
	ACTAVIS TRANSACTIONS:

On March 3, 2010, the Company, Actavis, Inc. ("Actavis", formerly Watson Pharmaceuticals, Inc. ), as a guarantor of Actavis' obligations, and Coventry Acquisition, Inc., a subsidiary of Actavis (the “Buyer”), entered into a Purchase and Collaboration Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Company agreed to sell, subject to shareholder approval, to Actavis (i) substantially all of its assets primarily relating to the research, development, regulatory approval, manufacture, distribution, marketing, sale and promotion of pharmaceutical products containing progesterone as an active ingredient, including CRINONE 8% progesterone gel, PROCHIEVE 4% progesterone gel and PROCHIEVE 8% progesterone gel, each sold by the Company in the U.S. (collectively, the “Progesterone Products”), including certain intellectual property, promotional materials, contracts, product data and regulatory approvals and filings (the “Purchased Assets”), and (ii) 11,200,000 shares (the “Shares”) of the Company's Common Stock. After the closing, the Company retained certain assets and rights relating to its progesterone business, including all rights necessary to perform its obligations under its agreement with Merck Serono (See Note 6). The transactions pursuant to the Purchase Agreement and the ancillary agreements thereto are referred to collectively herein as the “Actavis Transactions.”

On June 1, 2010, the Company borrowed $15,000,000 from Actavis pursuant to a forgivable Term Loan Promissory Note, dated June 1, 2010, (the “Actavis Note”). Amounts due under the Actavis Note accrued interest at the rate of 4% per annum. If the Actavis Transactions closed prior to December 31, 2011, all amounts otherwise due and payable under the Actavis Note would be forgiven in full; however, if the Company engaged in a Fundamental Transaction (as defined in the Actavis Note) with any party other than as contemplated pursuant to the Actavis Transactions, the Actavis Note would accelerate, and the Company would be required to repay all amounts due under the Actavis Note, plus accrued interest, on the earlier of (i) the date upon which all of the obligations in respect of the Company's Convertible Subordinated Notes (the "Notes") were paid in full or (ii) 21 Trading Days (as defined in the Actavis Note) after the occurrence of such Fundamental Transaction. If neither the Actavis Transactions nor another Fundamental Transaction closed, the Actavis Note would become due and payable on December 31, 2011. If the Company were required to repay the Actavis Note by reason of the occurrence of a Fundamental Transaction prior to August 31, 2011, then the Company would be required to pay to Actavis on the date the Actavis Note is to be repaid, in addition to all other amounts due and payable thereunder, a $2 million prepayment fee.

The Company's stockholders' approved the Actavis Transactions on July 1, 2010 and the Actavis Transactions closed on July 2, 2010. At the closing of the Actavis Transactions, in consideration for the sale of the Purchased Assets and the Shares, Actavis paid the Company $47 million in cash, forgave the Actavis Note and assumed certain liabilities associated with the Purchased Assets. In addition, Actavis agreed to pay the Company up to $45.5 million in cash upon the achievement of several contingent milestones. Actavis paid a $5 million milestone upon the acceptance by FDA of the NDA, and the parties have agreed that the clinical results milestone for either $6 million or $8 million was not payable under a strict interpretation of the agreement. Actavis also agreed to make royalty payments to the Company of 10 to 20 percent of annual net sales of certain Progesterone Products; provided, however that royalty rates would be reduced by 50% in a particular country if a generic entry by a third party occurs in such country and certain other circumstances are fulfilled. In addition, if Actavis commercializes a product through a third party outside of the U.S., in lieu of royalties, the Company will be entitled to 20% of gross profits associated with such commercialization. If Actavis or its affiliates effects a generic entry with respect to a progesterone product in a country in the circumstances permitted by the Purchase Agreement, in lieu of royalties payable in respect of net sales for such generic product, the Company will be entitled to 20% of the gross profits associated with the commercialization of such generic product in such country.

