DISCONTINUED OPERATIONS

9 Months Ended

Sep. 30, 2011

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

2. DISCONTINUED OPERATIONS

On October 1, 2010, the Company entered into a definitive Asset Purchase Agreement with Meda AB, or Meda, to sell certain rights and assets related to MUSE, transurethral alprostadil, for the treatment of erectile dysfunction, or the MUSE Transaction. Meda had been the Company’s European distributor of MUSE since 2002. The assets sold in the MUSE Transaction include the U.S. and foreign MUSE patents, existing inventory, and the manufacturing facility located in Lakewood, New Jersey. The Company retained all of the liabilities associated with the pre-closing operations and products of the MUSE business and the accounts receivable for pre-closing MUSE sales. The transaction closed on November 5, 2010. Prior to the closing of the MUSE Transaction, the Company terminated all of the rights to MUSE and avanafil held by Deerfield Management Company, L.P. and affiliates and by Crown Bank, N. A. as collateral to the Company’s notes payable. Under the terms of the MUSE Transaction, the Company received an upfront payment of $22 million upon the closing and is eligible to receive an additional $1.5 million based on future sales of MUSE, provided that certain sales milestones are reached. Meda is now responsible for the manufacturing, selling and marketing of MUSE. Meda also assumed all post-closing expenses and liabilities associated with MUSE. The Company has agreed not to develop, manufacture or sell any transurethral erectile dysfunction drugs for a period of three years following the closing of the MUSE Transaction.

The sale of the MUSE product and certain related assets has been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented, since (i) the MUSE product and related assets have identifiable cash flows that are largely independent of the cash flows of other groups of assets and liabilities, (ii) the Company does not have any significant continuing involvement with the product after the close of the transaction, and (iii) the cash milestone payment to be received upon achievement of certain sales levels is considered an indirect cash flow. The assets and liabilities related to the MUSE operations are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets for all periods presented. The extinguishment of the largest liability of the discontinued operations, accrued product returns, will be settled in accordance with the returns policy and by cash payments made to former customers for the return of expired MUSE product sold by VIVUS. The return window for expired MUSE product will end in 2013.

The following table presents the major classes of assets and liabilities that have been presented as assets and liabilities of discontinued operations in the condensed consolidated balance sheets (in thousands):

	September 30, 2011(unaudited)		December 31, 2010
ASSETS
Trade accounts receivable, net	$	—	$	6
Total current assets of discontinued operations	$	—	$	6

	September 30, 2011(unaudited)		December 31, 2010
LIABILITIES
Accounts payable	$	13	$	211
Accrued product returns	2,053		2,598
Accrued chargeback reserve	278		472
Accrued employee compensation and benefits	—		47
Accrued and other liabilities	—		184
Total current liabilities of discontinued operations	$	2,344	$	3,512

The following table presents summarized results of operations for the discontinued operations presented in the condensed consolidated statements of operations (in thousands)(unaudited):

	For the Three MonthsEnded				For the Nine MonthsEnded
	September 30,2011		September 30,2010		September 30,2011		September 30,2010
	(unaudited)				(unaudited)
Operating income (loss)	$	185	$	253	$	306	$	(2,946	)
Income (loss) before provision for income taxes	185		162		306		(3,218		)
Net income (loss) from discontinued operations	$	185	$	157	$	306	$	(3,238	)