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<b><font style="font-family: 'Times New Roman', Times">9.  </font></b>
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<td>
<b><font style="font-family: 'Times New Roman', Times">Commitments
and Contingencies</font></b>
</td>
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<b><i><font style="font-family: 'Times New Roman', Times">Legal
Proceedings Related to the Pfizer Transaction</font></i></b>
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Since the announcement on October 12, 2010 of the
Company’s entry into an agreement and plan of merger with
Pfizer Inc. and a wholly-owned subsidiary of Pfizer Inc.
(“Pfizer”) (see Note 15, “Subsequent
Event”), a
number of putative class action lawsuits have been filed in
federal and state court in Tennessee by purported shareholders
of the Company on behalf of themselves and other shareholders of
the Company. The complaints name as defendants the Company and
its directors and, in certain cases, Pfizer.
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The complaints variously allege, among other things, that the
Company’s directors breached their fiduciary duties to
shareholders of the Company in connection with the
Company’s entry into the agreement and plan of merger with
Pfizer. Certain of the complaints also allege that the Company
and/or Pfizer aided and abetted the directors’ purported
breaches of fiduciary duties. The complaints seek, among other
things, class action status, an order enjoining the proposed
transaction, and attorneys’ fees and expenses.
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<b><i><font style="font-family: 'Times New Roman', Times">Intellectual
Property Matters</font></i></b>
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<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i><font style="font-family: 'Times New Roman', Times">Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup></font></i>
</div>
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Eon Labs, Inc. (“Eon Labs”), CorePharma and Mutual
Pharmaceutical Company, Inc. (“Mutual”) each filed an
Abbreviated New Drug Application (“ANDA”) with the
U.S. Food and Drug Administration (“FDA”) seeking
permission to market a generic version of
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
400 mg tablets. Additionally, Eon Labs’ ANDA seeks
permission to market a generic version of
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
800 mg tablets. United States Patent Nos. 6,407,128 (the
“ ‘128 patent”) and 6,683,102 (the
“ ‘102 patent”), two
<font style="white-space: nowrap">method-of-use</font>
patents relating to
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>,
are listed in the FDA’s Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma each filed
Paragraph IV certifications against the ‘128 and
‘102 patents alleging non-infringement, invalidity and
unenforceability of those patents. Mutual has filed a
Paragraph IV certification against the ‘102 patent
alleging non-infringement and invalidity of that patent. A
patent infringement suit was filed against Eon Labs on
January 2, 2003 in the U.S. District Court for the
Eastern District of New York; against CorePharma on
March 7, 2003 in the U.S. District Court for the
District of New Jersey (subsequently transferred to the
U.S. District Court for the Eastern District of New York);
and against Mutual on March 12, 2004 in the
U.S. District Court for the Eastern District of
Pennsylvania, concerning their proposed 400 mg products.
Additionally, the Company filed a separate suit against Eon Labs
on December 17, 2004 in the U.S. District Court for
the Eastern District of New York, concerning its proposed
generic version of the 800 mg
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
product. On May 17, 2006, the U.S. District Court for
the Eastern District of Pennsylvania placed the Mutual case on
the Civil Suspense Calendar pending the outcome of the FDA
activity described below. On June 16, 2006, the
U.S. District Court for the Eastern District of New York
consolidated the Eon Labs cases with the CorePharma case. In
January 2008, the Company entered into an agreement with
CorePharma providing it with, among other things, the right to
launch an authorized generic version of
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
pursuant to a license in December 2012 or earlier under certain
conditions. On January 8, 2008, the Company and CorePharma
submitted a joint stipulation of dismissal without prejudice. On
January 15, 2008, the Court entered an order dismissing the
case without prejudice.
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The Company believes that CorePharma began shipping a generic
form of
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
in early April 2010. On April 13, 2010, the Company brought
suit against CorePharma in the U.S. District Court for New
Jersey asserting certain of the Company’s rights under the
January 2008 agreement. The parties appeared at a District Court
hearing on April 14, 2010, at which the Company sought, and
was denied, a temporary restraining order (“TRO”)
against CorePharma to prevent further sales of generic product.
On May 6, 2010, the Court granted a preliminary injunction
against CorePharma. On May 19, 2010, the Court entered a
consent order from the parties vacating the preliminary
injunction, and CorePharma resumed selling the authorized
generic form of
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
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Pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provided the Company with an automatic stay of
FDA approval of Eon Labs’ ANDA for its proposed 400 mg
and 800 mg products for 30 months (unless the patents
are held invalid, unenforceable or not infringed) from no
earlier than November 18, 2002 and November 3, 2004,
respectively. The
<font style="white-space: nowrap">30-month</font>
stay of FDA approval for Eon Labs’ ANDA for its proposed
400 mg product expired in May 2005 and Eon Labs
subsequently withdrew its 400 mg ANDA in September 2006.
