The Company sells its products primarily to large national wholesalers, which in turn may resell the products to smaller or regional wholesalers, hospitals, retail pharmacies, chain drug stores, government agencies and other third parties. The following tables list the Company’s customers that individually comprised greater than 10% of total gross product sales for the three and nine months ended September 30, 2011 and 2010 or 10% of total accounts receivable as of September 30, 2011 and December 31, 2010:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	Gross Product			Gross Product			Gross Product			Gross Product
	Sales			Sales			Sales			Sales
Cardinal Health, Inc.		38	%		38	%		39	%		39	%
McKesson Corporation		34			29			35			32
AmerisourceBergen Drug Corporation		23			25			21			22

Total		95	%		92	%		95	%		93	%


	September 30,			December 31,
	2011			2010
	Accounts			Accounts
	Receivable			Receivable
Cardinal Health, Inc.		35	%		50	%
McKesson Corporation		22			30
AmerisourceBergen Drug Corporation		41			15

Total		98	%		95	%

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company maintains its cash deposits with federally insured banks. As of September 30, 2011, all cash deposits were federally insured.

Accounts Receivable

The Company typically requires its customers to remit payments within the first 30 to 90 days, depending on the customer and the products purchased. In addition, the Company offers wholesale distributors a prompt payment discount if they make payments within these deadlines. This discount is generally 2%, but may be higher in some instances due to product launches or customer and/or industry expectations. Because the Company’s wholesale distributors typically take the prompt payment discount, the Company accrues 100% of the prompt payment discounts, based on the gross amount of each invoice, at the time of sale, and the Company applies earned discounts at the time of payment. The Company adjusts the accrual periodically to reflect actual experience. Historically, these adjustments have not been material.

The Company performs ongoing credit evaluations and does not require collateral. As appropriate, the Company establishes provisions for potential credit losses. In the opinion of management, no allowance for doubtful accounts was necessary as of September 30, 2011 or December 31, 2010. The Company writes off accounts receivable when management determines they are uncollectible and credits payments subsequently received on such receivables to bad debt expense in the period received. There were no write offs during the three or nine months ended September 30, 2011 or 2010.

The following table represents accounts receivable, net, as of September 30, 2011 and December 31, 2010 (in thousands):


	September 30,			December 31,
	2011			2010
Accounts receivable	$	17,641		$	78,491
Less allowance for prompt payment discounts		(561	)		(2,015	)

Accounts receivable, net	$	17,080		$	76,476

The Company has ceased manufacturing and distribution of ALLERX^® and HYOMAX^®. During 2010, in connection with certain sales of its remaining inventory of these products, the Company offered various extended payment terms to certain customers, primarily national wholesalers, some of which extend through June 2012. In March 2011 the FDA announced that it intended to take enforcement action against marketed unapproved prescription cough, cold and allergy products shipped on or after August 30, 2011 (the “March 2011 FDA Announcement”). During the three months ended September 30, 2011, certain wholesalers requested to return approximately $26.4 million of ALLERX Dose Pack product since they interpreted the March 2011 FDA Announcement to cover distribution of these products by wholesalers. In connection with the expected returns, the Company reclassified $26.4 million of deferred revenue and related accrued expenses to accrued product returns. During September 2011, the Company satisfied $16.7 million of its accrued product return liability for ALLERX Dose Pack returns by disbursing cash of $5.7 million and reducing accounts receivable by $11.0 million. Approximately $3.0 million of accounts receivable related to previously deferred sales of ALLERX Dose Packs remains recorded on the consolidated balance sheet as of September 30, 2011 and will be reversed (along with the associated accrued product return liability) when the Company receives the returned product.

Inventories

Inventories are stated at the lower of cost or market value with cost determined under the first-in, first-out method and consist of raw materials, work in process and finished goods. Raw materials include the API for a product to be manufactured, work in process includes the bulk inventory of tablets that are in the process of being coated and/or packaged for sale and finished goods include pharmaceutical products ready for commercial sale or distribution as samples.

On a quarterly basis, the Company analyzes its inventory levels and records allowances for inventory that has become obsolete, inventory that has a cost basis in excess of the expected net realizable value and inventory that is in excess of expected requirements based upon anticipated product revenues.

