Edgar Filing: AKORN INC

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

a50472467.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER: 001-32360

AKORN, INC.

(Exact Name of Registrant as Specified in its Charter)


LOUISIANA		72-0717400
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1925 W. Field Court, Suite 300
Lake Forest, Illinois		60045
(Address of Principal Executive Offices)		(Zip Code)

(847) 279-6100

(Registrant’s telephone number, including area code)

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.

Yes o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

At November 7, 2012 there were 95,435,788 shares of common stock, no par value, outstanding.


		Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets - September 30, 2012 and December 31, 2011		3
Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2012 and 2011		4
Condensed Consolidated Statements of Shareholders’ Equity - Nine months ended September 30, 2012		5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2012 and 2011		6
Notes to Condensed Consolidated Financial Statements		7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		24
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.		30
ITEM 4. Controls and Procedures.		31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.		32
ITEM 1A. Risk Factors.		32
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.		32
ITEM 3. Defaults Upon Senior Securities.		32
ITEM 4. Mine Safety Disclosures.		32
ITEM 5. Other Information.		33
ITEM 6. Exhibits.		33

EX-31.1:

EX-31.2:

EX-32.1:

EX-32.2:

EX-101

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE DATA


	September 30, 2012 (unaudited)			December 31, 2011
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents	$	38,402		$	83,962
Trade accounts receivable, net		44,536			25,307
Inventories, net		50,230			35,456
Deferred taxes, current		6,380			8,153
Prepaid expenses and other current assets		3,896			3,071
TOTAL CURRENT ASSETS		143,444			155,949
PROPERTY, PLANT AND EQUIPMENT, NET		78,152			44,389
OTHER LONG-TERM ASSETS:
Goodwill		32,369			11,863
Product licensing rights, net		64,186			67,822
Other intangibles, net		17,375			13,016
Deferred financing costs, net		3,279			3,864
Deferred taxes – non-current		1,938			—
Long-term investments		10,284			10,137
Other		200			105
TOTAL OTHER LONG-TERM ASSETS		129,631			106,807
TOTAL ASSETS	$	351,227		$	307,145
LIABILITIES AND SHAREHOLDERS’ EQUITY:
CURRENT LIABILITIES:
Trade accounts payable	$	17,478		$	17,874
Accrued compensation		4,816			5,094
Accrued acquisition related compensation		3,250			—
Accrued expenses and other liabilities		13,750			5,321
TOTAL CURRENT LIABILITIES		39,294			28,289
LONG-TERM LIABILITIES:
Long-term debt		103,653			100,808
Purchase consideration payable		14,910			13,841
Deferred taxes – non-current		1,686			3,742
Product warranty liability		1,299			1,299
Lease incentive obligation and other long-term liabilities		874			958
TOTAL LONG-TERM LIABILITIES		122,422			120,648
TOTAL LIABILITIES		161,716			148,937
SHAREHOLDERS EQUITY:
Common stock, no par value – 150,000,000 shares authorized; 95,314,602 and 94,936,282 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		221,064			212,636
Warrants to acquire common stock		17,946			17,946
Accumulated deficit		(45,807	)		(72,374	)
Accumulated other comprehensive loss		(3,692	)		—
TOTAL SHAREHOLDERS’ EQUITY		189,511			158,208
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	351,227		$	307,145

See notes to condensed consolidated financial statements.

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AKORN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

IN THOUSANDS, EXCEPT PER SHARE DATA

(UNAUDITED)



	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2012			2011			2012			2011
Revenues	$	69,634		$	36,703		$	184,638		$	94,295
Cost of sales (exclusive of amortization of intangibles included below)		29,541			14,725			77,917			40,181
GROSS PROFIT		40,093			21,978			106,721			54,114
Selling, general and administrative expenses		12,346			8,669			33,625			22,983
Acquisition-related costs		511			337			9,155			556
Research and development expenses		2,874			3,109			9,824			7,763
Amortization of intangibles		1,759			509			5,076			1,074
TOTAL OPERATING EXPENSES		17,490			12,624			57,680			32,376
OPERATING INCOME		22,603			9,354			49,041			21,738
Amortization of deferred financing costs		(193	)		(165	)		(581	)		(1,761	)
Non-cash interest expense		(1,228	)		(909	)		(3,615	)		(1,195	)
Interest expense, net		(959	)		(973	)		(3,009	)		(1,286	)
Equity in earnings of unconsolidated joint venture		—			—			—			14,530
INCOME BEFORE INCOME TAXES		20,223			7,307			41,836			32,026
Income tax provision (benefit)		6,470			(6,217	)		15,269			(5,254	)

CONSOLIDATED NET INCOME	$	13,753		$	13,524		$	26,567		$	37,280
CONSOLIDATED NET INCOME PER SHARE:
BASIC	$	0.14		$	0.14		$	0.28		$	0.39

DILUTED	$	0.12		$	0.13		$	0.24		$	0.36

SHARES USED IN COMPUTING CONSOLIDATED NET INCOME PER SHARE:
BASIC		95,128			94,650			95,078			94,477
DILUTED		111,388			104,188			110,430			103,524


COMPREHENSIVE INCOME:
Consolidated net income	$	13,753		$	13,524		$	26,567		$	37,280
Foreign currency translation gain (loss)		3,268			—			(3,692	)		—
COMPREHENSIVE INCOME	$	17,021		$	13,524		$	22,875		$	37,280

See notes to condensed consolidated financial statements.

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AKORN, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

IN THOUSANDS (UNAUDITED)

					Warrants
	Number				to acquire					Other
	of				Common		Accumulated			Comprehensive
	Shares		Amount		Stock		Deficit			Loss			Total
BALANCES AT DECEMBER 31, 2011		94,936	$	212,636	$	17,946	$	(72,374	)	$	—		$	158,208
Consolidated net income		—		—		—		26,567			—			26,567
Exercise of stock options		295		599		—		—			—			599
Employee stock purchase plan issuances		71		373		—		—			—			373
Amortization of deferred compensation related to restricted stock awards		13		287		—		—			—			287
Stock-based compensation expense		—		4,762		—		—			—			4,762
Foreign currency translation adjustment		—		—		—		—			(3,692	)		(3,692	)
Excess tax benefit – stock compensation		—		2,407		—		—			—			2,407

BALANCES AT SEPTEMBER 30, 2012		95,315	$	221,064	$	17,946	$	(45,807	)	$	(3,692	)	$	189,511

See notes to condensed consolidated financial statements.

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AKORN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

IN THOUSANDS (UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,
	2012			2011
				(Restated)
OPERATING ACTIVITIES:
Consolidated net income	$	26,567		$	37,280
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization		8,240			3,701
Write-off and amortization of deferred financing fees		581			1,761
Non-cash stock compensation expense		5,049			3,767
Non-cash interest expense		3,615			1,195
Deferred tax assets, net		200			(6,688	)
Excess tax benefit from stock compensation		(2,407	)		—
Equity in earnings of unconsolidated joint venture		—			(14,530	)
Changes in operating assets and liabilities:
Trade accounts receivable		(17,208	)		(7,980	)
Inventories		(13,080	)		(8,164	)
Prepaid expenses and other current assets		(1,052	)		(216	)
Trade accounts payable		(733	)		3,066
Accrued expenses and other liabilities		11,540			1,024
NET CASH PROVIDED BY OPERATING ACTIVITIES		21,312			14,216
INVESTING ACTIVITIES:
Payments for acquisitions		(55,224	)		(36,734	)
Purchases of property, plant and equipment		(14,756	)		(8,362	)
Distribution from unconsolidated joint venture		—			3,881
Purchase of product licensing rights		—			(5,678	)
NET CASH USED IN INVESTING ACTIVITIES		(69,980	)		(46,893	)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes		—			120,000
Debt financing costs		—			(4,683	)
Excess tax benefit from stock compensation		2,407			—
Net proceeds from common stock offering and warrant exercises		—			1,727
Proceeds under stock option and stock purchase plans		972			618
NET CASH PROVIDED BY FINANCING ACTIVITIES		3,379			117,662
Effect of exchange rate changes on cash and cash equivalents		(271	)		—
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(45,560	)		84,985
Cash and cash equivalents at beginning of period		83,962			41,623
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	38,402		$	126,608
SUPPLEMENTAL DISCLOSURES
Amount paid for interest	$	2,166		$	11
Amount paid for income taxes	$	11,547		$	1,718

See notes to condensed consolidated financial statements.

