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

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

COMMISSION FILE NUMBER: 001-32360

AKORN, INC.

(Exact Name of Registrant as Specified in its Charter)

LOUISIANA (State or Other Jurisdiction of Incorporation or Organization)		72-0717400 (I.R.S. Employer Identification No.)
1925 W FIELD CT STE 300 LAKE FOREST, ILLINOIS (Address of Principal Executive Offices)		60045 (Zip 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.

     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 o 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

     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 October 31, 2009 there were 90,387,722 shares of common stock, no par value, outstanding.

 

 

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets-September 30, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Operations-Three and nine months ended September 30, 2009 and 2008			4
Condensed Consolidated Statement of Shareholders’ Equity- Nine months ended September 30, 2009 and 2008			5
Condensed Consolidated Statements of Cash Flows- Nine months ended September 30, 2009 and 2008			6
Notes to Condensed Consolidated Financial Statements			7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.			27
ITEM 4. Controls and Procedures.			27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.			29
ITEM 1A. Risk Factors.			29
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.			29
ITEM 3. Defaults Upon Senior Securities.			30
ITEM 4. Submission of Matters to a Vote of Security Holders.			30
ITEM 5. Other Information.			30
ITEM 6. Exhibits.			31
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
		(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,018			$	1,063
Trade accounts receivable (less allowance for doubtful accounts of $2 and $22, respectively)			11,360				6,529
Other receivable			—				1,221
Inventories			17,409				30,163
Prepaid expenses and other current assets			485				1,770
TOTAL CURRENT ASSETS			31,272				40,746
PROPERTY, PLANT AND EQUIPMENT, NET			32,169				34,223
OTHER LONG-TERM ASSETS
Intangibles, net			5,033				6,017
Deferred financing costs, net			4,060				272
Other			1,892				1,071
TOTAL OTHER LONG-TERM ASSETS			10,985				7,360
TOTAL ASSETS		$	74,426			$	82,329
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable		$	4,458			$	8,795
Accrued compensation			1,469				1,070
Accrued expenses and other liabilities			3,856				2,906
Short term subordinated debt — related party			—				5,332
Revolving line of credit — related party			7,509				—
Warrants liability — related party			6,654				—
Supply agreement termination costs			1,500				—
TOTAL CURRENT LIABILITIES			25,446				18,103
LONG-TERM LIABILITIES
Lease incentive obligation			1,350				1,484
Product warranty liability			1,299				1,299
Subordinated note — related party			5,853				—
TOTAL LONG-TERM LIABILITIES			8,502				2,783
TOTAL LIABILITIES			33,948				20,886
SHAREHOLDERS’ EQUITY
Common stock, no par value — 150,000,000 shares authorized; 90,340,678 and 90,072,662 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			173,304				170,617
Warrants to acquire common stock			1,821				2,731
Accumulated deficit			(134,647	)			(111,905	)
TOTAL SHAREHOLDERS’ EQUITY			40,478				61,443
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	74,426			$	82,329

See notes to condensed consolidated financial statements.

AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2009				2008				2009				2008
Revenues		$	19,371			$	31,874			$	57,711			$	67,562
Cost of sales			16,686				21,968				47,997				49,082
GROSS PROFIT			2,685				9,906				9,714				18,480
Selling, general and administrative expenses			5,187				6,199				18,016				18,370
Supply agreement termination expenses			—				—				5,929				—
Amortization of intangibles			320				339				1,234				1,016
Research and development expenses			1,013				1,143				3,681				4,744
TOTAL OPERATING EXPENSES			6,520				7,681				28,860				24,130
OPERATING (LOSS) INCOME			(3,835	)			2,225				(19,146	)			(5,650	)
Write-off and amortization of deferred financing costs			(187	)			—				(1,739	)			—
Interest expense, net			(441	)			(295	)			(1,095	)			(579	)
Equity in earnings of unconsolidated joint venture			484				447				672				447
Change in fair value of warrants liability			(1,122	)			—				(1,432	)			—
Other income (expense)			—				24				—				(177	)
(LOSS) INCOME BEFORE INCOME TAXES			(5,101	)			2,401				(22,740	)			(5,959	)
Income tax provision			—				—				2				3
NET (LOSS) INCOME		$	(5,101	)		$	2,401			$	(22,742	)		$	(5,962	)
NET (LOSS) INCOME PER SHARE:
BASIC		$	(0.06	)		$	0.03			$	(0.25	)		$	(0.07	)
DILUTED		$	(0.06	)		$	0.03			$	(0.25	)		$	(0.07	)
SHARES USED IN COMPUTING NET (LOSS) INCOME PER SHARE:
BASIC			90,303				89,250				90,209				89,169
DILUTED			90,303				90,065				90,209				89,169

See notes to condensed consolidated financial statements.

AKORN, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
UNAUDITED
(In Thousands)

										Warrants to
										acquire
		Common Stock								Common				Accumulated
Nine Months Ended September 30, 2009		Shares				Amount				Stock				Deficit				Total
BALANCES AT DECEMBER 31, 2008			90,073			$	170,617			$	2,731			$	(111,905	)		$	61,443
Net loss			—				—				—				(22,742	)			(22,742	)
Employee stock purchase plan issuances			122				149				—				—				149
Amortization of deferred compensation related to restricted stock awards			146				286				—				—				286
Restricted stock awards vested net of amounts withheld for payment of employee tax liability			—				(47	)			—				—				(47	)
Stock-based compensation expense			—				1,389				—				—				1,389
Expiration of stock warrants			—				910				(910	)			—				—
BALANCES AT SEPTEMBER 30, 2009			90,341			$	173,304			$	1,821			$	(134,647	)		$	40,478

										Warrants to
										acquire
		Common Stock								Common				Accumulated
Nine Months Ended September 30, 2008		Shares				Amount				Stock				Deficit				Total
BALANCES AT DECEMBER 31, 2007			88,901			$	165,829			$	2,795			$	(103,966	)		$	64,658
Net loss			—				—				—				(5,962	)			(5,962	)
Exercise of warrants into common stock			50				101				(64	)			—				37
Exercise of stock options			217				608				—				—				608
Employee stock purchase plan issuances			31				149				—				—				149
Amortization of deferred compensation related to restricted stock awards			—				492				—				—				492
Restricted stock awards vested net of amounts withheld for payment of employee tax liability			66				(158	)			—				—				(158	)
Stock-based compensation expense			—				1,329				—				—				1,329
BALANCES AT SEPTEMBER 30, 2008			89,265			$	168,350			$	2,731			$	(109,928	)		$	61,153

AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)

		NINE MONTHS
		ENDED SEPTEMBER 30
		2009				2008
OPERATING ACTIVITIES
Net loss		$	(22,742	)		$	(5,962	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			4,118				3,348
Write-off and amortization of deferred financing fees			1,739				—
Non-cash stock compensation expense			1,675				1,821
Non-cash supply agreement termination expense			1,051				—
Non-cash change in fair value of warrants liability			1,432				—
Gain on disposal of assets			—				(25	)
Equity in earnings of unconsolidated joint venture			(672	)			(447	)
Changes in operating assets and liabilities:
Trade accounts receivable			(4,831	)			(11,620	)
Inventories			12,754				2,662
Prepaid expenses and other current assets			1,228				252
Other long-term assets			—				1,246
Supply agreement termination liabilities			1,500				—
Trade accounts payable			(4,337	)			(6,651	)
Accrued expenses and other liabilities			1,736				1,081
NET CASH USED IN OPERATING ACTIVITIES			(5,349	)			(14,295	)
INVESTING ACTIVITIES
Purchases of property, plant and equipment			(922	)			(2,742	)
Purchase of product licensing rights			(250	)			—
Proceeds from sale of fixed assets			—				74
NET CASH USED IN INVESTING ACTIVITIES			(1,172	)			(2,668	)
FINANCING ACTIVITIES
Repayment of long-term debt			—				(208	)
Restricted cash for revolving credit agreement							(2,050	)
Loan origination fees — new revolving line of credit & subordinated note			(1,356	)			—
Proceeds from line of credit			7,509				5,727
Proceeds from warrants exercised			—				37
Proceeds from subordinated note			—				5,000
Proceeds under stock option and stock purchase plans			1,323				599
NET CASH PROVIDED BY FINANCING ACTIVITIES			7,476				9,105
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			955				(7,858	)
Cash and cash equivalents at beginning of period			1,063				7,948
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	2,018			$	90
SUPPLEMENTAL DISCLOSURES
Amount paid for interest		$	387			$	534
Amount paid for income taxes		$	3			$	3

See notes to condensed consolidated financial statements

AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A — BUSINESS AND BASIS OF PRESENTATION

     Business: Akorn, Inc. and its wholly owned subsidiary, Akorn (New Jersey), Inc. (collectively, the “Company” or “Akorn”), manufacture and market diagnostic and therapeutic pharmaceuticals in specialty areas such as ophthalmology, rheumatology, anesthesia, antidotes and vaccines, among others. Customers, including physicians, optometrists, wholesalers, group purchasing organizations and other pharmaceutical companies, are served primarily from three operating facilities in the United States. In September 2004, the Company, along with a venture partner, Strides Arcolab Limited (“Strides”), formed a mutually owned limited liability company, Akorn-Strides, LLC (the “Joint Venture Company”). The accompanying unaudited condensed consolidated financial statements include the accounts of Akorn, Inc. and Akorn (New Jersey) Inc. Intercompany transactions and balances have been eliminated in consolidation.

     Basis of Presentation: These 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 nine-month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2009.

NOTE B — 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. Significant estimates and assumptions for the Company relate to the allowance for doubtful accounts, the allowance for chargebacks, the allowance for rebates, the allowance for product returns and discounts, the reserve for slow-moving and obsolete inventories, the carrying value of intangible assets and the carrying value of deferred income tax assets.

     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 expense provision for chargebacks is recorded 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’s estimate of the percentage amount of wholesaler inventory that will ultimately be sold to a third party that is subject to a contractual price agreement is based on a six-quarter trend of such sales through wholesalers. The Company uses this percentage estimate (97% in the quarter ended September 30, 2009 and 95% in the previous quarters in 2009 and all quarters in 2008) 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.

