FIRST HORIZON PHARMACEUTICAL CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 000-30123
FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 58-2004779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

660 HEMBREE PARKWAY 30076
SUITE 106 (Zip Code)
ROSWELL, GEORGIA
(Address of Principal Executive
Offices)

Registrant's telephone number, including area code: (770) 442-9707

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.001 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Common shares of the registrant outstanding at March 25, 2002 were
27,760,092. The aggregate market value, as of March 25, 2002, of such common
shares held by non-affiliates of the registrant was approximately $395,889,684
based upon the last sales price reported that date on the Nasdaq Stock Market of
$21.85 per share. (Aggregate market value estimated solely for the purposes of
this report. For purposes of this calculation, all executive officers, directors
and 10% stockholders are classified as affiliate status.)

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of Registrant's Proxy Statement relating to the 2002
Annual Meeting of Stockholders are incorporated into Part III of this Form 10-K.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

First Horizon Pharmaceutical Corporation is a specialty pharmaceutical
company that markets and sells brand name prescription products. We focus on the
treatment of cardiovascular, obstetrical and gynecological, pediatric and
gastroenterological conditions and disorders. Our strategy is to acquire or
license pharmaceutical products that other companies do not actively market and
that we believe have high sales growth potential, are promotion-sensitive and
complement our existing products. In addition, we intend to develop new
patentable formulations, use new delivery methods and seek regulatory approval
for new indications of existing drugs. We may also acquire businesses with
complementary products or development pipelines consistent with our therapeutic
focus.

Large multinational companies dominate the U.S. prescription pharmaceutical
market. These companies often divest products which, as a result of
consolidation or lack of strategic fit, do not meet the threshold level of sales
required for continued marketing and promotion, as these companies continue to
focus on drugs with annual sales in excess of $1 billion. In the last four
years, we have acquired and licensed products from AstraZeneca UK Limited,
Aventis SA, Bayer AG, Elan Corporation, Pfizer Inc., Sanofi-Synthelabo Inc. and
Wyeth. Third parties manufacture all of our products.

Since 1992, we have introduced 17 products. We promote our products through
our nationwide sales and marketing force of approximately 160 professionals,
targeting high-prescribing cardiologists, obstetricians and gynecologists,
pediatricians, gastroenterologists and select primary care physicians. We also
contract with third parties to promote our products in order to target a broader
number of physicians.

We were incorporated in Delaware in July 1992 as the surviving corporation
of a merger between Century Pharmaceutical Corporation and Horizon
Pharmaceutical Corporation. Our principal office is located at 660 Hembree
Parkway, Suite 106, Roswell, Georgia 30076 and our telephone number is (770)
442-9707. Our corporate Internet address is www.firsthorizonpharm.com. We do not
intend the information contained on our website to be a part of this Annual
Report.

FIRST HORIZON STRATEGY

We believe that our ability to market, acquire and develop brand name
prescription products uniquely positions us to continue to grow. The key
elements of our strategy include:

- Increase product sales through targeted promotion. We seek to increase
sales by promoting our products to physicians through our nationwide
sales and marketing force. We also contract with third parties to promote
our products in order to target a broader number of physicians. We
recently entered into co-promotion agreements for our Prenate and
Nitrolingual Pumpspray products in order to expand our targeted promotion
efforts. We also use direct mail and telemarketing to promote our
products. As a result of our promotional efforts, prescriptions of our
Robinul and Robinul Forte, Tanafed and Ponstel products have grown 51.9%,
41.9% and 47.0%, respectively, from 2000 to 2001 according to IMS
Health's National Prescription Audit Plus data.

- Acquire brand name prescription products. We seek to acquire rights to
brand name pharmaceutical products that we believe are promotion
sensitive, complement our areas of therapeutic focus and have the
potential to leverage our sales infrastructure. In connection with our
acquisition of products, we also consider barriers to entry for
competitive products including patent protection, complexity of
manufacturing processes

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and patient and physician loyalty. Over the last four years, we have
acquired or licensed nine products.

- Develop proprietary products and line extensions. We seek to reduce the
costs and risks of development by focusing on drugs that the FDA has
already approved. We plan to develop and launch products, including line
extensions of our current products, using patent-protected delivery
systems or formulations that offer market differentiation and the
potential for market exclusivity. Our current development pipeline
includes a line extension to Robinul to treat excessive salivation and
the development of a product to treat migraine headaches.

- Acquire businesses with products and development pipelines complementary
to ours. We regularly review opportunities to acquire businesses that
sell products or have products under development that complement our
areas of therapeutic focus.

PRODUCTS

Most of our products treat recurring or chronic conditions or disorders
which result in repeat use over an extended period of time and generate
consistent revenue streams. Our key products include:

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* Scheduled for second quarter 2002.

Sular

We recently acquired certain U.S. rights relating to the antihypertensive
prescription medication Sular from AstraZeneca. We also entered into a long-term
manufacturing, supply and distribution agreement with Sular's manufacturer,
Bayer. Sular is a patented, once-a-day treatment for hypertension that competes
in the approximately $16 billion antihypertensives market. Sular had U.S. sales
of $45.9 million in 2001.

Prior to the acquisition of Sular, our cardiovascular product offering was
limited to Nitrolingual Pumpspray, a product for the treatment of acute angina.
We believe that Sular will complement our cardiovascular franchise because the
physicians who prescribe our Nitrolingual Pumpspray comprise a large part of the
target audience for Sular. In addition, many patients who suffer from acute
angina also suffer from hypertension. We believe that Sular offers advantages
over other antihypertensives based upon its proven efficacy and safety, its
demonstrated ability to provide twenty-four hour blood pressure control and its
relative value on a cost per day basis as compared to other branded
antihypertensives.

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Nisoldipine, the active ingredient in Sular, belongs to a group of
medicines called calcium channel blockers. Calcium channel blockers prevent
calcium from entering certain types of muscle cells. Because the muscle cells
need calcium to contract, calcium channel blockers prevent the cells from
contracting and cause them to relax. Nisoldipine selectively relaxes the muscles
of small arteries causing them to dilate but has little or no effect on muscles
or the veins of the heart.

We believe that Sular has not been actively promoted in the U.S. since
1999. Based on management's experience promoting cardiovascular products and the
results of market research we conducted, we believe that it is
promotion-sensitive. We plan to launch Sular in the second quarter of 2002 and
have developed a launch plan that includes:

- Hiring new sales professionals. We are recruiting new sales
professionals and district managers and intend to increase the size of
our sales organization by approximately 50 individuals by the end of this
year to increase our reach to physicians.

- Contracting with an external sales organization. Similar to our
promotional strategy for Nitrolingual Pumpspray and Prenate GT, we intend
to contract with an external sales organization to increase the number of
physicians we reach with direct selling and sampling efforts.

- Training our sales professionals. We have developed and will implement a
training program to prepare our sales professionals to promote Sular to
targeted physicians. We plan to complete the training of sales personnel
by the end of the second quarter of this year. Once we have partnered
with an external sales organization, we will also provide training
support to our alliance sales force.

- Developing marketing plans. With the assistance of advertising agencies,
we are finalizing our key marketing messages for Sular. Once we have
completed the marketing strategy, we will produce promotional materials
and print advertisements to support our direct sales efforts.

Sular was developed and patented by Bayer and was approved by the FDA in
1995. In 1996, Bayer granted to Zeneca Limited, a predecessor entity to
AstraZeneca, the exclusive right to market, distribute and sell products
containing nisoldipine, Sular's active ingredient, in the U.S. As part of this
transaction, Bayer has granted to us an exclusive ten-year license to its
patents and other intellectual property for the sale of Sular in the United
States. Bayer has also agreed to supply us with Sular during the term of this
license. Sular is protected by Bayer's patent covering the composition of its
coat core tablet that expires in June 2008 and its patent covering the Sular
manufacturing process that expires in 2004.

Nitrolingual Pumpspray

In February 2000, we began marketing Nitrolingual Pumpspray for which we
acquired exclusive distribution rights in the United States from Pohl-Boskamp.
Nitrolingual Pumpspray is an oral spray of nitroglycerin used for the acute
relief or prevention of chest pain associated with angina pectoris that results
from heart disease. Pohl-Boskamp holds a patent that was issued in 1993 on the
formulation of Nitrolingual that we license. According to the American Heart
Association, about 6.2 million Americans suffer from angina pectoris.

The primary competitor to Nitrolingual Pumpspray is nitroglycerin, which is
generally prescribed in tablet form. Unlike tablets, which begin to lose their
potency immediately upon opening the bottle, Nitrolingual Pumpspray maintains
its potency for two years. Further, studies have shown that Nitrolingual
Pumpspray provides for more rapid absorption than the tablets. Each metered dose
of Nitrolingual Pumpspray provides for consistent delivery of nitroglycerin.
Also, unlike the tablets, Nitrolingual Pumpspray requires no special storage or
handling to maintain its potency.

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Prenate Advance and Prenate GT

In August 2001, we acquired the Prenate line of products from
Sanofi-Synthelabo, including Prenate GT, which is a line extension to Prenate
Advance that is manufactured using a gel-coating applied with a patent protected
manufacturing technology. Prenate GT was also reformulated to include additional
vitamins. Prescription prenatal vitamins are generally recommended before,
during and after pregnancy so that the mother and the fetus receive adequate
amounts of essential vitamins and minerals. The Prenate line has been a market
leader of prescription prenatal vitamins based upon total prescriptions written.
We believe that the advantages of Prenate GT include easier swallowing and
masked taste and smell.

Ponstel

In April 2000, we acquired exclusive U.S. rights to market, distribute and
sell Ponstel from Pfizer. Ponstel is used for the relief of mild to moderate
pain for patients 14 years of age and older if therapy will be for less than one
week and for primary dysmenorrhea, which is pain associated with menstruation.
One class of frequently prescribed pain relievers is nonsteroidal
anti-inflammatory drugs, or NSAIDs. Ponstel is a well known NSAID for treating
dysmenorrhea and we believe that its advantages are its non-addictive qualities,
low stomach-related side effects and efficacy. Primary dysmenorrhea is one of
the most frequently encountered gynecological complaints and affects as many as
half of postpubescent females.

Furadantin

In December 2001, we acquired U.S. rights to Furadantin from Elan.
Furadantin is indicated for the treatment of urinary tract infections and is
prescribed primarily by pediatricians. We launched Furadantin in January 2002.
We believe that Furadantin will complement our Tanafed products which are also
primarily prescribed by pediatricians. Furadantin is a product well-suited for
children because it is formulated in liquid suspension form and has a
fruit-flavored taste. Furadantin contains nitrofurantoin, which has no known
bacterial resistance and is not known to cause allergic side effects that are
well documented with other antibiotics.