The <font style="white-space: nowrap">30-month</font>
stay of FDA approval for Eon Labs’ 800 mg product was
tolled by the Court from January 10, 2005 to April 30,
2007, and the stay expired in early August 2009. On
April 30, 2007, Eon Labs’ 400 mg case was
dismissed
without prejudice, although Eon Labs’ claim for fees and
expenses was severed and consolidated with Eon Labs’
800 mg case. On August 27, 2007, Eon Labs served a
motion for summary judgment on the issue of infringement. The
Court granted the Company discovery for purposes of responding
to Eon’s motion until March 14, 2008 and set a
briefing schedule. On March 7, 2008, the Company filed a
letter with the Court regarding Eon Labs’ inability to
adhere to the discovery schedule and the Court took Eon
Labs’ motion for summary judgment on the issue of
infringement off the calendar. Subsequently, Eon Labs filed an
amended motion for summary judgment on the issue of infringement
on April 4, 2008. Eon Labs also filed a motion for summary
judgment on the issue of validity on April 16, 2008. On
May 8, 2008, Eon Labs filed amended pleadings. On
May 22, 2008, the Company moved to dismiss certain defenses
and counterclaims. On June 6, 2008, the Company responded
to Eon Labs’ motion for summary judgment on the issue of
validity. On January 20, 2009, the Court issued an order
ruling invalid the ‘128 and ‘102 patents. The
order was issued without the benefit of a hearing in response to
Eon Labs’ motion for summary judgment. The order also
allowed Eon Labs to pursue its claim for exceptional case, and
on March 31, 2009, Eon Labs filed its motion for this
purpose, which was fully briefed by the parties. On
September 2, 2010, the Court dismissed all of Eon
Labs’ pending counterclaims. On September 10, 2010,
the Court denied Eon Labs’ motion for exceptional case. On
May 20, 2009, Eon Labs asked for entry of final judgment,
and on June 4, 2009, the Court granted this request. On
July 1, 2009, the Company filed a notice of appeal to the
Court of Appeals for the Federal Circuit of the Court’s
entry of judgment. On July 2, 2009, Elan did the same. The
appeals were docketed by the Federal Circuit on July 10,
2009. In late July 2009, the companies moved to dismiss the
appeals for lack of jurisdiction. On September 30, 2009,
the Federal Circuit denied the motions to dismiss. The Company
and Elan filed opening briefs on November 23, 2009. Eon
filed its opposition brief on January 19, 2010. The Company
and Elan filed reply briefs on February 19, 2010. Oral
argument of the appeal was heard by the Federal Circuit on
May 7, 2010. On August 2, 2010, the Federal Circuit
affirmed the district court’s grant of summary judgment and
vacated the order against Elan for lack of subject matter
jurisdiction. A petition for panel rehearing and rehearing en
banc was filed on September 21, 2010. The Federal Circuit
Court denied the petition on October 14, 2010. On
October 26, 2010, Eon filed a Notice of Appeal to the
Federal Circuit to appeal the district court’s decision on
its motion for exceptional case.
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On December 5, 2008, the Company, along with co-plaintiff
Pharmaceutical IP Holding, Inc. (“PIH”) initiated suit
in the U.S. District Court of New Jersey against Sandoz,
Inc. (“Sandoz”) for infringement of U.S. Patent
No. 7,122,566 (the “ ‘566 patent”). The
‘566 patent is a
<font style="white-space: nowrap">method-of-use</font>
patent relating to
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
that is listed in the FDA’s Orange Book; it expires on
February 6, 2026. The ‘566 patent is owned by PIH and
licensed to the Company. The Company and PIH sued Sandoz,
alleging that Eon Labs’ submission of its ANDA seeking
approval to sell a generic version of a 800 mg
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
tablet prior to the expiration of the ‘566 patent
constitutes infringement of the patent. Sandoz, which acquired
Eon Labs, is the named owner of Eon Labs’ ANDA and filed a
Paragraph IV certification challenging the validity and
alleging non-infringement of the ‘566 patent. On
January 13, 2009, Sandoz answered the complaint and filed
counterclaims of invalidity and non-infringement. The Company
filed a reply on February 5, 2009.