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AKORN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — BUSINESS AND BASIS OF PRESENTATION

Business: Akorn, Inc. and its wholly owned subsidiaries (collectively, the “Company”) manufacture and market a full line of diagnostic and therapeutic ophthalmic pharmaceuticals as well as niche hospital drugs and injectable pharmaceuticals. In addition, through its subsidiary Advanced Vision Research, Inc. (“AVR”), the Company manufactures and markets a line of over-the-counter (“OTC”) ophthalmic products for the treatment of dry eye, eyelid hygiene and macular degeneration primarily under the TheraTears® brand name. The Company is a manufacturer and marketer of diagnostic and therapeutic pharmaceutical products in various specialty areas, including ophthalmology, antidotes, anti-infectives and controlled substances for pain management and anesthesia, among others. The Company operates pharmaceutical manufacturing plants domestically in Decatur, Illinois and Somerset, New Jersey, and internationally in Paonta Sahib, Himachal Pradesh, India, a central distribution warehouse in Gurnee, Illinois, an R&D center in Skokie, Illinois and corporate offices in Lake Forest, Illinois. Customers of the Company’s products include physicians, optometrists, chain drug stores, group purchasing organizations and their member hospitals, alternate site providers, wholesalers, distributors, retail chains, and other pharmaceutical companies. In addition, the Company is a 50% investor in a limited liability company, Akorn-Strides, LLC (the “Joint Venture Company”), which formerly developed and manufactured injectable pharmaceutical products for sale in the United States. The Joint Venture Company sold all of its Abbreviated New Drug Applications (“ANDAs”) to Pfizer, Inc. (“Pfizer”) in December 2010 and discontinued product sales in June 2011. The Company accounts for the Joint Venture Company using the equity method of accounting. The accompanying unaudited condensed consolidated financial statements include the accounts of Akorn, Inc. and its wholly owned subsidiaries. Inter-company transactions and balances have been eliminated in consolidation.

Basis of Presentation: The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and accordingly do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in these financial statements. Operating results for the three-month and nine-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K filed March 15, 2012.

Cash Flow Restatement and Other Changes in Presentation: The Company’s consolidated statement of cash flows for the nine months ended September 30, 2011 has been restated to correct a classification error which resulted in overstatement of cash provided by operating activities in the amount of $1,762,000 and overstatement of cash used by investing activities by that same amount. The error was related to capital expenditures that were accrued but unpaid. The following table sets forth the numbers in our consolidated statement of cash flows for the nine months ended September 30, 2011 that needed to be restated (in thousands):

	Nine months ended
	September 30, 2011
	As Filed			Restated
Changes in operating assets and liabilities:
Trade accounts payable	$	4,828		$	3,066
NET CASH PROVIDED BY OPERATING ACTIVITIES		15,978			14,216

Purchases of property, plant and equipment		(10,124	)		(8,362	)
NET CASH USED IN INVESTING ACTIVITIES		(48,655	)		(46,893	)

In addition, various amounts within the financial statements have been reclassified to match the current year presentation. Specifically, acquisition-related costs – which previously had been included within selling, general and administrative expenses – have been reclassified to be separately stated within the consolidated statements of comprehensive income.

The Company has considered the accounting and disclosure of events occurring after the balance sheet date through the filing date of this Form 10-Q.

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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Chargebacks: The Company enters into contractual agreements with certain third parties such as hospitals and group-purchasing organizations to sell certain products at predetermined prices. The parties have elected to have these contracts administered through wholesalers that buy the product from the Company and subsequently sell it to these third parties. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product. The Company reduces gross sales and increases the chargeback allowance by the estimated chargeback amount for each product sold to a wholesaler. The Company reduces the chargeback allowance when it processes a request for a chargeback from a wholesaler. Actual chargebacks processed by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However, the Company’s provision for chargebacks is fully reserved for at the time when sales revenues are recognized.

Management obtains certain wholesaler inventory reports to aid in analyzing the reasonableness of the chargeback allowance. The Company assesses the reasonableness of its chargeback allowance by applying the product chargeback percentage based on historical activity to the quantities of inventory on hand per the wholesaler inventory reports and an estimate of in-transit inventory that is not reported on the wholesaler inventory reports at the end of the period. In accordance with its accounting policy, the Company estimates the percentage amount of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a six-quarter trend of such sales through wholesalers. The Company uses this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, the Company evaluates its actual chargeback rate experience, and new trends are factored into its estimates each quarter as market conditions change. The Company used an estimate of 98.5% during all of 2011 and the first six months of 2012, and used an estimate of 95.0% for the quarter ended September 30, 2012.

Sales Returns: Certain of the Company’s products are sold with the customer having the right to return the product within specified periods and guidelines for a variety of reasons, including but not limited to, pending expiration dates. Provisions are made at the time of sale based upon tracked historical experience, by customer in some cases. The Company estimates its sales returns reserve based on a historical percentage of returns to sales by product. One-time historical factors, new product introductions or pending new developments that would impact the expected level of returns are taken into account to determine the appropriate reserve estimate at each balance sheet date.

As part of the evaluation of the balance required, the Company considers actual returns to date that are in process, the expected impact of any product recalls and the wholesaler’s inventory information to assess the magnitude of unconsumed product that may result in a sales return to the Company in the future. The sales returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the end-user pull through for sales of the Company’s products and ultimately impact the level of sales returns. Actual returns experience and trends are factored into the Company’s estimates each quarter as market conditions change.

Coupons and In-Store Promotions: The Company utilizes various types of coupons, as well as sales promotions through major retail chains to assist in selling its OTC eye care products. At the time coupons are issued, the Company records a provision based on the dollar amount of the coupon offer and the estimated rate of redemption which is calculated based on historical experience.

Advertising and Promotional Allowances to Customers: The Company routinely sells its non-prescription ophthalmic and other drug products to major retail drug chains. From time to time, the Company may arrange for these retailers to run in-store promotional sales of the Company’s products. The Company reserves an estimate of the dollar amount owed back to the retailer, recording this amount as a reduction to revenue at the later of the date on which the revenue is recognized or the date the sales incentive is offered. When the actual invoice for the sales promotion is received from the retailer, the Company adjusts its estimate accordingly.

For our treatment of advertising and promotional expenses paid to customers, we referred to guidance contained within ASC 605-50, Customer Payments and Incentives.

Income taxes: Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized.

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Fair Valuation of Financial Instruments: The Company applies ASC Topic 820, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC Topic 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC Topic 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability, and are to be developed based on the best information available in the circumstances.

The valuation hierarchy is composed of three categories. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The categories within the valuation hierarchy are described below:

-	Level 1—Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities. The carrying value of the Company’s cash and cash equivalents are considered Level 1 assets.

-	Level 2—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company does not have any Level 2 assets or liabilities.

-	Level 3—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities. The contingent consideration related to the Company’s December 22, 2011 Lundbeck business acquisition is a Level 3 liability.

The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (amounts in thousands):

			Fair Value Measurements at Reporting Date, Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	September 30,		Identical Items		Inputs		Inputs
Description	2012		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	38,402	$	38,402	$	—	$	—
Total assets	$	38,402	$	38,402	$	—	$	—

Purchase consideration payable	$	14,910	$	—	$	—	$	14,910
Total liabilities	$	14,910	$	—	$	—	$	14,910

			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	December 31,		Identical Items		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	83,962	$	83,962	$	—	$	—
Total assets	$	83,962	$	83,962	$	—	$	—

Purchase consideration payable	$	13,841	$	—	$	—	$	13,841
Total liabilities	$	13,841	$	—	$	—	$	13,841

The carrying amounts of the purchase consideration payable were initially determined based on the terms of the underlying contracts and the Company’s subjective evaluation of the likelihood of the additional purchase consideration becoming payable. The purchase consideration payable is primarily related to the Company’s obligation to pay additional consideration related to the acquisition of selected assets from H. Lundbeck A/S on December 22, 2011. The underlying obligations are long-term in nature, and have therefore been discounted to present value based on an assumed discount rate. The $1,069,000 change in value from $13,841,000 at December 31, 2011 to $14,910,000 at September 30, 2012 consisted of a $300,000 increase to the opening balance based on finalizing the valuation and applying a discount rate of 9.0% instead of 10.0%, and $769,000 of accrued interest on amortizing the discount to fair value. This $769,000 was included within “Non-cash interest expense” on the Company’s condensed consolidated statements of comprehensive income for the nine month period ended September 30, 2012. The Company initially determined that there was a 100% likelihood of the purchase consideration ultimately becoming payable, and has reaffirmed that this is still the Company’s determination as of September 30, 2012. Should subjective and objective evidence lead the Company to change this assessment, an adjustment to the carrying value of the liability would be recorded as “other income” in the Company’s condensed consolidated statements of comprehensive income. There have been no significant changes within our assumptions that would impact the fair value of the contingent consideration during the period.