Tanafed and Tanafed DM

Tanafed is a liquid cold and allergy product marketed to pediatricians. We
believe that pediatricians prescribe Tanafed because it is effective and
children prefer its taste. We introduced Tanafed DM, a line extension of Tanafed
containing a cough suppressant, in January 2002.

Robinul and Robinul Forte

In January 1999, we acquired exclusive U.S. rights to Robinul and Robinul
Forte, which is a higher-strength dosage of Robinul, from Wyeth. Both Robinul
and Robinul Forte belong to a class of drugs known as anticholinergics that
reduce the motion of the gastrointestinal tract and decrease stomach secretions.
The FDA has approved both products for use as a therapy in conjunction with
other therapeutics in the treatment of peptic ulcers. Compared to other
anticholinergics, the Robinul product line has an overall better side effect
profile and is longer acting, thereby requiring fewer doses. We are currently
developing a line extension and will seek regulatory approval to use the active
ingredient in Robinul to treat symptoms associated with the excessive production
of saliva. Industry sources estimate that the U.S. market for anticholinergics
was $130 million in 1999.

Other Products

In June 2000, we acquired world-wide rights to market, distribute and sell
Cognex, as well as rights to a new unapproved controlled release version of
Cognex called Cognex CR, from

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Pfizer. Cognex is used for the treatment of mild to moderate dementia associated
with Alzheimer's disease. Alzheimer's disease is a progressive, degenerative
disease that attacks the brain and results in impaired memory, thinking and
behavior. According to the Alzheimer's Association, approximately four million
Americans have Alzheimer's disease. Cognex is one of only four FDA-approved drug
treatments for mild to moderate dementia associated with Alzheimer's disease.

In addition to Tanafed and Tanafed DM, our other products for the treatment
of cough, cold and allergy are Defen-LA tablets, Mescolor tablets and the
Protuss product line, which includes Protuss liquid, Protuss DM tablets and
Protuss-D Liquid.

We sell Zoto-HC ear drops for the treatment of swimmer's ear infections and
Zebutal capsules for the treatment of tension headaches. A study has shown that
approximately nine out of ten people have at least one headache in any given
year. Headaches account for approximately 18 million outpatient visits annually
to hospitals and healthcare clinics.

REGULATORY CLASSIFICATION

The FDA approved Sular, Furadantin, Cognex, Ponstel, Nitrolingual
Pumpspray, Robinul and Robinul Forte based on new drug application submissions.
The FDA also approved an abbreviated new drug application for Zebutal. Prenate
is a prescription vitamin and does not have an approved new drug application.
However, the FDA has not requested a new drug application on the Prenate line of
products because of their long marketing history. We believe our other products
are classified by the FDA as drugs that may be marketed without submitting
safety and efficacy data at this time because of safety data submitted to the
FDA at an earlier time.

PRODUCT DEVELOPMENT

We seek to maximize the value of drugs by developing new patentable
formulations, using new delivery methods and seeking regulatory approval for new
indications. Through the use of these distinct formulations and patent-protected
delivery systems, we plan to create a marketing advantage over competing drugs.
Some of these development projects include line extensions which allow us to
extend the life cycles of our products. We expect the strength of extensive
literature-based clinical data on the active ingredients in our products under
development, current acceptance and usage of the active ingredients in these
products by healthcare professionals and the safety profile of the active
ingredients in approved products will reduce development costs and risks
associated with FDA approval.

We generally seek to contract third parties to formulate, develop and
manufacture materials needed for clinical trials and to perform scale-up work.
We select third-party contractors that we believe have the capability to
commercially manufacture the products. By selecting qualified third parties
capable of both developing formulations and providing full-scale manufacturing
services, we believe we will be able to shorten development and scale-up times
necessary for production. The key advantage to this approach is that the
third-party contractor will have the equipment, operational parameters and
validated testing procedures already in place for the commercial manufacture of
our products. Our management team has experience in selecting and managing
activities of third-party contract companies.

Migraine Product (FHPC 01)

We are developing a proprietary formulation of a product named FHPC 01 for
the treatment of migraine headaches, which contains an active ingredient that is
currently approved by the FDA for other indications. We have entered into a
development agreement with Penwest Pharmaceuticals Co. to develop the product
using Penwest's patented TIMERx controlled-release technology. Penwest has also
granted us the right to reference their drug master file as

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necessary for us to submit a new drug application for this product. A drug
master file is a submission to the FDA, often in support of a new drug
application, that companies may use to provide confidential, detailed
information to the FDA about facilities, processes or articles used in the
manufacturing, processing, packaging and storing of one or more human drugs
without disclosure to third parties. We have developed a once a day formulation
for this product and we filed an investigational new drug application for this
product on February 17, 2000 which has been accepted by the FDA. We have engaged
Parexel International to conduct clinical trials for this product. We have
completed a Phase I clinical trial for this product. The National Institute of
Health estimates that 28 million Americans suffer from migraine headaches. Of
these, approximately half suffer from migraines that are moderately to severely
disabling. We encounter risks in connection with our proposed development of our
FHPC 01 product which are described under "Risk Factors" in our registration
statement on Form S-1 filed on March 5, 2002 (Commission File No. 333-83698), as
amended (the "Registration Statement").

Excessive Salivation Product (FHPC 02)

We are developing a product named FHPC 02 for the treatment of the symptoms
associated with the excessive production of saliva primarily in children. This
product will be a line extension of our Robinul products. We have entered into
an agreement with Mikart to develop a new dosage form and to manufacture the
product. On December 29, 2000, we filed an investigational new drug application
for this product which has been accepted by the FDA. Excessive salivation, also
known as sialorrhea, occurs primarily in patients suffering from cerebral palsy
and other neurodevelopmental diseases.

SALES AND MARKETING

To maximize the effectiveness of our selling efforts, our sales force
targets select specialty physicians and high-prescribing primary care
physicians. Our sales force seeks to develop close relationships with these
physicians and respond to their needs. During 2001, we expanded our sales and
marketing force from approximately 150 to approximately 160 professionals
nationwide. We are realigning our sales force into three specialty groups to
optimize productivity. The first specialty group, which is currently in place,
markets Sular, Nitrolingual Pumpspray, Prenate GT and Furadantin to physicians
at teaching hospitals. The second specialty group will market Sular,
Nitrolingual Pumpspray and our Robinul products to primary care physicians and
cardiologists. The third specialty group will market our Prenate GT, Ponstel,
Tanafed, Furadantin and Robinul products to obstetricians and gynecologists,
pediatricians and gastroenterologists. We plan to have our sales force
realignment completed during the second quarter of 2002. In September 2001, we
entered into a co-promotion agreement with Otsuka to co-promote our Nitrolingual
Pumpspray product and a separate co-promotion agreement with PDI to co-promote
Prenate GT.

We sell our products to pharmaceutical wholesalers (who in turn distribute
to pharmacies), chain drug stores, other retail merchandisers and, on a limited
basis, directly to pharmacies. For the year ended December 31, 2001, sales to
our top four pharmaceutical wholesalers accounted for over 81.9% of all of our
sales. The following wholesalers each accounted for 10.0% or more of all of our
sales: McKesson Corporation (21.5%), Cardinal Health, Inc. (21.2%),
AmerisourceBergen (20.3%) and Bindley Western Industries, a division of Cardinal
(18.9%).

We have a group of sales professionals that focuses exclusively on building
relationships with managed-care organizations that can be leveraged across
markets. We continue to strengthen this group to gain access to formularies and
develop long-term working relationships with managed care organizations.

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For the years ended December 31, 1999, 2000 and 2001, Nitrolingual
Pumpspray accounted for 0.7%, 24.5% and 19.3%, respectively, of our total sales.
For the years ended 1999, 2000 and 2001, Robinul and Robinul Forte accounted for
26.1%, 20.0% and 18.1%, respectively, of our total sales. In 1999, 2000 and
2001, the Tanafed line accounted for 24.2%, 22.3% and 28.5%, respectively, of
our total sales.

Although our business is generally non-seasonal, sales of certain products,
such as cough and cold products, increase slightly between October and March due
to the cold and flu season. We expect the impact of seasonality to decrease as
we acquire or obtain licenses for products that treat chronic conditions.
However, we anticipate that the seasonality may continue to affect sales for the
foreseeable future.

THIRD-PARTY AGREEMENTS

Sular

In March 2002, we acquired exclusive U.S. rights to distribute and sell
Sular from AstraZeneca and Bayer. The purchase price under our asset purchase
agreement with AstraZeneca was $155.0 million plus the assumption of certain
liabilities, subject to post-closing adjustments. Under the asset purchase
agreement, we acquired the regulatory approval to sell Sular in the United
States, current inventory, certain intellectual property, marketing materials
for the promotion, advertising and marketing of Sular in the United States,
study materials relating to clinical studies of Sular, and certain of
AstraZeneca's contracts relating to the marketing, sale and distribution of
Sular. We must pay AstraZeneca up to an additional $20.0 million upon
achievement of certain sales milestones before the third anniversary date of the
closing of the transaction.

We also purchased from Bayer the U.S. trademark for Sular for $20.0
million. We entered into a ten year agreement with Bayer, which appoints us as
the exclusive party to sell and distribute Sular in the United States, provides
us with the rights to sell Sular under certain patents and other technical
information owned by Bayer, and provides for the manufacture and supply of Sular
to us. We must pay Bayer an additional $10.0 million within 30 days of the
closing under the asset purchase agreement with AstraZeneca. We will pay Bayer
for the manufacture and supply of Sular on a unit basis. The unit price to us
for Sular may adjust after 2003 based upon changes in the net revenue per unit
that we recognize in the sale of Sular. We must also pay Bayer an additional
$10.0 million upon the achievement of a certain sales milestone for Sular if a
sales threshold is achieved during the ten year term of the agreement. Under
this agreement, we must purchase minimum quantities of Sular from Bayer each
year and we must obtain the consent of Bayer prior to selling another product
containing the active ingredient in Sular.

Subject to obtaining the consent of Bayer prior to conducting clinical
trials for new cardiovascular indications for Sular and in the event that we
receive a new drug application approval for these new uses, we may deduct a
percentage of the costs incurred to obtain such approval, up to a certain
amount, from our payments to Bayer under the agreement for five years following
such approval. Bayer will have access to any data that we obtain pursuant to
such trials and we will grant Bayer a license to use such data outside of the
United States at no cost.