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On March 31, 2010, Sandoz received approval from the FDA to
commercialize a generic product containing metaxalone. On
April 1, 2010, the Company sought, and the United States
District Court of New Jersey granted, a TRO enjoining Sandoz
from using, offering to sell, or selling within the United
States its generic metaxalone product. On April 9, 2010,
the TRO was vacated. On April 14 and May 5, 2010, the
District Court heard the Company’s arguments in support of
a preliminary injunction against Sandoz. The preliminary
injunction motion was denied on May 17, 2010. On
June 1, 2010, the Company filed an amended complaint to
include claims for monetary damages. On June 15, 2010,
Sandoz answered the amended complaint and filed amended
counterclaims. The Company’s request for a jury trial was
also granted and the trial date for the patent litigation
against Sandoz was set for September 7, 2010. The trial
concluded on September 16, 2010. The jury found the
‘566 patent invalid and not infringed. On October 18,
2010, the plaintiffs filed post-trial motions.
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On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
stating that the use listed in the FDA’s Orange Book for
the ‘128 patent may be deleted from the ANDA
applicants’ product labeling. The Company believes that
this decision is arbitrary, capricious and inconsistent with
the FDA’s previous position on this issue. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the ‘128 patent and
prohibit the removal of information corresponding to the use
listed in the Orange Book. The Company concurrently filed a
petition for stay of action requesting the FDA to stay approval
of any generic
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
products until the FDA has fully evaluated the Company’s
Citizen Petition.
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On March 12, 2004, the FDA sent a letter to the Company
explaining that the Company’s proposed labeling revision
for
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>,
which includes references to additional clinical studies
relating to food, age and gender effects, was approvable and
only required certain formatting changes. On April 5, 2004,
the Company submitted amended labeling text that incorporated
those changes. On April 5, 2004, Mutual filed a petition
for stay of action requesting the FDA to stay approval of the
Company’s proposed labeling revision until the FDA has
fully evaluated and ruled upon the Company’s Citizen
Petition, as well as all comments submitted in response to that
petition. The Company, CorePharma and Mutual filed responses and
supplements to their pending Citizen Petitions and responses. On
December 8, 2005, Mutual filed another supplement with the
FDA in which it withdrew its prior petition for stay, supplement
and opposition to the Company’s Citizen Petition. On
November 24, 2006, the FDA approved the revision to the
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
labeling. On February 13, 2007, the Company filed another
supplement to the Company’s Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
labeling. On May 2, 2007, Mutual filed comments in
connection with the Company’s supplemental submission.
These issues are pending. On July 27, 2007 and
January 24, 2008, Mutual filed two other Citizen Petitions
in which it seeks a determination that
Skelaxin<sup style="font-size: 85%; vertical-align: text-top">®</sup>
labeling should be revised to reflect the data provided in its
earlier submissions. These petitions were denied on
July 18, 2008.
</div>
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<i><font style="font-family: 'Times New Roman', Times">Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup></font></i>
</div>
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Actavis, Inc. (“Actavis”) filed an ANDA with the FDA
seeking permission to market generic versions of
Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup>
at the 30 mg, 45 mg, 60 mg and 120 mg
dosages. U.S. Patent No. 6,066,339 (the
“ ‘339 patent”) is a formulation patent
relating to
Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup>
that is listed in the Orange Book and expires on
November 25, 2017. Actavis filed a Paragraph IV
certification challenging the validity and alleging
non-infringement of the ‘339 patent, and the Company and
Elan Pharma International LTD (“EPI”), the owner of
the ‘339 patent, filed suit on October 18, 2007 in the
U.S. District Court for the District of New Jersey to
defend the rights under the patent. Pursuant to the Hatch-Waxman
Act, the filing of the lawsuit against Actavis provided the
Company with an automatic stay of FDA approval of Actavis’
ANDA for up to 30 months (unless the patent is held
invalid, unenforceable or not infringed) from no earlier than
September 4, 2007. On November 18, 2007, Actavis
answered the complaint and filed counterclaims of
non-infringement and invalidity. The Company and EPI filed a
reply on December 7, 2007. The initial scheduling
conference was held on March 11, 2008.
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In November 2009, Actavis sent the Company and EPI a second
Paragraph IV certification adding the 75 mg and
90 mg dosages. The Company and EPI initiated another suit
against Actavis in New Jersey on December 15, 2009. On
January 12, 2010, Actavis answered the complaint and filed
counterclaims of non-infringement and invalidity. On
February 23, 2010, this case was consolidated with the
earlier-initiated suit.
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The Court held a claim construction hearing on March 19,
2010 and issued a ruling. The Court scheduled trial to begin on
February 7, 2011. The close of all discovery is currently
set for January 7, 2011.
</div>
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Sandoz filed an ANDA with the FDA seeking permission to market
generic versions of
Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup>
at the 30 mg and 120 mg dosages and provided the
Company with a Paragraph IV certification challenging the
validity and alleging non-infringement of the ‘339 patent.