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As of September 30, 2012 and December 31, 2011, the Company’s long-term investments were $10,284,000 and $10,137,000, respectively, and represent cost-basis investments for which fair value is not readily determinable.

Business Combinations: Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, the Company may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired and liabilities assumed, or may complete some or all of the valuations internally. In either case, the Company takes full responsibility for the determination of the fair value of the assets acquired and liabilities assumed. The value of goodwill will be determined as the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.

Acquisition-related costs are costs the Company incurs to effect a business combination. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received.

NOTE 3 — STOCK BASED COMPENSATION

Stock-based compensation cost is estimated at grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, if necessary, if actual forfeitures differ from initial estimates. The Company uses the single-award method for allocating compensation cost related to stock options to each period.

The following table sets forth the components of the Company’s stock-based compensation expense for the three and nine month periods ended September 30, 2012 and 2011 (in thousands):.

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011

Stock options & ESPP	$	1,590	$	1,269	$	4,762	$	3,754
Restricted stock awards		278		4		287		13
Total stock-based compensation expense	$	1,868	$	1,273	$	5,049	$	3,767

The weighted-average assumptions used in estimating the grant date fair value of the stock options granted during the three month periods ended September 30, 2012 and 2011, along with the weighted-average grant date fair values, were as follows:

	Three months ended September 30,
	2012			2011
Expected volatility		71	%		75	%
Expected life (in years)		4.0			3.8
Risk-free interest rate		0.7	%		1.4	%
Dividend yield		—	%		—	%
Fair value per stock option	$	7.08		$	3.80
Forfeiture rate		8	%		8	%

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The table below sets forth a summary of activity within the Company’s stock-based compensation plans for the nine months ended September 30, 2012:

	Number of Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2011		9,399		$	2.89		3.25	$	77,371,000
Granted		990			13.12
Exercised		(295	)		2.04
Forfeited		(78	)		4.13
Outstanding at September 30, 2012		10,016		$	3.91		2.72	$	93,331,000
Exercisable at September 30, 2012		5,764		$	2.39		2.33	$	62,418,000

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock as of the date indicated and the exercise price of the stock options. During the three and nine month periods ended September 30, 2012, 206,000 and 295,000 stock options were exercised resulting in cash payment to the Company of $452,000 and $599,000, respectively. These option exercises generated tax-deductible expenses totaling $2,496,000 and $3,398,000, respectively. During the prior year three and nine month periods ended September 30, 2011, 45,000 and 198,000 stock options were exercised resulting in cash payment to the Company of $114,000 and $398,000, respectively. These option exercises generated tax-deductible expenses totaling $235,000 and $878,000, respectively.

The Company also grants restricted stock awards to certain employees and members of its Board of Directors. Restricted stock awards are valued at the closing market value of the Company’s common stock on the day of grant and the total value of the award is recognized as expense ratably over the vesting period of the grants. The Company granted a total of 35,000 shares of restricted stock to its Board of Directors during the quarter ended September 30, 2012, of which 17,500 shares vested immediately upon grant and the remaining 17,500 will vest on the one-year anniversary of grant. During the three and nine month periods ended September 30, 2012, the Company recognized compensation expense of $278,000 and $287,000, respectively, related to unvested restricted stock awards. During the three and nine month periods ended September 30, 2011, the Company recognized compensation expense of $4,000 and $13,000, respectively, related to outstanding restricted stock awards.

The following is a summary of non-vested restricted stock activity:


	Number of Shares		Weighted Average
	(in thousands)		Grant Date Fair Value
Non-vested at December 31, 2011		13	$	1.34
Granted		35		14.63
Forfeited		—		—
Vested		(30)		9.09
Non-vested at September 30, 2012		18	$	14.63

NOTE 4 — REVENUE RECOGNITION

Revenue is recognized when all obligations of the Company have been fulfilled and collection of the related receivable is probable. For sales of prescription and contract manufactured products, the Company recognizes sales upon the shipment of goods or completion of services as appropriate. For certain OTC eye care products and certain export sales into foreign countries, the Company recognizes sales upon receipt by the customer, consistent with the timing of transfer of title.

Provision for estimated chargebacks, rebates, discounts, product returns and doubtful accounts is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.

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NOTE 5 — ACCOUNTS RECEIVABLE ALLOWANCES

The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is a natural circumstance of the pharmaceutical industry and not specific to the Company and inherently lengthens the final net collections process. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the respective terms with end-user customers (which in turn depends on which end-user customer, with different pricing arrangements might be entitled to a particular deduction). This process can lead to partial payments against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.

The provisions for the following customer reserves are reflected in the accompanying financial statements as reductions of revenues in the statements of income with the exception of the provision for doubtful accounts which is reflected as part of selling, general and administrative expense. The ending reserve amounts are included in trade accounts receivable, net in the Company’s balance sheets.

Net trade accounts receivable consists of the following (in thousands):


	SEPTEMBER 30,			DECEMBER 31,
	2012			2011
Gross accounts receivable	$	65,839		$	39,330
Less:
Chargeback and rebates reserves		(11,661	)		(5,949	)
Returns reserve		(7,895	)		(6,846	)
Discount and allowances reserve		(1,139	)		(743	)
Advertising and promotion reserve		(582	)		(386	)
Allowance for doubtful accounts		(26	)		(99	)
Net trade accounts receivable	$	44,536		$	25,307

For the three month periods ended September 30, 2012 and 2011, the Company recorded chargeback and rebate expense of $30,377,000 and $19,031,000, respectively. For the nine month period ended September 30, 2012 and 2011, the Company recorded chargeback and rebate expense of $75,404,000 and $48,296,000, respectively.

For the three month period ended September 30, 2012, the Company recorded a benefit of $252,000 from a change in estimate of future product returns, while for the three month period ended September 30, 2011, the Company recorded a provision for product returns of $550,000. For the nine month periods ended September 30, 2012 and 2011, the Company recorded provisions for product returns of $2,798,000 and $2,035,000, respectively.

For the three month periods ended September 30, 2012 and 2011, the Company recorded provisions for cash discounts of $1,645,000 and $970,000, respectively. For the nine month periods ended September 30, 2012 and 2011, the Company recorded provisions for cash discounts of $4,208,000 and $2,399,000, respectively.

The increases in the provisions for chargebacks and rebates and for cash discounts over the prior year periods were primarily due to increased sales in the Ophthalmic and Hospital drugs & Injectables segments. The benefit recorded in the quarter ended September 30, 2012 from reversal of product return allowances was the result of a decline in anticipated future returns based on a favorable long-term trend in returns processed.

NOTE 6 — INVENTORIES

The components of inventories are as follows (in thousands):


	SEPTEMBER 30,		DECEMBER 31,
	2012		2011
Finished goods	$	17,336	$	11,588
Work in process		5,160		5,841
Raw materials and supplies		27,734		18,027
	$	50,230	$	35,456

The Company maintains reserves and records provisions for slow-moving and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value. Inventory at September 30, 2012 and December 31, 2011 was reported net of these reserves of $2,147,000 and $1,239,000, respectively, primarily related to finished goods.

- 12 -

As of September 30, 2012 and December 31, 2011, the Company’s inventory balances included $2,506,000 and $4,035,000, respectively, related to products which have not yet received approval from the U.S. Food and Drug Administration (“FDA”). The Company established a reserve of $1,676,000 in the year ended December 31, 2011 against this inventory for products approaching expiration. This reserve remained at $470,000 as of September 30, 2012.