Nitrolingual Pumpspray

In July 1999, we acquired exclusive U.S. rights to distribute, market and
sell Nitrolingual Pumpspray from Pohl-Boskamp beginning on February 1, 2000 for
five years plus an additional five-year renewal period subject to establishing
mutually acceptable minimum sales requirements. Under the agreement,
Pohl-Boskamp supplies us Nitrolingual Pumpspray at prices that decrease as
volume purchased in each year increases. We must purchase designated

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minimum quantities in each year of the agreement or pay a fee to keep the
agreement in effect. We must also pay a royalty on net sales of the product.
Also, Pohl-Boskamp can terminate our distribution agreement for Nitrolingual
Pumpspray if we do not sell specified minimum quantities of the product each
year, if a company with a product competitive with Nitrolingual Pumpspray
acquires direct or indirect influence or control over us, or if a significant
change in our stockholders occurs so that Kapoor-Pharma Investments and our
employees, management, directors, and any of their respective affiliates, do not
in the aggregate directly or indirectly beneficially own at least 20.0% of our
shares. Our agreement with Pohl-Boskamp prohibits us from selling other products
which are indicated for the relief of angina pectoris.

In September 2001, we entered into a co-promotion agreement with Otsuka to
co-promote Nitrolingual Pumpspray through its sales representatives and to
promote the product on our behalf in exchange for commission and bonus payments
based upon net sales made by Otsuka sales representatives. The term of this
agreement is through December 31, 2004, subject to annual renewals.

Prenate Advance and Prenate GT

In August 2001, we purchased the Prenate line of prescription prenatal
vitamins from Sanofi-Synthelabo. We acquired all of Sanofi-Synthelabo's
intellectual property, regulatory permits and licenses and contract rights
related to Prenate. The purchase price for the acquired assets was $52.5 million
in cash plus the assumption of certain liabilities and payment for product
inventory, subject to post-closing adjustments.

We also assumed Sanofi-Synthelabo's Prenate-related contracts, including a
contract with Patheon, Inc., to manufacture Prenate Advance tablets and the core
tablets for Prenate GT, and a contract with Banner Pharmacaps to manufacture
Prenate GT using its patented manufacturing process to create gelatin-enrobed
tablets. Banner Pharmacaps has agreed not to use this manufacturing process to
make any other prenatal vitamins. The agreement with Patheon is for a term of
five years, beginning October 1, 1999. The agreement with Banner Pharmacaps is
for a term of five years, beginning May 3, 2001. Under the terms of the supply
agreement with Banner Pharmacaps, the Company will pay Banner Pharmacaps a
royalty on net sales above a certain amount of net sales.

In September 2001, we entered into a co-promotion agreement with PDI under
which it will promote and distribute samples of Prenate GT to specified
physicians for specified fees. The initial term of this agreement is through
October 14, 2002.

Ponstel

In April 2000, we acquired exclusive rights to market, distribute and sell
Ponstel in the United States from Pfizer. The total purchase price was $13.0
million. In April 2000, we also entered into a supply agreement with Pfizer
under which Pfizer was to supply us with designated quantities of Ponstel
through the expiration of the supply agreement, which occurred on March 31,
2001. Pfizer has continued to supply Ponstel to us under the same terms. We pay
Pfizer an agreed upon price for the supply of Ponstel.

In December 2000, we signed an agreement with West-ward Pharmaceuticals to
manufacture Ponstel after West-ward obtains FDA approval to manufacture the
product. We anticipate that this will occur by the fourth quarter of 2002. This
agreement expires in April 2005. We must purchase all of our requirements for
Ponstel from West-ward and are subject to minimum purchase requirements. We must
pay West-ward a price for Ponstel based on a multiple of West-ward's direct cost
of goods sold in the manufacture and supply of the product. In addition, we must
pay West-ward milestone payments, as long as no generics have been introduced,
upon certain anniversary dates of FDA approval of the manufacture of Ponstel

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by West-ward. West-ward is currently in the process of manufacturing the
required pilot batches in order to obtain such approval.

Furadantin

In December 2001, we acquired U.S. rights to Furadantin from Elan. The
purchase price for the acquired assets was $15.8 million in cash, subject to
post-closing adjustments, the assumption of certain liabilities and payment for
product inventory. Under the agreement, we acquired the assets relating to
Furadantin, including the new drug application, trademark and related inventory.

In December 2001, we also entered into a supply agreement with Elan to
manufacture and supply Furadantin to us through May 3, 2003. Under the supply
agreement, we paid an up-front fee of $200,000.

Tanafed and Tanafed DM

In January 1996, we obtained exclusive distribution rights to Tanafed in
North America through December 31, 2003 plus an additional seven years at our
option from Unisource Inc. The agreement requires us to purchase all of our
requirements for Tanafed from Unisource, including at least certain minimum
quantities of Tanafed in each year of the agreement.

In December 1998, we entered into an exclusive distribution agreement with
Unisource granting us exclusive rights to sell Tanafed DM in North America and
for Unisource to supply Tanafed DM to us through December 2005, subject to an
automatic seven year renewal. The agreement requires us to purchase all of our
Tanafed DM requirements from Unisource and subjects us to minimum purchase
requirements. We must pay Unisource for the manufacture and supply of Tanafed DM
based upon fixed unit costs.

We entered into a patent license agreement with Jame Fine Chemicals, Inc.,
a supplier of a raw material for Tanafed, effective January 1, 2000. This
agreement grants us a semi-exclusive license to use, sell and distribute
finished products containing an active ingredient used in Tanafed. The licensed
patent covers the manufacturing process of an active ingredient used in Tanafed.
The license continues through the life of the licensed patent, which expires in
2016. We paid an up-front license fee and agreed to pay certain royalties based
on net sales of Tanafed at rates which we believe are within industry customary
ranges. Another party also has a license for one of the active ingredients in
Tanafed.

Robinul and Robinul Forte

In January 1999, we acquired exclusive rights in the United States to
Robinul and Robinul Forte tablets from Wyeth. We must pay royalties on net sales
under our license agreement with Wyeth. We entered into agreements with Mikart,
dated April 23, 1999 and January 21, 2001, for Mikart to become qualified under
applicable regulations to manufacture and supply our requirements for Robinul.
Mikart became qualified by the FDA to manufacture Robinul on December 3, 2001
and began supplying the Robinul products to us in December 2001. Under these
agreements, Mikart will manufacture the products for five years from the time
Mikart became a qualified manufacturer plus renewal terms of one year until
either party elects not to renew. The agreement with Mikart requires that we
purchase certain designated minimum quantities.

In January 2002, we entered into a license agreement with Wyeth-Ayerst
Canada Inc. and Whitehall-Robins Inc. under which we acquired rights to
manufacture, have manufactured for us, market and sell Robinul and Robinul Forte
in Canada. When we begin to sell Robinul in Canada, we will pay Wyeth-Ayerst
Canada a royalty on net sales of Robinul in Canada.

9

Other Products

In June 2000, we acquired world-wide rights to market, distribute and sell
Cognex as well as rights to a new unapproved version of Cognex called Cognex CR
from Pfizer. We paid $3.5 million in cash for Cognex. We must pay Pfizer up to
$1.5 million in additional purchase price if we obtain FDA approval to market
Cognex CR in the United States. At this time, we have no intention of seeking
FDA approval to market Cognex CR. In the event that we voluntarily stop selling
Cognex for 60 days or more, other than for reasons outside our control, the FTC
may order that Cognex revert back to Pfizer and be divested by the FTC to
another purchaser.

Under the purchase agreement for the Cognex transaction, we are required to
pay royalties upon achieving certain net sales levels of Cognex. We do not
expect to pay significant royalties in the near future.

The purchase agreement for Cognex provides for a supply agreement under
which an affiliate of Pfizer will manufacture and supply to us either Cognex or
the active ingredient in Cognex for two years after the Cognex transaction
closed in June 2000, subject to a one year renewal. We paid an agreed upon price
for the supply of Cognex and the active ingredient. The supply agreement
contains designated quantities of Cognex and its active ingredient that Pfizer's
affiliate will supply to us and that we must purchase. We plan to secure a
replacement manufacturer for Cognex and are currently in negotiations with a
potential manufacturer.

Generally, our other products are manufactured under manufacturing and
supply agreements which require that we purchase all of our requirements for
these products from the manufacturers which are a party to these agreements,
including specified minimum purchase quantities of the product for each year.
Except for our Defen-LA, Protuss-D and Zoto-HC products, these agreements
generally state that the product supplier will provide products only to us.

Migraine Product (FHPC 01)

In October 1998, we entered into an agreement with Inpharmakon Corporation
in which we acquired rights to the proprietary information for the migraine
product FHPC 01 for which we completed Phase I clinical studies and plan to
submit a new drug application. The agreement expires on October 31, 2008, but we
may renew it indefinitely after expiration. In May 2000, we entered into an
amendment to this agreement in which Inpharmakon Corporation released us from
all previous claims that Inpharmakon Corporation may have had under the
agreement, and deleted the required time within which we must commence clinical
trials and file for regulatory approval of the product. Under the amended
agreement, we must develop a workable once-a-day formulation for the drug,
conduct clinical trials and file for and exert reasonable efforts to obtain
regulatory approval for the drug. If we do not obtain regulatory approval of the
drug within three years after filing for such approval and thereafter commence
and continue to aggressively market and sell the product, Inpharmakon may
terminate the agreement. In the event that Inpharmakon terminates the agreement
for failure to achieve these milestones, Inpharmakon may purchase rights to
develop the drug at our costs to date. We must also pay up to an aggregate of
$950,000 in non-refundable fees to Inpharmakon at various developmental
milestones through and including regulatory approval of the product, and, in the
event of commercial sales of the product, we must pay royalties at rates which
we believe are within industry customary ranges. If we elect to sell the
business opportunity to a third party, we must share the proceeds of the sale
with Inpharmakon.

In March 1999, we acquired rights from Penwest Pharmaceuticals Co. to use
Penwest's TIMERx controlled-release technology to develop FHPC 01. Under the
Penwest agreement, we have the right to manufacture, use and sell the developed
product in North America and Mexico for a period extending 15 years from the
date a new drug application is issued for the product, as well as a license
under certain Penwest patents. We must pay Penwest up to an aggregate

10

of approximately $2.6 million of non-refundable fees upon achieving specified
development milestones through the first anniversary of the first commercial
sale of the product following regulatory approval and royalties upon any sales
of the migraine product at rates which we believe are within industry customary
ranges. Penwest may terminate the agreement in the event we fail to timely
achieve designated performance milestones within prescribed time periods
including the completion of clinical trials by April 2002, applying for FDA
approval of the product within six months after completing clinical trials and
commercially launching the product within two months after obtaining FDA
approval. Penwest may also terminate the agreement if we fail to either sell
specified minimum quantities of the product each year after approval of the
product or pay the applicable royalty to Penwest as if we had sold such minimum
quantity. While we will not complete clinical trials of our migraine product by
April 2002, we are in negotiations with Penwest to extend or eliminate the
milestone date in connection with our continuing negotiations to enter into new
arrangements for the development of the migraine product. In the event that we
are unable to successfully conclude such new arrangements, we may lose our
rights to this product opportunity. We can provide no assurance that we will be
able to successfully conclude such new arrangements and maintain our rights to
this product opportunity.