The Company and EPI filed suit on July 21, 2009 in the
U.S. District Court for the District of New Jersey to
defend the rights under the patent. Pursuant to the Hatch-Waxman
Act, the filing of the lawsuit against Sandoz provided the
Company with an automatic stay of FDA approval of Sandoz’s
ANDA for up to 30 months (unless the patent is held
invalid, unenforceable or not infringed) from no earlier than
June 11, 2009. Sandoz subsequently sent the Company and EPI
a second Paragraph IV certification adding the 45 mg,
60 mg, 75 mg and 90 mg dosages. The Company and
EPI initiated another suit against Sandoz in New Jersey
on September 1, 2009. On October 2, 2009, Sandoz
answered the complaints and filed counterclaims of
non-infringement and invalidity. The Company and EPI filed a
reply on October 22, 2009. The two cases were consolidated
on January 4, 2010. The parties are in the midst of fact
discovery. A claim construction hearing was held on
September 30, 2010 and the Court issued a ruling on
October 1, 2010. Trial is currently set for May 9,
2011.
</div>
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The Company intends to vigorously defend its rights under the
‘339 patent. Net sales of
Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup>
were $131,148 in 2009 and $27,281 and $75,218, respectively, in
the three and nine months ended September 30, 2010. As of
September 30, 2010, the Company had net intangible assets
related to
Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup>
of $195,178. If a generic form of
Avinza<sup style="font-size: 85%; vertical-align: text-top">®</sup>
enters the market or if the Company’s current estimates
regarding future cash flows adversely change, the Company may
have to write off a portion or all of these intangible assets,
and the Company’s business, financial condition, results of
operations and cash flows could be otherwise materially
adversely affected.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i><font style="font-family: 'Times New Roman', Times">EpiPen<sup style="font-size: 85%; vertical-align: text-top">®</sup></font></i>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
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<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On November 11, 2008, the Company was granted
U.S. Patent 7,449,012 (the “ ‘012
patent”) covering the next generation autoinjector
(“NGA”) for use with epinephrine to be sold under the
EpiPen<sup style="font-size: 85%; vertical-align: text-top">®</sup>
brand name. The ‘012 patent expires September 11,
2025. The ‘012 patent was listed in FDA’s Orange Book
on July 17, 2009 under the
EpiPen<sup style="font-size: 85%; vertical-align: text-top">®</sup>
NDA. On July 21, 2009, the Company received a
Paragraph IV certification from Teva Pharmaceutical
Industries Ltd. (“Teva”) giving notice that it had
filed an ANDA to commercialize an epinephrine injectable product
and challenging the validity and alleging non-infringement of
the ‘012 patent. On August 28, 2009, the Company filed
suit against Teva in the U.S. District Court for the
District of Delaware to defend its rights under the ‘012
patent. On October 21, 2009, Teva filed its answer
asserting non-infringement and invalidity of the ‘012
patent. A claim construction hearing is set for
September 15, 2011 and trial is currently set for
February 16, 2012. The parties are in the midst of fact
discovery.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
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<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On June 4, 2010, the Company received a Paragraph IV
certification from Sandoz giving notice that it had filed an
ANDA to commercialize an epinephrine injectable product and
challenging the validity and alleging non-infringement of the
‘012 patent. On July 14, 2010, the Company filed suit
against Sandoz in the U.S. District Court for District of
New Jersey to defend its rights under the ‘012 patent.
</div>
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On September 13, 2010, Sandoz answered the complaint and
filed counterclaims of noninfringement and invalidity. The
Company filed a reply on October 7, 2010. An initial
scheduling conference is set for December 2, 2010.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
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On September 14, 2010, the U.S. Patent and Trademark
Office issued U.S. Patent No. 7,794,432 (“the
‘432 patent”) covering the NGA for use with
epinephrine sold under the
EpiPen<sup style="font-size: 85%; vertical-align: text-top">®</sup>
brand name. The ‘432 patent expires September 11,
2025. The ‘432 patent was listed in FDA’s Orange Book
on September 15, 2010 under the
EpiPen<sup style="font-size: 85%; vertical-align: text-top">®</sup>
NDA. On September 17, 2010, the Company sent notice to Teva
and Sandoz that it had added the ‘432 patent to the FDA
Orange Book.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On November 2, 2010, the Company received a
Paragraph IV certification from Teva challenging the
validity and alleging non-infringement of the ‘432 patent.
