings and is granted an exclusive license to sell the product in the U.S. GSK is obligated to purchase from us and, subject to certain exceptions, we are obligated to supply GSK with, GSK’s total requirements of EUR-1048 for the U.S. We retain certain rights to the product outside the U.S. In addition to development payments, milestone payments ($12 million

of which we have already received and an additional $30 million that we could potentially receive) and manufacturing fees, we are entitled to receive royalties based on a percentage of GSK’s net sales of the product. The agreement provides for a term of 15 years following the date GSK begins selling the product in the U.S.

 

EUR-1000

 

EUR-1000 was designed as an AB-rated generic product to Inderal LA, a long-acting formulation of propranolol that is indicated for the treatment of hypertension and migraines. In the U.S., an AB rating allows a pharmacist to substitute a generic for a brand without physician approval. In 2006, Inderal LA generated approximately $175 million in sales. The Orange Book listings for Inderal LA indicate that the patents related to this product have expired. We have a co-development agreement with GSK (acquired by GSK from Reliant Pharmaceuticals in December 2007) to develop EUR-1000. Under the agreement, signed in 2000, we performed feasibility studies, formulation optimization and scale-up, provided clinical supply and are responsible for validating the manufacturing process. Furthermore, pursuant to the agreement, GSK is obligated to purchase from us, and we are obligated to supply GSK with, GSK’s total requirements of the product. GSK conducted clinical trials to determine bioequivalence and is responsible for regulatory filings and distribution and sales of the product. In addition to development and manufacturing fees, we are entitled to receive royalties based on a percentage of GSK ’s net sales of the product. In addition, GSK is obligated to pay us certain minimum annual royalty payments, which, if not maintained, allow us to enter into a development, license or supply agreement with any third party for the product. The ANDA for EUR-1000 was submitted by Reliant to the FDA in December 2006 and is under review.

 

Earlier Stage Product Candidates

 

In addition to our advanced development pipeline, we have several co-development and proprietary product candidates that are in earlier stages of research and development. We expect to continue to expand our product pipeline through the application of our proprietary formulation technologies to our own and our collaborators’ product ideas.

 

Proprietary Pharmaceutical Technologies

 

We have a broad and validated portfolio of proprietary pharmaceutical technologies, providing us with the opportunity to develop innovative products for our internal product pipeline and the flexibility to offer our collaborators a variety of solutions for their drug development objectives. In total, we have three technology platforms with eight distinct technologies that we apply to meet a range of challenging drug development objectives, including technologies that:

 

 

We believe we are able to improve the therapeutic efficacy and safety profile of drugs and enhance patient compliance through the application of our drug formulation technologies. We have the ability to manufacture commercial-scale quantities of products utilizing our technologies.

 

Customized Release

 

Our customized release platform has four separate technologies: Diffucaps ^® , Diffutab ^® , Eurand Minitabs ^® and Orbexa ^® . These technologies can be selected on the basis of the desired pharmacokinetic profile, the nature of the drug substance and the market requirements for the finished dosage form. These technologies can be used to provide

a sustained release of the drug to reduce daily dosing requirements, or to release at selected sites in the gastrointestinal tract or at selected times after ingestion to potentially improve therapeutic benefits or the safety profile. Alternatively, the drug can be set to release at a time of day when patients are most at risk from the acute disease effects, such as the early morning for cardiovascular disease.

 

 

Tastemasking/ODT

 

Our tastemasking/ODT technologies create convenient, patient-friendly dosage forms, such as orally disintegrating tablet formulations, liquid suspensions and sprinkles. We are able to apply our Microcaps taste-masking technology to all these dosage forms.

 

 

Bioavailability Enhancement

 

Biorise technology enhances solubility and absorption of insoluble drugs by creating stable nanocrystalline and amorphous drug forms that can be produced as capsules or tablets. The result is that the onset of therapeutic action is faster, lower amounts of a drug can be used for equivalent efficacy, and promising molecules that could not ordinarily be drug candidates due to low absorption can now enter a development pipeline. Biorise does not modify the chemical structure of the drug compound and, as a result, we do not expect to be required to repeat initial clinical trials and toxicity studies for products using Biorise.

 

Our Diffucaps technology can be used to improve the solubility of “pH-dependent” drugs. The inherent solubility of these drugs is affected by the pH of their surrounding environment. This phenomenon can affect the absorption of certain drugs from the GI tract, where the pH varies significantly, thereby limiting the ability to deliver the drug over a prolonged period of time. The Diffucaps technology can be used to overcome this limitation.

 

Research and Development

 

We have built a research and development organization that includes expertise in product formulation, pharmaceutical development, physical pharmacy and clinical development. We focus our research and development efforts primarily on making proprietary improvements to marketed or development-stage products through the application of our drug formulation technologies and developing product opportunities for commercialization by ourselves. Improvements to existing products generally involve less development and regulatory risk and shorter time from concept to market than traditional new drug developments.

 

We have an in-house product pipeline team that oversees development activities with representatives from each of our departmental functions. This team meets regularly to discuss product concepts and conduct our product portfolio management assessments. As a result of input from this team and external sources, we are able to identify product concepts that meet a therapeutic need, that can be developed and produced and that are commercially valuable. We test our concepts through input from external key opinion leaders.

 

Our research and development activities include collaborating with many leading pharmaceutical and biotechnology companies to provide formulation solutions to enhance their products or aid in product life-cycle management. We have signed four new co-development agreements in 2009. As of December 31, 2009, we had 117 employees in the research and development department worldwide, including more than 56 with Ph.D.s, masters or medical degrees (including Clinical, Regulatory Affairs and analysts working on our pancreatin project). Our research and development activities are conducted both in the U.S. and Italy.

 

Manufacturing

 

We supply finished pharmaceutical products for ourselves and to our various licensees and marketing collaborators for packaging and sale worldwide. All of our facilities are operated in compliance with cGMP and good laboratory practices, or GLP, and are audited by the relevant authorities. Our facilities provide us with the capacity to manufacture products for ourselves and our collaborators.

 

We have undergone successfully numerous audits by customers and regulatory agencies, including the FDA and European authorities. The U.S. Drug Enforcement Administration (DEA) has approved our U.S. location for the research and manufacture of DEA-regulated controlled substances, and the relevant European authorities have approved our European facilities for the research and manufacture of controlled substances.

 

To compete within our industry, we believe that a comprehensive research, development and manufacturing infrastructure is critical. In addition, our ability to provide these services to our collaboration partners enhances our ability to attract collaborators. We believe that our scale-up and manufacturing experience, coupled with our

multinational manufacturing infrastructure, offers us a competitive advantage over many of our competitors, including our ability to:

 

 

We believe our current manufacturing capabilities in our existing facilities are sufficient for our present and future operations, and we currently have no material expansion plans. We believe, however, that we have the ability to expand our manufacturing capacity in our existing facilities, if needed.

 

Intellectual Property

 

We actively seek patent protection for the proprietary technology that we consider important to our business, including our core platform technologies, as well as compounds, compositions and formulations and their methods of use and the processes for their manufacture. In addition to seeking patent protection in the U.S., we generally file patent applications in Canada, Europe, Japan and other countries on a selective basis to further protect the inventions that we consider important to the development of our business. We also maintain and rely on trade secrets, know-how, continuing technological innovation, in-licensed technologies and in-licensing opportunities to develop and maintain our proprietary positions. Our success depends in part on our ability to obtain and maintain proprietary protection for our products, product candidates, technology and know-how, to operate without infringing the proprietary rights of others, and to prevent others from infringing our proprietary rights as we develop new technologies or expand into new territories.

 

Patents and Proprietary Technology

 

Patents and trade secrets are important to our business. Our patent portfolio contains over 100 patent families that consist of over 390 granted patents and nearly 310 pending applications. We continue to file new applications on an ongoing basis. Our current patent portfolio is largely composed of patents with claims directed to our core platform technologies and related materials, processes, equipment and methods of manufacture and applications of the same to various formulations or drugs.

 

Our controlled-release Diffucaps ^® technology is present in a number of products marketed worldwide such as: in the U.S., Innopran XL ^® , and Amrix ^® ; in Japan, NitorolR ^® ; and in Europe, Diffu-K ^® , Slozem ^® and Diclomax Retard ^® . The Diffucaps technology portfolio contains a number of patents granted throughout the world, including five in the U.S. and two in Europe, with expiry dates between 2021 and 2025 (unless otherwise extended or reduced). Recent developments include the design and clinical testing of Diffucaps systems designed to deliver weakly basic drugs that are practically insoluble above pH 6.8, for absorption throughout the gastrointestinal tract. In 2009, we filed one new U.S. patent application related to this technology.

 

Our Microcaps ^® technology is present in Children’s Tylenol ^® , Advil ^® chewable tablets, Rulide ^® Roxithromycin tablets for suspension and Cibalginadue ^® Ibuprofen. Patents that describe our Microcaps technology have been granted in various countries throughout the world, including thirteen in the U.S. and six in Europe. These patents have expiry dates between 2010 and 2024 (unless otherwise extended or reduced). Recent developments include the design and clinical testing of Microcaps systems based on the pore-former approach to rapidly release the drug upon entry into the stomach to enhance the probability of being bioequivalent to RLD (reference listed drug) product. Currently, we have five U.S. patent applications related to this technology. In 2009, we filed four new U.S. patent applications related to this technology.