Excessive Salivation Product (FHPC 02)

In January 2001, we entered into a manufacturing and supply agreement with
Mikart granting Mikart exclusive rights to manufacture and package our product
under development for the treatment of excessive salivation upon approval of the
product by the FDA and upon approval by the FDA of the manufacture of the
product by Mikart. The term of this agreement expires five years after FDA
approval of the new drug application or supplemental new drug application for
the product, subject to automatic one-year renewals.

MANUFACTURERS AND SINGLE SOURCE SUPPLIERS

We use third-party manufacturers for the production of our products for
development and commercial purposes. Given the general under-utilization of
resources, the availability of excess capacity for manufacturing in the
marketplace and the lower cost of outsourcing, we intend to continue to
outsource our manufacturing for the near term.

Our manufacturers manufacture our products pursuant to our product
specifications. Our supply agreement with Pfizer for Ponstel expired March 31,
2001. Pfizer has agreed to supply a quantity of Ponstel which we believe is
sufficient for our requirements until the third-party with whom we have an
agreement becomes qualified to manufacture Ponstel. We believe this will occur
by the fourth quarter of 2002. Under some of our agreements, the manufacturers
or other third parties own rights to the products that we have under our
marketing licenses. We have not entered into agreements for alternative
manufacturing sources for any of our products. Our supplier of Sular has patents
on the manufacturing process and composition of its coat core tablet. The
suppliers of Nitrolingual Pumpspray and the raw materials for our Tanafed
products hold patents relating to their respective products. Banner Pharmacaps
holds the patent to the gel-coating technology it uses to manufacture the
Prenate GT tablets. These patents may provide us with a competitive advantage
because the patents create a barrier to entry to other companies that might
otherwise seek to develop similar products.

TRADEMARKS

Because of the large number of products on the market which compete with
our products, we believe that our product brand names are an important factor in
establishing product recognition. We have applied for a U.S. trademark
registration for the mark First Horizon Pharmaceutical, which is currently under
appeal. We also have trademark applications pending for the marks Tanafed DM,
Prenate (and Design), and Prenate GT. Our products are sold under

11

a variety of trademarks registered in the United States, including Mescolor,
Protuss, Zoto-HC (and Design), Tanafed, Defen, Zebutal and Furadantin. We own
the U.S. rights to the Cognex trademark and its international counterparts, and
the trademarks for Sular, Prenate Advance, Prenate Ultra, MicroIron, MicroIron
II, Prenate 90 and Ponstel. Further, we have been licensed rights to use the
trademarks Nitrolingual and Robinul from Pohl-Boskamp and Wyeth, respectively.
We have rights to the TIMERx trademark pursuant to our rights to market the
product we have under development with Penwest. Our trademark registrations
could be challenged by others which could result in the loss of use of one or
more of our trademarks. Maintenance of our trademarks requires that we enforce
our rights by preventing infringement by third parties, and we may not have the
resources to stop others from infringing our trademarks.

PATENTS

We consider the protection afforded by patents important to our business.
We intend to seek patent protection in the United States and selected foreign
countries where deemed appropriate for products we develop. There can be no
assurances that any patents will result from our patent applications, that any
patents that may issue will protect our intellectual property or that any issued
patents will not be challenged by third parties. In addition, if we do not avoid
infringement of the intellectual property rights of others, we may have to seek
a license to sell our products, defend an infringement action or challenge the
validity of the intellectual property in court, all of which could be expensive
and time consuming.

Sular

Pursuant to our distributorship agreement with Bayer, we are afforded
patent protection arising from Bayer's patent covering the Sular manufacturing
process and Bayer's patent covering the composition of Sular's coat core tablet.
These patents expire in 2004 and 2008, respectively.

Nitrolingual Pumpspray

By virtue of our distribution agreement with Pohl-Boskamp for Nitrolingual
Pumpspray, we are afforded patent protection arising from Pohl-Boskamp's 1993
U.S. patent relating to the product. This patent expires in 2010.

Tanafed and Tanafed DM

We entered into a licensing agreement with the raw material supplier for
our Tanafed products effective January 1, 2000. This agreement grants us a
license to market and distribute Tanafed for which the manufacturer has a patent
covering the manufacturing process of one of their active ingredients. This
patent expires in 2016. In 2001, we filed U.S. patent applications relating to
the compositions comprising an active ingredient in Tanafed DM.

Cognex

We own certain patent rights relating to the use of an active ingredient in
Cognex to treat conditions associated with Alzheimer's disease. The U.S. patents
expire from 2006 through 2013.

Migraine Product (FHPC 01)

Pursuant to our development agreement with Penwest for a once-a-day
migraine product, we are the licensee of certain Penwest patents for the purpose
of manufacturing and marketing the product under development. These patents
expire from 2008 through 2016.

12

Active Ingredient in Robinul and Robinul Forte

In 1999, we filed a U.S. patent application directed to the use of
glycopyrrolate for the treatment of certain new indications. Glycopyrrolate is
the active ingredient in Robinul and Robinul Forte. We will not pursue patent
applications outside of the United States for this use.

COMPETITION

The market for drugs is highly competitive with many established
manufacturers, suppliers and distributors actively engaged in all phases of the
business. We believe that competition in the sale of our products is based
primarily on brand awareness, price, availability, product efficacy and service.
Our brand name pharmaceutical products may be subject to competition from
alternate therapies during the period of patent protection and thereafter from
generic or other competitive products. Some of our products compete with generic
and other competitive products in the marketplace.

We also compete with other pharmaceutical companies for new products and
product line acquisitions. These competitors include Forest Laboratories, Inc.,
Watson Pharmaceuticals, Inc., King Pharmaceuticals, Inc., Shire Pharmaceuticals
Group plc, Biovail Corporation and other companies that acquire branded product
lines from other pharmaceutical companies.

GOVERNMENT REGULATION

According to the Federal Food, Drug, and Cosmetic Act ("FDC Act"), all new
drugs are subject to premarket approval by the FDA. Applicable FDA law will
treat our development of new products and new uses for approved products or the
development of any of our line extensions as "new drugs," which requires the
submission of a new drug application ("NDA") or a supplemental NDA ("sNDA") (or
an abbreviated NDA ("ANDA") if applicable), and approval by the FDA.

The steps required for approval of an NDA or sNDA may include:

- extensive pre-clinical toxicology and pharmacology studies,

- submission to the FDA of an investigational new drug application ("IND"),
which must become effective before human clinical trials can be
commenced,

- a series of preliminary clinical studies to demonstrate safety (Phase I)
and optimal dosing and pharmacologic effects (Phase II),

- adequate and well-controlled human clinical trials (Phase III) to
establish the safety and effectiveness of the product,

- submission of an NDA or an sNDA to the FDA (typically six to twelve month
internal FDA review cycle),

- presentation of NDA data to an FDA Advisory Panel for its recommendation
and

- FDA approval of the NDA or sNDA prior to any commercial sale or shipment
of the product.

Pre-clinical studies generally include laboratory evaluation of product
chemistry and formulation, as well as toxicological and pharmacological animal
studies, to assess quality and safety and provide a basis for design of the
human clinical trials. An applicant submits the results of the pre-clinical
studies with chemistry, manufacturing and control information and pharmacology
and toxicology data in support of the proposed clinical study design to the FDA
as a part of an IND and for review by the FDA prior to the commencement of human
clinical trials. Unless the FDA says otherwise, the IND will become effective 30
days following its receipt by the FDA; however, the FDA may place an IND on
"clinical hold" until the sponsor

13

generates and supplies the FDA with additional data, which prohibits the sponsor
of the IND from commencing with clinical studies.

Clinical trials involve the administration of the investigational new drug
to humans under the clinical study protocols that had been submitted to the FDA
in the IND. The conduct of the clinical trials is subject to extensive
regulation including compliance with good clinical practices, obtaining informed
patient consent, sponsor monitoring and auditing of the clinical, laboratory and
product manufacturing sites and review and approval of each study by an
Institutional Review Board. Clinical trials are typically conducted in three
sequential Phases, although Phases may overlap. In Phase I, the investigational
new drug usually is administered to 20-50 healthy human subjects and is tested
for safety. Phase II usually involves studies in a limited patient population
(50-200 patients) to:

- determine the initial effectiveness of the investigational new drug for
specific indications,

- determine dosage tolerance and optimal dosage and

- identify possible adverse effects and safety risks.

When an investigational new drug is found to be effective to that point and
to have an acceptable safety profile in Phase II evaluation, Phase III trials
are undertaken to further evaluate clinical effectiveness and to further test
for safety within an expanded patient population of usually 200 or more
patients. The FDA reviews both the clinical plans and the results of the trials
and may require the study to be discontinued at any time if there are
significant safety issues or lack of efficacy. In some cases, the FDA can
request Phase IV clinical studies to be conducted as a condition of approval of
the NDA, to be performed after the NDA approval with a timeframe. These studies
can be designed to obtain additional safety and efficacy data, detect new uses
for or abuses of a drug, or determine effectiveness for labeled indications
under conditions of widespread usage. These studies can involve significant
additional expenses, and failure to perform these Phase IV studies within the
FDA-stated timeframe can result in the FDA withdrawing the NDA approval.

Once the FDA has approved an NDA, the holder of the NDA may request changes
to the product or manufacturing through a supplement to the original NDA, termed
an sNDA. The format, content and procedures applicable to NDA supplements are
generally the same as those for NDAs. However, the only information required in
a supplement is that needed to support the requested change. If the NDA or sNDA
is based on new clinical investigations that are essential to the approval of
the application, other than bioavailability studies, it may qualify for a three-
year period of marketing exclusivity, distinct from any applicable patent
protection that may exist. In such a case, the FDA may accept for filing, but
will not approve a generic product for three years from the date of that
application's approval. The FDA may also require user fees in excess of $300,000
for prescription drug NDAs or sNDAs. Supplements proposing to include a new
indication for use in pediatric populations are not subject to user fees.

Another form of an NDA is the so-called "505(b)(2)" NDA, which applicants
submit pursuant to Section 505(b)(2) of the FDC Act. This type of NDA permits
the cross-referencing of safety and effectiveness studies that the applicant has
not conducted or been granted a right of reference by the sponsor of the animal
or human studies, submitted in a prior NDA or in the literature which utilized
the same drug. In addition, the FDA recommends a 505(b)(2) NDA for a
modification, such as a new dosage form or drug delivery form, of a previously
approved drug (but not that held by the 505(b)(2) applicant), which requires
more than merely bioequivalence data. This 505(b)(2) NDA is similar to a full
NDA, except that, under conditions prescribed by the FDA, it may be supported in
whole or in part by one or more animal and human study investigations in the
originator NDA or those published in scientific literature in lieu of the
applicant's clinical trials. We intend to submit this type of NDA

14

application to market potential product line extensions or new uses of
already-approved products. Payment of user fees may also be required by the FDA.