     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 product and by customer in some cases. The Company estimates its sales returns reserve based on a historical percentage of returns to sales. One-time historical factors 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.

NOTE C — STOCK-BASED COMPENSATION

     Stock-based compensation cost is estimated at the 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 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 those estimates. After reviewing historical forfeiture information, the Company decided to revise its estimate from 10% used in 2006 and 2007 to 13% as an estimated forfeiture rate commencing in the fourth quarter 2008 and all quarters in 2009.

     The Company recognized stock-based compensation expense related to options of $339,000 and $1,389,000 during the three and nine-month periods ended September 30, 2009, respectively. Stock-based compensation expense related to options of $438,000 and $1,329,000 was recognized during the three and nine-month periods ended September 30, 2008. The Company uses the single-award method for allocating the compensation cost to each period.

     The weighted-average assumptions used in estimating the grant date fair value of the stock options granted during the three months ended September 30, 2009 and 2008, along with the weighted-average grant date fair values, were as follows:

		THREE MONTHS				THREE MONTHS
		ENDED				ENDED
		SEPTEMBER 30, 2009				SEPTEMBER 30, 2008
Expected volatility			81	%			48	%
Expected life (in years)			3.9				4.0
Risk-free interest rate			2.5	%			3.1	%
Dividend yield			—				—
Fair value per stock option		$	0.81			$	1.79
Forfeiture rate			13	%			10	%

     A summary of stock-based compensation activity within the Company’s stock-based compensation plans for the nine-month period ended September 30, 2009 is as follows:

										Weighted Average
		Number of				Weighted				Remaining				Aggregate
		Shares				Average				Contractual Term				Intrinsic Value
		(in thousands)				Exercise Price				(Years)				(in thousands)
Outstanding at December 31, 2008			3,684			$	5.20				2.56			$	44
Granted			1,213				1.08
Exercised			—
Forfeited			(1,769	)			5.06
Outstanding at September 30, 2009			3,128				3.68				2.99			$	401
Exercisable at September 30, 2009			1,557				5.01				1.83			$	18

     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 end of the period and the exercise price of the stock options. No stock options were exercised during the first nine months of 2009.

     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 restricted stock awards valued at $174,000 during the third quarter of 2009. As of September 30, 2009, the total amount of unrecognized compensation expense related to nonvested restricted stock awards was $219,000. The Company recognized compensation expense of $93,000 and $286,000 during the three and nine-month periods ended September 30, 2009, related to outstanding restricted stock awards. The Company recognized compensation expense of $134,000 and $492,000 during the three and nine-month periods ended September 30, 2008, related to outstanding restricted stock awards.

     The following is a summary of nonvested restricted stock activity:

		Number of Shares				Weighted Average
		(in thousands)				Grant Date Fair Value
Nonvested at December 31, 2008			125			$	5.74
Granted			185				1.59
Vested			(202	)			3.55
Nonvested at September 30, 2009			108				2.73

NOTE D — REVENUE RECOGNITION

     The Company recognizes product sales for its ophthalmic, hospital drugs & injectables, and biologics & vaccines            business segments upon the shipment of goods or upon the delivery of goods as appropriate. Revenue is recognized when all obligations of the Company have been fulfilled and collection of the related receivable is probable.

     The contract services segment, which produces products for third party customers based upon their specifications and at pre-determined prices, also recognizes sales upon the shipment of goods or upon delivery of the product or service as appropriate. Revenue is recognized when all obligations of the Company have been fulfilled and collection of the related receivable is probable.

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

NOTE E — 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 doubtful accounts, product returns, chargebacks, rebates 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 operations with the exception of the allowance for doubtful accounts which is reflected as part of selling, general and administrative expense. The ending reserve amounts are included in trade accounts receivable in the accompanying balance sheets.

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

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
Gross accounts receivable		$	17,140			$	18,723
Less:
Allowance for doubtful accounts			(2	)			(22	)
Returns reserve			(2,456	)			(2,539	)
Discount and allowances reserve			(297	)			(322	)
Chargeback and rebates reserves			(3,025	)			(9,311	)
Net trade accounts receivable		$	11,360			$	6,529

     For the three-month periods ended September 30, 2009 and 2008, the Company recorded chargeback and rebate expense of $6,238,000 and $7,390,000, respectively. For the nine-month periods ended September 30, 2009 and 2008, the Company recorded chargeback and rebate expense of $20,178,000 and $23,566,000, respectively. These decreases for both the three and nine month periods were primarily due to reduced sales into wholesalers and a favorable sales mix of lower chargeback products in 2009.

     For the three-month periods ended September 30, 2009 and 2008, the Company recorded a provision for product returns of $489,000 and $764,000 respectively. For the nine-month periods ended September 30, 2009 and 2008, the Company recorded a provision for product returns of $3,809,000 and $1,714,000, respectively. The increase in the product returns provision for the nine months ended September 30, 2009 was primarily due to a provision of $708,000 related to the Company’s Akten^® ophthalmic solution product, $242,000 in additional returns for a product recall on the Company’s Cyanide Antidote Kits due to a supplier syringe recall, lower than anticipated market pull through on Ophthalmic products and also to reflect increased returns anticipated from wholesalers on certain other products. Akten^® was launched in October 2008 and the significant returns were not previously anticipated as the Company had expected to capture significant market share based on the product’s attributes. The Company has continued a trial sampling and price reduction program which was implemented in the first half of 2009, along with additional field sales coverage for key users to stimulate market demand for this product.

     For the three-month periods ended September 30, 2009 and 2008, the Company recorded a net benefit for doubtful accounts of $16,000 and a net provision for doubtful accounts of $8,000, respectively. For the nine-month periods ended September 30, 2009 and 2008, the Company recorded a net benefit for doubtful accounts of $20,000 and a net provision for doubtful accounts of $8,000, respectively.

     For the three-month periods ended September 30, 2009 and 2008, the Company recorded a provision for cash discounts of $379,000 and $618,000, respectively. This decrease primarily relates to the decrease in sales for the quarter. For the nine-month periods ended September 30, 2009 and 2008, the Company recorded a provision for cash discounts of $1,246,000 and $1,409,000, respectively. This decrease primarily relates to the decrease in sales for the respective nine month periods.

NOTE F — INVENTORIES

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

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
Finished goods		$	8,120			$	21,000
Work in process			1,901				1,802
Raw materials and supplies			7,388				7,361
		$	17,409			$	30,163

     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, 2009 and December 31, 2008 is reported net of these reserves of $1,386,000 and $1,179,000, respectively, primarily related to finished goods. At September 30, 2009, the Company had $835,000 in its ending inventory for raw material and $149,000 for finished goods related to its generic oral Vancomycin capsule product. The Company has not yet received U.S. Food and Drug Administration (“FDA”) approval, however it believes that FDA approval is probable and it will be able to fully realize the costs of this inventory upon FDA approval.

NOTE G — PROPERTY, PLANT AND EQUIPMENT

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

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
Land		$	396			$	396
Buildings and leasehold improvements			20,027				19,607
Furniture and equipment			46,661				46,297
			67,084				66,300
Accumulated depreciation			(35,250	)			(32,710	)
			31,834				33,590
Construction in progress			335				633
Property, plant, and equipment, net		$	32,169			$	34,223

NOTE H — FINANCING ARRANGEMENTS

Subordinated Note Payable

     On July 28, 2008, the Company borrowed $5,000,000 from The John N. Kapoor Trust dated September 20, 1989 (the “Kapoor Trust”), the sole trustee and sole beneficiary of which is Dr. John N. Kapoor, the Company’s Chairman of the Board of Directors and the holder of a significant stock position in the Company, in return for issuing the trust a Subordinated Promissory Note (“Subordinated Note”). The Subordinated Note accrues interest at a rate of 15% per year and was due and payable on July 28, 2009. The proceeds from the Subordinated Note were used in conjunction with the amended MBL Distribution Agreement that was negotiated with the Massachusetts Biologic Laboratories of the University of Massachusetts Medical School (“MBL”) on July 14, 2008, which resulted in favorable pricing and reduced purchase commitments for the Company (see Note L — Commitments and Contingencies).

     On August 17, 2009, the Company refinanced its $5,000,000 subordinated debt payable to the Kapoor Trust. The principal amount of $5,000,000 has been increased to $5,853,267 to include accrued interest through August 16, 2009 (interest accruing thereafter is payable monthly) and the annual interest rate of 15% remained unchanged. The term of the Subordinated Note has been extended by an additional five years and is now due and payable on August 17, 2014. As part of this refinancing agreement, the Company issued the Kapoor Trust an additional 2,099,935 warrants to purchase the Company’s common stock at an exercise price of $1.16, the closing price of the Company’s stock on August 14, 2009. The fair value of these warrants on August 17, 2009, using a Black-Scholes valuation model, was $1,575,000 and this amount was capitalized as financing costs and is being amortized over the term of the subordinated debt.

     The fair value of these warrants increased from $1,575,000 on August 17, 2009 to approximately $1,953,000 as of September 30, 2009 and this $378,000 increase in the fair value of the warrants liability was reflected as a non-operating expense in the Company’s condensed consolidated statement of operations. Future increases or decreases in the fair value of these warrants will be recorded in a similar manner.