NOTE 7 — PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):


	SEPTEMBER 30, 2012			DECEMBER 31, 2011

Land	$	2,812		$	396
Buildings and leasehold improvements		29,884			20,337
Furniture and equipment		65,180			50,833
Capitalized value of assets placed in service		97,876			71,566
Accumulated depreciation		(46,231	)		(43,060	)
Property, plant and equipment placed in service, net		51,645			28,506

Construction in progress		26,507			15,883
Property, plant and equipment, net	$	78,152		$	44,389

Property, plant and equipment as of September 30, 2012 included assets acquired through the acquisition of certain assets of Kilitch Drugs (India) Limited (the “Kilitch Acquisition”) on February 28, 2012. Of the current year increase in property, plant and equipment, net, $24,326,000 was related to the Kilitch Acquisition and its current year capital expenditures, while the remaining $9,437,000 was related to domestic activities, principally capital improvements at the Company’s domestic manufacturing facilities.

NOTE 8 — INTANGIBLE ASSETS

The following table sets forth information about the changes in the net book value of the Company’s intangible assets during the nine month period ended September 30, 2012 and the weighted average remaining amortization period as of September 30, 2012 (in thousands):

	Goodwill			Product Licensing Rights			Other Intangibles			TOTAL
DECEMBER 31, 2011	$	11,863		$	67,822		$	13,016		$	92,701
Kilitch Acquisition		21,933			—			5,908			27,841
Fair value adjustment – Lundbeck products		—			300			—			300
Currency translation adjustment		(1,427	)		—			(409	)		(1,836	)
Amortization of intangibles		—			(3,936	)		(1,140	)		(5,076	)
SEPTEMBER 30, 2012	$	32,369		$	64,186		$	17,375		$	113,930

Weighted average remaining amortization period		N/A		14.0 years			18.7 years

NOTE 9 — FINANCING ARRANGEMENTS

Convertible Notes

On June 1, 2011, the Company closed its offering of $120,000,000 aggregate principal amount of 3.50% Convertible Senior Notes due 2016 (the “Notes”) which includes $20,000,000 in aggregate principal amount of the Notes issued in connection with the full exercise by the initial purchasers of their over-allotment option. The Notes are governed by the Company’s indenture with Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately $115,317,000, after deducting underwriting fees and other related expenses.

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The Notes have a maturity date of June 1, 2016 and pay interest at an annual rate of 3.50% semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2011. The Notes are convertible into Akorn’s common stock, cash or a combination thereof at an initial conversion price of $8.76 per share, which is equivalent to an initial conversion rate of approximately 114.1553 shares per $1,000 principal amount of Notes. The conversion price is subject to adjustment for certain events described in the Indenture, including certain corporate transactions which will increase the conversion rate and decrease the conversion price for a holder that elects to convert its Notes in connection with such corporate transaction.

The Notes are not listed on any securities exchange or on any automated dealer quotation system. The initial purchasers of the Notes advised the Company of their intent to make a market in the Notes following the offering, though they are not obligated to do so and may discontinue any market making at any time. As of September 30, 2012 the Notes were trading at approximately 167% of their face value, resulting in a total market value of approximately $200.0 million compared to their face value of $120.0 million. The actual conversion value of the Notes is based on the product of the conversion rate and the market price of the Company's common stock at conversion, as defined in the Indenture. As of September 30, 2012, the Company's common stock closed at $13.22 per share, resulting in a conversion value for the Notes of approximately $181.1 million. Increases in the market value of the Company’s common stock increase the Company’s obligation accordingly. There is no upper limit placed on the possible conversion value of the Notes.

The Notes may be converted at any time prior to the close of business on the business day immediately preceding December 1, 2015 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2011, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price in effect on each applicable trading day; (2) during the five consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes per $1,000 principal amount of Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; or (3) upon the occurrence of specified corporate events. On or after December 1, 2015 until the close of business on the business day immediately preceding the stated maturity date, holders may surrender all or any portion of their Notes for conversion at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, at the Company’s option, cash, shares of the Company’s common stock, or a combination thereof. If a fundamental change (as defined in the Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or a portion of their Notes.

The Notes became convertible as of April 1, 2012 and will continue to be convertible at least through December 31, 2012. Convertibility was triggered when the Company’s common stock closed above the required trading price of $11.39 per share for 20 of the last 30 consecutive trading days in the quarters ended March 31, 2012. This convertibility condition was likewise met at the end of the quarters ended June 30, 2012 and September 30, 2012 as well. As of the date of this report, no holders have submitted their Notes for conversion.

The Notes are accounted for in accordance with ASC 470-20. Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components.

The application of ASC 470-20 resulted in the recognition of $20,470,000 as the value for the equity component. At September 30, 2012 and December 31, 2011, the net carrying amount of the equity and liability components and the remaining unamortized debt discount were as follows (in thousands):

	SEPTEMBER 30, 2012		DECEMBER 31, 2011
Carrying amount of equity component	$	20,470	$	20,470
Carrying amount of the liability component		103,653		100,808
Unamortized discount of the liability component		16,347		19,192
Unamortized deferred financing costs		2,956		3,470

The Company incurred debt issuance costs of $4,683,000 related to its issuance of the Notes. In accordance with ASC 470-20, the Company allocated this debt issuance cost ratably between the liability and equity components of the Notes, resulting in $3,852,000 of debt issuance costs allocated to the liability component and $831,000 allocated to the equity component. The portion allocated to the liability component was classified as deferred financing costs and is being amortized by the effective interest method through the earlier of the maturity date of the Notes or the date of conversion, while the portion allocated to the equity component was recorded as an offset to additional paid-in capital upon issuance of the Notes.

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For the three and nine months ended September 30, 2012, the Company recorded the following expenses related to the Notes (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Interest expense at 3.50% coupon rate (1)	$	1,050	$	1,050	$	3,150	$	1,400
Debt discount amortization (2)		965		909		2,845		1,195
Deferred financing cost amortization (3)		174		165		514		216
	$	2,189	$	2,124	$	6,509	$	2,811

Line Item in which each item is included within the Condensed Consolidated Statements of Comprehensive Income:

(1)

Interest (expense) income, net

(2)

Non-cash interest expense

(3)

Amortization of deferred financing costs

Upon issuing the Notes in 2011, the Company established a deferred tax liability of $8,597,000 related to the debt discount of $21,301,000, with an offsetting reduction of $8,597,000 to Common stock. The deferred tax liability was established because the amortization of the debt discount generates non-cash interest expense that is not deductible for income tax purposes. Since the Company’s net deferred tax assets were fully reserved by valuation allowance at the time the Notes were issued, the Company reduced its valuation allowance by $8,597,000 upon recording the deferred tax liability related to the debt discount with an offsetting credit of $8,597,000 to Common stock. As a result, the net impact of these entries was a debit of $8,597,000 to the valuation reserve against the Company’s deferred tax assets and a credit of $8,597,000 to deferred tax liability. The deferred tax liability is being amortized monthly as the Company records non-cash interest from its amortization of the debt discount on the Notes.

Bank of America Credit Facility

On October 7, 2011, the Company and its domestic subsidiaries (the “Borrowers”) entered into a Loan and Security Agreement (the “B of A Credit Agreement”) with Bank of America, N.A. (the “Agent”) and other financial institutions (collectively with the Agent, the “B of A Lenders”) through which it obtained a $20.0 million revolving line of credit (the “Facility”), which includes a $3.0 million letter of credit facility. The Company may request expansion of the Facility from time to time in increments of at least $5.0 million up to a maximum commitment of $35.0 million, so long as no default or event of default has occurred and is continuing. The facility matures in March 2016. The Company may early terminate the B of A Lenders’ commitments under the Facility upon 90 days’ notice to the Agent at any time after the first year.