Pursuant to the Purchase Agreement, the Company and Actavis have also agreed to collaborate with respect to the development of Progesterone Products. In connection therewith, the parties agreed to establish a joint development committee to oversee and supervise all development activities. The Company was responsible for completion of the PREGNANT Study and such other activities as determined by the joint development committee. The Company was responsible for the costs of conducting the PREGNANT Study and the preparation, filing and approval process of the related new drug application (or the supplemental new drug application) up to a maximum of $7 million incurred after January 1, 2010. The maximum was achieved in the first quarter of 2011. All other development costs incurred in connection with the development collaboration were paid by Actavis. From January 1, 2010 through December 31, 2012, the Company spent $10.6 million in costs related to the PREGNANT study and related NDA. Actavis reimbursed the Company for $3.6 million of these costs in total, $0.4 million was recognized during 2012. The reimbursable costs were credited to research and development expense.

The parties also entered into various ancillary agreements, including an Investor's Rights Agreement (pursuant to which Actavis has the right to designate a member of the Company's board of directors for the period set forth therein, Actavis obtained certain registration rights pertaining to the Shares and Actavis agreed to certain transfer restrictions pertaining to the Shares), a Supply Agreement pursuant to which the Company will supply CRINONE 4%, PROCHIEVE 8% and CRINONE 8% to Actavis for sale in the U.S. at a price equal to 110% of cost of goods sold, and a License Agreement relating to the grant of certain intellectual property licenses.

As part of the Purchase Agreement, from the date of the closing of the Actavis Transactions until the second anniversary of the date on which the Company and Actavis terminate their relationship with respect to the joint development of Progesterone Products, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions. The joint development collaboration can be terminated by either party five years after the closing of the Actavis Transactions on July 2, 2010.

Accounting Treatment of the Actavis Transactions

Upon the closing of the Actavis Transactions on July 2, 2010, the Company allocated the $47 million initial proceeds plus the $15 million in forgiven Actavis Note proceeds plus accrued interest to the fair value of the Shares in the amount of $11.8 million and the elimination of the remaining book value of the CRINONE intangible assets in the amount of $16.2 million. The excess has been recorded as deferred revenue and was amortized over the remaining research and development period for the PREGNANT Study including the Company's filing with, and the Food and Drug Administration's ("FDA") acceptance of, the related new drug application in June 2011. Actavis paid a $5 million milestone upon the acceptance by FDA of NDA 22-139 which amount was recorded in other revenues, and the parties have agreed that the clinical results milestone for either $6 million or $8 million was not payable under a strict interpretation of the agreement.

Transaction costs in connection with the Actavis Transactions, which include investment banking, legal and other advisory services, are expensed as incurred and recorded as general and administrative expense. For 2010, these expenses were $4.2 million. There were no such costs in 2012 or in 2011.

Royalties on net sales of all Progesterone Products by Actavis are recognized as revenue when earned. Future contingent milestone payments under the Purchase Agreement related to the successful completion of the PREGNANT Study, acceptance of the related FDA filing, first commercial sale in the U.S., acceptance of an ex-US filing and ex-U.S. approval will be recognized as revenue when and if these milestones are achieved. However, all of these potential milestones relate to the preterm birth indication. Given that Actavis has discontinued the development of PROCHIEVE 8% or an alternative formulation of the progesterone for the preterm birth indication, we do not expect to receive these milestone payments.

All royalty and milestone payments from Actavis are subject to a 1% fee payable to Torreya Partners, LLC, the Company's investment advisor, and will be recorded upon the achievement of the milestones or receipt of the royalties subject to a maximum payment of $10 million. To ensure the successful transition of the commercial operations of CRINONE and PROCHEIVE, the Company continued certain contracts and services with its vendors on behalf of Actavis for which Actavis reimbursed the Company. These expenses and payments have been netted within operating expenses. The Company has received payment for these expenses due from Actavis for approximately $1.1 million in 2010.