Credit Facility

     On January 7, 2009, the Company entered into a Credit Agreement (the “Credit Agreement”) with General Electric Capital Corporation (“GE Capital”) as agent for several financial institutions (the “Lenders”) to replace its previous credit agreement with Bank of America which expired on January 1, 2009, which, as is more fully discussed below, was subsequently assigned. Pursuant to the

Credit Agreement, the Lenders agreed, among other things, to extend loans to the Company under a revolving credit facility (including a letter of credit subfacility) up to an aggregate principal amount of $25,000,000 (the “Credit Facility”). At the Company’s election, borrowings under the Credit Facility bore interest at a rate equal to either: (i) the base rate (defined as the highest of the Wall Street Journal prime rate, the federal funds rate plus 0.5% or LIBOR plus 1.0%), plus a margin equal to (x) 4% for the period commencing on the closing date through April 14, 2009, or (y) a percentage that ranged between 3.75% and 4.25% for the period after April 14, 2009, or (ii) LIBOR (or 2.75%, if LIBOR is less than 2.75%), plus a margin equal to (x) 5% for the period commencing on the closing date through April 14, 2009, or (y) a percentage that ranged between 4.75% and 5.25% for the period after April 14, 2009. Upon the occurrence of any event of default, the Company was to pay interest equal to an additional 2.0% per year. The Credit Agreement contained affirmative, negative and financial covenants customary for financings of this type. The negative covenants included restrictions on liens, indebtedness, payments of dividends, disposition of assets, fundamental changes, loans and investments, transactions with affiliates and negative pledges. The financial covenants included fixed charge coverage ratio, minimum-EBITDA, minimum liquidity and a maximum level of capital expenditures. In addition, the Company’s obligations under the Credit Agreement could have been accelerated upon the occurrence of an event of default under the Credit Agreement, which included customary events of default such as payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, defaults relating to certain governmental enforcement actions, and a change of control default.

     Also on January 7, 2009, in connection with the Credit Agreement, the Company entered into a Guaranty and Security Agreement (the “Guaranty and Security Agreement”) with GE Capital, as agent for the Lenders and each other secured party thereunder. Pursuant to the Guaranty and Security Agreement, the Company granted a security interest to GE Capital in the collateral described in the Guaranty and Security Agreement as security for the Credit Facility. The Company’s obligations were secured by substantially all of its assets, excluding its ownership interest in Akorn-Strides, LLC and in certain licenses and other property in which assignments are prohibited by confidential provisions.

     In connection with the Credit Agreement, on January 7, 2009, the Company also entered into a Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing by the Company, in favor of GE Capital, relating to the real property owned by the Company located in Decatur, IL. The mortgage granted a security interest in the two parcels of real property to GE Capital, as security for the Credit Facility.

     Also on January 7, 2009, in connection with the Credit Agreement, the Company entered into a Subordination Agreement with the Kapoor Trust and GE Capital, as agent for the Lenders. Pursuant to the Subordination Agreement, the Kapoor Trust and the Company agreed that the Subordinated Note payable to the Kapoor Trust was subordinated to the Credit Facility, except that so long as there was no event of default outstanding under the Credit Agreement, the Company could repay that debt in full if the repayment occurred by July 28, 2009.

     On February 19, 2009, GE Capital informed the Company that it was applying a reserve against availability which effectively restricted the Company’s borrowings under the Credit Agreement to the balance outstanding as of February 19, 2009, which was $5,523,620. GE Capital advised that it had applied this reserve due to concerns about financial performance, including the Company’s prospective compliance with certain covenants in the Credit Agreement for the quarter ended March 31, 2009.

     On March 31, 2009, the Company consented to an Assignment Agreement (“Assignment”) between GE Capital and EJ Funds LP (“EJ Funds”) which transferred to EJ Funds all of GE Capital’s rights and obligations under the Credit Agreement. Pursuant to the Assignment, EJ Funds became the agent and lender under the Credit Agreement. Accordingly, GE is no longer the Company’s lender. Dr. Kapoor is the President of EJ Financial Enterprises, Inc., a healthcare consulting investment company (“EJ Financial”) and EJ Financial is the general partner of EJ Funds.

     In connection with the Assignment, on April 13, 2009, the Company entered into a Modification, Warrant and Investor Rights Agreement (the “Modification Agreement”) with EJ Funds that, among other things, (i) reduced the revolving loan commitment under the Credit Agreement to $5,650,000, (ii) provided an extended cure period until July 22, 2009 for any event, other than specified types of “material defaults” listed in the Modification Agreement, which could constitute an event of default under the Credit Agreement, unless that period is terminated earlier due to the occurrence of a material default or as otherwise provided in the Modification Agreement, (iii) set the interest rate for all amounts outstanding under the Credit Agreement at an annual rate of 10% with interest payable monthly, (iv) granted a security interest in and lien upon all the collateral under the Credit Agreement to the Kapoor Trust as security for the Subordinated Note, and (v) requires the Company, within 30 days after the date of the Modification Agreement, to enter into security

documents consisting of a security agreement and mortgages (if requested by the Kapoor Trust) in form and substance substantially similar to the corresponding security documents under the Credit Agreement for the Kapoor Trust’s interest in connection with the Subordinated Note. The Modification Agreement also granted EJ Funds the right to require the Company to nominate two directors to serve on its Board of Directors. The Kapoor Trust is entitled to require the Company to nominate a third director under its Stock Purchase Agreement dated November 15, 1990 with the Kapoor Trust. In addition, the Company agreed to pay all accrued legal fees and other expenses of EJ Funds that relate to the Credit Agreement and other loan documents, including legal expenses incurred with respect to the Modification Agreement and the Assignment.

     Pursuant to the Modification Agreement, on April 13, 2009, the Company granted EJ Funds a warrant (the “Modification Warrant”) to purchase 1,939,639 shares of its common stock at an exercise price of $1.11 per share, subject to certain adjustments. The Modification Warrant expires five years after its issuance and is exercisable upon payment of the exercise price in cash or by means of a cashless exercise yielding a net share figure. Under the Modification Agreement, the Company has the right to convert the Subordinated Note into term indebtedness under the Credit Agreement in exchange for additional warrants, on terms substantially identical to the Modification Warrant, to purchase 343,299 shares of its common stock for each $1,000,000 of converted debt. The exercise price of those warrants would also be $1.11 per share. The fair value of the Modification Warrant, using a Black-Scholes valuation model, is $1,784,000 at September 30, 2009.

     The fair value of these warrants increased from $2,409,000 at March 31, 2009 to approximately $3,166,000 as of September 30, 2009 and this $757,000 increase in the fair value of the warrants liability was reflected as a non-operating expense in the Company’s condensed consolidated statement of operations. Future increases or decreases in the fair value of these warrants will be recorded in a similar manner.

     In 2008, the Company capitalized $272,000 of loan origination fees and costs in association with the Credit Facility. In 2009, the Company incurred closing costs and additional legal fees related to the Credit Facility of $1,182,000. Upon the assignment of the Credit Facility to EJ Funds, the Company expensed the total deferred financing costs of $1,454,000. In 2009, the Company capitalized $1,358,000 for the fair value of the Modification Warrant and $153,000 for other costs in association with the assignment of the Credit Facility. The Company is amortizing the fees associated with the Credit Facility assignment on a straight-line basis over the remaining term of the Credit Facility which amounted to $245,000 in amortization expense for the nine months ended September 30, 2009.

     On August 17, 2009, the Company completed negotiations with EJ Funds for additional capacity on its Credit Facility, increasing the loan commitment from $5,650,000 to $10,000,000. The Credit Facility is secured by the assets of the Company and is not subject to debt covenants until April 1, 2010. In connection with this loan commitment increase, the Company issued EJ Funds 1,650,806 warrants to purchase its common stock at an exercise price of $1.16, the closing price of the Company’s stock on August 14, 2009. The estimated fair value of these warrants, using a Black-Scholes valuation model, was $1,238,000 on August 17, 2009, and this amount was capitalized as financing costs and is being amortized over the remaining term of the Credit Facility.

     The fair value of these warrants increased from $1,238,000 on August 17, 2009 to $1,535,000 as of September 30, 2009 and this $297,000 increase in the fair value of the warrants liability was reflected as a non-operating expense in the Company’s condensed consolidated statement of operations. Future increases or decreases in the fair value of these warrants will be recorded in a similar manner.

     The Company classified the fair value of the Modification Warrant and the warrants issued in conjunction with its Reimbursement and Warrant Agreement (see Note L — Commitments and Contingencies) as a current liability in accordance with Accounting Standards Codification “ASC” 815-40-15-3 (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 the requirement that the shares to be issued upon exercise of the warrants be registered shares which cannot be absolutely assured.

     The liability at September 30, 2009 for all outstanding warrants has been estimated using a Black-Scholes valuation model with the fair value per warrant ranging from $0.92 to $0.93. The assumptions used in estimating the fair values at September 30, 2009 included expected life ranging from 4.5 to 4.9 years, expected volatility of 81%, dividend yield of 0%, and risk-free interest rate of 2.5%.

Series B Warrants

     On August 23, 2004, in connection with an issuance of preferred stock to certain investors, the Company issued warrants to purchase 1,566,667 shares of common stock exercisable until August 23, 2009, with an exercise price of $3.50 per share (the “Series B Warrants”). There were 455,556 Series B Warrants outstanding on August 23, 2009 and the book value of these warrants was reclassified to Common Stock on the Company’s financial statements as the warrants expired unexercised.

NOTE I — COMMON STOCK ISSUANCE

     On March 8, 2006, the Company 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 warrants are exercisable for a five-year period at an exercise price of $5.40 per share and may be exercised by cash payment of the exercise price or by means of a cashless exercise. All 1,509,088 warrants remained outstanding as of September 30, 2009. 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 market values of the common stock and warrants with $16,257,000 allocated to the common stock and $1,821,000 allocated to the warrants.

NOTE J — EARNINGS PER COMMON SHARE

     Basic net (loss)/income per common share is based upon weighted average number of common shares outstanding. Diluted net (loss)/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. However, for the three-month period ended September 30, 2009 and the nine-month periods ended September 30, 2009 and 2008, the assumed exercise of any of these securities would have been anti-dilutive and, accordingly, the diluted (loss)/income per share equals the basic (loss)/income per share for that period.

     The number of such shares as of September 30, 2009 and 2008 subject to warrants was 8,701,401 and 1,964,644, respectively. The number of such shares as of September 30, 2009 and 2008 subject to stock options was 3,127,566 and 4,389,985, respectively.