Under the terms of the B of A Credit Agreement, amounts outstanding will bear interest at the Company’s election at (a) LIBOR or (b) the bank’s Base Rate (which is the greatest of: (i) the prime rate, (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.0%), plus an applicable margin, which margin is based on the consolidated fixed charge coverage ratio of the Company and its subsidiaries from time to time. Additionally, the Borrowers will pay an unused line fee of 0.250% per annum on the unused portion of the Facility. Interest and unused line fees will be accrued and paid monthly. In addition, with respect to any letters of credit that may be issued, the Borrowers will pay: (i) a fee equal to the applicable margin times the average amount of outstanding letters of credit, (ii) a fronting fee equal to 0.125% per annum on the stated amount of each letter of credit, and (iii) any additional fees incurred by the applicable issuer in connection with issuing the letter of credit. During an event of default, any interest or fees payable will be increased by 2% per annum.

Availability under the revolving credit line is equal to the lesser of (a) $20.0 million reduced by outstanding letter of credit obligations or (b) the amount of a Borrowing Base (as defined in accordance with the terms of the B of A Credit Agreement) determined by reference to the value of the Borrowers’ eligible accounts receivable, eligible inventory and fixed assets as of the closing date and the end of each calendar month thereafter.

Obligations under the B of A Credit Agreement are secured by substantially all of the assets of each of the Borrowers and a pledge by the Borrowers of their respective equity interest in each domestic subsidiary of the Company and 65% of their respective equity interests in any foreign subsidiary of the Company. The B of A Credit Agreement contains representations and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on: distributions while the Company has any outstanding commitments or obligations under the B of A Credit Agreement; additional borrowings and liens; additional investments and asset sales; and fundamental changes to corporate structure or organization documents. The financial covenants require the Borrowers to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 during any period commencing on the date that an event of default occurs or availability under the B of A Credit Agreement is less than 15% of the aggregate B of A Lenders’ commitments under the B of A Credit Agreement. During the term of the agreement, the Company must provide the Agent with monthly, quarterly and annual financial statements, monthly compliance certificates, annual budget projections and copies of press releases and SEC filings.

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As of September 30, 2012, the Company’s borrowing availability under the B of A Credit Agreement was $19.7 million. There were no outstanding borrowings against the Facility as of September 30, 2012.

EJ Funds Credit Facility

From January 7, 2009 to June 17, 2011, the Company was party to a credit facility originally entered into with General Electric Capital Corporation, and subsequently assigned to EJ Funds, LP on March 31, 2009. The Company early terminated this credit facility on June 17, 2011. The Company had not borrowed against the EJ Funds Credit Agreement since repaying its outstanding balance in the first quarter of 2010. Upon terminating the EJ Funds Credit Agreement, the Company expensed $1.2 million in remaining unamortized deferred financing costs incurred related to entering into the EJ Funds Credit Agreement. No fees or penalties were incurred related to the early termination of the EJ Funds Credit Agreement.

NOTE 10 — COMMON STOCK WARRANTS

Kapoor Warrants

During 2009, in connection with modifications to our Subordinated Note, Credit Agreement and MBL Distribution Agreement, the Company granted various warrants to acquire our common stock (the “Kapoor Warrants”) to EJ Funds and the Kapoor Trust, companies controlled by the Chairman of our Board of Directors, Dr. John N. Kapoor. Each of the Kapoor Warrants will expire five years after its grant date, if not exercised before such date.

The fair value of each of the Kapoor Warrants was calculated at their grant dates using the Black-Scholes option pricing model. From their grant dates until June 28, 2010, the Kapoor Warrants were classified as current liabilities on the Company’s consolidated balance sheets and were adjusted quarterly to reflect changes in their calculated fair values. Increases in fair value, or decreases in fair value to, but not below, their initial calculated fair values, were recorded as non-operating expenses or income in the Company’s condensed consolidated statements of operations for the applicable periods. The Company classified the fair value of the Kapoor Warrants as a current liability in accordance with ASC 815-40-15-3, Derivatives and Hedging, (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) . This is a result of a requirement in the Registration Rights Agreement – entered into among the Kapoor Trust, EJ Funds and the Company on August 17, 2009 – that the shares to be issued upon exercise of the warrants be registered shares, which cannot be absolutely assured.

On June 28, 2010, the Company entered into an Amended and Restated Registration Rights Agreement (the “Amended Agreement”) with Dr. Kapoor which modified certain terms related to the Company’s obligation to obtain and maintain registration of any shares issued pursuant to exercise of the Kapoor Warrants. The Amended Agreement required the Company to use “commercially reasonable efforts” to file a registration statement pursuant to Rule 415 of the Securities Act of 1933 (“Registration Statement”) for any shares of common stock that may be issued under the applicable warrant agreements, but stated that in the event that we, after using good faith commercially reasonable efforts, are not able to obtain or maintain registration of the common stock, deliver of unregistered shares upon exercise of the Kapoor Warrants will be deemed acceptable and a net cash settlement will not be required. The Amended Agreement further provides that the term “commercially reasonable efforts” in such instance shall not mean an absolute obligation of the Company to obtain and maintain registration.

On June 28, 2010, upon entering into the Amended Agreement, we completed a final Black-Scholes calculation of the fair value of the Kapoor Warrants and adjusted their book value accordingly, then reclassified the Kapoor Warrants from a current liability to a component of shareholders’ equity. No future fair value adjustments are required.

The assumptions used in estimating the fair value of the warrants at June 28, 2010 were as follows:


Expected Volatility			79.7%
Expected Life (in years)			3.8 – 4.1
Risk-free interest rate			1.8%
Dividend yield			—

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The following table provides summarized information about the Kapoor Warrants:

Granted To:	Warrant Identification	Grant Date	Warrants Granted		Exercise Price		Fair Value at June 28, 2010

EJ Funds	Modification Warrants (1)	Apr.13, 2009		1,939,639	$	1.11	$	1,358,000
Kapoor Trust	Reimbursement Warrants (2)	Apr.13, 2009		1,501,933	$	1.11		1,051,000
EJ Funds	Credit Facility Warrants (3)	Aug.17, 2009		1,650,806	$	1.16		1,238,000
Kapoor Trust	Subordinated Note Warrants (4)	Aug.17, 2009		2,099,935	$	1.16		1,575,000
				7,192,313			$	5,222,000

Footnotes:

1	The Modification Warrants were granted to EJ Funds on April 13, 2009 when we signed the Modification Agreement with EJ Funds related to modifications made to our Credit Agreement following its assignment from GE Capital to EJ Funds on March 31, 2009. Those modifications included resetting the maximum loan commitment to $5.7 million and setting the interest rate at a fixed 10% per annum, among others.

2	The Reimbursement Warrants were granted to the Kapoor Trust on April 13, 2009 when we entered into a Reimbursement and Warrant Agreement (the “Reimbursement Agreement”) with EJ Funds and the Kapoor Trust pursuant to which the Kapoor Trust agreed to provide the L/C as security for our payment obligations to MBL under the MBL Letter Agreement and the MBL Settlement Agreement.

3	The Credit Facility Warrants were granted to EJ Funds on August 17, 2009 in connection with the negotiated modification to the Credit Agreement increasing the total loan commitment from $5.7 million to $10.0 million.

4	The Subordinated Note Warrants were issued to the Kapoor Trust on August 17, 2009 in connection with refinancing the Subordinated Note to extend its term for an additional five years and increase the principal from $5.0 million to $5.9 million to include accrued interest through August 17, 2009.

PIPE Warrants

During the quarter ended March 31, 2011, the Company issued 365,157 shares of its common stock pursuant to warrant exercises. On March 8, 2006, the Company had issued 4,311,669 shares of its common stock in a private placement with various investors at a price of $4.50 per share which included warrants to purchase 1,509,088 additional shares of common stock (the “PIPE Warrants”). The PIPE Warrants were exercisable for a five-year period at an exercise price of $5.40 per share and could be exercised by cash payment of the exercise price or by means of a cashless exercise. The total price of the private placement was approximately $19,402,000 and the net proceeds to the Company, after payment of approximately $1,324,000 of commissions and expenses, was approximately $18,078,000. The net proceeds were allocated based on the relative fair values of the common stock and warrants, with $16,257,000 allocated to the common stock and $1,821,000 allocated to the warrants.