In addition, if we submit a 505(b)(2) NDA or ANDA, the FDA will require us
to certify as to any patent which covers the drug for which we seek approval. If
there is a patent in existence, a certain type of certification commonly
referred to as a "paragraph 4 certification," is made and proper notice to the
patent holder of our intent to market the drugs is given, and the patent holder
makes an infringement claim within a specified time period, then the FDA will
not approve our marketing application for 30 months or until the patent
litigation is resolved, whichever occurs sooner. In addition, distinct from
patent considerations, approval of a generic type of ANDA could be delayed
because of the existence of five or three years of marketing non-patent
exclusivity afforded by the FDA for the innovator drug or 180 days of non-patent
exclusivity afforded to the first applicant to submit an ANDA with a paragraph 4
certification; however, in certain proscribed cases, this non-patent exclusivity
may not prevent the submission and approval of competitor applications. A patent
holder can, however, sue for infringement under traditional patent law.

The least burdensome application for new drug approval is the ANDA, which
may apply to a new drug that is shown to be bioequivalent to a drug previously
approved by the FDA for safety and effectiveness and listed as the drug to which
bioequivalence must be shown. An applicant may submit an ANDA for products that
are the same as an approved originator drug regarding active ingredient(s),
route of administration, dosage form, strength and conditions of use recommended
on the labeling. The ANDA requires only bioequivalence data and other technical
and manufacturing information, but typically no safety and effectiveness
studies.

Even after obtaining regulatory approval, such approval may require
post-marketing (Phase IV) testing and surveillance to monitor the safety of the
product. In addition, the product approval may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. At present, companies cannot export pharmaceutical products that
cannot be lawfully sold in the United States unless certain statutorily
prescribed conditions are met.

FDA regulations require that we report adverse events suffered by patients,
submit new marketing and promotional materials, submit changes we plan to make
to the product manufacturing or labeling and comply with recordkeeping
requirements and requirements relating to the distribution of drug samples to
physicians. In the event that we do not comply with the FDA requirements, the
manufacture, sales and distribution of our products may be suspended, and we may
be prevented from obtaining FDA approval of new products. We received a FD-483
at the conclusion of a recent FDA inspection that listed observations relating
to record keeping and reporting. We submitted a response, and the FDA has
replied that the corrective actions appear to address the issues, but will
verify the corrections at the next scheduled inspection.

Our third-party manufacturers must adhere to FDA regulations relating to
current good manufacturing practice ("cGMP") regulations, which include
requirements relating to organization of personnel, buildings and facilities,
equipment, control of components and drug product containers and closures,
production and process controls, packaging and labeling controls, holding and
distribution, laboratory controls, records and reports, and returned and
salvaged products. Ongoing compliance with cGMP procedures, labeling and other
regulatory requirements are monitored through periodic inspections and market
surveillance by state and federal agencies, including the FDA. It is also our
obligation to periodically monitor the FDA compliance of our third-party
manufacturers. Failure by our third-party manufacturers to comply with these
rules could result in sanctions being imposed, including fines, injunctions,
civil penalties, suspension or withdrawal of FDA approvals, seizures or recalls
of products, operating restrictions and criminal prosecutions. In addition, we
rely upon our third-party manufacturers to

15

provide many of the documents that we use to comply with our FDA reporting
requirements for Prenate, Ponstel, Robinul, Robinul Forte and Nitrolingual
Pumpspray.

In addition, we are subject to fees under the Prescription Drug User Fee
Act for new drug applications for new drug products and sNDAs for new uses,
except that we may qualify for a waiver of the fee for our first new drug
application. We will be responsible for paying these fees for NDAs, sNDAs and
subsequent submissions, unless we receive approval from the FDA for a waiver,
reduction or refund. We are also subject to regulation under other federal and
state laws, including the Occupational Safety and Health Act and other
environmental laws and regulations, national restrictions on technology transfer
and import, export and customs regulations. In addition, some of our products
that contain controlled substances, such as Protuss and Protuss-D, are subject
to Drug Enforcement Administration requirements relating to storage,
distribution, importation and sampling procedures. We have registered with the
Drug Enforcement Administration under the Controlled Substances Act which
establishes, among other things, registration, security and recordkeeping
requirements. We must also comply with federal and state anti-kickback and other
healthcare fraud and abuse laws.

In addition, whether or not we obtain FDA approval, we must obtain approval
of a pharmaceutical product by comparable governmental regulatory authorities in
foreign countries prior to the commencement of clinical trials and subsequent
marketing of such product in these countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval.

ORPHAN DRUG DESIGNATION

We may request orphan drug status for some of our products under
development. Orphan drug designation may be granted to those products developed
to treat diseases or conditions that affect fewer than 200,000 persons in the
United States or that affect more than 200,000 persons in the United States and
for which there is no reasonable expectation that the cost of developing and
making a drug in the United States for such disease or condition will be
recovered from sales in the United States of such drug. Under the law, the
developer of an orphan drug may be entitled to seven years of market exclusivity
following the approval of the product by the FDA, exemption from user fee
payments to the FDA and a tax credit for the amount of money spent on human
clinical trials. However, we must be the first to receive FDA marketing approval
to receive market exclusivity under the orphan drug statute should there be a
competitor with a similar molecular entity pursuing the same intended clinical
use. Although we may get market exclusivity under the Orphan Drug Act, the FDA
will allow the sale of a molecularly equivalent drug which is clinically
superior to or a molecular entity different from another approved orphan drug,
although for the same indication, during the seven-year exclusive marketing
period. It is also possible that a competitor might try to undermine any
exclusivity provided by promoting a product for an off-label use that is the
otherwise protected product. We cannot be sure that any of our products under
development would ultimately receive orphan drug designation, or that the
benefits currently provided by this designation, if we were to receive it, will
not subsequently be amended or eliminated. Orphan drug designation does not
convey any advantage in, or shorten the duration of, the regulatory review and
approval process.

REIMBURSEMENT

Our ability to market our products successfully will depend in part on the
extent to which reimbursement for the costs of the products will be available
from government health administration authorities, private health insurers and
managed care organizations in the United States and in any foreign markets where
we may sell our products. Third-party payors can affect the pricing or relative
attractiveness of our products by regulating the reimbursement they provide on
our products and competing products. Insurance carriers may not reimburse

16

healthcare providers for use of our products used for new indications. Domestic
and foreign government and third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products.

BACKLOG

As of December 31, 2001, we had no material backlog.

INSURANCE

We maintain a product liability insurance policy. We do not maintain
separate business interruption insurance, however our property and casualty
insurance policy provides for payment for lost inventory and lost sales in the
event of loss from damage to our property.

EMPLOYEES

We had 195 full-time employees as of December 31, 2001, including 156 sales
and marketing employees in the field and 39 in management, finance and
administration. We also maintain active independent contractor relationships
with various individuals with whom we have consulting agreements. We believe our
employee relations are good. None of our employees is subject to a collective
bargaining agreement.

ITEM 2. PROPERTIES

We lease a 24,300 square-foot facility in Roswell, Georgia. Our facility
includes space for offices and a warehouse. This lease expires on August 31,
2003. We recently entered into a lease for a 101,120 square foot office and
warehouse facility in Alpharetta, Georgia and plan to relocate to this facility
in April 2002. This lease expires eight years and one month after we begin
occupying the premises.

ITEM 3. LEGAL PROCEEDINGS

On November 7, 2001, Ethex Corporation and Ther-Rx, both Missouri
corporations, filed a complaint against us in the Circuit Court of St. Louis
County, Missouri. The complaint alleges that we made false and misleading
statements about our Prenate products and about Ethex and Ther-Rx's products in
the course of our advertising and promotion of the products in violation of the
Lanham Act and under Missouri state law. The complaint seeks unspecified
monetary damages and an injunction against further violations, certain
corrective actions and a declaratory judgment. We plan to vigorously defend this
suit. From time to time, we may become involved in routine litigation in the
ordinary course of our business. Other than the claim discussed above, we are
not a party to any material legal proceedings.

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

No matters were submitted to a vote of our stockholders during the fourth
quarter of 2001.

17

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock began trading on the Nasdaq National Market on May 31,
2000. Our trading symbol is "FHRX." The following table lists, for the periods
indicated, the high and low sale prices per share for our common stock as
reported on the Nasdaq National Market.

On September 24, 2001, we completed a three-for-two stock split. The stock
split was effected in the form of a stock dividend paid on September 24, 2001 to
stockholders of record on September 10, 2001. The high and low sale prices per
share of common stock have been retroactively adjusted to reflect the stock
split.

On March 25, 2002, the last reported sale price for our common stock on the
Nasdaq National Market was $21.85 per share. As of March 21, 2002, there were
approximately 166 holders of record of our common stock.

DIVIDEND POLICY

We have not declared or paid any cash dividends since our inception. We
currently intend to retain our future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Our current credit facility prohibits the payment of any
dividends or other distributions on any shares of our stock.

18

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to and
should be read in conjunction with our financial statements and the related
notes and other financial information included elsewhere in this Annual Report
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected financial data has been derived from our financial
statements which have been audited by Arthur Andersen LLP, independent public
accountants. These results may not be indicative of future results.

- ------------

(1) We acquired the rights to Prenate and Furadantin in August 2001 and December
2001, respectively. The results of these acquisitions are included in our
operating results subsequent to the respective dates of these product
acquisitions. In addition, we acquired Sular in March 2002.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and related financial data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report.

OVERVIEW

We are a specialty pharmaceutical company that markets and sells brand name
prescription products. We focus on the treatment of cardiovascular, obstetrical
and gynecological, pediatric and gastroenterological conditions and disorders.
Our strategy is to acquire or license pharmaceutical products that other
companies do not actively market and that we believe have high sales growth
potential, are promotion-sensitive and complement our existing products, in
addition, we intend to develop new patentable formulations, use new delivery
methods and seek regulatory approval for new indications of existing drugs. We
may also acquire businesses with complementary products or development pipelines
consistent with our therapeutic focus.

Since 1999, we have acquired or licensed products from AstraZeneca,
Aventis, Bayer, Elan, Pfizer, Sanofi-Synthelabo and Wyeth. These acquisitions
have included the following: Sular, a hypertension product acquired in 2002,
Furadantin, a pediatric urinary tract infection product acquired in 2001, the
Prenate line of prenatal vitamins acquired in 2001, Ponstel, a product for the
treatment of pain and painful menstruation acquired in 2000, Nitrolingual
Pumpspray, a product for the treatment of acute angina acquired in 1999, and the
Robinul line of products, an adjunctive therapy for the treatment of peptic
ulcers, acquired in 1999.