 

The AdvaTab ^® technology is licensed from Kyowa Hakko as a worldwide license that is exclusive subject to Kyowa Hakko’s reservation of certain rights. The technology platform includes nine U.S. patents, seven European patents and nine Japanese patents with expiry dates from 2013 to 2023 (unless otherwise extended or reduced).

Kyowa Hakko or Eurand also has over 30 pending patent applications for this technology. The pending applications, improvements and new patent filings are subject to the license agreement. Recent developments at Eurand include the design and clinical testing of AdvaTab systems wherein the Microcaps and AdvaTab technologies are combined to produce patient-friendly orally disintegrant tablet dosage forms. There are several pending patent applications with U.S. Patent and Trademark Office. Some of the pending patent applications include orally disintegrating tablet systems based on the combination of Diffucaps and AdvaTab technologies. In 2009, we filed three new U.S. patent applications related to this technology.

 

Our Biorise ^tm bioavailability enhancement technology portfolio includes six U.S. patents, seven European patents and one Japanese patent, with expiry dates between 2010 and 2023 (unless otherwise extended or reduced). There are over 20 pending patent applications relating to this technology.

 

Our polymer conjugation technology portfolio includes new chemical entity and technology patents, including four U.S. and four European issued patents. These patents have expiry dates between 2018 and 2026 (unless otherwise extended or reduced). There are nearly twenty pending patent applications relating to this technology. In 2009, we filed two new U.S. patent applications related to this technology.

 

The products that we currently produce on behalf of our collaborators or licensors may or may not be covered by patents in our portfolio. These patents, if present, may form only a part of our collaborator’s strategy for market exclusivity. Our patent portfolio is also broad and diversified and it is our belief that, based on our current revenue model, the loss of individual patents in our portfolio through expiry, litigation or a business decision not to maintain them would not have a material impact on our revenue.

 

We own several product-specific patents, including: (i) Orange Book-listed U.S. patent (US 6500454), with an expiry date of October 4, 2021 (unless otherwise extended or reduced), for GSK ’s Innopran XL ^® product; (ii) Orange Book-listed U.S. patent (US 7387793), with an expiry date of February 26, 2025 (unless otherwise extended or reduced) for Cephalon’s Amrix ^® product and (iii) U.S. and European patents, which expire in 2019 (unless otherwise extended or reduced), for Novartis’ Cibalginadue ^® , Ibuprofen.

 

We have five years of data exclusivity until August 2014 for ZENPEP ^® in the U.S. We also have one granted patent, four pending patent applications in the U.S. as well as an international application under the Patent Cooperation Treaty, or PCT, and national patent applications in Argentina, Chile and Taiwan with claims related to ZENPEP. The patent applications include claims intended to provide market exclusivity for certain commercial aspects of the product, including the formulation, the methods of making, the methods of using and the commercial packaging of the product. We also maintain as trade secrets or know-how certain of the technology used in developing or manufacturing ZENPEP.

 

In addition, we believe features of our pipeline products are specifically covered by certain patents or patent applications in our portfolio.

 

At any given time, the precise composition of our patent portfolio may change due to decisions we make in the course of our normal business practices not to maintain issued patents or to cease the prosecution of patent applications in certain selected territories or technology areas.

 

Generally, our employees and consultants execute a confidentiality agreement upon commencement of an employment or consulting relationship with us. The agreements provide that all confidential information developed or made known to an individual during the course of the employment or consulting relationship will be kept confidential and not be disclosed to third parties except in specified circumstances. In the case of employees, where not otherwise provided for under local law, the agreements provide that all inventions made by the individual while employed by us will be our exclusive property or are assignable to us. There can be no assurance, however, that these agreements will provide meaningful protection for our intellectual property, including our trade secrets, in the event of unauthorized use or disclosure of such information.

 

The patent position of drug formulation companies generally is highly uncertain and unpredictable because the determination of the scope of claims in biotechnology and pharmaceutical patents involves complex legal and factual questions. Consequently, there can be no assurance that we will be granted patents in respect of the claims in any of our currently pending or future patent applications, and we can offer no assurance that, in the event any

claims in any of our issued patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable or sufficiently broad in scope to protect our proprietary rights. Further, we may not have the necessary financial resources to enforce our patents.

 

Trademarks

 

We have registered, or have pending applications for the registration of, certain of our trademarks in various countries, which allow us to create brand recognition of our products and enhance loyalty within our customer base. We actively manage our trademark portfolio, maintain long-standing trademarks that are in use, and file applications for trademark registrations for new brands in all relevant jurisdictions. Although we police our trademark portfolio, our efforts may be unsuccessful against competitors, potential infringers or other violating entities, and we may not have adequate remedies for any misappropriation or infringement of our trademark rights because, for example, a violating company may be insolvent. At any given time, the precise composition of our trademark portfolio may change due to decisions we make in the course of our normal business practices not to use or maintain trademarks or to cease the prosecution of trademark applications in certain selected territories or technology areas.

 

Know-how

 

In addition to our patents, trade secrets and trademarks, we have established a proprietary knowledge base around our technologies, manufacturing processes and procedures, general business processes and project management systems. Our policy is to protect this information by, among other things, entering into confidentiality agreements with parties that have access to it, such as certain of our collaboration partners, licensees, employees and consultants. The policy also provides for the identification of trade secrets, and implementation of processes to ensure its protection, by limiting access thereto and educating those with access thereto how and why to maintain the confidentiality of the trade secrets.

 

Competition

 

The pharmaceutical industry is highly competitive and subject to rapidly advancing technologies. We and our collaborators face, and will continue to face, intense competition from pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies engaged in drug development activities or funding, both in the U.S. and abroad. Some of these entities are pursuing the development of drugs and other products that target the same diseases and conditions that we and our collaborators target in preclinical studies and clinical trials.

 

Many of our competitors have greater capital resources, manufacturing and marketing experience, research and development resources and production facilities. Many of them also have more experience than we have in conducting preclinical studies and clinical trials of new drugs and in obtaining FDA, EMEA and other applicable regulatory approvals. Accordingly, our competitors may succeed more rapidly than we or our collaborators in obtaining FDA approval for products and achieving widespread market acceptance. If we obtain necessary regulatory approval and commence commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities. In addition, our competitors’ success in obtaining patents may make it difficult or impossible for us to compete with them.

 

Our competitors may also be able to use alternative technologies that do not infringe our patents to formulate the active materials in our products; for example, alternative orally disintegrating tablets, particle-coating or controlled-release drug formulation technologies. They may, therefore, bring to market products that are able to compete with our product candidates, our co-development products, or other products that we have developed or may in the future develop. If successful, products derived from alternative technologies will compete against our products and product candidates.

 

Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are more effective, have fewer side effects, are more convenient or are less expensive than any of the products that we currently sell or may sell in the future. In addition, our ability to compete may be affected in some cases because insurers and other third-party payors seek to encourage the use of generic products or less expensive

alternatives. This may have the effect of making branded products less attractive from a cost perspective to patients, providers or payors.

 

Currently, we do not market any pharmaceutical products outside of the U.S., but rely on our collaborators to commercialize our products. In the U.S., we market ZENPEP ^® through our established sales and marketing force which is also marketing products to the CF community. If our proprietary clinical-stage product candidates are approved, they will compete with currently marketed drugs and potentially with product candidates in development for the same indications, including those marketed by our collaboration partners. In the event our products compete with our existing collaborators’ products, we may lose those collaborators or experience decreased sales of existing products with no corresponding increase in revenues.

 

We are one of the largest suppliers and manufacturers of currently marketed PEPs in the U.S. Although we anticipate, based on the FDA’s original 2004 guidance, a significant reduction in the number of PEPs on the market as of April 28, 2010, this decline in competition may not occur. FDA’s amended guidance in October 2007 now only requires that for companies who were marketing unapproved pancreatic enzyme products as of April 28, 2004, such companies submit an NDA on or before April 28, 2009 and continue diligent pursuit of regulatory approval in order to satisfy the April 28, 2010 deadline. The level of competition that ZENPEP faces from products in the U.S. depends on whether the manufacturers of currently marketed products file NDAs by the deadline set by the FDA and ultimately obtain approval for their NDAs and, if they do not follow the current guidance, whether the FDA takes regulatory action against these manufacturers and the nature of any such action.

 

ZENPEP competes with currently marketed porcine-derived PEPs from Axcan, Johnson & Johnson, and Solvay/Abbott. In December 2007, the FDA accepted and granted priority review for Axcan’s Ultrase NDA and provided a date suggesting a four month review. We licensed the Ultrase product to Axcan, and we receive manufacturing fees and royalties based on a percentage of Axcan’s annual net sales of the finished product. In May 2009, Solvay announced that it had received an approval for its new reformulated PEP, Creon ^® . Creon, Pancrease MT and Ultrase compete with ZENPEP.

 

Our pharmaceutical technologies compete with existing technologies such as those utilized by Biovail, Elan, Skye Pharma, and Cima (a subsidiary of Cephalon), among others. Competing technologies include the multiple-particle systems of Andrx, a subsidiary of Watson, Biovail and Elan; the controlled-release tablet technologies of Penwest and SkyePharma; and the solubility- enhancement technologies of Elan, SkyePharma and Soliqs, a division of Solvay/Abbott. Our pharmaceutical technologies will also compete with new drug development technologies that may be developed or commercialized in the future. Any of these technologies may receive governmental approval or gain market acceptance more rapidly than our product candidates, may offer therapeutic or cost advantages over our product candidates or may cure our targeted diseases or their underlying causes completely. As a result, our product candidates may become noncompetitive or obsolete.