     A reconciliation of the share data from a basic to a fully diluted basis is detailed below (share data in thousands):

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2009				2008				2009				2008
Basic Shares			90,303				89,250				90,209				89,169
Effect of Dilutive Securities:
Warrants			—				117				—				—
Options			—				698				—				—
Fully Diluted Shares			90,303				90,065				90,209				89,169

NOTE K — INDUSTRY SEGMENT INFORMATION

     The Company classifies its operations into four business segments: ophthalmic, hospital drugs & injectables, biologics & vaccines, and 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 biologics & vaccines segment markets adult Tetanus Diphtheria (“Td”) and flu vaccines directly to hospitals and physicians as well as through wholesalers and national distributors. The contract services segment manufactures products for third party pharmaceutical and biotechnology customers based on their specifications. The Company’s basis of accounting in preparing its segment information is consistent with that used in preparing its consolidated financial statements.

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

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2009				2008				2009				2008
REVENUES
Ophthalmic		$	4,803			$	5,121			$	12,867			$	15,362
Hospital Drugs & Injectables			3,220				6,293				11,054				16,226
Biologics & Vaccines			9,421				17,879				27,950				29,698
Contract Services			1,927				2,581				5,840				6,276
Total revenues		$	19,371			$	31,874			$	57,711			$	67,562
GROSS PROFIT
Ophthalmic		$	1,406			$	1,553			$	1,957			$	4,363
Hospital Drugs & Injectables			39				2,384				1,149				4,813
Biologics & Vaccines			1,041				5,290				6,073				7,444
Contract Services			199				679				535				1,860
Total gross profit			2,685				9,906				9,714				18,480
Operating expenses			6,520				7,681				28,860				24,130
Operating (loss) income			(3,835	)			2,225				(19,146	)			(5,650	)
Interest & other (expense)/income			(1,266	)			176				(3,594	)			(309	)
(Loss)/ income before income taxes		$	(5,101	)		$	2,401			$	(22,740	)		$	(5,959	)

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

NOTE L — COMMITMENTS AND CONTINGENCIES

     (i) 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 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.

     (ii) The Company has negotiated a payment deferral of $825,000 for product development milestone fees with one of its development partners. The Company will pay these fees in June of 2010.

     (iii) In July 2008, the Company and MBL amended their Exclusive Distribution Agreement dated as of March 22, 2007 (the “MBL Distribution Agreement”) to: (i) allow the Company to destroy its remaining inventory of Td vaccine, 15 dose/vial, in exchange for receiving an equivalent number of doses of preservative-free Td vaccine, 1 dose/vial (the “Single-dose Product”) at no additional cost other than destruction and documentation expenses; (ii) reduce the purchase price of the Single-dose Product during the first year of the MBL Distribution Agreement by approximately 14.4%; (iii) reduce the Company’s purchase commitment for the second year by approximately 34.7%; and (iv) reduce the Company’s purchase commitment for the third year by approximately 39.5%.

     The Company was subsequently unable to make a payment of approximately $3,375,000 for Td vaccine products which was due to MBL by February 27, 2009 under its MBL Distribution Agreement. While the Company made a partial payment of $1,000,000 to MBL on March 13, 2009, it would have also been unable to make another payment of approximately $3,375,000 due to MBL on March 28, 2009. Accordingly, the company entered into a letter agreement with MBL on March 27, 2009 (“MBL Letter Agreement”), pursuant to which it agreed to pay MBL the $5,750,000 remaining due for these Td vaccine products plus an additional $4,750,000 in consideration of the amendments to the MBL Distribution Agreement payable according to a periodic payment schedule through June 30, 2010 (the “Settlement Payments”). In addition, pursuant to the MBL Letter Agreement, the MBL Distribution Agreement was converted to a non-exclusive agreement, the Company became obligated to provide MBL with a standby letter of credit (the “L/C”) by April 12, 2009 to secure its obligation to pay amounts due to MBL, and the Company was released from its obligation to further purchase Td vaccine products from MBL upon providing MBL with such L/C. In addition, pursuant to the MBL Letter Agreement, MBL agreed not to declare a breach or otherwise act to terminate the MBL Distribution Agreement, if the Company complied with the terms of the MBL

Letter Agreement, the MBL Distribution Agreement (as amended by the MBL Letter Agreement) and any agreements required to be entered into pursuant to the MBL Letter Agreement.

     On April 15, 2009, the Company entered into a Settlement Agreement with MBL (the “MBL Settlement Agreement”) to elaborate the MBL Letter Agreement. The MBL Settlement Agreement provides that the Company will pay MBL the Settlement Payments according to a monthly payment schedule through June 30, 2010. The MBL Settlement Agreement provides that MBL may only draw on the L/C if: (i) the Company fails to make any Settlement Payment when due, (ii) any Settlement Payment made is set aside or otherwise required to be repaid by MBL, or (iii) the Company becomes the debtor in a bankruptcy or other insolvency proceeding begun before October 6, 2010 and no replacement letter of credit has been issued prior to the expiration of the L/C. The Company has made timely payments on all Settlement Payments to date with $1,500,000 remaining as of September 30, 2009. This $1,500,000 is due on June 30, 2010.

     Also on April 15, 2009, the Company entered into an amendment to the MBL Distribution Agreement with MBL (the “MBL Amendment”). The MBL Amendment modified the MBL Distribution Agreement to, among other things, eliminate the Company’s future minimum purchase requirements under the MBL Distribution Agreement.

     On April 15, 2009, the Company 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 the Company’s payment obligations to MBL under the MBL Letter Agreement and the MBL Settlement Agreement. Simultaneous with the delivery of the Reimbursement Agreement, the L/C was issued by Bank of America in favor of MBL. The Reimbursement Agreement provides, among other things, that the Company will reimburse the Kapoor Trust for any draws by MBL under the L/C through the mechanism of causing the amount of the draws to become term indebtedness payable to the Kapoor Trust on the same terms as the revolving debt under the Credit Agreement. All of the Company’s obligations under the Reimbursement Agreement will also be considered secured obligations under the Credit Agreement. Pursuant to the Reimbursement Agreement, the Company also issued a warrant to the Kapoor Trust (the “Reimbursement Warrant”) to purchase 1,501,933 shares of its common stock at an exercise price of $1.11 per share, subject to certain adjustments. The Reimbursement Warrant expires five years from the date of issuance and is exercisable upon payment of the exercise price in cash or by means of a cashless exercise yielding a net share figure. In addition, the Reimbursement Agreement provides that the Company must issue the Kapoor Trust additional warrants, at that same price of $1.11 per share, to purchase 200,258 shares of its common stock per $1,000,000 drawn on the L/C. The fair value of the Reimbursement Warrant, using a Black-Scholes valuation model, is $1,382,000 at September 30, 2009.

     The shares of the Company’s common stock issuable upon exercise of the Modification Warrant and the Reimbursement Warrant, along with those other warrants that may be issued under the Modification Agreement and Reimbursement Agreement and other shares of common stock held by EJ Funds, the Kapoor Trust and their affiliates, are subject to registration rights as set forth in the Modification Agreement. Under the Modification Agreement, the Company agreed to file a registration statement with the SEC within 75 days of the date of the Modification Agreement. The Company also agreed to continue the effectiveness of the registration statement until the earliest of the dates (i) all securities registrable thereunder have been sold, (ii) all such registrable securities may be sold in a single transaction by their holders to the public under Rule 144 under the Securities Act of 1933, and (iii) no shares of the Company’s common stock registered under the registration statement qualify as “registrable securities” thereunder.

     (iv) On January 29, 2009, Arthur S. Przybyl was notified he would no longer be the President and Chief Executive Officer of the Company. Mr. Przybyl’s Executive Employment Agreement dated April 24, 2006, which was filed with the SEC as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 28, 2006, required the Company to pay severance under certain circumstances specified in the Executive Employment Agreement. The Company has advised Mr. Przybyl that it does not believe those circumstances occurred. Mr. Przybyl has demanded an arbitration to resolve these issues. Accordingly, the Company does not yet know whether it will ultimately pay Mr. Przybyl any severance or, if so, how much will be paid. The Company has also asserted claims against Mr. Przybyl.

     (v) The Company manufactures and distributes finished drug products within the jurisdiction of several regulatory authorities — two of which are the FDA and the U.S. Drug Enforcement Agency. Failure to comply with respective regulatory criteria could result in material impact to the Company (e.g. withholding of product approvals, interruption to operations, product recalls and / or seizure). To date, Akorn continues to operate within this jurisdiction, having undergone four (4) inspections by the FDA during 2009 — applicable to all three of Akorn’s sites. The Company has responded to respective observations, with no subsequent comment from the FDA. Akorn will continue to work with the FDA to resolve any potential open questions, if / as they arise. No adverse impact to the Company has occurred to date, from these inspections.

     (vi) The Company is a party in other legal proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, management of the Company at this time does not believe that such proceedings will have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.

NOTE M — CUSTOMER AND SUPPLIER CONCENTRATION

     AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. These three customers accounted for 53% and 51% of the Company’s gross revenues and 43% and 40% of net revenues for the three months ended September 30, 2009 and 2008, respectively. These three customers accounted for 60% and 58% of the Company’s gross revenues and 56% and 45% of net revenues for the nine months ended September 30, 2009 and 2008, respectively. They accounted for approximately 56% and 59% of the gross accounts receivable balance as of September 30, 2009 and 2008, respectively. No other customers accounted for more than 10% of gross sales, net revenues or gross trade receivables for the indicated dates and periods.

     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.

     For the three months ended September 30, 2009, McKesson Medical Surgical (supplier for flu vaccine) accounted for 29% of the Company’s purchases. For the three months ended September 30, 2008, MBL (supplier for Td vaccine) and McKesson Medical Surgical (supplier for flu vaccine) accounted for 52% and 16% of the Company’s purchases, respectively. For the nine months ended September 30, 2009, MBL (supplier for vaccine products) accounted for 42% of the Company’s purchases. For the nine months ended September 30, 2008, MBL and McKesson accounted for 55% and 11% of the Company’s purchases, respectively.