In December 2010, holders submitted 77,779 PIPE Warrants for cashless exercise, resulting in the Company issuing 9,195 shares of its common stock. There were 1,431,309 PIPE Warrants outstanding as of December 31, 2010. During the quarter ended March 31, 2011, (a) 319,863 of these warrants were cash exercised generating proceeds of $1,727,000, (b) 878,112 warrants were cashless exercised resulting in the issuance of 45,294 shares, and (c) 233,334 warrants expired unexercised on March 8, 2011.

NOTE 11 — EARNINGS PER COMMON SHARE

Basic net income per common share is based upon the weighted average common shares outstanding during the period. Diluted net income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of stock options and warrants using the treasury stock method.

Certain shares that are potentially dilutive in the future have been excluded from the diluted net income per share computation as they would have been anti-dilutive for the period. There were no such shares subject to warrants during the periods presented.

The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, (ii) warrants that are in-the-money, and (iii) unvested restricted stock awards (“RSAs”). A reconciliation of the earnings per share data from a basic to a fully diluted basis is detailed below:

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	THREE MONTHS ENDED SEPTEMBER 30,				NINE MONTHS ENDED SEPTEMBER 30,
	2012		2011		2012		2011
Consolidated net income	$	13,753	$	13,524	$	26,567	$	37,280
Consolidated net income per share:
Basic	$	0.14	$	0.14	$	0.28	$	0.39
Diluted	$	0.12	$	0.13	$	0.24	$	0.36

Shares used in computing consolidated net income per share:
Weighted average basic shares outstanding		95,128		94,650		95,078		94,477
Dilutive securities:
Stock option and unvested RSAs		4,460		3,393		4,301		3,091
Stock warrants		6,613		6,145		6,565		5,956
Shares issuable upon conversion of convertible notes (1)		5,187		—		4,486		—
Total dilutive securities		16,260		9,538		15,352		9,047

Weighted average diluted shares outstanding		111,388		104,188		110,430		103,524


Shares subject to stock options omitted from the calculation of net income per share as they would have been anti-dilutive		775		1,860		399		1,421

(1) Shares issuable upon conversion of convertible notes assumes that that Company would repay the principal of the notes in cash and pay any incremental value in shares of the Company’s common stock.

NOTE 12 — INDUSTRY SEGMENT INFORMATION

During the three and nine month periods ended September 30, 2012 and September 30, 2011, the Company reported results for three segments:

	-	Ophthalmic
	-	Hospital Drugs & Injectables
	-	Contract Services

The ophthalmic segment manufactures, markets and distributes diagnostic and therapeutic pharmaceuticals. The hospital drugs & injectables segment manufactures, markets and distributes drugs and injectable pharmaceuticals, primarily in niche markets. The contract services segment manufactures products for third party pharmaceutical and biotechnology customers based on their specifications.

The Company’s reportable segments are based upon internal financial reports that aggregate certain operating information. The Company’s chief operating decision maker, as defined in ASC Topic 280, Segment Reporting, is its chief executive officer, or CEO. The Company’s CEO oversees operational assessments and resource allocations based upon the results of the Company’s reportable segments, all of which have available discrete financial information.

The Company’s basis of accounting in preparing its segment information is consistent with that used in preparing its consolidated financial statements.

The revenue and gross profit of the business acquired through the Kilitch Acquisition from its acquisition date of February 28, 2012 through September 30, 2012 has been included within the Contract Services segment for the three and nine months ended September 30, 2012. The manufacture and sale of pharmaceutical products for contract customers in India represents a substantial majority of their business.

Selected financial information by industry segment is presented below (in thousands).


	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2012			2011			2012			2011
REVENUES
Hospital drugs & injectables	$	34,675		$	13,816		$	92,335		$	34,615
Ophthalmic		28,153			19,730			75,114			48,972
Contract services		6,806			3,157			17,189			10,708
Total revenues		69,634			36,703			184,638			94,295
GROSS PROFIT
Hospital drugs & injectables	$	22,278		$	7,206		$	58,132		$	18,162
Ophthalmic		16,637			12,821			43,869			30,899
Contract services		1,178			1,951			4,720			5,053
Total gross profit		40,093			21,978			106,721			54,114
Operating expenses		17,490			12,624			57,680			32,376
Operating income		22,603			9,354			49,041			21,738
Other (expense) income, net		(2,380	)		(2,047	)		(7,205	)		10,288
Income before income taxes	$	20,223		$	7,307		$	41,836		$	32,026

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The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not identify assets by segment for internal purposes, as certain of the Company’s manufacturing and warehouse facilities support more than one segment.

NOTE 13 — BUSINESS COMBINATIONS

Kilitch Acquisition

On February 28, 2012, Akorn India Private Limited (“AIPL”), a wholly owned subsidiary of Akorn, Inc. (the “Company”) completed and closed on its previously announced acquisition of selected assets of Kilitch Drugs (India) Limited (“KDIL”). This acquisition (the “Kilitch Acquisition”) was pursuant to the terms of the Business Transfer Agreement (the “BTA”) entered into among the Company, KDIL and the members of the promoter group of KDIL on October 5, 2011. In accordance with terms contained in the BTA, the Company also closed on a related Product Transfer Agreement between the Company and NBZ Pharma Limited (“NBZ”), a company associated with KDIL. The primary asset transferred in the Kilitch Acquisition was KDIL’s manufacturing plant in Paonta Sahib, Himachal Pradesh, India, along with its existing book of business. KDIL was engaged in the manufacture and sale of pharmaceutical products for contract customers in India and for export to various unregulated world markets. While the Paonta Sahib manufacturing facility is not currently certified by the U.S. Food and Drug Administration (the “FDA”) for the exporting of drugs to the U.S., the facility was designed with future FDA certification in mind. Accordingly, the Kilitch Acquisition provided the Company with the potential for future expansion of its manufacturing capacity for products to be sold in the U.S., as well as the opportunity to expand the Company’s footprint into markets outside the U.S. The Company has determined that the assets acquired through the Kilitch Acquisition constitute a “business” as defined by Rule 11-01(d) of Regulation S-X and ASC 805, Business Combinations. Accordingly, the Company has accounted for the Kilitch Acquisition as a business combination.

AIPL paid the equivalent of approximately USD $60.1 million at closing. Total purchase consideration was approximately $55.2 million which consisted of approximately $51.2 million in base consideration and $4.0 million in reimbursement for capital expenditures made by KDIL from April 1, 2011 to the closing date. In addition, AIPL paid $3.4 million related to compensation earned from the achievement of acquisition-related milestones by the closing date, and $1.6 million in stamp duties paid to transfer title to the land and buildings at Paonta Sahib from Kilitch to AIPL. In addition to the amounts paid at closing, AIPL owes $3.3 million in additional compensation which is payable based on achievement of certain milestones that the Company determined were probable of achievement and which were subsequently achieved. Accordingly, the Company has recorded this amount as “accrued acquisition related compensation” in its condensed consolidated balance sheet as of September 30, 2012. In addition, the Company paid $0.5 million in compensation during the quarter ended September 30, 2012 related to the achievement of certain operational milestones, and expects to pay up to an additional $0.5 million for future services that would be expensed as the services are provided. The compensation for acquisition-related milestones and other acquisition costs have been recorded within “acquisition related costs” as part of operating expenses in the Company’s condensed consolidated statement of comprehensive income. The BTA also contains a working capital guarantee that calls for KDIL or AIPL to reimburse the other party for any shortfall or excess, respectively, in the actual acquired working capital compared to the target working capital as established in the BTA.