 

Our ability to compete successfully is based on many factors, including our ability to protect our trade secrets, proprietary know-how and manufacturing processes; our ability to retain and recruit skilled and experienced scientific, clinical development, commercial and executive personnel; and the positive differentiation of our product candidates according to their efficacy, safety profile and convenience relative to competing products.

 

Government Regulation and Price Constraints

 

The pharmaceutical industry is subject to extensive global regulation by regional, country, state and local agencies. The Federal Food, Drug, and Cosmetic Act (FDC Act), other Federal statutes and regulations, various state statutes and regulations, and laws and regulations of foreign governments govern to varying degrees the testing, approval, production, labeling, distribution, post-market surveillance, advertising, dissemination of information and promotion of our products. The lengthy process of laboratory and clinical testing, data analysis, manufacturing, development, and regulatory review necessary for required governmental approvals is extremely costly and can significantly delay product introductions in a given market. Promotion, marketing, manufacturing and distribution of pharmaceutical products are extensively regulated in all major world markets. In addition, our operations are subject to complex Federal, state, local, and foreign environmental and occupational safety laws and regulations. We anticipate that the laws and regulations affecting the manufacture and sale of current products and

the introduction of new products will continue to require substantial scientific and technical effort, time and expense as well as significant capital investments.

 

United States

 

Of particular importance is the FDA in the U.S. It imposes requirements covering the testing, safety, effectiveness, manufacturing, labeling, marketing, advertising and post-marketing surveillance of our products. In many cases, FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the U.S.

 

Clinical Trials

 

As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animals to identify potential safety problems and, in some cases, to evaluate potential efficacy. The results of the preclinical studies are submitted to regulatory authorities as a part of an IND that is filed with regulatory agencies prior to beginning studies in humans. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. Phase I typically begins with the initial introduction of the drug into human subjects prior to introduction into patients. In Phase I, the compound is tested for safety, dosage tolerance, absorption, biodistribution, metabolism, excretion and clinical pharmacology, as well as, if possible, to gain early information on effectiveness. Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the drug for a specific indication, determine dose tolerance and the optimal dose range, and to gather additional information relating to safety and potential adverse effects. Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population, generally at multiple study sites, to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, one or more independent Institutional Review Boards must evaluate each clinical study. The Institutional Review Board considers, among other things, ethical factors, the safety of the study, the adequacy of informed consent by human subjects and the possible liability of the institution. The process of completing clinical trials for a new drug is likely to take a number of years and require the expenditure of substantial resources.

 

New Drug Application (NDA)

 

Promising data from preclinical and clinical trials are submitted to the FDA in an NDA for marketing approval. Preparing an NDA or foreign application involves considerable data collection, verification, analyses and expense, and there can be no assurance that the applicable regulatory authority will accept the application or grant an approval on a timely basis, if at all. The marketing or sale of pharmaceuticals in the U.S. may not begin without FDA approval. The approval process is affected by a number of factors, including primarily the safety and efficacy demonstrated in clinical trials and the severity of the disease. Regulatory authorities may deny an application if, in their sole discretion, they determine that applicable regulatory criteria have not been satisfied or if, in their judgment, additional testing or information is required to ensure the efficacy and safety of the product.

 

cGMP Regulations

 

One of the conditions for initial marketing approval, as well as continued post-approval marketing, is that a prospective manufacturer’s quality control and manufacturing procedures conform to the current Good Manufacturing Practice regulations of the FDA. In complying with cGMP regulations, manufacturers must continue to expend time, money and effort in production, recordkeeping and quality control to ensure that products meet applicable specifications and other requirements to ensure product safety and efficacy. The FDA periodically inspects our drug manufacturing facilities to ensure compliance with applicable cGMP requirements. Failure to comply with the statutory and regulatory requirements subjects us to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or voluntary recall of a product. Adverse experiences with the use of products must be reported to the FDA and could result in the imposition of market restrictions through labeling changes or product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not

maintained or if problems concerning safety or efficacy occur following approval. The Federal government has extensive enforcement powers over the activities of pharmaceutical manufacturers, including authority to withdraw product approvals, commence actions to seize and prohibit the sale of unapproved or non-complying products, to halt manufacturing operations that are not in compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, civil monetary and criminal penalties.

 

Post-marketing Requirements

 

After regulatory approval has been obtained, further studies, including Phase IV post-marketing studies, may be required to provide additional data on safety, to validate surrogate efficacy endpoints, or for other reasons, and the failure of such studies can result in a range of regulatory actions, including withdrawal of the product from the market. Further studies will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially approved. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including any change in indication, manufacturing process, labeling or manufacturing facility, it may be necessary to submit an application seeking approval of such changes to the FDA or foreign regulatory authority.

 

Finally, the FDA can place restrictions on approval and marketing utilizing its authority under applicable regulations. Marketing authorization for our products is subject to revocation by the applicable governmental agencies. In addition, modifications or enhancements of approved products or changes in manufacturing locations are in many circumstances subject to additional FDA approvals, which may or may not be received and which may be subject to a lengthy application process.

 

Drug Distribution Requirements

 

The distribution of pharmaceutical products is subject to the Prescription Drug Marketing Act (PDMA) as part of the FDC Act, which regulates such activities at both the Federal and state level. Under the PDMA and its implementing regulations, states are permitted to require registration of manufacturers and distributors who provide pharmaceuticals even if such manufacturers or distributors have no place of business within the state. States are also permitted to adopt regulations limiting the distribution of product samples to licensed practitioners. The PDMA also imposes extensive licensing, personnel recordkeeping, packaging, quantity, labeling, product handling and facility storage and security requirements intended to prevent the sale of pharmaceutical product samples or other product diversions.

 

Additional Requirements

 

The FDA Amendments Act of 2007 imposed additional obligations on pharmaceutical companies and delegated more enforcement authority to the FDA in the area of drug safety. Key elements of this legislation give the FDA authority to (1) require that companies conduct post-marketing safety studies of drugs, (2) impose certain drug labeling changes relating to safety, (3) mandate risk mitigation measures such as the education of healthcare providers and the restricted distribution of medicines, (4) require companies to publicly disclose data from clinical trials and (5) pre-review television advertisements.

 

The marketing practices of all U.S. pharmaceutical manufacturers are subject to Federal and state healthcare laws that are used to protect the integrity of government healthcare programs. The Office of Inspector General of the U.S. Department of Health and Human Services (OIG) oversees compliance with applicable Federal laws, in connection with the payment for products by government funded programs (primarily Medicaid and Medicare). These laws include the Federal anti-kickback statute, which criminalizes the offering of something of value to induce the recommendation, order or purchase of products or services reimbursed under a government healthcare program. The OIG has issued a series of Guidances to segments of the healthcare industry, including the 2003 Compliance Program Guidance for Pharmaceutical Manufacturers (the OIG Guidance), which includes a recommendation that pharmaceutical manufacturers, at a minimum, adhere to the PhRMA Code, a voluntary industry code of marketing practices. Failure to comply with these healthcare laws could result in administrative and legal proceedings, including actions by Federal and state government agencies. Such actions could result in the imposition of civil and criminal sanctions, which may include fines, penalties and injunctive remedies

We are also subject to the jurisdiction of various other Federal and state regulatory and enforcement departments and agencies, such as the Federal Trade Commission, the Department of Justice and the Department of Health and Human Services in the U.S. We are also licensed by the U.S. Drug Enforcement Agency to procure and produce controlled substances. We are, therefore, subject to possible administrative and legal proceedings and actions by these organizations. Such actions may result in the imposition of civil and criminal sanctions, which may include fines, penalties and injunctive or administrative remedies.

 

We participate in state government-managed Medicare and Medicaid programs, as well as certain other qualifying Federal and state government programs whereby discounts and rebates are provided to participating state and local government entities.

 

Outside of the U.S.

 

Our activities outside the U.S. are also subject to regulatory requirements governing the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of our products. These regulatory requirements vary from country to country. Whether or not FDA approval or approval of the EMA has been obtained for a product, approval of the product by comparable regulatory authorities of countries outside of the U.S. or the EU, as the case may be, must be obtained prior to marketing the product in those countries. The approval process may be more or less rigorous from country to country, and the time required for approval may be longer or shorter than that required in the U.S. Approval in one country does not assure that a product will be approved in another country.

 

In many markets outside the U.S., we operate in an environment of government-mandated, cost-containment programs. Several governments have placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and/or enacted across-the-board price cuts as methods of cost control. In most EU countries, the government regulates pricing of a new product at launch often through direct price controls, international price comparisons, controlling profits and/or reference pricing. In other markets, the government does not set pricing restrictions at launch, but pricing freedom is subsequently limited. Companies also face significant delays in market access for new products and, in certain European countries, more than two years can elapse before new medicines become available on some national markets. Additionally, member states of the EU have regularly imposed new or additional cost containment measures for pharmaceuticals. In recent years, Italy, for example, has imposed mandatory price decreases. The existence of price differentials within the EU due to the different national pricing and reimbursement laws leads to significant parallel trade flows.