The Company is evaluating the certification and intends to
vigorously enforce its intellectual property related to
EpiPen<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i><font style="font-family: 'Times New Roman', Times">Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup></font></i>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On November 17, 2008, Alpharma filed a declaratory judgment
action against Purdue Pharma L.P. (“Purdue”) in the
U.S. District Court for the Western District of Virginia,
seeking an order declaring that nine of Purdue’s patents
are invalid
<font style="white-space: nowrap">and/or</font> would
not be infringed by the commercialization of
Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
The complaint was served on March 12, 2009, and on
April 22, 2009, Purdue filed a motion requesting that the
court dismiss the action for lack of subject matter jurisdiction
or, alternatively, to transfer the action to the District of
Connecticut. On July 9, 2009, the court denied
Purdue’s motion to dismiss or transfer. On August 6,
2009, Purdue filed its answer and counterclaims, and filed a
motion for an order certifying the court’s July 9 order for
immediate appeal. On
August 26, 2009, the court denied Purdue’s motion to
certify for immediate appeal and issued an order scheduling
certain discovery and hearing dates. On December 4, 2009,
the Company was added as a plaintiff to the lawsuit. On
December 23, 2009, Purdue delivered an unconditional and
irrevocable covenant not to sue the Company (or any of its
affiliates, subsidiaries, parents, divisions, successors and
assigns) for infringement of eight of the nine patents in the
suit. On that day, the parties also filed a Stipulation with the
Court to dismiss the lawsuit with prejudice with respect to
these eight patents. The only patent remaining in the case was
U.S. Patent No. 6,696,088 (the “ ‘088
patent”). On February 4, 2010, after extensive
briefing, the Court held a claim construction hearing.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On February 9, 2010, the United States Patent &
Trademark Office issued U.S. Patent No. 7,658,939
(“the ‘939 patent”) to Purdue. The ‘939
patent is a continuation of the ‘088 patent. On the same
day, Purdue filed a patent infringement action against the
Company in the U.S. District Court for the District of New
Jersey, alleging infringement of the ‘939 patent by the
commercialization of
Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
On February 10, 2010, the Company filed a motion in the
U.S. District Court for the Western District of Virginia
seeking leave to amend its complaint to add declaratory judgment
counts of non-infringement and invalidity against the ‘939
patent.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On March 19, 2010, the Court in the Western District of
Virginia granted the Company’s motion for leave to amend
its complaint adding the ‘939 patent to the existing
litigation. A trial date was set for August 18, 2010, for
both the ‘088 and the ‘939 patents. On April 2,
2010, Purdue’s action brought in the U.S. District
Court for the District of New Jersey was dismissed. On
June 22, 2010, the Court issued its opinion and order
regarding claim construction.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
On July 23, 2010, the Company and Alpharma (collectively
the “King Parties”) entered into a settlement
agreement with Purdue. Pursuant to the terms of the agreement,
Purdue agreed not to sue the King Parties or their affiliates in
the United States with regard to the manufacture, use or sale of
Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
The King Parties are obligated to pay to Purdue an up-front
payment, which was paid in the third quarter of 2010, and a
quarterly royalty on net sales of
Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup>
for the duration of any valid claims in the ‘088 and
‘939 patents, or other patents in the same family that
cover the
Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup>
product beginning on August 1, 2010. In addition, the King
Parties agreed not to challenge certain of Purdue’s
patents, including the ‘088 and ‘939 patents, as they
may relate to
Embeda<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
The agreement also obligates the parties to dismiss the civil
action pending in the District Court for the Western District of
Virginia.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<b><i><font style="font-family: 'Times New Roman', Times">Average
Wholesale Price Litigation</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
In August 2004, the Company and Monarch Pharmaceuticals, Inc.
(“Monarch”), a wholly-owned subsidiary of the Company,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(“NYC”) in Federal court in the State of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (“AWP”) and fraudulently failed to
accurately report their “best prices” and their
average manufacturer’s prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits and
treble and punitive damages. The U.S. District Court for
the District of Massachusetts has been established as the
multidistrict litigation court for the case, <i>In re:
Pharmaceutical Industry Average Wholesale Pricing Litigation</i>
(the “MDL Court”).
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
Since the filing of the NYC case, 48 New York counties have
filed lawsuits against the pharmaceutical industry, including
the Company and Monarch. The allegations in all of these cases
are virtually the same as the allegations in the NYC case. All
of these lawsuits are currently pending in the MDL Court, except
for the Erie, Oswego and Schenectady County cases, which were
removed in October 2006 and remanded to the state of
New York Supreme Court in Erie County, New York state court
in September 2007. Motions to dismiss were granted in part and
denied in part for all defendants in all NYC and county cases
pending in the MDL Court. The Erie motion to dismiss was granted
in part and denied in part by the state court before removal.