     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 materials. Certain of these ingredients and components are available from only a single source and, in the case of certain of the Company’s Abbreviated New Drug Applications and New Drug Applications (“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.

NOTE N — RECENT ACCOUNTING PRONOUNCEMENTS

     On January 1, 2008, the Company adopted ASC 820 (formerly SFAS No. 157, Fair Value Measurements). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February of 2008, the FASB delayed the effective date of ASC 820 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. The Company adopted the remaining provisions of ASC 820 effective January 1, 2009 and the adoption did not have a material impact on the Company’s results of operations or financial position.

     On January 1, 2009, the Company adopted ASC 810-10 (formerly SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51). ASC 810-10 establishes new standards for the accounting for and reporting of non-controlling interests (formerly minority interests) and for the loss of control of partially owned and consolidated subsidiaries. ASC 810-10 does not change the criteria for consolidating a partially owned entity. ASC 810-10 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810-10 did not have a material impact on the Company’s consolidated financial statements.

     On January 1, 2009, the Company adopted ASC 805 (formerly SFAS 141R, Business Combinations). ASC 805 establishes requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests. ASC 805 also

provides disclosure requirements related to business combinations. ASC 805 is effective for fiscal years beginning after December 15, 2008. ASC 805 will be applied prospectively to business combinations with an acquisition date on or after the effective date.

     On January 1, 2009, the Company adopted ASC 350-30-35 (formerly SFAS No. 142-3, Determination of the Useful Life of Intangible Assets) , which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. The intent of this update is to improve the consistency between the useful life of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of the asset under the new business combination accounting (as currently codified under ASC 850). ASC 350-30-35 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of ASC 350-30-35 did not have a material impact on the Company’s financial statements.

     During the second quarter of 2009, the Company adopted guidance issued by the FASB in April 2009 that requires entities to provide disclosure of the fair value of all financial instruments within the scope of ASC 825, for which it is practicable to estimate that value, in interim reporting periods as well as in annual financial statements. The Company’s cash, accounts receivable, accounts payable and debt obligations approximate fair value at September 30, 2009.

     During the second quarter of 2009, the Company adopted ASC 855 (formerly SFAS No. 165, Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued for interim and annual periods ending after June 15, 2009. The Company has considered the accounting and disclosure of events occurring after the balance sheet date through the date and time the Company’s financial statements were issued on November 9, 2009. The adoption of this standard did not have an impact on the Company’s financial statements.

     During the third quarter of 2009, the Company adopted ASC 105 (formerly SFAS No. 168, “The FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles) which has become the single source of authoritative nongovernmental U.S. GAAP. Rules and interpretations of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As ASC 105 does not change or alter existing GAAP, it did not have any impact on the Company’s financial statements.

NOTE O — UNCONSOLIDATED JOINT VENTURE

     The Joint Venture Company launched its first commercialized product in the third quarter of 2008. The Joint Venture Company purchases product from Strides while the Company assists with the sales and product distribution/fulfillment functions. The Company and Strides each own a 50% interest in the Joint Venture Company.

     Operating results of the Joint Venture Company for the three months ended September 30, 2009 included revenue of $3,771,000, gross profit of $1,325,000 and net income of $967,000. For the nine months ended September 30, 2009, operating results included revenue of $6,534,000, gross profit of $2,285,000 and net income of $1,343,000. Operating results for the three months ended September 30, 2008 included revenue of $1,083,000, gross profit of $976,000 and net income of $895,000. The Company’s 50% share of the Joint Venture Company net income was $484,000 and $672,000 for the three and nine month periods ended September 30, 2009, respectively, and $447,000 for the three and nine months ended September 30, 2008, and is reflected as equity in earnings of unconsolidated joint venture on the Company’s statement of operations and statement of cash flows.

     As of September 30, 2009 and December 31, 2008, the Joint Venture Company owed the Company $311,000 and $210,000, respectively, related to sales and product distribution/fulfillment functions.

NOTE P — SEVERANCE CHARGES

     During the second quarter of 2009, management restructured its operations resulting in the elimination of approximately 25 positions as part of a broad cost reduction emphasis for the Company. Severance charges of $493,000 were recorded for the quarter ended June 30, 2009 and were primarily related to the elimination of operational and administrative positions and changes in the senior executive

team. The charges were recorded in selling, general and administrative expenses on the statement of operations. The remaining severance obligation at September 30, 2009 of $311,000 will be paid during the fourth quarter of 2009 and during 2010.

NOTE Q — SUBSEQUENT EVENTS

In October 2009, the Company offered a stock option exchange program for employees to voluntarily exchange certain previously outstanding stock options for common shares of the Company’s stock for new stock options of the Company’s common shares. The new stock options price will be the greater of $1.34 per share or the closing price of the Company’s common stock on November 19, 2009 which is the date the option exchange program offer is set to expire. Employees may select to exchange all their eligible stock option awards or only certain previous option awards that are eligible for this exchange program. Vesting for the options which are exchanged will follow the same schedule as had originally applied to those options, except that the vesting will restart based on the grant date of the new option. All such exchanged options will expire on the fifth anniversary of the grant date for the new stock options.

Item 2.

AKORN, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS

     Certain statements in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. When used in this document, the words “anticipate,” “believe,” “estimate” and “expect” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statements, including statements regarding the intent, belief or expectations of Akorn or its management are not guarantees of future performance. These statements involve risks and uncertainties and actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to:

	•		our ability to comply with all of the requirements of the U.S. Food and Drug Administration (“FDA”), including current Good Manufacturing Practices regulations;
	•		our ability to avoid defaults under debt covenants;
	•		our ability to obtain regulatory approvals for products manufactured in our new lyophilization facility;
	•		our ability to generate cash from operations sufficient to meet our working capital requirements;
	•		our ability to obtain additional funding or financing to operate and grow our business;
	•		the effects of federal, state and other governmental regulation on our business;
	•		our success in developing, manufacturing, acquiring and marketing new products;
	•		our ability to make timely payments to our Td vaccine supplier;
	•		the success of our strategic partnerships for the development and marketing of new products;
	•		our ability to bring new products to market and the effects of sales of such products on our financial results;
	•		the effects of competition from generic pharmaceuticals and from other pharmaceutical companies;
	•		availability of raw materials needed to produce our products; and
	•		other factors referred to in this Form 10-Q, our Form 10-K and our other SEC filings.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2008

     The following table sets forth, for the periods indicated, revenues by segment, excluding intersegment sales (in thousands):

		THREE MONTHS ENDED SEPTEMBER 30,
		2009				2008
Ophthalmic		$	4,803			$	5,121
Hospital Drugs & Injectables			3,220				6,293
Biologics & Vaccines			9,421				17,879
Contract Services			1,927				2,581
Total revenues		$	19,371			$	31,874

     Consolidated revenues decreased $12,503,000 or 39.2% in the quarter ended September 30, 2009 compared to the same period in 2008 mainly due to decreased sales of Td and flu vaccine and overall lower sales to wholesalers as part of a targeted program to reduce wholesalers’ inventory levels.

     Ophthalmic revenues decreased by $318,000 or 6.2%, primarily due to targeted wholesaler reductions in stocking levels. Hospital drugs and injectables revenues decreased $3,073,000 or 48.8%, reflecting the targeted wholesaler reduction in stocking levels and associated decreased sales volume of anesthesia and antidote products. Vaccine sales for the quarter decreased by $8,458,000 versus the prior year period primarily due to the phase-out of our Td vaccine products along with less availability of flu vaccine. Contract services revenues decreased by $654,000 or 25.3%, mainly due to decreased order volumes on ophthalmic contract products.

     Consolidated gross profit was $2,685,000 or 13.9% of revenue for the third quarter of 2009 as compared to a gross profit of $9,906,000 or 31.1% of revenue in the same period a year ago mainly due to reduced hospital drug and injectable sales to wholesalers, higher purchase costs for our Td vaccine product and a mix shift toward lower margin hospital drugs and injectables and contract manufacturing products. We continue to seek margin enhancement opportunities through our product offerings and efficiencies directed at reducing our product returns expense as well as efficiencies and cost reductions in our operating facilities.

     Selling, general and administrative (“SG&A”) expenses decreased by $1,012,000 or 16.3%, during the quarter ended September 30, 2009 as compared to the same period in 2008. The decrease is mainly due to cost reduction measures we implemented including personnel reductions and reduced travel costs in the first nine months of 2009 and we continue to evaluate cost reduction opportunities.

     Research and development (“R&D”) expense of $1,013,000 decreased by $130,000 or 11.4% in the quarter from the level of $1,143,000 for the same period in 2008 mainly due to the timing of product development milestone expenses.

     Net interest expense for the third quarter of 2009 was $441,000 compared to $295,000 for the same period in 2008. This increase is primarily due to interest on our subordinated note which was issued in the third quarter of 2008. Also included in non-operating expenses for the third quarter of 2009 was $187,000 for amortization of deferred finance costs related to the credit facility and $1,122,000 for the change in the fair value of the warrants liability.

     We reported a net loss of $5,101,000 for the three months ended September 30, 2009, compared to a net profit of $2,401,000 for the same period in 2008 mainly due to the decreased sales volume and gross profit along with higher net interest expense, the change in the warrants liability value and other non-operating expenses partially offset by reduced SG&A and R&D expenses as discussed above.

NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2008

     The following table sets forth, for the periods indicated, revenues by segment, excluding intersegment sales (in thousands):

		NINE MONTHS ENDED SEPTEMBER 30
		2009				2008
Ophthalmic		$	12,867			$	15,362
Hospital Drugs & Injectables			11,054				16,226
Biologics & Vaccines			27,950				29,698
Contract Services			5,840				6,276
Total revenues		$	57,711			$	67,562

     Consolidated revenues decreased $9,851,000 or 14.6% for the nine months ended September 30, 2009 compared to the same period in 2008.