The following table sets forth the consideration paid for the Kilitch Acquisition, the acquisition-related costs incurred, and the fair values of the assets acquired and the liabilities assumed (U.S. dollar amounts in thousands):


Consideration:	Initial Fair Valuation				Changes in Estimate		Adjusted Fair Valuation
Cash paid	$	55,224					$ 55,224
Less working capital shortfall, due back from sellers		(890	)		(138	)	(1,028	)
	$	54,334		$	(138	)	$ 54,196

Acquisition-related costs:
Stamp duties paid for transfer of land and buildings	$	1,583					$ 1,583
Acquisition-related compensation expense paid		2,247			511		2,758
Acquisition-related compensation expense accrued but not yet paid		3,475					3,475
Due diligence, legal, travel and other acquisition-related costs		1,576			119		1,695
	$	8,881		$	630		$ 9,511

Recognized amounts of identifiable assets acquired and liabilities assumed:
Accounts receivable	$	2,130					$ 2,130
Inventory		1,799					1,799
Land		3,714			(1,131)		2,583
Buildings, plant and equipment		8,474					8,474
Construction in progress		14,231					14,231
Goodwill, deductible		21,609			324		21,933
Other intangible assets, deductible		5,806			102		5,908
Other assets		38					38
Assumed liabilities		(2,099	)		(801	)	(2,900	)
Deferred tax liabilities		(1,368	)		1,368		—
	$	54,334		$	(138)		$ 54,196

The Adjusted Fair Valuation presented above is preliminary pending final settlement of the working capital shortfall settlement between the Company and the sellers. The changes in estimate recorded in the quarters ended June 30 and September 30, 2012 were primarily related to refining the calculated fair value of certain acquired assets, adjustments to the working capital settlement amount due from the sellers to the Company, and final determination regarding the tax-deductibility of the acquired intangible assets. The acquisition-related costs incurred in the quarter ended June 30, 2012 were primarily related to the preparation and audit of historical financial statements of the acquired business for disclosure to the U.S. Securities and Exchange Commission, while the additional acquisition-related costs recorded in the quarter ended September 30, 2012 was related to pre-negotiated compensation paid to members of the sellers’ family based on achievement of various operational milestones.

Goodwill represents expected synergies and intangible assets that do not qualify for separate recognition. Based on a recent Indian Supreme Court ruling upholding the deductibility of goodwill for India tax purposes, the Company anticipates being able to deduct the value of goodwill and other intangible assets for income tax purposes in India. The Company had initially recorded a deferred tax liability valued at $1,368,000 and subsequently adjusted to $679,000 related to intangible assets that it did not believe would be amortizable for Indian tax purposes. This remaining deferred tax liability of $679,000 was reversed against goodwill in the quarter ended September 30, 2012.

For book purposes, the other intangible assets acquired are being amortized over lives of four to five years. Goodwill is not amortized for book purposes but is subject to impairment testing, per Company policy. The tangible assets acquired consist primarily of construction in progress fair valued at $14,231,000, buildings, plant and equipment fair valued at a combined $8,474,000, land fair valued at $3,714,000, accounts receivable fair valued at $2,130,000 and inventory fair valued at $1,799,000.

The unaudited pro forma results presented below reflect the consolidated results of operation of the Company as if the Kilitch Acquisition had taken place at the beginning of the period presented below. The pro forma results include amortization associated with the acquired intangible assets and interest on funds used for the acquisition. The unaudited pro forma financial information presented below does not reflect the impact of any actual or anticipated synergies expected to result from the acquisition. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date (amounts in thousands, except per share data):

	Nine months ended September 30, 2012
Revenue	$	188,642
Net income	$	26,911
Net income per diluted share	$	0.24

The business acquired through the Kilitch Acquisition generated revenue of $12,449,000 and a pre-tax loss of $8,363,000 during the seven-month period from its acquisition through September 30, 2012. The pre-tax loss included the impact of acquisition-related costs of $8,836,000 recognized by the Company in relation to the Kilitch Acquisition.

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Lundbeck Acquisition

As more fully described in the Company’s 2011 Annual Report on Form 10-K, on December 22, 2011, the Company entered into an Asset Sale and Purchase Agreement (the “Lundbeck Agreement”) to acquire the rights to three branded, injectable drug products from the U.S. subsidiary of H. Lundbeck A/S (“Lundbeck”) for an estimated purchase price of approximately $63.4 million (the “Lundbeck Acquisition”). Per terms of the Lundbeck Agreement, the Company made an upfront payment of $45.0 million. The Company also acquired inventory from Lundbeck for a price of $4.6 million, which was paid early in 2012. The Company will owe a subsequent milestone payment of $15.0 million in cash to Lundbeck on the third anniversary of closing of the Lundbeck agreement. The initial purchase consideration and the subsequent milestone payment are subject to a reduction if certain sales targets are not met in the first three years and the subsequent three years post closing. The acquired products include Nembutal®, a Schedule II controlled drug, Diuril® and Cogentin®. This acquisition adds to the Company’s portfolio of injectable drug products, allowing the Company to leverage its existing sales infrastructure to promote sales of these products. The Company has determined that the acquired assets represent a “business” as defined per Rule 11-01(d) of Regulation S-X and ASC 805, Business Combinations. Accordingly, the Company has accounted for the Lundbeck Acquisition as a business combination.

The following table sets forth the consideration paid for the Lundbeck Acquisition and the fair values of the assets acquired and the liabilities assumed. The present value of contingent consideration was initially valued at $11.3 million based on a discount rate of 10.0%. The Company subsequently determined that a discount rate of 9.0% was more reflective of the Company’s actual cost of capital, and the present value of contingent consideration was adjusted accordingly during the quarter ended June 30, 2012. (U.S. dollar amounts in thousands):

Consideration:	Initial Fair Valuation			Change in Estimate		Adjusted Fair Valuation
Cash paid	$	49,559				$	49,559
Present value of contingent consideration		11,300			300		11,600
Total consideration	$	60,859		$	300	$	61,159

Recognized amounts of identifiable assets acquired and liabilities assumed:
Product licensing rights	$	59,525		$	300	$	59,825
Inventory		3,825					3,825
Fixed assets		50					50
Assumed liability – unfavorable contract		(2,541	)				(2,541	)
Total fair value of acquired assets and assumed liabilities	$	60,859		$	300	$	61,159

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Product Warranty Reserve

The Company has an outstanding product warranty reserve which relates to a ten-year expiration guarantee on injectable radiation antidote products (“DTPA”) sold to the United States Department of Health and Human Services in 2006. The Company is performing yearly stability studies for this product and, if the annual stability study does not support the ten-year product life, it will replace the product at no charge. The Company’s supplier, Hameln Pharmaceuticals, will also share one-half of this cost if the product does not meet the stability requirement. If the ongoing product testing confirms the ten-year stability for DTPA, the Company will not incur a replacement cost and this reserve will be eliminated with a corresponding reduction to cost of sales after the ten-year period. All studies to date have confirmed the product’s stability. This reserve balance was $1,299,000 at September 30, 2012 and December 31, 2011.

Payments Due under Strategic Business Agreements

The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies. Each strategic business agreement includes a future payment schedule for contingent milestone payments. The Company will be responsible for contingent milestone payments to these strategic business partners based upon the occurrence of future events. Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timelines, successful product testing and validation, successful clinical studies, various FDA and other regulatory approvals and other factors as negotiated in each agreement. None of the contingent milestone payments is expected to be individually material to the Company. These costs, when realized, will be reported as part of research and development expense in the Company’s Condensed Consolidated Statement of Comprehensive Income. As of September 30, 2012, the Company has agreements with strategic business partners for which it expects to pay the approximate dollar amounts listed below (in thousands):

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Period of payment	Amount
Q4 2012	$	1,835
2013		3,733
2014 and beyond		998
Total	$	6,566

Business Combinations

The Company entered into an agreement with H. Lundbeck A/S on December 22, 2011 to acquire its rights to the NDAs of three off-patent, branded injectable products (the “Lundbeck Agreement”). Pursuant to the terms of the underlying Asset Sale and Purchase Agreement, in addition to the $45.0 million paid in cash at closing, the Company is obligated to pay $15.0 million in additional consideration on the third anniversary of the closing date. The initial $45.0 million and subsequent $15.0 million are subject to claw-back provisions should sales of the acquired products fail to reach the required levels. The Company recorded the present value of the $15.0 million future payment as a long-term liability on its balance sheet as of December 31, 2011. Interest is being accrued on this obligation at a rate of 9.0%, which was determined to be the Company’s approximate cost of capital.

Also in relation to the Lundbeck Agreement, the Company assumed minimum annual purchase obligations under a pharmaceutical manufacturing supply agreement covering two of the three acquired products. The supply agreement commits the Company to purchase $12.9 million in product during the period from 2012 through 2015. The Company determined that its commitment under this contract required it to purchase more product than it anticipates being able to sell. According, the Company recorded as part of purchase accounting a long-term liability of $2.5 million which equals the estimated present value of the unfavorable contract terms.