Motions to dismiss were filed in October 2007 in the Oswego and
Schenectady cases, and these cases were subsequently transferred
to Erie County for coordination with the Erie County case. A
hearing on these motions to dismiss occurred on March 15,
2010, and the Court has taken the motions under advisement. It
is not anticipated that any trials involving the Company will be
set in any of these cases in 2010. On January 27, 2010, the
MDL Court granted partial summary judgment for the plaintiffs in
a case involving other pharmaceutical company defendants.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
In January 2005, the State of Alabama filed a lawsuit in the
Circuit Court for Montgomery County, Alabama against 79
defendants, including the Company and Monarch. The four causes
of action center on the allegation that all defendants
fraudulently inflated the AWPs of their products. A motion to
dismiss was filed and denied by the Court, but the Court
required an amended complaint to be filed. The Company filed an
answer and counterclaim for return of rebates overpaid to the
state. Alabama filed a motion to dismiss the counterclaim, which
was granted. The Company appealed the dismissal. The Alabama
Supreme Court affirmed the dismissal. In a separate appeal of a
motion to sever denied by the trial court, the Alabama Supreme
Court severed all defendants into single-defendant cases. Trials
against AstraZeneca International, Novartis Pharmaceuticals,
SmithKline Beecham Corporation and Sandoz resulted in verdicts
for the State. These defendants appealed their verdicts. On
October 16, 2009, the Alabama Supreme Court reversed all of
the verdicts against AstraZeneca, Novartis and SmithKline
Beecham and rendered judgment in favor of these companies.
Alabama filed a petition to rehear in the Alabama Supreme Court,
which was denied in January 2010. Trials scheduled to begin in
2010 have been stayed or continued pending a ruling on the
Sandoz appeal. A trial against Watson Pharmaceuticals, Inc. in
June 2009 resulted in a deadlocked jury. In April 2009, the
Court established various trial dates for all defendants. The
Company was scheduled for trial in January 2011 but, as with
other scheduled cases, this trial date was continued as a result
of the Alabama Supreme Court decision.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
In October 2005, the State of Mississippi filed a lawsuit in the
Chancery Court of Rankin County, Mississippi against the
Company, Monarch and 84 other defendants, alleging fourteen
causes of action. Many of those causes of action allege that all
defendants fraudulently inflated the AWPs and wholesale
acquisition costs of their products. A motion to dismiss the
criminal statute counts and a motion for more definite statement
were granted. Mississippi filed an amended complaint dismissing
the Company and Monarch from the lawsuit without prejudice.
These claims could be refiled.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
Over half of the states have filed similar lawsuits but the
Company has not been named in any other case except Iowa’s,
which was instituted in October 2007, Oklahoma’s, filed in
September 2010 and Louisiana’s, filed in October 2010.
The Company expects the Oklahoma case to be voluntarily
dismissed. The Company filed a motion to dismiss the Iowa
complaint. On February 20, 2008, the Iowa case was
transferred to the MDL Court. The relief sought in all of these
cases is similar to the relief sought in the NYC lawsuit. The
MDL Court granted in part and denied in part the Company’s
motion to dismiss, and the Company has filed its answer.
Discovery is proceeding in these cases. The Company intends to
defend all of the AWP lawsuits vigorously, but is currently
unable to predict the outcome or reasonably estimate the range
of potential loss.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
See also “AWP Litigation” under the section
“Alpharma Matters” below.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<b><i><font style="font-family: 'Times New Roman', Times">Fen-Phen
Litigation</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multidistrict litigation court has been established in the
U.S. District Court for the Eastern District of
Pennsylvania, <i>In re: Fen-Phen Litigation. </i>The plaintiffs
seek, among other things, compensatory and punitive damages
<font style="white-space: nowrap">and/or</font>
court-supervised medical monitoring of persons who have ingested
these products.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
The Company’s wholly-owned subsidiary, King Research and
Development, was originally a defendant in numerous cases. These
lawsuits were filed in various jurisdictions throughout the
United States and in each of these lawsuits King Research and
Development, as the successor to Jones Pharma Incorporated
(“Jones”), was one of many defendants, including
manufacturers and other distributors of these drugs. Although
Jones did not at any time
manufacture dexfenfluramine, fenfluramine or phentermine, Jones
was a distributor of a generic phentermine product and, after
its acquisition of Abana Pharmaceuticals (“Abana”),
was a distributor of
Obenix<sup style="font-size: 85%; vertical-align: text-top">®</sup>,
Abana’s branded phentermine product. The manufacturer of
the phentermine, purchased by Jones, filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation. All of the cases involving King Research and
Development have been dismissed.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<b><i><font style="font-family: 'Times New Roman', Times">Hormone
Replacement Therapy</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