 

In recent years, Congress and some state legislatures have considered a number of proposals and have enacted laws that could effect major changes in the healthcare system, either nationally or at the state level. Driven in part by budget concerns, Medicaid access and reimbursement restrictions have been implemented in some states and proposed in many others. Similar cost containment issues exist in many foreign countries where we do business.

 

Property, Plants and Equipment

 

Insurance

 

We maintain property insurance and general, commercial and product liability policies in amounts we consider adequate and customary for a business of our kind. However, because of the nature of our business, we cannot assure you that we will be able to maintain insurance on a commercially reasonable basis or at all, or that any future claims will not exceed our insurance coverage.

 

Environmental Matters

 

We are subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. We believe that our business, operations and facilities are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations. Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on us. The operation of our facilities,

however, entails risks in these areas. Significant expenditures could be required in the future if we are required to comply with new or more stringent environmental or health and safety laws, regulations or requirements.

 

In early January 2010, during routine inspection activities, an accidental release of cyclohexane was discovered to have occurred to the ambient air from the conservation vent of an on-site aboveground storage tank located at our facility in Vandalia, Ohio. We believe that this release did not pose any significant health-based or environmental impacts. However, due to the occurrence of such an event, and upon discovery, we immediately reported the release to the appropriate authorities, those being the National Response Center, the State Emergency Response Commission and subsequently the Regional Air Pollution Control Agency. We also developed a system of corrective actions to establish procedures and safeguards to minimize the potential for such an event to occur in the future.

 

Properties and Infrastructure

 

We own and operate two facilities in Milan, Italy. The main facility, which houses administrative, research, production and warehouse activities, is approximately 151,000 total square feet in size and was built in 1996. The laboratory and office space were expanded in 2001 and the office space was expanded again in 2008, adding an additional 3,700 square feet. We acquired the second facility in 2000 through the acquisition of Pharmatec International S.r.l. This approximately 60,000 square-foot production facility was completely renovated in 2003.

 

We also own a manufacturing facility of approximately 22,000 square feet in Nogent-Oise, France. This facility was constructed in 1977 and has been upgraded and renovated a number of times over the years, most recently in 2005, when we renovated certain testing and quality control laboratory areas in the facility.

 

Our U.S. manufacturing operations are based near Dayton, Ohio, where we own a facility of approximately 101,000 square feet, which houses our administrative, research, production and warehouse operations in the U.S. This facility was built in 1985 and completely renovated and expanded in 2001. In 2008, we completed a construction project which included the renovation of approximately 13,000 square feet of our existing building, as well as a 13,000 square-foot addition. In addition, adjacent to the facility, we lease approximately 5,000 square feet of office space that houses certain administrative personnel.

 

Following a strategic overview of our technology portfolio, we have decided to cease all internal investment in the drug conjugation technology. We may seek to out-license this technology and its intellectual property to interested parties. As a result of this, the drug conjugation facility and the leased office space of approximately 8,600 square feet in the Area Science Park of Trieste, Italy, was closed on March 1, 2010.

 

We lease office space of approximately 11,475 square feet near Philadelphia, Pennsylvania for Eurand Pharmaceuticals, Inc.’s operations.

 

We also lease office space of approximately 5,500 square feet in Huntsville, Alabama for SourceCF’s and Eurand Pharmaceuticals, Inc.’s operations.

 

All our manufacturing facilities are operated in compliance with cGMPs and GLPs and are periodically audited by the relevant authorities and customers. We believe that all of our present facilities are suitable for their intended purposes. We believe our current manufacturing capabilities in our existing facilities are sufficient for our present and future operations, and we currently have no material expansion plans. We believe, however, that we have the ability to expand our manufacturing capacity in our existing facilities, if needed.

 

Employees

 

Discussion of our employees is set forth in “Item 6. Directors, Senior Management and Employees”.

 

 

Not applicable.

 

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 20-F. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Item 3. Key Information — Risk Factors” and elsewhere in this Annual Report on Form 20-F, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a specialty pharmaceutical company that develops, manufactures and commercializes pharmaceutical and biopharmaceutical products. We utilize our proprietary pharmaceutical technologies to develop novel products that we believe will have advantages over existing products or will address unmet medical needs. Through our collaboration arrangements, we have successfully applied our technologies to drug products in a diverse range of therapeutic areas, including cardiovascular, gastrointestinal, pain, nutrition and respiratory. We are simultaneously developing and commercializing our own portfolio of products to address cystic fibrosis and gastrointestinal disorders. Using our own sales and marketing team, we are currently commercializing a portfolio of products for cystic fibrosis patients in the U.S. On August 27, 2009, the U.S. Food and Drug Administration, or FDA, approved our lead product EUR-1008, or ZENPEP ^® , for sale in the U.S. for the treatment of exocrine pancreatic insufficiency, or EPI, due to cystic fibrosis (CF) or other conditions. Other conditions that result in EPI frequently include gastrointestinal surgery, chronic pancreatitis and pancreatic cancer. We launched ZENPEP ^® (pancrelipase) Delayed-Release Capsules in the U.S. late in the fourth quarter of 2009 and expanded and supplemented our sales force immediately prior to launch to address both the gastrointestinal (GI) and CF communities. We also currently have two late-stage proprietary product candidates, EUR-1073 (beclomethasone) and EUR-1025 (ondansetron) in development in our own portfolio, as well as a number of other products currently in development with collaboration partners, including EUR-1000, which is partnered with GlaxoSmithKline, or GSK, which we currently expect to be approved by the FDA in 2010. We continue to advance and develop additional products using our pharmaceutical technologies.

 

We currently have manufacturing and research facilities in the U.S., Italy and France. In 2009, we had approximately €120.6 million (or $172.8 million) in total revenues. We manufacture and supply over 40 different products for sale in many of the world’s largest pharmaceutical markets. These products generated €99.0 million (or $141.9 million) in product sales in 2009. The remainder of our revenues generally consists of royalties and development fees.

 

We were formed in 1999 when affiliates of Warburg Pincus LLC and Gearóid Faherty, our chief executive officer and chairman, acquired the pharmaceutical technology business of American Home Products Corporation, now Wyeth. Warburg Pincus remains the majority shareholder of our ordinary shares. Since our formation, we have evolved into a specialty pharmaceutical company that develops, manufactures and commercializes pharmaceutical and biopharmaceutical products. Our evolution has been marked by the acquisition a number of businesses and technologies for an aggregate amount of approximately €27.3 million, consisting of:

 

 

Although the activities of SourceCF are different from those of our existing business, we manage the acquired activities as part of our existing business segment because they are comparatively small in financial terms. We will continue to monitor our activities to determine if our business should be managed in more than one segment.

 

In addition to these acquisitions, in December 2002, we entered into an agreement with Kyowa Hakko under which we have a worldwide license to practice under patents related to the AdvaTab ^® technology. The license is exclusive subject to Kyowa Hakko’s reservation of certain rights. For a further description of our arrangement with Kyowa Hakko, see “— Contractual Commitments.”

 

Traditionally, we have developed new pharmaceutical formulations and entered into agreements whereby we manufactured and supplied the resultant product and our collaboration partners or licensee commercialized the product, frequently subject to royalty and milestone obligations. Pursuant to these types of arrangements, we currently generate revenues through three primary sources: the manufacture and supply of products, development and sales of out-licensed products, and fees related to our formulation and product development work. We plan on continuing to build this business. Moreover, we plan to increase our revenues from the products commercialized and marketed by us, especially revenues from our lead product, ZENPEP, which was launched in 2009.

 

We refer to agreements that involve formulating a new product for a collaboration partner or licensee using our proprietary technologies as “co-development agreements”. In 2009, we entered into four co-development agreements with various collaboration partners and we continue to negotiate additional co-development agreements. Co-development agreements govern a wide range of arrangements from determining the feasibility of using a particular drug with a particular technology to contract services to formulate and supply a product. We believe we are not substantially dependent on any one of them individually. We have completed work on some of these co-development agreements, and, based on past experience and for a variety of reasons, it is likely that a number of our co-development agreements will not result in a commercialized product.

 

We have successfully applied our proprietary technologies to formulate products in a diverse range of therapeutic areas, including gastrointestinal, cardiovascular, pain, nutrition, and respiratory, which represented 51%, 16%, 12%, 13% and 3% of our 2009 revenues from product sales, respectively. Our ability to meet the goals of our collaboration partners coupled with our broad technology platforms and research infrastructure has allowed us to attract many of the leading pharmaceutical and biotechnology companies as collaboration partners and licensees, including Eisai, GSK, Cephalon, Novartis, and Sanofi-Aventis. Since 2001, five of our partnered drug products, KCl 20mEq, Innopran XL ^® , Metadate CD ^® , Amrix ^® and Lamictal ^® ODT ^tm have received FDA approval. Our collaboration partners and licensees market over 40 different products using our technologies in many of the world’s largest pharmaceutical markets, including:

 

 

Our largest collaboration product, in terms of revenue, is pancreatin, a PEP which we developed and manufacture and supply to licensees in both the U.S. and Europe. For the years ended 2007, 2008 and 2009 revenues attributable pancreatin supplied to licensees accounted for 23%, 26% and 33% of our total revenues, respectively. For the year ended December 31, 2009, approximately 93% of our revenues from pancreatin supplied to licensees were generated in the U.S.