Legal Proceedings

On September 12, 2012, Fera Pharmaceuticals, LLC (the “Plaintiff”) filed a civil complaint against Akorn and certain individual defendants (together, the “defendants”) in the Supreme Court of New York (the “Fera lawsuit”). The complaint alleges, among other things, a breach of a manufacturing agreement and misappropriation of the plaintiff’s trade secrets. On October 15, 2012, the case was removed to the Federal District Court for the Southern District of New York. A responsive pleading from the defendants is due by November 21, 2012. The Company believes that the Plaintiff’s claims lack merit and the Company intends to vigorously defend this lawsuit; however, no assurance may be given regarding the ultimate outcome of this lawsuit.

The Company is also party to other proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to the Fera lawsuit and other proceedings cannot be determined at this time. Despite the inherent uncertainties of litigation, the Company does not currently believe that the proceedings described herein will have a material adverse impact on the Company’s financial condition, results of operations, or cash flows.

NOTE 15 — CUSTOMER AND SUPPLIER CONCENTRATION

Customer Concentrations

Three large wholesale drug distributors – AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) (collectively, the “Big 3 Wholesalers”) – are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. These three customers individually and collectively represented a significant percentage of the Company’s sales and accounts receivable as of and for the three and nine-month periods ended September 30, 2012 and 2011.

The following table sets forth the percentage of the Company’s consolidated gross sales, net sales and gross accounts receivable attributable collectively to these three wholesalers (in thousands):

	Three months ended September 30,						Nine months ended September 30,
Big 3 Wholesalers combined:	2012			2011			2012			2011
Percentage of gross sales		61	%		67	%		56	%		67	%
Percentage of net sales revenues		46	%		50	%		40	%		50	%

	September 30, 2012			December 31, 2011
Percentage of gross trade accounts receivable		63	%		72	%

If sales to any of Amerisource, Cardinal or McKesson were to diminish or cease, the Company believes that the end users of its products would find little difficulty obtaining the Company’s products either directly from the Company or from another distributor.

No other customers accounted for more than 10% of gross sales, net revenues or gross trade receivables for the indicated dates and periods.

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Supplier Concentrations

The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for its own use and for third parties with which it has contracted. The principal components of the Company’s products are active and inactive pharmaceutical ingredients and certain packaging containers and materials. Certain of these ingredients and components are available from only a single source and, in the case of certain of the Company’s ANDAs and NDAs, only one supplier of raw materials has been identified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts. If for any reason the Company is unable to obtain sufficient quantities of any of the raw materials or components required to produce and package its products, it may not be able to manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

No individual supplier accounted for 10% or more of the Company’s purchases during the quarter or nine months ended September 30, 2012. During the quarter ended September 30, 2011, purchases of finished product from Horizon Pharmaceuticals represented 10% of the Company’s total purchases during that period. No individual supplier accounted for 10% or more of the Company’s purchases during the nine months ended September 30, 2011.

NOTE 16 — INCOME TAXES

The following table sets forth the Company’s income tax provision for the periods indicated (dollar amounts in thousands):

	Three Months ended September 30,						Nine Months ended September 30,
	2012			2011			2012			2011
Income before income taxes	$	20,223		$	7,307		$	41,836		$	32,026
Income tax provision (benefit)		6,470			(6,217	)		15,269			(5,254	)
Net income	$	13,753		$	13,524		$	26,567		$	37,280

Income tax provision (benefit) as a percentage of income before income taxes		32.0	%		(85.1	%)		36.5	%		(16.4	%)

The Company anticipates that its blended effective income tax rate for the year 2012 will be 38.1%. This tax provision rate factors in various domestic deductions and the impact of foreign operations on the Company’s overall tax rate.

The Company’s provisions for income taxes were equal to 32.0% and 36.5% of income before income taxes for the three and nine month periods ended September 30, 2012, respectively. These effective rates are lower than the anticipated 2012 annual rate of 38.1% for two main reasons. First, the Company recorded a credit to its current year tax provision on a discrete basis for R&D tax credits claimed on its filed 2011 federal and state tax returns. These R&D tax credits were not known and therefore not factored into the Company’s effective tax rate in 2011. Second, a recent court ruling of the Supreme Court of India which held that goodwill, as defined by Indian tax law, is an amortizable asset for tax purposes, resulted in the Company providing a tax benefit for various acquisition-related costs it recognized in the quarter ended March 31, 2012. These acquisition-related costs were of a nature that would be considered goodwill for Indian tax purposes.

The Company’s income tax benefit in the quarter and nine months ended September 30, 2011 was related to the reversal of valuation allowances on its net deferred tax assets, primarily consisting of net operating loss carry-forwards (“NOLs”). During the quarter ended September 30, 2011, the Company determined that it would likely be able to realize the benefit of these NOLs and reversed its valuation allowances accordingly.

As of December 31, 2011, the Company had not identified any uncertain tax positions that required establishment of a reserve. As of September 30, 2012, the Company determined that by their nature, the R&D tax credits claimed for 2011 represented an uncertain tax position, and reserved a percentage allowance against them.

NOTE 17 — UNCONSOLIDATED JOINT VENTURE

The Company is party to a 50/50 joint venture agreement (the “Joint Venture Agreement”), initiated on September 22, 2004, with Strides Arcolab Limited (“Strides”), a pharmaceutical manufacturer based in India, for the development, manufacturing and marketing of various generic pharmaceutical products for sale in the United States. The joint venture, known as Akorn-Strides LLC (the “Joint Venture Company”), launched its first commercialized product during 2008 and operated until May 2011, at which point it ceased operations after the sale and transfer of its operating assets to Pfizer, Inc. pursuant to an Asset Purchase Agreement entered into on December 29, 2010.

Under the Joint Venture Agreement, Strides was primarily responsible for developing and manufacturing injectable pharmaceutical products while the Company was responsible for marketing and selling these products. For its sales and marketing efforts, the Company earned revenue from the Joint Venture Company in the form of a fee calculated as a percentage of the Joint Venture Company’s monthly net sales revenue. To supplement Strides’ manufacturing capabilities, the Company manufactured one of the Joint Venture Company’s products from the second quarter of 2010 through the first quarter of 2011.

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On December 29, 2010, the Joint Venture Company entered into an Asset Purchase Agreement with Pfizer, Inc. (“Pfizer”) to sell the rights to all of its abbreviated new drug applications (“ANDAs”) for $63.2 million in cash. In accordance with an amendment to the Joint Venture Agreement, the proceeds were split unevenly, with the Company receiving $35.0 million and Strides receiving $28.2 million. The Asset Purchase Agreement included an initial closing date of December 29, 2010 and a final closing date of May 1, 2011. The ANDAs for dormant and in-development products were transferred on the initial closing date, while the ANDAs for actively-marketed products were transferred to Pfizer on the final closing date. The Joint Venture Company recognized a gain of $63.1 million from the sale, of which $38.9 million was recognized in the fourth quarter of 2010 and the remaining $24.2 million was recognized in the second quarter of 2011. Having sold all of its ANDAs, the Joint Venture Company discontinued product sales in the second quarter of 2011 and its operations ceased. It is anticipated that the Joint Venture Company will continue to exist until all products that it sold are beyond the potential product return period.

The following tables set forth condensed statements of income of the Joint Venture Company for the three and nine-month periods ended September 30, 2012 and 2011, as well as condensed balance sheets as of September 30, 2012 and December 31, 2011.

CONDENSED STATEMENTS OF INCOME (IN THOUSANDS)
	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Revenues	$	—	$	—	$	—	$	6,332
Cost of sales		—		—		—		3,534
Gross profit		—		—		—		2,798
Operating expenses		—		—		—		497
Operating income		—		—		—		2,301
Gain from Pfizer ANDA Sale		—		—		—		24,160
Income before income taxes		—		—		—		26,461
Income tax provision		—		—		—		—
Net income	$	—	$	—	$	—	$	26,461

Allocation of net income to Akorn, Inc.	$	—	$	—	$	—	$	14,530

CONDENSED BALANCE SHEETS
(IN THOUSANDS)

	September 30,		December 31,
	2012		2011
Assets:
Cash	$	793	$	859
Other assets		8		75
Total assets	$	801	$	934