Currently, the Company is named as a defendant by 20 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous other pharmaceutical companies have also
been sued. The Company was sued by approximately 1,000
plaintiffs, but most of those claims were voluntarily dismissed
or dismissed for lack of product identification. The remaining
20 lawsuits were filed in Alabama, Arkansas, California,
Missouri, Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation court has been
established in the U.S. District Court for the Eastern
District of Arkansas, Western Division, <i>In re: Prempro
Products Liability Litigation</i>, and all of the
plaintiffs’ claims have been transferred and are pending in
that Court except for one lawsuit pending in Philadelphia,
Pennsylvania state court. Many of these plaintiffs allege that
the Company and other defendants failed to conduct adequate
research and testing before the sale of the products and
post-sale monitoring to establish the safety and efficacy of the
long-term hormone therapy regimen and, as a result, misled
consumers when marketing their products. Plaintiffs also allege
negligence, strict liability, design defect, breach of implied
warranty, breach of express warranty, fraud and
misrepresentation. Discovery of the plaintiffs’ claims
against the Company has begun but is limited to document
discovery. No trial has occurred in the hormone replacement
therapy litigation against the Company. Most of the trials have
involved Wyeth/Pfizer/Upjohn. The trials against Pfizer/Wyeth
have resulted in verdicts for and against Pfizer/Wyeth, with
several verdicts against Wyeth reversed on post-trial motions.
Pfizer/Wyeth lost appeals in the Eighth Circuit from an adverse
jury verdict in the federal multidistrict litigation court and
in the Pennsylvania Court of Appeals. Pfizer/Upjohn has lost
several jury verdicts. One of these verdicts was later reversed,
and one other was partially reversed. The Company does not
expect to have any trials set in the next year. The Company
intends to defend these lawsuits vigorously but is currently
unable to predict the outcome or to reasonably estimate the
range of potential loss, if any. The Company may have limited
insurance for these claims. The Company would have to assume
defense of the lawsuits and be responsible for damages, fees and
expenses, if any, that are awarded against it or for amounts in
excess of the Company’s product liability coverage.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<b><i><font style="font-family: 'Times New Roman', Times">Alpharma
Matters</font></i></b>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
The following matters relate to our Alpharma subsidiary
<font style="white-space: nowrap">and/or</font>
certain of its subsidiaries.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i><font style="font-family: 'Times New Roman', Times">Department
of Justice Investigation</font></i>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
As previously disclosed, Alpharma, acquired by the Company in
December 2008, received a subpoena from the U.S. Department
of Justice (“DOJ”) in February 2007 in connection with
its investigation of alleged improper sales and marketing
practices related to the sale of the pain medicine
Kadian<sup style="font-size: 85%; vertical-align: text-top">®</sup>.
The Company divested Alpharma’s
Kadian<sup style="font-size: 85%; vertical-align: text-top">®</sup>
assets to Actavis LLC simultaneously with the closing of the
acquisition of Alpharma.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
In September 2009 the Company reached an agreement in principle
with the U.S. Attorney’s Office and DOJ which would
resolve this investigation. The Company recorded a reserve of
$42,500 in connection with this development in the third quarter
of 2009 as an adjustment to the goodwill associated with the
purchase of Alpharma. Under the terms of the agreement in
principle, the Company began accruing interest on
October 1, 2009 at a rate of
3.125% per annum. During the first quarter of 2010, Alpharma
entered into a definitive settlement agreement and paid $42,500
plus interest of $648 to the DOJ, of which $8,876 plus interest
of $161 is related to certain states.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i><font style="font-family: 'Times New Roman', Times">Chicken
Litter Litigation</font></i>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
Alpharma and one of its subsidiaries are two of multiple
defendants that have been named in several lawsuits that allege
that one of its animal health products causes chickens to
produce manure that contains an arsenical compound which, when
used as agricultural fertilizer by chicken farmers, degrades
into inorganic arsenic and may have caused a variety of diseases
in the plaintiffs (who allegedly live in close proximity to such
farm fields). These lawsuits were filed beginning on
December 16, 2003. Alpharma provided notice to its
insurance carriers and its primary insurance carriers have
responded by accepting their obligations to defend or pay
Alpharma’s defense costs, subject to reservation of rights
to later reject coverage for these lawsuits. One of the carriers
has filed a declaratory judgment action in state court in which
it has sought a ruling concerning the allocation of its coverage
obligations to Alpharma among the several insurance carriers
and, to the extent Alpharma does not have full insurance
coverage, to Alpharma. Further, this declaratory judgment action
requests that the Court rule that certain of the carrier’s
policies provide no coverage because certain policy exclusions
allegedly operate to limit its coverage obligations under said
policies. The insurance carriers may take the position that
some, or all, of the applicable insurance policies contain