IMPACT OF RECENT ACQUISITIONS

The following discussion compares our results of operations for the years
ended December 31, 2001 and December 31, 2000 as reported in our consolidated
financial statements included elsewhere in this Annual Report. Our results of
operations for 2001 do not include Sular and include Prenate and Furadantin only
from August 20, 2001 and December 21, 2001, the respective dates on which we
acquired those product lines. On March 5, 2002, we filed the Registration
Statement to register 7,475,000 shares of common stock. Included in the
Registration Statement is pro forma financial information which contains
adjustments to our actual results of operations for 2001 to include the actual
operating results of such product lines in those portions of 2001 during which
we did not own such product lines, as well as certain other adjustments
attributable to such acquisitions. As set forth in the following discussion, we
believe that our results of operations for 2001 and the pro forma financial
information is not indicative of our future operating results due to our
expectations concerning the following:

- increased revenues as a result of completed and pending acquisitions and
our promotional efforts,

- decreased overall margins as a result of lower margins on Sular,

- increased selling, general and administrative expense related to
promotional efforts for our new products,

- increased depreciation and amortization expense due to completed and
pending acquisitions,

- increased interest expense due to the financing of the Sular acquisition
with debt and

- reduced interest income as a result of investing a portion of our cash
and cash equivalents in product acquisitions.

20

PENDING PUBLIC OFFERING

If completed, estimated net proceeds from the offering described in the
Registration Statement would approximate $133 million based on the sale of
6,500,000 shares of common stock at the public offering price of $21.75 per
share. In general, we intend to use the proceeds from this offering to repay
debt incurred to purchase Sular. Further details of the risks involved with this
offering, the risks in the event we are unable to complete this offering, the
risks that this offering does not generate sufficient proceeds to repay
outstanding debt, and the expected use of proceeds can be found in the
Registration Statement.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000

Net revenues increased $32.6 million, or 89.1%, over the year ended
December 31, 2000, to $69.3 million for the year ended December 31, 2001. The
increase in sales for the year ended December 31, 2001 was primarily due to
increased unit sales of our key products Tanafed, Robinul, Nitrolingual
Pumpspray and Ponstel. According to IMS Health's National Prescription Audit
Plus data, total prescriptions of Tanafed, Robinul and Robinul Forte and Ponstel
increased 41.9%, 51.9% and 47.0%, respectively. While we do not report
independent market data on prescriptions of Nitrolingual Pumpspray because we
believe such data does not capture prescriptions from some of the non-retail
channels, unit sales of Nitrolingual Pumpspray also increased substantially.

Our operating results for the year ended December 31, 2001 include net
sales of Prenate Advance and Prenate GT since August 2001. The year ended
December 31, 2001 does not include any net sales of Furadantin or Sular. Prior
to our acquisitions of the Prenate line, Furadantin and Sular, the Prenate line
had U.S. net sales of $11.0 million for the period of January 1, 2001 through
August 20, 2001, Furadantin had U.S. net sales of $4.4 million in calendar year
2001 and Sular had U.S. net sales of $45.9 million in calendar year 2001. We
began to sell Nitrolingual Pumpspray in February, 2000 and Ponstel in April,
2000.

Cost of revenues increased $4.9 million, or 90.5%, to $10.4 million for the
year ended December 31, 2001 compared to $5.4 million for the year ended
December 31, 2001. Gross margin for the years ended December 31, 2001 and
December 31, 2000 was 85.1% and 85.2%, respectively. Gross margin for the year
ended 2001 does not include the impact of Furadantin and Sular. Gross margins
are expected to decrease as Sular has previously had a lower gross margin than
our other products. Sular had a pro forma gross margin of 74.8% in 2001.

Selling, general and administrative expense increased $14.5 million, or
59.8%, to $38.7 for the year ended December 31, 2001. As a percentage of net
revenues, selling, general and administrative expenses were 55.8% in 2001 and
66.1% in 2000, representing our ability to leverage our selling, general and
administrative expense over a larger sales base. Selling related expense
increased in 2001 due to higher commission, royalty and product sampling expense
as a result of increased sales and higher advertising, promotion, consulting and
market research reporting costs associated with the launch of Prenate GT in
September 2001. Selling expense also increased in 2001 due to additional
commissions under our co-promotion agreements with PDI and Otsuka for Prenate GT
and Nitrolingual Pumpspray, respectively.

Selling expense will increase significantly as a result of the acquisitions
of Sular and, to a lesser extent, Furadantin. We will incur significant
training, sampling, advertising and promotion

21

costs during the launch of these products, especially with respect to Sular
during our second quarter of 2002. We also expect to incur increased expense in
2002 as a result of our planned expansion of our sales force by up to 50 persons
during 2002 and our plans to enter into a co-promotional arrangement with a
third party regarding Sular.

General and administrative expense increased for the year ended December
31, 2001 due to additions to our management team and support personnel, and
higher insurance costs due to increased insurance coverage. Also included in the
2001 expense were one-time charges of approximately $250,000 for severance to a
departing officer as well as approximately $300,000 of lease abandonment costs
incurred in connection with our move to a new facility. We recently signed a
lease for a 101,000 square foot building that we plan to occupy beginning April
1, 2002 which increases the size of our facility by approximately 75,000 square
feet. General and administrative expense will increase as a result of the
acquisition of Sular due to increases in insurance expense and additional
personnel we expect to hire during 2002.

Depreciation and amortization expense increased $1.6 million, or 149.7%, to
$2.7 million for the year ended December 31, 2001. This increase resulted from
higher amortization expense related to the acquisition of Furadantin on December
21, 2001, the Prenate line on August 20, 2001, Ponstel on April 14, 2000, Cognex
on June 22, 2000 and increased depreciation expense for furniture, computer
equipment and leasehold improvements at the Company's corporate headquarters.
Amortization expense for the year ended December 31, 2001 does not include a
full year of expense for the Prenate line and Furadantin. It also does not
include amortization for Sular. Amortization expense will increase significantly
in 2002 and beyond due to the amortization of Sular. During early 2002,
depreciation expense will increase due to the accelerated write down of
leasehold improvements located in our current facility that we plan to vacate
during the second quarter of 2002.

Research and development expense increased $35,000, to $1.8 million for the
year ended December 31, 2001 compared to $1.8 million for the year ended
December 31, 2000. We continue to incur research and development cost associated
with the development of the migraine product and the Robinul line extension.
Research and development expense for 2001 does not include expenses related to
the Prenate line, Furadantin and Sular. We estimate that our research and
development expense through 2003 will be approximately $6.1 million due to
continued development work on our proposed migraine product and Robinul line
extension, planned reformulations of Prenate GT and other development
initiatives.

Interest expense was $4,000 for the year ended December 31, 2001 compared
to $324,000 for the year ended December 31, 2000. At December 31, 2001, we did
not have any debt outstanding. In March 2002 as part of the Sular acquisition,
we incurred $127.0 million of term debt accruing interest at the Eurodollar rate
plus 3.75% and $10.0 million of revolving debt accruing interest at the
Eurodollar rate plus 3.25%. While these amounts remain outstanding under this
credit facility, we expect our monthly expense under this credit facility to be
approximately $640,000. In addition to such interest expense, we have incurred
various fees and may incur additional fees in connection with this credit
facility which will be recorded as interest expense during the period in which
borrowings under this credit facility are expected to remain outstanding. These
borrowings are expected to be repaid during the second quarter of 2002. These
fees will range between $2.6 million and $5.1 million depending on the timing of
the completion of our pending public offering and the retirement of the term
loan as more fully described below under "Liquidity and Capital Resources". We
expect to use the proceeds from our pending public offering to retire the term
loan and reduce the borrowings under the revolver. If we are unsuccessful in
concluding our pending public offering or another equity offering to raise funds
sufficient to retire the term loan prior to its maturity date (which occurs in
September 2002) and reduce the borrowings under our revolver to not more than
$5.0 million, we will be required to locate other sources of financing to retire
such indebtedness and would expect to incur significant additional fees for such
purposes.

22

Interest income was $1.9 million for the year ended December 31, 2001
compared to $348,000 for the year ended December 31, 2000. The increase was the
result of interest earned on the proceeds of our follow-on offering that we
completed in May 2001. We expect our interest income for 2002 to be lower due to
our uses of cash for acquisitions completed during 2001 and expected to occur in
2002, and our expected use of most of the proceeds from our pending public
offering to retire or reduce the amount of borrowings under our credit facility.

Income taxes were provided for at a rate of 39.0% in 2001 compared to 39.8%
in 2000. The decrease is primarily due to state income tax structuring
initiatives.

YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999

Net revenues increased $18.0 million or 96.8%, over the year ended December
31, 1999, to $36.7 million for the year ended December 31, 2000. Sales of
continuing products increased $6.3 million or 34.4% to $24.4 million for the
year ended December 31, 2000. Sales of a discontinued product were $324,000 for
the year ended December 31, 1999. The increase in sales of continuing products
was primarily due to higher unit sales of Robinul, Robinul Forte and Tanafed.
Sales of Nitrolingual Pumpspray, Ponstel and Cognex, were $12.2 million for the
year ended December 31, 2000. We began to sell Nitrolingual Pumpspray on
February 1, 2000 (under a license agreement entered into in 1999), Ponstel on
April 14, 2000 and Cognex on June 22, 2000.

Cost of revenues increased $2.3 million or 73.1%, to $5.4 million for the
year ended December 31, 2000 compared to $3.1 million for the year ended
December 31, 1999. Gross margin for the year ended December 31, 2000 was 85.2%
compared to 83.1% for the year ended December 31, 1999. This increase resulted
primarily from increased sales of Robinul and Robinul Forte, which have higher
margins than our other products, as well as sales of the newly acquired Cognex
and Ponstel products, which also have higher margins.

Selling, general and administrative expense increased $11.7 million, or
93.0%, to $24.2 million for the year ended December 31, 2000. Selling expense
increased due to expansion of our sales force, higher commission expense due to
increased sales, increased marketing and promotional expense due to promotional
campaigns for new products, increased sampling of our products, increased
training expense for new and existing sales representatives and other market
research activities. Royalty expense increased due to increased sales of
Robinul, Robinul Forte and Zebutal and royalties on sales of Nitrolingual
Pumpspray and Tanafed. There was no comparable royalty expense on Tanafed sales
in 1999.

General and administrative expense increased due to additions to our
management team and support personnel in our corporate office, higher insurance
costs due to increased insurance coverage, higher professional fees related to
our public reporting requirements, and higher consulting costs.

Depreciation and amortization expense increased $667,000 or 157.3% to $1.1
million for the year ended December 31, 2000. This increase resulted from higher
amortization expense related to the acquisition of Robinul and Robinul Forte in
January 1999, Ponstel on April 14, 2000 and Cognex on June 22, 2000, and
increased depreciation expense for furniture, computer equipment and leasehold
improvements at our corporate headquarters.