The following table represents inventories, net, as of September 30, 2011 and December 31, 2010 (in thousands):


	September 30,			December 31,
	2011			2010
Raw materials	$	3,516		$	5,542
Work in process		497			1,575
Finished goods:
Pharmaceutical products — trade		8,465			8,635
Pharmaceutical products — samples		722			1,267

Total		13,200			17,019

Inventory allowances		(905	)		(1,845	)

Inventories, net	$	12,295		$	15,174

Revenue Recognition

The Company’s consolidated net revenues represent the Company’s net product sales and license and royalty agreement revenues. The following table sets forth the categories of the Company’s net revenues (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Gross product sales	$	37,873		$	41,616		$	133,345		$	140,724
Sales allowances		(12,695	)		(15,206	)		(50,228	)		(49,462	)

Net product sales		25,178			26,410			83,117			91,262
License and royalty agreement revenues		2			1,522			99			1,541

Net revenues	$	25,180		$	27,932		$	83,216		$	92,803

The Company records all of its revenue from product sales, license agreements and royalty agreements when realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Net Product Sales

Product Sales. The Company recognizes revenue from its product sales upon transfer of title, which occurs when product is received by its customers. The Company sells its products primarily to large national wholesalers, which have the right to return the products they purchase. The Company is required to reasonably estimate the amount of future returns at the time of revenue recognition. The Company recognizes product sales net of estimated allowances for product returns, rebates, price adjustments, chargebacks, and prompt payment and other discounts. When the Company cannot reasonably estimate the amount of future product returns, it records revenues when the risk of product return has been substantially eliminated.

As of September 30, 2011 and December 31, 2010, the Company had $2.3 million and $57.2 million, respectively, of deferred revenue related to sales made in 2010 for which future returns could not be reasonably estimated at the time of sale. The deferred revenue is recognized when the product is sold through to the end user based upon prescriptions filled. To estimate product sold through to end users, the Company relies on third-party information, including prescription data and information obtained from significant distributors with respect to their inventory levels and sell-through to customers. Deferred revenue is recorded net of estimated allowances for rebates, price adjustments, chargebacks, and prompt payment and other discounts. Changes in estimated allowances are recorded when information that gives rise to the changes becomes known.

During the three months ended September 30, 2011, certain wholesalers indicated that they interpreted the March 2011 FDA Announcement to cover distribution of ALLERX Dose Pack products by wholesalers and requested to return approximately $26.4 million of ALLERX Dose Pack product to the Company. In connection with the expected returns, the Company reclassified $26.4 million of deferred revenue and related accrued expenses to accrued product returns. During September 2011, the Company satisfied $16.7 million of its accrued product return liability for ALLERX Dose Pack returns by disbursing cash of $5.7 million and reducing accounts receivable by $11.0 million. Approximately $3.0 million of accounts receivable related to previously deferred sales of ALLERX Dose Packs remains recorded on the consolidated balance sheet as of September 30, 2011 and will be reversed (along with the associated accrued product return liability) when the Company receives the returned product.

Product Returns. Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the majority of its products within an 18-month period that begins six months prior to and ends twelve months subsequent to expiration of the products. The Company’s products have an 18 to 48 month expiration period from the date of manufacture. The Company adjusts its estimate of product returns if it becomes aware of other factors that it believes could significantly impact its expected returns. These factors include actual and historical return rates for expired lots, historical and forecasted product sales and consumer consumption data reported by external information management companies, estimated expiration dates or remaining shelf life of inventory in the distribution channel, estimates of inventory levels of its products in the distribution channel and any significant changes to these levels, and competitive issues such as new product entrants and other known changes in sales trends. The Company evaluates this reserve on a quarterly basis, assessing each of the factors described above, and adjusts the reserve through charges to income in the period in which the information that gives rise to the adjustment becomes known.

Rebates. The liability for government program rebates is calculated based on historical and current rebate redemption and utilization rates contractually submitted by each program’s administrator.

Price Adjustments and Chargebacks. The Company’s estimates of price adjustments and chargebacks are based on its estimated mix of sales to various third-party payers, which are entitled either contractually or statutorily to discounts from the Company’s listed prices of its products. These estimates are also based on the contract fees the Company pays to certain group purchasing organizations (“GPOs”) in connection with the Company’s sales of CUROSURF^®. In the event that the sales mix to third-party payers or the contract fees paid to GPOs are different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it has estimated.

The Company, from time to time, offers certain promotional product-related incentives to its customers. These programs include sample cards to retail consumers, certain product incentives to pharmacy customers and other sales stocking allowances. The Company has initiated voucher programs for its promoted products whereby the Company offers a point-of-sale subsidy to retail consumers. The Company estimates its liabilities for these voucher programs based on the historical redemption rates for similar completed programs used by other pharmaceutical companies as reported to the Company by a third-party claims processing organization and actual redemption rates for the Company’s completed programs. The Company accounts for the costs of these special promotional programs as price adjustments, which are a reduction of gross revenue.

Prompt Payment Discounts. The Company typically offers its wholesale customers a prompt payment discount of 2% as an incentive to remit payments within the first 30 to 90 days after the invoice date depending on the customer and the products purchased (see “Accounts Receivable” above).