certain provisions that could limit coverage for future product
liability claims arising in connection with product sold on and
after December 16, 2003.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
In addition to the potential for personal injury damages to the
approximately 138 plaintiffs, the plaintiffs are asking for
punitive damages and requesting that Alpharma be enjoined from
the future sale of the product at issue. In September 2006, in
the first trial, which was brought by three plaintiffs, the
Circuit Court of Washington County, Arkansas, Second Division
entered a jury verdict in favor of Alpharma. The plaintiffs
appealed the verdict, challenging certain pretrial expert
rulings; however, in May 2008, the Supreme Court of Arkansas
denied plaintiffs’ challenges. In its ruling, the Supreme
Court of Arkansas also overturned the trial court’s grant
of summary judgment that had the effect of dismissing certain
poultry company co-defendants from the case. The case was tried
against the poultry company co-defendants in April and May 2009,
resulting in a verdict for the defendants. In July 2009 the
plaintiffs filed a notice of appeal of that verdict. It is
expected that the appeal of the case will be heard in 2010. No
additional cases have been set for trial. Subsequent cases may
be tried against both the poultry companies and Alpharma
together.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
While the Company can give no assurance of the outcome of any
future trial in this litigation, it believes that it will be
able to continue to present credible scientific evidence that
its product is not the cause of any injuries the plaintiffs may
have suffered. There is also the possibility of an adverse
customer reaction to the allegations in these lawsuits, as well
as additional lawsuits in other jurisdictions where the product
has been sold. Worldwide sales of this product were
approximately $23,606 in 2009 and approximately $8,231 and
$22,466, respectively, in the three and nine months ended
September 30, 2010.
</div>
<div style="margin-top: 12pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i><font style="font-family: 'Times New Roman', Times">AWP
Litigation</font></i>
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
Alpharma, and in certain instances one of its subsidiaries, are
defendants in connection with various elements of the litigation
described above under the heading “Average Wholesale Price
Litigation”, primarily related to sale of
Kadian<sup style="font-size: 85%; vertical-align: text-top">®</sup>
capsules. At present, Alpharma is involved in proceedings in the
following courts:
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="text-align: left">
<tr>
<td width="4%"></td>
<td width="2%"></td>
<td width="94%"></td>
</tr>
<tr valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
<td> </td>
<td> • 
</td>
<td align="left">
Superior Court for the State of Alaska, Third Judicial District
of Anchorage;
</td>
</tr>
<tr style="line-height: 6pt; font-size: 1pt">
<td> </td>
</tr>
<tr valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: transparent">
<td> </td>
<td> • 
</td>
<td align="left">
Second Judicial Court in and for Leon County, Florida;
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Circuit Court of Cook County, Illinois, County Department,
Chancery Division; and
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Court of Common Pleas, for the Fifth Judicial District, State of
South Carolina, County of Richland.
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In addition, Alpharma’s New York and Iowa cases are pending
in the MDL Court discussed above, and the Oklahoma case is
pending in the District Court of Pottawotomie County, Oklahoma.
Mississippi and Texas cases against Alpharma were dismissed
without prejudice. The Company expects the Florida case will be
dismissed voluntarily.
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These lawsuits vary with respect to the particular causes of
action and relief sought. The relief sought in these lawsuits
includes statutory causes of action including civil penalties
and treble damages, common law causes of action, declaratory and
injunctive relief, and punitive damages, including, in certain
lawsuits, disgorgement of profits. The Company believes it has
meritorious defenses and intends to vigorously defend its
positions in these lawsuits. Numerous other pharmaceutical
companies are defendants in similar lawsuits.
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<b><i><font style="font-family: 'Times New Roman', Times">Environmental
Matters</font></i></b>
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In 2006, the Company contacted the U.S. Environmental
Protection Agency (“EPA”) to report past deviations
from the requirements of the state conditional major air
emissions operating permit relating to the Company’s
operation of certain pollution control equipment at its Bristol,
Tennessee facility. In May 2009, the Company received an
information request from EPA pursuant to section 114 of the
Clean Air Act regarding the Company’s historic air
emissions and its operation of certain pollution control
equipment (“Information Request”). In June 2009, the
Company provided EPA with its initial response to the
Information Request. The Company has subsequently provided
additional information to, and met with, EPA and the Tennessee
Department of Environment and Conservation. At this time, the
Company cannot predict or determine the outcome of this matter
or reasonably estimate the amount or range of amounts of fines
or penalties, if any, that might result from an adverse outcome.
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