Research and development expense increased $924,000, or 107.4% to $1.8
million for the year ended December 31, 2000. This increase resulted from
continued development of FHPC 01, our migraine product under development, and
the Robinul line extension. In addition, on May 3, 2000, we amended the payment
terms under our Collaboration Agreement with Inpharmakon Corporation relating to
the development of FHPC 01. Under the amended terms, we paid a $200,000 fee to
Inpharmakon upon completion of our initial public offering.

23

Interest expense decreased $33,000, or 9.2%, to $324,000 for the year ended
December 31, 2000.

Interest income was $348,000 for the year ended December 31, 2000 compared
to $12,000 for the year ended December 31, 1999. The increase was the result of
interest earned on the remaining proceeds from our initial public offering which
was completed in May 2000.

Income taxes were provided for in the amount of $1.7 million at a rate of
39.8% in 2000 compared to $548,000 at a rate of 41.6% in 1999. The decreased
rate is primarily due to state income tax structuring initiatives.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity requirements arise from debt service, working capital
requirements and funding of acquisitions. We have met these cash requirements
through cash from operations, proceeds from our line of credit, borrowings for
product acquisitions and the issuance of common stock.

Our cash and cash equivalents were $220,000, $14.2 million and $53.5
million at December 31, 1999, 2000 and 2001, respectively. Net cash provided by
operating activities for the years ended December 31, 1999, 2000 and 2001 was
$1.0 million, $3.3 million and $24.0 million, respectively. The sources of cash
primarily resulted from net income plus non-cash expense and increased accounts
payable and accrued expense, partially offset by increases in accounts
receivable and inventories. In 2001, our tax liability was reduced by $8.9
million due to the exercise of non-qualified stock options by employees. Our
purchase of inventory impacts our liquidity. During 2002, we expect to invest
cash in the purchase of inventory for our recently acquired product lines and
expect we will also experience growth in our accounts receivable as we begin to
sell these products which are new to us. We believe that our cash on hand, cash
we expect to generate from our operations and availability under our revolving
credit facility will be sufficient to fund these working capital requirements.
While some of our supply agreements contain minimum purchase requirements, these
minimum purchase requirements are not material to us as in each case our
requirements for inventory substantially exceed such minimum purchase
requirements. We expect to use significant cash for operating activities in the
future in connection with our development activities. We have estimated that our
research and development expenses through 2003 will be approximately $6.1
million due to continued development work on our proposed migraine product and
Robinul line extension, planned reformulations of Prenate GT and other
development initiatives.

Net cash used in investing activities for the years ended December 31,
1999, 2000 and 2001 was $4.2 million, $17.1 million and $69.4 million,
respectively. In 1999 we purchased the rights to market Robinul and Robinul
Forte for $4.0 million in cash with an additional $1.8 million financed by the
seller, which we paid off in January 2001. In April 2000, we purchased the
rights to market Ponstel for $13.0 million. In June 2000, we purchased the
rights to market Cognex for $3.5 million in cash. In August 2001, we purchased
the Prenate line from Sanofi-Synthelabo for $51.9 million in cash. In December
2001, we purchased Furadantin and completed a supply agreement from Elan for
$16.0 million in cash. In addition, we purchased $186,000, $547,000, and
$191,000 of property and equipment in the years ended December 31, 1999, 2000
and 2001, respectively.

Net cash provided by financing activities for the years ended December 31,
1999, 2000 and 2001 was $3.0 million, $27.8 million and $84.6 million,
respectively. During 1999, we borrowed $4.0 million and incurred indebtedness of
$1.8 million for the purchase of intangible assets. In 1999, we also made
payments of $1.2 million on long-term debt and had a net increase of $197,000 on
our revolving line of credit. The primary source of cash in 2000 was from our
initial public offering and the exercise of stock options that provided net
proceeds of $31.3 million offset by payment on the revolving loan agreement of
$800,000 and a net repayment of debt of $2.7 million. For 2001, the source for
cash was the Company's follow-on

24

offering and the exercise of stock options by employees that together provided
net proceeds of $84.8 million offset by a payment of long-term debt of $221,000.

In January 1999, we borrowed $2.4 million under a term loan with LaSalle
Bank. The term loan bore an interest rate at our choice of either the bank's
prime rate or LIBOR plus 2%. On April 14, 2000, the credit facility was further
amended to include bridge financing of up to $13.0 million to finance product
acquisitions. On April 14, 2000, we borrowed $9.5 million under this bridge loan
for the purchase of Ponstel. Borrowings under the bridge loan bore interest at
our choice of the bank's prime rate or LIBOR plus 1.5%. On June 5, 2000, the
outstanding balance under this term loan and bridge loan were paid with proceeds
from our initial public offering. On April 14, 2000, we issued a promissory note
to Pfizer evidencing $3.5 million of the purchase price of Ponstel. This
promissory note was interest free. We paid this promissory note in full with
proceeds from the initial public offering.

On March 5, 2002, we entered into a credit agreement for a senior secured
credit facility arranged by Deutsche Banc Alex. Brown Inc. for $152.0 million
consisting of a $127.0 million term loan and a $25.0 million revolving loan to
fund the purchase of Sular and our working capital requirements. Borrowings
under the term loan bear interest at our option at the base rate in effect from
time to time plus an applicable margin or the Eurodollar rate, plus an
applicable margin. The actual interest rate on the term loan approximates 5.66%
based on current Eurodollar rates. The term loan matures in September 2002. We
are required to apply our net proceeds from any equity or debt financing, sale
of assets and certain other events to repayment of the term loan. Borrowings
under the revolving loan bear interest at our option at the base rate in effect
from time to time plus an applicable margin or the Eurodollar rate, plus an
applicable margin. The actual interest rate on the revolving loan approximates
5.16% based on current Eurodollar rates. The revolving loan matures in March
2005, provided that, in the event the term loan is not repaid in full from the
proceeds of one or more stock offerings or other junior financing, on or prior
to the term loan maturity date, then the revolving loan will mature on the same
date as the term loan. We intend to retire the term loan and reduce borrowings
under the revolving loan with the proceeds from our pending public offering. We
are required to reduce our borrowings under the revolving loan facility to not
more than $5.0 million concurrently with our retirement of the term loan.
However, we may thereafter draw the funds under the revolving facility in
accordance with its terms.

In addition to the interest described above, our interest expense while the
credit facility is outstanding will include the amortization, over the expected
life of the facility, of approximately $2.5 million of financing fees, $1.2
million of which was paid in connection with our entering into the definitive
agreement to acquire Sular and $1.3 million which we paid at the time of our
acquisition of Sular. In addition, if we are unable to retire the term loan
facility prior to certain dates specified in the loan commitment, we will be
required to pay additional fees ranging from approximately $800,000 if such term
loan has not been retired by May 1, 2002 to an aggregate of approximately $2.5
million if such term loan facility has not been retired by August 6, 2002. Other
fees payable by us under such credit facility include an annual administrative
fee of $100,000, a commitment fee of 0.75% per annum of the total facility from
January 28, 2002 until March 6, 2002 and a fee of 0.75% (0.50% after retirement
of the term loan) of the unused portion of the revolving loan facility.

This credit facility contains various restrictive covenants, including
covenants relative to maintaining financial ratios and earnings, limitations on
acquisitions, dispositions and capital expenditures, limitations on incurring
additional indebtedness and a prohibition on payment of dividends and other
payments on our common stock. In addition, we are required to raise net proceeds
of at least $30.0 million from an equity financing by June 2002 and apply such
net proceeds to repayment of the term loan.

25

We intend to use the net proceeds from our pending public offering to
retire the term loan and reduce the outstanding balance under our revolving loan
to not more than $5.0 million. Assuming we do not use our existing cash to repay
any of these borrowings, we estimate that this will require net proceeds of not
less than $132.0 million to retire the $127.0 million of indebtedness
outstanding under the term loan and repay $5.0 million of the $10.0 million
indebtedness outstanding under the revolving loan. To the extent we draw
additional funds under the revolving loan to satisfy our liquidity requirements
pending completion of this offering, we will be required to raise additional
funds to comply with the requirements of our senior secured credit facility.

Assuming that we are able to successfully complete our pending public
offering and raise net proceeds sufficient to retire the term loan and reduce
the indebtedness outstanding under the revolving loan to not more than $5.0
million, management believes that our cash and cash equivalents, cash to be
generated from operations and the revolving credit facility under our senior
secured credit facility will be adequate to fund our current working capital
requirements for at least the next 12 months. However, in the event that we make
significant acquisitions in the future, we may be required to raise additional
funds through additional borrowings or the issuance of debt or equity
securities.

If we are unable to successfully complete our pending public offering and
raise net proceeds sufficient to retire the term loan and reduce the
indebtedness outstanding under the revolving loan to not more than $5.0 million,
we will be required to locate other means to repay or refinance the indebtedness
then outstanding under our senior secured credit facility. We do not currently
have a commitment or other means to repay or refinance such facility and we can
provide no assurances that we will be able to refinance or repay such facility
on acceptable terms, if at all.

INFLATION

We have experienced only moderate price increases under our agreements with
third-party manufacturers as a result of raw material and labor price increases.
We have generally passed these price increases along to our customers.

SEASONALITY

Although our business is generally non-seasonal, sales of certain products,
such as cough and cold products, increase slightly between October and March due
to the cold and flu season. We expect the impact of seasonality to decrease as
we acquire or obtain licenses for products that treat chronic conditions.
However, we anticipate that the seasonality may continue to affect sales for the
foreseeable future.

CRITICAL ACCOUNTING POLICIES

We view our critical accounting policies to be those policies which are
very important to the portrayal of our financial condition and results of
operations, and require management's most difficult, complex or subjective
judgments. The circumstances that make these judgments difficult or complex
relate to the need for management to make estimates about the effect of matters
that are inherently uncertain. We believe our critical accounting policies to be
as follows:

- Allowance for doubtful accounts. We are required to estimate the level
of accounts receivable recorded in our balance sheet which will
ultimately not be paid. Among other things, this assessment requires
analysis of the financial strength of our customers, which can be highly
subjective, particularly in the recent difficult general economic
environment. Our policy is to estimate bad debt expense based on prior
experience supplemented by a periodic customer specific review when
needed.

26

- Sales deductions. We provide volume rebates, contractual price
reductions with drug wholesalers and insurance companies, and certain
other sales related deductions on a regular basis. The exact level of
these deductions is not always immediately known and thus we must record
an estimate at the time of sale. Our estimates are based on historical
experience with similar programs, and since we have a relatively small
customer base, customer specific historical experience is often useful in
determining the estimated level of deductions expected to be refunded to
our customers when sales incentives are offered.