 

Financial Operations Overview

 

Revenues

 

We currently generate our revenues from product sales, royalties or distribution fees for products our collaborators or distributors sell, and development fees for formulation work. Our direct product sales comprise a portfolio of products for cystic fibrosis and other patients in the U.S. This currently includes ZENPEP ^® (pancrelipase) Delayed-Release Capsules launched in the U.S. late in the fourth quarter of 2009 and the SourceCF product portfolio. The SourceCF product portfolio most notably includes a portfolio of vitamins and the TRIO ^®

(formerly marketed under the name eFlow ^® ) electronic nebulizer. Prior to ZENPEP’s commercial launch in November 2009, we marketed an unapproved PEP under the tradename Pancrelipase.

 

We are a global company with revenues generated in Europe, North America, Asia, South America and Africa. The proportion of our revenues derived from all countries which are a material source of revenue for us is shown in the table below, which includes revenue from The Netherlands, our country of domicile:

 

 

 

 

Our revenues have increased by approximately 22% for the year ended December 31, 2009 compared to the same period in 2008. However, this growth would have been approximately 18% for the year ended December 31, 2009 compared to the same period in 2008 had our revenues not been positively affected by changes in exchange rates, which increased the reported revenue figure by approximately €4.1 million for the year ended December 31, 2009. For the year ended December 31, 2008 our revenues increased approximately 16% as compared to the previous year for the reasons discussed in ‘‘— Results of Operations.”

 

Product Sales.   Product sales represent revenues from products manufactured in commercial quantities and sold by us to our customers and revenues from the sales of products commercialized and marketed by us, such as ZENPEP, Pancrelipase and SourceCF product portfolio. As our co-development and proprietary product candidates are commercialized, we expect product sales to increase.

 

Royalties.   In certain instances, we receive royalty revenues from our collaborators equal to a percentage of their product sales. Although product sales historically have accounted for most of our revenues, in recent years we have seen an increase in the revenues arising from royalty arrangements we have in place with a number of our collaboration partners including, for example, the Amrix product for Cephalon and the Ultrase product for Axcan.

 

Development Fees.   Development of a new pharmaceutical formulation generally includes the following stages:

 

 

We generally apply our proprietary pharmaceutical technologies in one of two ways — either to develop products on behalf of our collaborators or as internal programs. In both situations, we are involved in all stages of the formulation development process and perform largely the same types of work although, in general, we only perform clinical trials for the products we develop internally. Clinical trials for co-developed products are typically performed by our collaboration partners. For internal projects, we fund all of the development costs with a view either to out-license the product once it is fully developed and has obtained the applicable regulatory approvals, or to market it directly.

 

In our typical co-development contract, we generally receive development fees and milestones from our collaborators. Most of our current co-development agreements provide for us to perform development activities based on an hourly service fee. Our current co-development agreements also typically include provisions for the receipt of milestone payments upon the achievement of certain development and/or regulatory milestones including, by way of example, successful completion of development phases, successful demonstration of bioequivalence, and acceptance and approval by the applicable regulatory agencies. Milestone payments are usually structured as lump sum payments, which are due if and when we reach certain mutually agreed-upon development milestones as set forth in the agreements. For the years ended December 31, 2007, 2008 and 2009, we recognized €3.6 million, €3.1 and €5.1 million of revenue from milestone payments, respectively. In many cases, achievement of such milestone payments is based on factors that are out of our control, including, among other things, regulatory approval of the product. In addition, in many cases, decisions directly affecting the receipt of these payments are made at the sole discretion of our collaborator.

 

Due to the structure of our co-development agreements and the inherent difficulty in predicting progress on development plans, our development fees may fluctuate significantly from quarter to quarter. In addition, development fees will fluctuate depending on the number of co-development agreements we enter into in a given year or quarter.

 

Expenses

 

Cost of Goods Sold.   We generally manufacture all of the products we sell — the exception being the products included in the SourceCF product portfolio which are sourced from third parties, but accounted for less than 2% of cost of goods sold in 2009. The more significant component of our cost of goods sold is represented by the cost of raw materials, in particular, active ingredients, that we purchase from specialized vendors. Other significant components include utilities, depreciation of our fixed assets, and costs of personnel used for manufacturing purposes, including stock-based compensation expenses. The cost of materials fluctuates in close relationship to the fluctuation of product sales, notably volumes. The majority of the other components of cost of goods sold is generally referred to as indirect costs or overhead and is more stable in nature. Therefore, when product sales increase or decrease rapidly, these indirect costs and overhead do not necessarily move in close relationship with product sales.

 

Research and Development.   Research and development expenses are primarily incurred at our research and development facilities in developing and testing newly formulated products, for both co-development projects and internal product pipeline development. More specifically, research and development expenses include:

 

 

The majority of these costs, including fixed overhead costs, are allocated between co-development projects and projects we undertake on our own behalf, based on the number of hours worked on the projects by our personnel. Direct costs, such as clinical trials, are attributed to the projects to which they relate. On this basis, research and development costs have been divided in our consolidated financial statements as follows:

 

 

 

 

The above figures are discussed in greater detail in “— Results of Operations.”

 

The underlying expenses incurred for co-development arrangements do not always correlate with the development fee revenues to which they relate, because the costs that contribute directly to development revenues may have been incurred in periods prior to those in which the related revenue is recognized. For example, milestone payments based on performance may relate to work performed in prior periods. In addition, all of our research and development efforts improve and expand our technology platforms with the result that the research and development activities related to our internal pipeline of product candidates benefit from the results of our co-development programs, and vice-versa. Accordingly, total research and development spending is important in understanding our development efforts.

 

The cost of clinical trials may vary significantly over the life of a program as a result of many factors, including:

 

 

We intend to continue to seek new development opportunities, both for our proprietary product pipeline and with collaboration partners. We expect that our research and development expenses will increase as we continue to invest in our product pipeline. Due to the uncertainties associated with clinical trials and the risks inherent in the development process, we are unable to determine the completion costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely.

 

Selling, General and Administrative Expenses.   Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel of our management, sales, marketing, finance, accounting, legal, information technology and human resource functions, including stock-based compensation expenses. Other costs primarily include depreciation and utilities not included in cost of goods sold or research and development expenses, and professional fees for legal services, consulting services, accounting and market research services and telecommunications.

 

In late 2009 we started marketing ZENPEP to the approximately 120 CF Centers across the U.S. through our own U.S. based commercial group of 16 highly-experienced sales and sales support professionals, and to the gastrointestinal market segment primarily through a contract sales force of 49 sales representatives.

We have significantly increased our direct selling expenses in the fourth quarter of 2009 as a result of the ZENPEP launch in November 2009. These are expected to be the main driver impacting overall selling, general and administrative expenses in the future. The increasing complexity of the Company will also require additional costs for management and compliance, including higher consulting, legal, accounting, insurance and investor relations costs.

 

Equity-Based Compensation.   The table below shows the impact of equity-based compensation expenses on our statement of operations.

 

 

Equity based compensation currently consists of stock options granted and shares awarded to employees. Our stock options generally vest over four years and expire ten years from the date of grant, except certain options granted in 2000, which were subject to accelerated vesting. During 2006 we did not grant any options, but recognized a €65,000 gain from the forfeiture of options previously expensed. During 2007, 2008 and 2009, we granted stock options to employees which were expensed at fair value over the related vesting periods. In December 2007, we also awarded 26,100 shares — 50 shares to each employee working for the Company on December 1, 2007. Since there were no future service requirements for employees, the shares were expensed immediately. No shares were awarded in 2006, 2008 or 2009.

 

Foreign Exchange Gains and Losses.   We purchase foreign exchange contracts so as to hedge our exposure to revaluation of monetary assets and liabilities held on our balance sheet. Due to these hedging activities, our foreign exchange gains and losses have not exceeded €330,000 in any single year during the 2005 to 2009 period. We intend to continue the same management policy toward the hedging of our exposure to foreign currency.

 

Other Operating Expenses   Other operating expenses are operating expenses that are unusual in nature and occur occasionally.

 

Interest Income and Interest Expense.   Interest income consists primarily of interest income earned on our cash balances. Interest expense consists of interest on outstanding debt and the amortization of financing costs. As of December 31, 2009, our total outstanding debt was €207,000, owed to banks.

 

Income Taxes

 

Income taxes consist of current corporate income taxes and deferred tax expense on our reported results. We are resident and domiciled in The Netherlands, but the majority of our business activity is taxed in other jurisdictions, principally the U.S. and Italy, where the income is deemed to have originated. Tax benefits are recognized for loss-making subsidiaries where it is more likely than not that future taxable profits will be available to offset the existing net operating losses and deductible temporary differences.

 

We establish a valuation allowance to reduce deferred tax assets to the extent that evidence indicates it is more likely than not that the deferred tax assets will not be realized in future periods. All available positive and negative evidence is considered in evaluating the ability to recover deferred tax assets, including past operating results, the existence of cumulative losses in recent years and the forecast of future taxable income. Assumptions used to estimate future taxable income include the amount of future state, federal and international pretax operating income and the reversal of temporary differences. These assumptions are consistent with our plans and estimates used to manage our business; however, such assumptions require significant judgment about the forecasts of future taxable income.