     Ophthalmic revenues decreased $2,495,000 or 16.2%, primarily due to a provision of $708,000 we recorded to recognize a significant return of our Akten^® ophthalmic solution product and also overall less favorable wholesaler returns experience. Akten^® was launched in October 2008 and the significant returns were not previously anticipated as we had expected to capture significant market share based on the product’s attributes. We have continued a trial sampling and price reduction program which we began in the first half of 2009 to stimulate market demand for this NDA product and do not expect additional significant returns of the product. Hospital Drugs & Injectables revenues decreased by $5,172,000 or 31.9% mainly due to targeted wholesaler stocking level reductions and decreased sales of anesthesia products. Biologics & Vaccines sales decreased by $1,748,000 or 5.9% primarily due to lower flu vaccine sales in 2009. The loss of our exclusivity with our Td vaccine supplier, as noted in our first quarter 2009 Form 10-Q, may adversely impact our ability to maintain market share and generate future Td sales. Our contract services revenues decreased by $436,000 or 6.9% mainly due to decreased order volumes on ophthalmic contract products

     Year-to-date consolidated gross profit was $9,714,000 or 16.8% of revenue for 2009 as compared to a gross profit of $18,480,000 or 27.4% of revenue for the same period a year ago mainly due to the variation in sales volume and product mix for each segment discussed above. We continue to seek margin enhancement opportunities through our product offerings as well as through cost reductions at our operating facilities.

     SG&A expenses decreased by $354,000 or 1.9 % for the year to date period ended September 30, 2009 as compared to the same period in 2008. This is mainly due to personnel reductions and targeted spending reductions, partially offset by severance costs in 2009.

     In the first nine months of 2009, we recognized $5,929,000 in expense related to the termination of our supply agreement with MBL which consisted of $4,750,000 in settlement payments, $1,051,000 in costs for an associated letter of credit guarantee for the $10,500,000 in total payments due MBL, and $128,000 in other related costs.

     R&D expense decreased $1,063,000 or 22.4% for the nine months ended September 30, 2009, to $3,681,000 from $4,744,000 for the same period in 2008 mainly due to reduced internal product development activities and reduced product development milestone expenses with our strategic business partners.

     Net interest expense for the nine month period ended September 30, 2009 was $1,095,000 as compared to $579,000 for the same period in 2008. This increase is primarily due to interest on our subordinated note payable which was issued in the third quarter of 2008. Also included in non-operating expenses for the nine month period ended September 30, 2009 was $1,739,000 for amortization and write-offs of deferred financing fees related to the credit facility and $1,432,000 for the change in the fair value of the warrants liability.

     For the nine-month period ended September 30, 2009, the income tax provision was $2,000 as compared to an income tax provision of $3,000 for the same period in 2008. These amounts reflect minimum state income tax assessments as we incurred tax losses in both periods.

     We reported a net loss of $22,742,000 for the nine months ended September 30, 2009, as compared to a net loss of $5,962,000 for the same period in 2008 mainly due to lower gross profit as a result of reduced overall sales, less favorable product mix and higher product returns experience, $5,929,000 in expenses associated with the termination of our supply agreement with MBL and $1,739,000 in amortization and write-offs of deferred finance costs, partially offset by lower R&D expense as discussed above.

FINANCIAL CONDITION AND LIQUIDITY

Overview

     During the nine-month period ended September 30, 2009, we used $5,349,000 in cash from operations, primarily due to the $22,742,000 net loss, a $4,831,000 accounts receivable increase due to the timing of sales and subsequent collections and a $4,337,000

decrease in accounts payable (primarily due to reduced Td vaccine payables), partially offset by a $12,754,000 decrease in inventory as we reduced our stock of Td vaccines. In addition, we had $1,739,000 in deferred financing fee write-offs along with non-cash depreciation, amortization, stock compensation, supply agreement termination expense and change in fair value of the warrants liability with these items totaling $8,276,000. Investing activities used $922,000 in cash mainly due to capital expenditures for plant equipment. Financing activities provided $7,476,000 in cash primarily due to the $7,509,000 in proceeds from our credit facility with EJ Funds and proceeds from stock option exercises of $1,323,000, partially offset by $1,356,000 in loan origination fees (see “Credit Facility” below).

     During the nine-month period ended September 30, 2008, we used $14,295,000 in cash from operations, primarily due to the $5,962,000 net loss, a $11,641,000 change in working capital items mainly due to an increase in accounts receivable related to increased sales and reduced accounts payable related to payments for vaccine inventory, partially offset by a reduction in vaccine inventory and non-cash expenses of $3,322,000 for the period. Investing activities generated a $2,668,000 reduction in cash flow mainly due to capital expenditures for production equipment and our new warehouse/office facilities. Financing activities provided $9,105,000 in cash, primarily due to the $5,727,000 in proceeds from our Credit Facility and $5,000,000 in proceeds from the Subordinated Note issued to The John N. Kapoor Trust Dated September 20, 1989 (the “Kapoor Trust”) in July 2008.

Credit Facility

     On January 7, 2009, we entered into a Credit Agreement (“Credit Agreement”) with General Electric Capital Corporation (“GE Capital”) as agent for several financial institutions (the “Lenders”) to replace our previous credit agreement with Bank of America which expired on January 1, 2009. Pursuant to the Credit Agreement, the Lenders agreed, among other things, to extend loans to us under a revolving credit facility (including a letter of credit subfacility) up to an aggregate principal amount of $25,000,000 (the “Credit Facility”). At our election, borrowings under the Credit Facility bore interest at a rate equal to either: (i) the base rate (defined as the highest of the Wall Street Journal prime rate, the federal funds rate plus 0.5% or LIBOR plus 1.0%), plus a margin equal to (x) 4% for the period commencing on the closing date through April 14, 2009, or (y) a percentage that ranged between 3.75% and 4.25% for the period after April 14, 2009, or (ii) LIBOR (or 2.75%, if LIBOR is less than 2.75%), plus a margin equal to (x) 5% for the period commencing on the closing date through April 14, 2009, or (y) a percentage that ranged between 4.75% and 5.25% for the period after April 14, 2009. Upon the occurrence of any event of default, we were to pay interest equal to an additional 2.0% per year. The Credit Agreement contained affirmative, negative and financial covenants customary for financings of this type. The negative covenants included restrictions on liens, indebtedness, payments of dividends, disposition of assets, fundamental changes, loans and investments, transactions with affiliates and negative pledges. The financial covenants included fixed charge coverage ratio, minimum-EBITDA, minimum liquidity and a maximum level of capital expenditures. In addition, our obligations under the Credit Agreement could have been accelerated upon the occurrence of an event of default under the Credit Agreement, which included customary events of default such as payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, defaults relating to certain governmental enforcement actions, and a change of control default. The Credit Facility would have terminated, and all amounts outstanding thereunder would have been due and payable, on January 7, 2013, or on an earlier date as specified in the Credit Agreement.

     Also on January 7, 2009, in connection with the Credit Agreement, we entered into a Guaranty and Security Agreement (“Guaranty and Security Agreement”) with GE Capital, as agent for the Lenders and each other secured party thereunder. Pursuant to the Guaranty and Security Agreement, we had granted a security interest to GE Capital in the collateral described in the Guaranty and Security Agreement as security for the Credit Facility. Our obligations were secured by substantially all of our assets, excluding our ownership interest in Akorn-Strides, LLC and in certain licenses and other property in which assignments are prohibited by confidential provisions.

     In connection with the Credit Agreement, on January 7, 2009, we also entered into a Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing by us, in favor of GE Capital, relating to the real property owned by us located in Decatur, Illinois. The mortgage granted a security interest in the two parcels of real property to GE Capital, as security for the Credit Facility.

     Also on January 7, 2009, in connection with the Credit Agreement, we entered into a Subordination Agreement with the Kapoor Trust and GE Capital, as agent for the Lenders. Pursuant to the Subordination Agreement, the Kapoor Trust agreed that our debt pursuant to the Subordinated Promissory Note dated as of July 28, 2008, in the principal amount of $5,000,000 (“Subordinated Note”) payable to the Kapoor Trust was subordinated to the Credit Facility, except that so long as there was no event of default outstanding under the Credit Agreement, we could repay the Subordinated Note in full if the repayment occurred by July 28, 2009.

     On February 19, 2009, GE Capital informed us that it was applying a reserve against availability which effectively restricted our borrowings under the Credit Agreement to the balance outstanding as of February 19, 2009, which was $5,523,620. GE Capital advised that it was applying this reserve due to concerns about financial performance, including our prospective compliance with certain covenants in the Credit Agreement for the quarter ended March 31, 2009.

     On March 31, 2009, we consented to an Assignment Agreement (“Assignment”) between GE Capital and EJ Funds LP (“EJ Funds”) which transferred to EJ Funds all of GE Capital’s rights and obligations under the Credit Agreement. Pursuant to the Assignment, EJ Funds became the agent and lender under the Credit Agreement. Accordingly, GE Capital is no longer our lender. Dr. Kapoor is the President of EJ Financial Enterprises, Inc., a healthcare consulting investment company (“EJ Financial”) and EJ Financial is the general partner of EJ Funds.

     In connection with the Assignment, on April 13, 2009, we entered into a Modification, Warrant and Investor Rights Agreement (the “Modification Agreement”) with EJ Funds that, among other things, (i) reduced the revolving loan commitment under the Credit Agreement to $5,650,000, (ii) provided an extended cure period until July 22, 2009 for any event, other than specified types of “material defaults” listed in the Modification Agreement, which could constitute an event of default under the Credit Agreement, unless that period is terminated earlier due to the occurrence of a material default or as otherwise provided in the Modification Agreement, (iii) set the interest rate for all amounts outstanding under the Credit Agreement at an annual rate of 10% with interest payable monthly, (iv) granted a security interest in and lien upon all the collateral under the Credit Agreement to the Kapoor Trust as security for the Subordinated Note, and (v) requires us, within 30 days after the date of the Modification Agreement, to enter into security documents consisting of a security agreement and mortgages (if requested by the Kapoor Trust) in form and substance substantially similar to the corresponding security documents under the Credit Agreement for the Kapoor Trust’s interest in connection with the Subordinated Note. The Modification Agreement also granted EJ Funds the right to require us to nominate two directors to serve on our Board of Directors. The Kapoor Trust is entitled to require us to nominate a third director under our Stock Purchase Agreement dated November 15, 1990 with the Kapoor Trust. In addition, we agreed to pay all accrued legal fees and other expenses of EJ Funds that relate to the Credit Agreement and other loan documents, including legal expenses incurred with respect to the Modification Agreement and the Assignment.