Valuation allowances are maintained until it is judged more likely than not that the deferred tax assets will be realized. The release of valuation allowances is credited to income tax benefit (expense) in the statement of operations of the period in which the release occurs.

 

For the years ended December 31, 2008 and 2009 we have recorded deferred tax assets relating to temporary timing differences of our Italian subsidiary to the extent that it is more likely than not that we will receive the related benefit as a reduction of taxes in future years. In addition, we have never accrued tax benefits on losses from our U.S. operations, where we do not have a history of profitability. In 2009, we recorded a valuation allowance against deferred tax assets deriving from loss carryforwards in our U.S. subsidiaries and partially reduced the valuation allowance for deferred tax assets deriving from temporary deductible differences expected to be realized in Italy and the Netherlands in 2010. The net effect was an increase in the valuation allowance of €3.7 million. In 2008, we partially reduced the valuation allowance, recorded primarily against deferred tax assets deriving from loss carryforwards in our U.S. subsidiaries, to offset taxes on profits created by the settlement of litigation. This reduction amounted to €4.8 million.

 

The total valuation allowance recognized against our deferred tax assets in our consolidated financial statements as of December 31, 2009 amounted to €18.8 million. These unrecognized deferred tax assets are available to reduce taxable income in the future years.

 

Our Italian subsidiaries incur income tax expense also in loss years as they are subject to IRAP, a regional tax for which interest expense and the major portion of labor costs are not deductible. In the years ended December 31, 2007, 2008 and 2009, we incurred IRAP tax amounting to €665,000, €618,000 and €1.2 million, respectively.

 

In the years ended December 31, 2008 and 2009 income tax expense included €1.8 million and €121,000, respectively, of provision expense related to amounts required to be recorded for changes to our uncertain tax positions including interest and penalties. The uncertain tax position related primarily to a one time modification of a loan type financing arrangement between our U.S. and Italian subsidiaries in July 2008 which, although subject to interpretation of U.S. tax law, is more likely than not subject to a withholding tax which would not be recoverable by the Italian counterparty.

 

Critical Accounting Policies

 

Our operating and financial review and prospects of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various financial conditions and results of operations and, if required, on the exercise of significant judgment and the use of estimates on the part of management in its application. Although we believe that our judgments and estimates are appropriate, actual results may differ from those estimates.

 

We believe the following to be our critical accounting policies because they are both important to the presentation of our financial condition and results of operations and they require critical management judgment and estimates about matters that are uncertain:

 

 

If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

 

Revenue Recognition

 

We recognize revenue in accordance with ASC 605, Revenue Recognition .  Our accounting policy for revenue recognition substantially impacts our reported results and relies on certain estimates that require difficult, subjective and complex judgments on the part of management. Changes in the conditions used to make these judgments can materially impact our results of operations. Management does not believe that the assumptions that underlie its estimates are reasonably likely to change in the future.

 

Our revenue recognition criteria are explained in detail in the notes to our consolidated financial statements appearing elsewhere in this annual report. What follows is a summary description of how we recognize our various revenue components.

 

 

Pre-Launch Inventories

 

In order to optimize the profit potential and avoid being at a competitive disadvantage, from time to time, we make commercial quantities of product candidates prior to the date that they receive authorization, or notice of authorization, from a government agency to market and sell the product candidate. We refer to these inventories as “pre-launch inventories”. In addition to preparedness for commercialization, we typically produce pre-launch inventory on a commercial scale in order to validate our manufacturing process with the guidelines of the FDA, or

other regulatory agencies. The initial production batches or, “validation lots”, can normally be sold when the product is approved.

 

The decision to capitalize the cost of our pre-launch inventory typically requires us to consider:

 

 

Before obtaining regulatory approval we had been reviewing the facts and circumstances relating to inventory of our lead product candidate EUR-1008 (currently marketed as ZENPEP). Prior to August 2009, when the product was approved by the FDA, we expensed our pre-launch inventory costs related to the product. The related expense was €636,000, €1.1 million and €1.6 million in the years ended December 31, 2007, 2008 and 2009, respectively.

 

Research and Development Expenses

 

Research and development costs are expensed as incurred. Research and development expenses are of two types.

 

 

Research and development expenses consist of research-related direct costs and allocated overhead. Allocated overhead include facilities costs, salaries, other related personnel costs and patent costs. Direct costs include the cost of materials and costs related to clinical trials and pre-clinical studies. Expenses resulting from clinical trials are recorded when incurred based in part on estimates as to the status of the various trials. The two types of expenses are shown on separate lines in the consolidated statement of operations.

 

Equity-Based Compensation

 

Effective January 1, 2006, we adopted Financial Accounting Standards Board Statement No. 123R, or SFAS 123R, which is now part of ASC 718, Compensation — Stock Compensation , which requires us to account for the grant date fair value of our employee stock options. SFAS 123R has been adopted prospectively, meaning that options awarded prior to January 1, 2006 continued to be accounted for using Accounting Principle Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees . Under APB, the excess of the underlying stock price over the exercise price on the measurement date is recognized as compensation expense. Because the exercise price of all our stock options granted after 2000 was set equal to the market price on the date of the grant (which was the measurement date), we did not record any expense to the consolidated statement of operations related to stock options (unless certain original grant date terms were subsequently modified). Options awarded on or after January 1, 2006 are being accounted for under the provisions of SFAS 123R. Our determination of the fair value of share-based payment awards on the grant date using an option valuation model requires the input of highly subjective assumptions, including expected price volatility, exercise patterns (which may be influenced by staff resignations among other considerations), post-vesting forfeiture rate and suboptimal exercise factor.

 

For the calculation of expected volatility, because we are a relatively new public company and therefore do not yet possess comprehensive company-specific historical and implied volatility information, we compared our historical volatility for 2008 and 2009 to the historical volatility of similar entities whose share prices are publicly available, and based our estimate of volatility on the result. We intend to continue to consistently apply this process using such similar entities until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified entities are no longer similar

to us. In this latter case, more suitable similar entities, whose share prices are publicly available, would be utilized in the calculation.

 

The post-vesting forfeiture rate and suboptimal exercise factor are based on the Company’s historical option cancellation and employee exercise information, respectively. The suboptimal exercise factor is the ratio by which the stock price must increase before employees are expected to exercise their stock options. In developing its estimates of post-vesting forfeiture rate and suboptimal exercise factor, due to the limited history, the historical share option exercise experience was considered alongside academic research and the publicly disclosed parameters available for other companies for the estimation of future exercise patterns. The Company will continue to evaluate the appropriateness of these assumptions.

 

As equity-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2009 is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 6% in the year ended December 31, 2009. The effect of pre-vesting forfeitures on the Company’s recorded expense has historically been negligible due to the predominantly monthly vesting of option grants. If pre-vesting forfeitures occur in the future, the Company will record the effect of such forfeitures as the forfeitures occur.

 

If factors change and we employ different assumptions in the application of ASC 718 in future periods, the compensation expense that we will record, may differ significantly from what we have recorded in the current period. Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using option valuation models to estimate stock-based compensation in accordance with ASC 718. Option valuation models were developed for use in estimating the value of traded options, which are listed on organized exchange markets, that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our stock-based payments have characteristics significantly different from those of freely traded, listed options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, in our opinion, existing valuation models, including the lattice model, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Employee stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models. Although the fair value of employee stock-based awards is determined in accordance with ASC 718 using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

 

In 2009 stock options were primarily granted to certain new employees when they began employment. Stock options were granted at the relevant closing market prices of ordinary shares at the grant dates. The criteria for measurement of option value, and the consequently the commencement of the amortization of the expense, were met for 336,000 options during 2009.

 

The Board of Directors of the Company approved annual bonus grants of stock options to certain employees on March 4, 2008 for 2007 performance and on November 5, 2008 for 2008 performance in accordance with the Company’s Equity Compensation Plan. Stock options were also granted to certain new employees when they joined the Company. The criteria for measurement of option value, and the consequently the commencement of the amortization of the expense, were met for 1,213,750 options during 2008.

 

On May 16, 2007, the date of the IPO, the Company granted stock options for 758,000 shares to certain employees at an exercise price equal to the estimated fair market value of the underlying shares of $16.00 per share, which was the IPO price. During the remainder of the year ended December 31, 2007 the Company granted stock options for an additional 199,000 shares.

Income Taxes

 

Income taxes are provided for separately for each jurisdiction in which we operate in accordance with the applicable local laws. This process requires estimates and judgment to evaluate certain tax liabilities and determine the recoverability of certain deferred tax assets. Deferred tax assets and liabilities arise when the tax and financial statement recognition of revenue and expense occur in different accounting periods. Deferred tax assets and liabilities could also be affected by changes in tax laws and rates in the future.

 

We establish a valuation allowance to reduce deferred tax assets to the extent that evidence indicates it is more likely than not that the deferred tax assets will not be realized in future periods. All available positive and negative evidence is considered in evaluating the ability to recover deferred tax assets, including past operating results, the existence of cumulative losses in recent years, tax planning strategies and the forecast of future taxable income. Assumptions used to estimate future taxable income include the amount of future state, federal and international pretax operating income and the reversal of temporary differences. These assumptions are consistent with our plans and estimates used to manage our business; however, such assumptions require significant judgment about the forecasts of future taxable income.

 

Valuation allowances are maintained until it is judged more likely than not that the deferred tax assets will be realized. The release of valuation allowances is credited to income tax benefit (expense) in the consolidated statement of operations of the period in which the release occurs.

 

Valuation of Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets constitute a substantial portion of our total assets. As of December 31, 2009, intangible assets represented approximately 21% of our total assets, with goodwill alone representing approximately 17% of our total assets.

 

Goodwill arising on acquisitions represents the excess of the purchase price over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed. We carry out an annual impairment review of goodwill unless events occur that trigger the need for an earlier impairment review. Goodwill is tested for impairment in accordance with ASC 350, Intangibles — Goodwill and Other at the reporting unit level, which, for us, is one reporting unit. During 2007, 2008 and 2009, we performed the required impairment test of goodwill and determined that there was no impairment. As we operate in a single business unit, management based the fair value of the entity on the market value of its shares. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our business is impaired.

 

Other intangible assets include purchased patents, licenses and exclusive supply rights. These assets are carried at cost and amortized on a straight-line basis over the estimated useful lives of seven to fifteen years; however, in no case are the useful lives in excess of their legal or contractual period. We assess the impairment of definite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Our analysis includes, but is not limited to, the following key factors and assumptions:

 

 

When we determine that there is an indicator that the carrying value of definite-lived intangible assets may not be recoverable based on undiscounted future cash flows, we measure impairment based on estimates of discounted future cash flow. If actual cash flows differ from those projected by management, or if there is a change in any of these key assumptions, additional write-offs may be required. Management does not believe that its key assumptions are reasonably likely to change in the future.

 

Derivatives and Hedging Instruments

 

We use derivatives and hedging instruments for two purposes:

 

 

All derivatives are recognized on the balance sheet at fair value. If derivatives and hedging instruments meet the standards for hedge accounting under ASC 815, Derivatives and Hedging , then gains and losses arising from changes in the fair value of the hedging instrument are recorded in other comprehensive income. Only to the extent that hedging instruments are ineffective or do not meet the standards for hedge accounting of ASC 815 are gains and losses recorded in the results of operations. In general, forward exchange contracts do not meet the hedge accounting criteria. Gains and losses from forward exchange contracts are included in foreign exchange gains (losses) in the statement of operations.

 

Recent Accounting Developments

 

We review new accounting pronouncements and assess the likely outcome of adoption. For details, refer to Note 2 in the accompanying consolidated financial statements.

 

Results of Operations

 

Year ended December 31, 2009 Compared to Year ended December 31, 2008

 

Revenues.   Total revenues were €120.6 million for full year ended December 31, 2009, compared to €98.5 million for the same period in 2008, an increase of €22.1 million or 22%. The increase was primarily due to sales of pancreatic enzyme products in the U.S., both sales of our low cost Pancrelipase formulation and shipments of Ultrase ^® to Axcan, as well as higher royalties from Amrix ^® . Our growth was positively affected by changes in exchange rates, which increased the reported revenue figure by approximately €4.1 million for full year ended December 31, 2009. Excluding exchange rate effects the increase in revenues would have been 18%.

 

Product sales were €99.0 million for full year ended December 31, 2009, an increase of €19.1 million or approximately 24% compared to the same period in 2008. As mentioned above, this increase was primarily due to sales of our unbranded Pancrelipase formulation, and sales of Ultrase to our marketing partner, Axcan. The increase in product sales growth would have been €16.0 million or 20% if positive currency effects worth approximately €3.0 million were excluded.

 

Royalties were €10.7 million for full year ended December 31, 2009, an increase of €2.6 million or 32%, due mainly to increased royalties from Amrix and in part to positive foreign currency effects of approximately €511,000.

 

Development fees were €10.9 million for full year ended December 31, 2009 compared to €10.5 million for the same period in 2008, an increase of €421,000 or 4%. The increase was due to positive foreign exchange effects of approximately €558,000. Our development fees may fluctuate significantly from quarter to quarter depending on when certain milestone fees are earned.

 

Cost of Goods Sold.   Cost of goods sold was €61.2 million for full year 2009, compared to €53.8 million in 2008, representing an increase of €7.4 million or 14%. This lower growth rate compared to the 24% growth of product sales was primarily due to the increased proportion of high margin pancreatic enzyme products in total product sales.

Research and Development Expenses.   Research and development expenses were €23.6 million for full year ended December 31, 2009 compared to 20.3 million for the same period in 2008, representing an increase of approximately 3.3 million or 16%. We allocate our research and development expenses into two categories, research and development expenses attributable to development fees and other research and development expenses.

 

Research and Development Expenses Attributable to Development Fees.   For the year ended December 31, 2009, we were involved in a number of external projects for third parties, which we refer to in our consolidated statement of operations as research and development expenses attributable to development fees. For the year ended December 31, 2009, we incurred €6.3 million in research and development expenses attributable to development fees, representing 27% of our total research and development expenses. This represented an increase of €0.5 million compared to 2008. The largest component of these research and development expenses attributable to development fees was personnel costs. For the year ended December 31, 2009, €2.4 million of personnel costs were incurred. With more than 10 active external projects during the year ended December 31, 2009, no single project was individually significant.

 

Other Research and Development Expenses.   In our consolidated statement of operations, we refer to internal research and development expenses as other research and development expenses. For the year ended December 31, 2009, we incurred €17.2 million in other research and development expenses, representing 63% of our total research and development expenses. This represented an increase of €2.8 million compared to 2008. For the year ended December 31, 2009, the only internal project that was individually significant with respect to our total research and development expenses was ZENPEP ^® . In 2009 development costs for EUR-1008 were €6.6 million. For the year ended December 31, 2009, the portion of our research and development expenses attributable to other internal development projects was €10.6 million and was comprised of multiple projects, none of which was individually significant in relation to our total research and development expenses.

 

Selling, General and Administrative Expenses.   Selling, general and administrative expenses were €37.4 million for full year ended December 31, 2009 compared to €30.5 million for the same period in 2008, representing an increase of €6.9 million or approximately 23%. The increase is due primarily to costs associated with the launch of ZENPEP, including the expansion of our sales force, product sampling and marketing and patient-support programs.

 

Income tax expense.   For full year ended December 31, 2009, we recorded income taxes of €2.7 million on pre-tax loss of €3.2 million. In full year ended December 31, 2008, we recorded income taxes of €3.6 million on a pre-tax income of €17.3 million. Our taxes do not correlate directly with our consolidated profits and losses before tax for two main reasons. First, we are subject to certain local income taxes in Italy for which labor and financial costs are non-deductible. Second we have recorded valuation allowances to offset deferred tax assets and withholding taxes recoverable in certain operating subsidiaries that are not generating taxable profits on a recurring basis, hence are not deemed to be more likely than not to recover their deferred tax assets. In 2009, we recorded a valuation allowance against deferred tax assets deriving from loss carryforwards in our U.S. subsidiaries and partially reduced the valuation allowance for deferred tax assets deriving from temporary deductible differences expected to be realized in Italy and the Netherlands in 2010. Net effect was an increase in the valuation allowance of €3.7 million. In 2008, we partially reduced the valuation allowance, recorded primarily against deferred tax assets deriving from loss carryforwards in our U.S. subsidiaries, to offset taxes on profits created by the settlement of litigation. This reduction amounted to €4.8 million.

 

Tax expense for the full years ended December 31, 2009 and 2008, included €121,000 and €1.8 million, respectively, of provision expense related to amounts required to be recorded for changes to our uncertain tax positions under Interpretation No. 48 (FIN 48), including interest and penalties. The uncertain tax position related primarily to a one time modification of a loan type financing arrangement between the Company’s U.S. and Italian subsidiaries in July 2008 which, although subject to interpretation of U.S. tax law, is more likely than not subject to a withholding tax which would not be recoverable by the Italian counterparty. Based on information available to date, other than incremental interest, the amount is not expected to change significantly in the next twelve months because no such modifications or similarly taxable actions are currently planned or expected. The Company is not able to determine when this tax position might be resolved with the relevant tax authorities.

Year ended December 31, 2008 Compared to Year ended December 31, 2007

 

Revenues.   Our revenues were €98.5 million for the year ended December 31, 2008, compared to €84.8 million for the same period in 2007, an increase of €13.7 million, or approximately 16%. This growth would, however, have been approximately 22% year on year had our revenues not been negatively affected by changes in exchange rates, which reduced the reported revenue figure by approximately €4.5 million for the year ended December 31, 2008. Furthermore, our revenues for the year ended December 31, 2008 included €3.2 million of revenues relating to the business of SourceCF acquired in December 2007. The two most significant contributors to this revenue growth were Amrix, a once-daily cyclobenzaprine product, partnered with and launched by Cephalon, Inc in the U.S. in late 2007 and Ultrase, a pancreatin formulation partnered with Axcan.

 

Our product sales were €79.9 million for the year ended December 31, 2008, an increase of €8.9 million, or approximately 13%, compared to the same period in 2007. The increase in product sales growth would have been €12.4 million, or approximately 18%, if negative currency effects worth approximately €3.6 million were excluded. In addition to product sales attributable to the SourceCF business, the increase was due to sales of the Ultrase pancreatin formulation and Amrix.

 

Our Royalties were €8.1 million for the year ended December 31, 2008, an increase of €3.8 million or 86%. In addition to royalties from the SourceCF business, acquired in December 2007, the increase was due to royalties from the Amrix.