     Pursuant to the Modification Agreement, on April 13, 2009, we granted EJ Funds a warrant (the “Modification Warrant”) to purchase 1,939,639 shares of our common stock at an exercise price of $1.11 per share, subject to certain adjustments. The Modification Warrant expires five years after its date of issuance and is exercisable upon payment of the exercise price in cash or by means of a cashless exercise yielding a net share figure. Under the Modification Agreement, we have the right to convert the Subordinated Note into term indebtedness under the Credit Agreement in exchange for additional warrants, on terms substantially identical to the Modification Warrant, to purchase 343,299 shares of our common stock for each $1,000,000 of converted debt. The exercise price of those warrants would also be $1.11 per share. The fair value of the Modification Warrant, using a Black-Scholes valuation model, is $1,784,000 on September 30, 2009.

     On August 17, 2009, we completed negotiations with EJ Funds for additional capacity on our Credit Facility, increasing the loan commitment from $5,650,000 to $10,000,000. The Credit Facility is secured by our assets and is not subject to debt covenants until April 1, 2010. In connection with this loan commitment increase, we issued EJ Funds 1,650,806 warrants to purchase our common stock at an exercise price of $1.16, the closing price of our stock on August 14, 2009. The fair value of these warrants, using a Black-Scholes valuation model, was $1,238,000 on August 17, 2009, and this amount was capitalized as financing costs and is being amortized over the remaining term of the Credit Facility.

Subordinated Debt

     On July 28, 2008, we borrowed $5,000,000 from the Kapoor Trust in return for issuing the trust the Subordinated Note. The Subordinated Note accrues interest at a rate of 15% per year and was due and payable on July 28, 2009. The proceeds from the Subordinated Note were used in conjunction with the July 2008 amended MBL Distribution Agreement, which resulted in favorable pricing and reduced purchase commitments (see Note L — Commitments and Contingencies).

     On August 17, 2009, we refinanced the $5,000,000 subordinated debt payable to the Kapoor Trust. The principal amount of $5,000,000 has been increased to $5,853,267 to include accrued interest through August 16, 2009 (interest accruing thereafter is payable monthly) and the annual interest rate of 15% remained unchanged. The term of the Subordinated Note has been extended by an

additional five years and is now due and payable on August 17, 2014. As part of this refinancing agreement, we issued the Kapoor Trust an additional 2,099,935 warrants to purchase our common stock at an exercise price of $1.16, the closing price of our stock on August 14, 2009. The fair value of these warrants on August 17, 2009, using a Black-Scholes valuation model, was $1,575,000 and this amount was capitalized as financing costs and is being amortized over the term of the subordinated debt.

Series B Warrants

     On August 23, 2004, in connection with an issuance of preferred stock to certain investors, we issued warrants to purchase 1,566,667 shares of common stock exercisable until August 23, 2009, with an exercise price of $3.50 per share (the “Series B Warrants”). There were 455,556 Series B Warrants outstanding on August 23, 2009 and the book value of these warrants was reclassified to Common Stock on our financial statements as the warrants expired unexercised.

CONTRACTUAL OBLIGATIONS

     In July 2008, we amended our Exclusive Distribution Agreement with the Massachusetts Biologic Laboratories of the University of Massachusetts Medical School (“MBL”) dated as of March 22, 2007 (the “MBL Distribution Agreement”) to: (i) allow us to destroy our remaining inventory of Tetanus Diphtheria (“Td”) vaccine, 15 dose/vial, in exchange for receiving an equivalent number of doses of preservative-free Tetanus Diphtheria vaccine, 1 dose/vial (the “Single-dose Product”) at no additional cost other than destruction and documentation expenses; (ii) reduce the purchase price of the Single-dose Product during the first year of the MBL Distribution Agreement by approximately 14.4%; (iii) reduce our purchase commitment for the second year by approximately 34.7%; and (iv) reduce our purchase commitment for the third year by approximately 39.5%.

     We were subsequently unable to make a payment of approximately $3,375,000 for Td vaccine products which was due to MBL by February 27, 2009 under the MBL Distribution Agreement. While we made a partial payment of $1,000,000 to MBL on March 13, 2009, we were unable to make another payment of approximately $3,375,000 due to MBL on March 28, 2009. Accordingly, we entered into a letter agreement with MBL on March 27, 2009 (“MBL Letter Agreement”), pursuant to which we agreed to pay MBL the $5,750,000 remaining due for these Td vaccine products plus an additional $4,750,000 in consideration of the amendments to the MBL Distribution Agreement payable according to a periodic payment schedule through June 30, 2010 (the “Settlement Payments”). In addition, pursuant to the MBL Letter Agreement, the MBL Distribution Agreement was converted to a non-exclusive agreement, we became obligated to provide MBL with a standby letter of credit (the “L/C”) to secure our obligation to pay amounts due to MBL, and we were released from our obligation to further purchase Td vaccine products from MBL upon providing MBL with such L/C. In addition, pursuant to the MBL Letter Agreement, MBL agreed not to declare a breach or otherwise act to terminate the MBL Distribution Agreement if we complied with the terms of the MBL Letter Agreement, the MBL Distribution Agreement (as amended by the MBL Letter Agreement) and any agreements required to be entered into pursuant to the MBL Letter Agreement.

     On April 15, 2009, we entered into a Settlement Agreement with MBL (the “MBL Settlement Agreement”) to elaborate the MBL Letter Agreement. The MBL Settlement Agreement provides that we will pay MBL the Settlement Payments according to a monthly payment schedule through June 30, 2010. The MBL Settlement Agreement provides that MBL may only draw on the L/C if: (i) we fail to make any Settlement Payment when due, (ii) any Settlement Payment made is set aside or otherwise required to be repaid by MBL, or (iii) we become the debtor in a bankruptcy or other insolvency proceeding begun before October 6, 2010 and no replacement letter of credit has been issued prior to the expiration of the L/C.

     Also on April 15, 2009, we entered into an amendment to the MBL Distribution Agreement with MBL (the “MBL Amendment”). The MBL Amendment modified the MBL Distribution Agreement to, among other things, eliminate our future minimum purchase requirements under the MBL Distribution Agreement. To date we have made timely payments for the Settlement Payments due MBL and the final remaining payment of $1,500,000 is due on June 30, 2010.

     On April 15, 2009, we also 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. Simultaneous with the delivery of the Reimbursement Agreement, the L/C was issued by the Bank of America in favor of MBL. The Reimbursement Agreement provides, among other things, that we will reimburse the Kapoor Trust for any draws by MBL under the L/C through the mechanism of causing the amount of the draws to become term indebtedness payable to the Kapoor Trust on the same terms as the revolving debt under the Credit Agreement. All of our obligations under the Reimbursement Agreement will also be considered secured obligations under the Credit Agreement.

Pursuant to the Reimbursement Agreement, we also issued a warrant to the Kapoor Trust (the “Reimbursement Warrant”) to purchase 1,501,933 shares of our common stock at an exercise price of $1.11 per share, subject to certain adjustments. The Reimbursement Warrant expires five years from the date of issuance and is exercisable upon payment of the exercise price in cash or by means of a cashless exercise yielding a net share figure. In addition, the Reimbursement Agreement provides that we must issue the Kapoor Trust additional warrants, at that same price of $1.11 per share, to purchase 200,258 shares of our common stock per $1,000,000 drawn on the L/C. The estimated fair value of the Reimbursement Warrant, using a Black-Scholes valuation model, is $1,382,000 at September 30, 2009.

     The shares of our common stock issuable upon exercise of the Modification Warrant and the Reimbursement Warrant, along with those other warrants that may be issued under the Modification Agreement and Reimbursement Agreement and other shares of common stock held by EJ Funds, the Kapoor Trust and their affiliates, are subject to registration rights as set forth in the Modification Agreement. Under the Modification Agreement, we agreed to file a registration statement with the SEC within 75 days of the date of the Modification Agreement. We also agreed to continue the effectiveness of the registration statement until the earliest of the dates (i) all securities registrable thereunder have been sold, (ii) all such registrable securities may be sold in a single transaction by their holders to the public under Rule 144 under the Securities Act, and (iii) no shares of our common stock registered under the registration statement qualify as “registrable securities” thereunder.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Item 1. Financial Statements, Note B — Summary of Significant Accounting Policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2008. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes in the application of the critical accounting policies since December 31, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

     On January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820 (formerly SFAS No. 157, Fair Value Measurements). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February of 2008, the FASB delayed the effective date of ASC 820 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. We adopted the remaining provisions of ASC 820 effective January 1, 2009 and the adoption did not have a material impact on our results of operations or financial position.

     On January 1, 2009, we adopted ASC 810-10 (formerly SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51). ASC 810-10 establishes new standards for the accounting for and reporting of non-controlling interests (formerly minority interests) and for the loss of control of partially owned and consolidated subsidiaries. ASC 810-10 does not change the criteria for consolidating a partially owned entity. ASC 810-10 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810-10 did not have a material impact on our consolidated financial statements.

     On January 1, 2009, we adopted ASC 805 (formerly SFAS 141R, Business Combinations). ASC 805 establishes requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests. ASC 805 also provides disclosure requirements related to business combinations. ASC 805 is effective for fiscal years beginning after December 15, 2008. ASC 805 will be applied prospectively to business combinations with an acquisition date on or after the effective date.

     On January 1, 2009, we adopted ASC 350-30-35 (formerly SFAS No. 142-3, Determination of the Useful Life of Intangible Assets) , which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. The intent of this update is to improve the consistency between the useful life

of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of the asset under the new business combination accounting (as currently codified under ASC 850). ASC 350-30-35 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of ASC 350-30-35 did not have a material impact on our financial statements.