 

Our development fees were €10.5 million for the year ended December 31, 2008 compared to €9.4 million for the same period in 2007 — an increase of €1.1 million, or approximately 12%. The increase is negatively affected by foreign exchange effects without which development fees would have increased by approximately €1.6 million, or approximately 17%.

 

Cost of Goods Sold.   Our Cost of goods sold was €53.8 million for the year ended December 31, 2008 compared to €49.4 million for the same period in 2007, representing an increase of €4.4 million, or approximately 9%. If foreign exchange currency effects of €1.9 million were excluded, the cost of goods would have increased by €6.3 million, or approximately 13%. Our cost of goods included €1.1 million of costs related to the initial lots of our product candidate, EUR-1008, which were not sold until commercial launch. In accordance with our accounting policy for pre-launch inventory, these costs related to EUR-1008 were expensed because the process for regulatory approval has not progressed far enough to determine with sufficient certainty that the costs will be recovered. The percentage growth rate of cost of goods sold is lower than the percentage growth rate of product sales primarily because products with higher than average margin grew proportionately more than product sales as a whole.

 

Research and Development Expenses.   Research and development expenses were €20.3 million for the year ended December 31, 2008 compared to €17.1 million for the same period in 2007, representing an increase of €3.2 million, due, primarily to increased clinical costs, partly offset by an increase of approximately €2 million in government grants received. We recognize government grants as a reduction of the operating expense when they are earned and when there is no remaining risk of repayment.

 

Selling, General and Administrative Expenses.   Selling, general and administrative expenses were €30.5 million for the year ended December 31, 2008 compared to €21.5 million for the same period in 2007, representing a increase of €9.0 million, or approximately 42%. This increase was primarily due to:

 

 

Income from Settlement of Litigation.   Income from Settlement of Litigation of €24.4 million has been recognized as operating income for the year ended December 31, 2008. As announced on August 6, 2008, Eurand

and UCB, Inc. agreed to settle litigation concerning a 1999 development, license and supply agreement between the two companies for a sustained-release formulation of methylphenidate hydrochloride (MPH). Under the terms of the settlement, Eurand receives $35 million, as follows:

 

 

The full amount of the settlement, excluding future interest, was recognized in the period. Payments not yet received are carried on the balance sheet.

 

Net interest.   Net interest income was €436,000 for the year ended December 31, 2008 compared to €1.5 million of expense for the same period in 2007. This change resulted primarily from the repayment of all outstanding notes payable to shareholders and almost all outstanding bank debt on May 30, 2007, using proceeds from our IPO.

 

Income tax expense.   For the year ended December 31, 2008, we recorded income taxes of €3.6 million on pre-tax income of €17.3 million. In the year ended December 31, 2007, we recorded income taxes of approximately €1.1 million on a pre-tax loss of €5.5 million. Our taxes do not correlate directly with our consolidated profits and losses before tax because we are subject to certain local income taxes in Italy for which labor and financial costs are non-deductible, and we have recorded valuation allowances to offset deferred tax assets and withholding taxes recoverable in certain operating subsidiaries that are not generating taxable profits on a recurring basis, hence are not deemed to be more likely than not to recover their tax loss carryforwards. In 2007 we recorded a valuation allowance against the benefits of tax loss carryforwards in our U.S. subsidiaries. In 2008, we partially reduced the valuation allowance, recorded primarily against deferred tax assets deriving from loss carryforwards in our U.S. subsidiaries by €4.8 million, to offset taxes on profits created by the settlement of litigation. Tax expense for the year ended December 31, 2008 included €1.8 million of provision expense related to amounts required to be recorded for changes to our uncertain tax positions including interest and penalties. The uncertain tax position related primarily to a one time modification of a loan type financing arrangement between our U.S. and Italian subsidiaries in July 2008 which, although subject to interpretation of U.S. tax law, is more likely than not subject to a withholding tax which would not be recoverable by the Italian counterparty. Based on information available to date, other than incremental interest, the amount is not expected to change significantly in the next twelve months because no such modifications or similarly taxable actions are currently planned or expected. We are not able to determine when this tax position might be resolved with the relevant tax authorities.

 

Financial Condition, Liquidity and Capital Resources

 

As of December 31, 2009 we had €16.9 million in cash and cash equivalents and €23.0 million of marketable securities. Total debt was €207,000, consisting of an overdraft. In addition, we had available €3.2 million of short-term lines of credit from our banks, none of which were utilized. Marketable securities represented U.S. treasury bills, German and French government bonds matured or maturing between January 4 and November 30, 2010.

 

As of December 31, 2008, we had €19.1 million in cash and cash equivalents and €3.6 million of marketable securities. Total debt was €186,000, consisting of an overdraft. In addition, we had available €11.0 million of short-term lines of credit from our banks, none of which were utilized. Marketable securities represented U.S. treasury bills matured on March 12, 2009.

 

As of December 31, 2007, we had €12.5 million in cash and cash equivalents. Total debt was €1.6 million. In addition, we had available €6.3 million of short-term lines of credit from our banks, none of which were utilized.

 

Except for a net income in 2008 of €13.6 million, which includes a gain on settlement of litigation of €24.4 million (see above) which is not expected to recur, we have incurred significant net losses since our formation in 1999, when we were established as a company independent of American Home Products, now Wyeth. As of December 31, 2009, we had an accumulated deficit of €44.3 million. Our net income (losses) were approximately €(6.7) million, €13.6 million and €(5.9) million, in 2007, 2008 and 2009, respectively. Prior to 2007, our net losses resulted principally from costs incurred in connection with servicing our outstanding debt. In addition, we have

made, and expect to continue to make, investments in our research and development programs.

 

Net Cash Provided by Operating Activities.   Net cash provided by operating activities during the years ended December 31, 2009 and 2008 was €9.5 million and €17.3 million, respectively. Cash flow from operating activities in the year ended December 31, 2008 was positively affected by the receipt in September 2008 of $25.0 million, approximately €17.4 million at the then-current exchange rate, for the first payment for the settlement of litigation with UCB. In the year ended December 31, 2009 we received a second payment from UCB of $5.0 million, approximately €3.4 million at the then-current exchange rate. Net of the effects of UCB payments, cash flow from operating activities increased in the year ended December 31, 2009 mainly due to the increased revenues and related gross margin on product sales.

 

Net cash provided by operating activities during the years ended December 31, 2008 and 2007 was €17.3 million and €1.8 million, respectively. Cash flow from operating activities increased in the year ended December 31, 2008 because of the receipt in September of $25.0 million, approximately €17.4 million at the then-current exchange rate, for the first payment for the settlement of litigation with UCB partly offset by higher operating expenses and an increase in working capital. Working capital increased primarily because of higher inventory at December 31, 2008 compared to a year earlier.

 

Net Cash Used in Investing Activities.   Net cash used in investing activities was €25.4 million and €11.5 million during the years ended December 31, 2009 and 2008, respectively. Net cash used in investing activities increased in the year ended December 31, 2009 because of the purchases of marketable securities that have not matured during the year. The excess of purchases over maturity of marketable securities amounted to €18.8 million in the year ended 31, 2009 and €3.7 million in the year ended December 31, 2008. Excluding the amount due to marketable securities, net cash used in investing activities was €6.2 million for the year ended December 31, 2009 and was primarily due to capital expenditures on property plant and equipment that totaled €6.3 million. Capital expenditures were generally related to the renewal of machinery and equipment in our manufacturing and research and development facilities. In future years we intend to expand our facilities in line with the growth of our business.

 

Net cash used in investing activities was €11.5 million and €8.7 million during the years ended December 31, 2008 and 2007, respectively. Net cash used in investing activities increased in the year ended December 31, 2008 because of higher acquisitions of property plant and equipment and the purchase of marketable securities for €3.7 million in December 2008, which were still held at the end of the year.

 

Net Cash Provided by Financing Activities.   Net cash provided by financing activities for the year ended December 31, 2009 was €14.0 million, deriving from the issuance of 2,000,000 ordinary shares from secondary offering, which resulted in €13.6 million, net of costs relating to underwriting and professional advisors’ fees, and from cash received on the exercise of employee stock options awarded for past service of €342,000. As of December 31, 2009 cash balances were €16.9 million.

 

Net cash provided by financing activities for the year ended December 31, 2008 was €453,000, deriving from cash received on the exercise of employee stock options awarded for past service of €1.8 million, offset by the repayment of all outstanding bank debt of €1.4 million. As of December 31, 2008 cash balances were €19.1 million.

 

In addition to the above financing activities we had unused lines of credit of €3.2 million at December 31, 2009, which are callable on demand and unsecured. We expect that our available funds together with our unused credit lines will be sufficient to meet our current anticipated needs for working capital and capital expenditures, for the next twelve months. Our future capital needs will depend on the success of our existing and future products and on the extent to which we identify and ultimately consummate potential new acquisitions. Thus, any projections of future cash needs and cash flows are subject to substantial uncertainty and our future capital requirements will depend on many factors, including:

 

 

 

Off-Balance Sheet Arrangements

 

As of December 31, 2009, we did not have any off-balance sheet arrangements.

 

Contractual Commitments

 

The following table summarizes our financial commitments as of December 31, 2009:

 

 

 

 

See “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.