     During the second quarter of 2009, we adopted guidance issued by the FASB in April 2009 that requires entities to provide disclosure of the fair value of all financial instruments within the scope of ASC 825, for which it is practicable to estimate that value, in interim reporting periods as well as in annual financial statements. Our cash, accounts receivable, accounts payable and debt obligations approximate fair value at September 30, 2009.

     During the second quarter of 2009, we adopted ASC 855 (formerly SFAS No. 165, Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued for interim and annual periods ending after June 15, 2009. We have considered the accounting and disclosure of events occurring after the balance sheet date through the date and time our financial statements were issued on November 9, 2009. The adoption of this standard did not have an impact on our financial statements.

     During the third quarter of 2009, we adopted ASC 105 (formerly SFAS No. 168, “The FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles) which has become the single source of authoritative nongovernmental U.S. GAAP. Rules and interpretations of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As ASC 105 does not change or alter existing GAAP, it did not have any impact on our financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

     We do not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are not subject to market risk associated with changes in interest rates as our interest rates on the Subordinated Note and the Credit Facility are both fixed interest rates.

     We have no material foreign exchange risk. We have no market risk sensitive instruments entered into for trading purposes.

     Our financial instruments consist mainly of cash, accounts receivable, accounts payable and debt. The carrying amounts of these instruments, except debt, approximate fair value due to their short-term nature.

     The fair value of the debt obligations approximated their recorded values as of September 30, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     An evaluation was performed, under the supervision and with the participation of our management, including the Interim Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including cost limitations, judgments used in decision making, assumptions regarding the likelihood of future events, soundness of internal controls, fraud, the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable, and not absolute, assurance of achieving their control objectives. Based on that evaluation, management, including the Interim CEO and CFO, has concluded that, as of September 30, 2009, our disclosure controls and procedures were

effective in all material respects at the reasonable assurance level to ensure that information required to be disclosed in reports that we file or submit under the Act is recorded, processed, summarized and timely reported in accordance with the rules and forms of the SEC.

Changes in Internal Control Over Financial Reporting

     In the fiscal quarter ended September 30, 2009, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are a party in legal proceedings and potential claims arising in the ordinary course of our business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, at this time we do not believe that such proceedings will have a material adverse impact on our financial condition, results of operations, or cash flows.

     On April 3, 2009, our former President and Chief Executive Officer, Arthur Przybyl, filed a demand for arbitration against the Company under his April 24, 2006 Executive Employment Agreement (the “Employment Agreement”). A copy of the Employment Agreement is Exhibit 10.1 to the Current Report on Form 8-K we filed with the SEC on April 28, 2006. Mr. Przybyl initiated this arbitration with the Chicago, Illinois office of the American Arbitration Association under an arbitration provision in the Employment Agreement.

     In his arbitration demand, Mr. Przybyl seeks severance and related benefits that would have been payable under the Employment Agreement were Mr. Przybyl terminated without cause and had he met additional requirements. Severance would have included 18 months of Mr. Przybyl’s base salary and a cash bonus equal to 1.5 times the average of the last two annual bonuses received by Mr. Przybyl. The salary component would have been $715,500 and, because Mr. Przybyl received no bonus for 2007 or 2008, we believe the bonus component would have been $0. Mr. Przybyl’s arbitration demand states that he seeks more than $1,250,000.

     We originally anticipated that we would pay severance to Mr. Przybyl. However, we later concluded that we had grounds for terminating Mr. Przybyl for “good cause” as that term is defined in the Employment Agreement. Accordingly, we informed Mr. Przybyl of that conclusion, after which Mr. Przybyl initiated the arbitration. In our response to Mr. Przybyl’s claim that we filed in the arbitration, we asserted counterclaims against Mr. Przybyl for (among other things) breach of contract and breach of fiduciary duty. We seek affirmative monetary relief under our counterclaims. The arbitration is in the discovery stage.

ITEM 1A. RISK FACTORS

     There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Form 10-K filed March 30, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     On August 23, 2005, we filed a Registration Statement on Form S-3 (File No. 333-127794) (the “S-3”) with the SEC, which was declared effective on September 7, 2005. Pursuant to Rule 429 under the Securities Act of 1933, the prospectus included in the S-3 is a combined prospectus and relates to the previously filed Registration Statement on Form S-1 (File No. 333-119168) (the “S-1”), as to which the S-3 constitutes Post-Effective Amendment No. 3. Such Post-Effective Amendment became effective concurrently with the effectiveness of the S-3. The S-3 relates to the resale of 64,964,680 shares, no par value per share, of our common stock by the selling stockholders identified in the S-3, which have been issued or reserved for issuance upon the conversion or exercise of shares of our Series A Preferred Stock, shares of Series B Preferred Stock, warrants and convertible notes, including shares estimated to be issuable or that have been issued in satisfaction of accrued and unpaid dividends and interest on shares of preferred stock and convertible notes, respectively. Of the 64,964,680 shares of our common stock registered under the S-3, 60,953,394 of such shares were registered under the S-1. The shares of common stock registered by the S-3 and the S-1 represent the number of shares that have been issued or are issuable upon the conversion or exercise of the Series A Preferred Stock, Series B Preferred Stock, warrants and convertible notes described in the Registration Statement, including shares estimated to be issuable in satisfaction of dividends accrued and unpaid through December 31, 2007 on such securities. All shares of Series A Preferred Stock, Series B Preferred Stock and all convertible notes have been converted to shares of our common stock.

     With respect to the S-1, we estimated the aggregate offering price of the amount registered to be $182,246,053, which was derived from the average of the bid and asked prices of our common stock on September 17, 2004, as reported on the OTC Bulletin Board(R). With respect to the S-3, we estimated the aggregate offering price of the amount registered to be $10,870,585, which was derived from the average of the high and low prices of our common stock as reported on the American Stock Exchange on August 18, 2005. Such amounts were estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(h) under the Securities Act of 1933. As of September 30, 2009, we are aware of the sale of 20,554,359 shares of common stock by selling

stockholders under the S-3 or the S-1. We do not know at what price such shares were sold, or how many shares of common stock will be sold in the future or at what price. We have not and will not receive any of the proceeds from the sale of the shares by the selling stockholders. The selling stockholders will receive all of the proceeds from the sale of the shares and will pay all underwriting discounts and selling commissions, if any, applicable to the sale of the shares. We will, in the ordinary course of business, receive proceeds from the issuance of shares upon exercise of the warrants described in the S-3 or the S-1, which we will use for working capital and other general corporate purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Our 2009 annual meeting of shareholders was held on August 7, 2009. At that meeting, the following proposals were approved:

1. The election of the following eight directors to our Board of Directors:

Nominee		Votes “For”				Votes “Withheld”
John N. Kapoor, Ph.D.			48,868,056				231,478
Jerry N. Ellis			46,735,387				2,364,147
Ronald M. Johnson			46,739,320				2,360,214
Subhash Kapre, Ph.D.			41,451,341				7,648,193
Brian Tambi			48,886,720				212,814
Steven J. Meyer			48,887,111				212,423
Alan Weinstein			48,887,178				212,356
Randall J. Wall			48,887,428				212,106

2. The ratification of the selection by the Audit Committee of the Board of Directors of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009. A total of 49,079,142 votes were cast in favor of this proposal, 18,189 votes were cast against, and there were 2,203 abstentions.

3. The amendment of the Amended and Restated Akorn, Inc. 2003 Stock Option Plan to increase the total number of shares authorized and reserved for issuance by 6,000,000 shares. A total of 35,961,785 votes were cast in favor of this proposal, 13,120,204 votes were cast against, and there were 17,545 abstentions.

4. The amendment of the Amended and Restated Akorn, Inc. Employee Stock Purchase Plan to increase the total number of shares authorized and reserved for issuance by 1,000,000 shares. A total of 48,657,066 votes were cast in favor of this proposal, 426,773 votes were cast against, and there were 15,695 abstentions.

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS

Those exhibits marked with a (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list. Portions of the exhibits marked with a (W) are the subject of a Confidential Treatment Request under 17 C.F.R. §§ 200.80(b)(4), 200.83 and 240.24b-2.

Exhibit
No.		Description
(4.1)		Common Stock Purchase Warrant dated August 17, 2009, in favor of EJ Funds LP. (Incorporated by reference to Exhibit 10.2 of a Form 8-K filed on August 21, 2009.)
(4.2)		Common Stock Purchase Warrant dated August 17, 2009, in favor of John N. Kapoor Trust Dated 9/20/89. (Incorporated by reference to Exhibit 10.4 of a Form 8-K filed on August 21, 2009.)
(10.1)		Amended and Restated Credit Agreement dated August 17, 2009, by and among the Company, Akorn (New Jersey), Inc., a wholly owned subsidiary of the Company, other persons party thereto that are designated as credit parties, EJ Funds LP, and the other financial institution from time to time party thereto. (Incorporated by reference to Exhibit 10.1 of a Form 8-K filed on August 21, 2009.)
(10.2)		Amended and Restated Subordinated Note dated August 17, 2009, made by the Company and Akorn (New Jersey), Inc., in favor of John N. Kapoor Trust Dated 9/20/89. (Incorporated by reference to Exhibit 10.3 of a Form 8-K filed on August 21, 2009.)
(10.3)		Registration Rights Agreement made and entered into as of August 17, 2009 by and among the Company, John N. Kapoor Trust Dated 9/20/89 and EJ Funds LP. (Incorporated by reference to Exhibit 10.5 of a Form 8-K filed on August 21, 2009.)
(10.4)		Amended and Restated Subordination Agreement dated as of August 17, 2009 by and among John N. Kapoor Trust Dated 9/20/89, the Company, Akorn (New Jersey), Inc. and EJ FUNDS LP. (Incorporated by reference to Exhibit 10.6 of a Form 8-K filed on August 21, 2009.)
(31.1)*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
(31.2)*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
(32.1)*		Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350.
(32.2)*		Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 9, 2009