- Product returns. In the pharmaceutical industry, customers are normally
granted the right to return product for a refund if the product has not
been used prior to its expiration date, which is typically two to three
years from the date of manufacture. Management is required to estimate
the level of sales which will ultimately be returned pursuant to our
return policy, and record a related reserve at the time of sale. These
amounts are deducted from our gross sales to determine our net revenues.
Our estimates take into consideration historical returns of a given
product, all of which have been on the market for many years, product
specific information provided by our customers and information obtained
from independent sources regarding the levels of inventory being held by
our customers, as well as overall purchasing patterns by our customers.

- Intangible assets. When we acquire the rights to manufacture and sell a
product, we record the cash purchase price, along with the value of the
product related liabilities we assume, as intangible assets. We use the
assistance of valuation experts to help us allocate the purchase price to
the fair value of the various intangible assets we have acquired. Then,
we must estimate the economic useful life of each of these intangible
assets in order to amortize their cost as an expense in our statement of
operations over the estimated economic useful life of the related asset.
The factors that drive the actual economic useful life of a
pharmaceutical product are inherently uncertain, and include patent
protection, physician loyalty and prescribing patterns, competition by
products prescribed for similar indications, future introductions of
competing products not yet FDA approved, the impact of promotional
efforts and many other issues. We use all of these factors in initially
estimating the economic useful lives of our products, and we also
continuously monitor these factors for indications of appropriate
revisions. See also "Recent Accounting Pronouncements" where we discuss
the adoption of SFAS No. 142 in 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations". SFAS No. 141 eliminates the pooling-of-interest method
of accounting for business combinations. SFAS No. 141 is effective for any
business combination completed after June 30, 2001. Management believes that the
application of the provisions of SFAS No. 141 will not have a material impact on
our financial position or results of operations.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized. Separate intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. SFAS No. 142 also establishes a new method of
testing goodwill and other intangible assets for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of that goodwill or other intangible asset below its
carrying value. The amortization provisions of SFAS No. 142 apply to goodwill
and other intangible assets acquired after June 30, 2001. Management believes
that the application of the provisions of SFAS No. 142 will not have a material
impact on our financial condition or results of operations.

27

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No.
144 addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for financial periods after
January 1, 2002. Management believes that the application of the provisions of
SFAS No. 144 will not have a material impact on our financial condition or
results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Our operating results and cash flows are subject to fluctuations from
changes in foreign currency exchange rates and interest rates. Our purchases of
Nitrolingual Pumpspray under our agreement with Pohl-Boskamp are made in Euros.
Our purchases of Sular product inventory from Bayer will be made in Euros. In
addition, sales of Cognex are recognized in the foreign currencies of the
respective European countries in which it is sold. While the effect of foreign
currency translations has not been material to our results of operations to
date, currency translations on export sales or import purchases could be
adversely affected in the future by the relationship of the U.S. dollar with
foreign currencies.

In connection with borrowings incurred under the senior secured credit
facility arranged by Deutsche Banc Alex. Brown Inc., we will experience market
risk with respect to changes in the general level of the interest rates and its
effect upon our interest expense. Borrowings under this facility bear interest
at variable rates. Because such rates are variable, an increase in interest
rates will result in additional interest expense and a reduction in interest
rates will result in reduced interest expense. Accordingly, our present exposure
to interest rate fluctuations is primarily dependent on rate changes that may
occur while the senior secured credit facility is outstanding.

28

FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
involve a number of risks and uncertainties. Although our forward-looking
statements reflect the good faith judgment of our management, these statements
can only be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from results and outcomes
discussed in the forward-looking statements.

Forward-looking statements can be identified by the use of forward-looking
words such as "believes," "expects," "hopes" "may," "will," "plan," "intends,"
"estimates," "could," "should," "would," "continue," "seeks," "pro forma" or
"anticipates," or other similar words (including their use in the negative), or
by discussions of future matters such as the development of new products,
technology enhancements, possible changes in legislation and other statements
that are not historical. These statements include but are not limited to
statements under the captions "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as other sections in this Annual Report.

Such statements include, but are not limited to the following: (i) our
ability to acquire or license products, (ii) our ability to develop new
formulations, use new delivery methods and seek regulatory approval for new
indications of existing drugs, (iii) our ability to acquire other businesses,
(iv) that Sular and Furadantin will complement existing products, (v) the
success of our launch plans for Sular, (vi) our ability to increase and realign
our sales force size and increase the promotional reach for Sular, (vii) our
ability to enter into agreements with third-party sales organizations to
co-promote our products including Sular, (viii) our ability to implement
successful sales force training and marketing plans for Sular, (ix) our ability
to increase sales of Sular, Furadantin and Prenate and the effects of the
Prenate, Furantin and Sular acquisitions on our operations and financial
statements, (x) timely supply to us of Ponstel by our new contract manufacturer,
(xi) our ability to obtain regulatory approval for our migraine development
product and Robinul line extension, (xii) the expected cost of development for
these products, (xiii) our ability to defend and enforce intellectual property
rights, (xiv) future amortization and depreciation, research and development,
and interest expense, (xv) our ability to satisfy our working capital
requirements, (xvi) our ability to repay our debt in a timely manner prior to
incurring expensive fees and interest, (xvii) our ability to repay all or a
portion of our debt with the proceeds from our pending public offering, (xviii)
timing of fees and interest due on our debt and (xix) the adequacy of the
current supply of Ponstel.

Such forward-looking statements involve uncertainties and other factors,
including those described in the "Risk Factors" section of the Registration
Statement under the headings: "We expect our operating results to be
substantially dependent upon our results of operations for Sular, and any factor
adversely affecting sales of Sular could have a material adverse effect on our
sales and profits," "We may have difficulty maintaining or increasing sales of
Sular, Prenate and Furadantin and successfully integrating these products into
our business," "The costs we may incur to sell our new products may be
disproportionately high relative to their expected revenues," "The potential
growth rate for Sular may be limited by slower growth for the class of drugs to
which Sular belongs," "We have no experience selling Sular, have only limited
experience selling Furadantin and the Prenate products and there is no
established market for Prenate GT," "The regulatory status of prenatal vitamins
may make Prenate products subject to increased competition," "Our level of debt
could reduce our growth and profitability," "If we are unable to timely and
successfully complete this offering, we will incur additional expenses, may be
required to enter into unfavorable financing arrangements, and may have
insufficient liquidity to execute our business strategy," "Our growth will
suffer if we do not acquire rights to new products and integrate them
successfully," "We depend entirely on third parties to

29

manufacture our products," "We may encounter interruptions in our supply of
Ponstel," "We may encounter interruptions in our supply of Furadantin," "Our
existing supply agreements may prohibit us from entering into potentially more
favorable supply relationships with others," "Part of our growth strategy is to
acquire businesses which subjects us to additional risks," "We face competition
from generic products that could lower prices and unit sales," "Strong
competition exists for our products, and competitors have introduced new
products and therapies that could make our products obsolete," "A small number
of customers account for a large portion of our sales and the loss of one of
them, or changes in their purchasing patterns, could result in reduced sales,"
"If our products under development fail in clinical studies or if we fail or
encounter difficulties in obtaining regulatory approval for new products or new
uses of existing products, we will have expended significant resources for no
return," "We or third parties may violate government regulations," "If
third-party payors do not adequately reimburse patients for our products,
doctors may not prescribe them," "We depend on highly trained management, and we
may not be able to keep current management or hire qualified management in the
future," "Product liability claims and product recalls could limit our ability
to sell products," "We expect to require additional funding and if we cannot
obtain it, our sales, profits, acquisitions and development projects could
suffer," "Competitors could offer a product competitive with Sular," "If we do
not secure or enforce our patents or other intellectual property rights, we
could encounter increased competition that could adversely affect our operating
results," "Our products could infringe the intellectual property rights of third
parties, which could require us to pay license fees or defend litigation that
could be expensive or prevent us from selling products," "The regulatory status
of some of our products makes these products subject to increased competition
and other risks," "We face risks under one of our development agreements because
the other party to the agreement is a related party," "Pohl-Boskamp can
terminate our rights to Nitrolingual," "We have no experience selling products
in other countries," "There is uncertainty concerning our continued use of
Arthur Andersen LLP as our outside auditor" and "There is uncertainty concerning
stockholder approval to increase our authorized common stock." We do not
undertake to update our forward-looking statements to reflect future events or
circumstances.

30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth at the pages indicated
in Item 14(a) below.

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

31

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers are as follows:

- ------------

(1) Member of Stock Option Subcommittee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.

Mahendra G. Shah, Ph.D. is the Chairman of the Board, Chief Executive
Officer and President. Dr. Shah has been a director since 1993, and his present
term as director will expire at the annual meeting of stockholders to be held in
2004. Dr. Shah became Chief Executive Officer in October 1999 and President in
January 2002. From 1991 to 2000, he was a Vice President of EJ Financial
Enterprises, Inc., which manages a fund that invests in healthcare companies.
From 1996 to the present, he has been the President of Protomed Pharmaceuticals,
Inc., which is a privately-held drug development company. From 1987 to 1991, he
was the senior director of new business development with Fujisawa USA, Inc.
Prior to that, he worked in various scientific and management positions with
Schering-Plough and Bristol-Myers Squibb Company. He serves on the board of
Structural Bioinformatics Inc. and Introgen Therapeutics. He was previously
Chairman of Inpharmakon Corporation. Dr. Shah received a Ph.D. degree in
Industrial Pharmacy from St. John's University. EJ Financial Enterprises, Inc.
is the managing general partner of Kapoor-Pharma Investments, L.P., our largest
stockholder.

Balaji Venkataraman has been the Vice President and Chief Financial Officer
since November 1999. He was appointed as Executive Vice President and Secretary
in January 2001 and Chief Operating Officer in January 2002. Between August 1998
and September 1999, he was our Vice President of Corporate Development and
Strategic Planning. He also served as a consultant to us during his employment
as the Director of Strategic Planning at EJ Financial Enterprises, Inc. from
September 1997 to August 1998. From 1995 to 1997, he was Associate, Licensing
and New Business Start-up, at the University of Pennsylvania Center for
Technology Transfer. From 1994 to 1995, he was the Marketing Manager at Curative
Technologies Inc., a wound care services company. From 1993 to 1994, he was a
Technical Sales Representative for

32

Millipore Corporation. From 1991 to 1993, he was the Senior Research Chemist at
Scios Inc. He has also held product management and finance positions at Schering
Plough and Pfizer, Inc. Mr. Venkataraman received an M.S. degree in Organic
Chemistry from Case Western Reserve University and an M.B.A. degree from the
Wharton School of Business at the University of Pennsylvania.

Christopher D. Offen was appointed Vice President and Chief Commercial
Officer in January 2001 and Executive Vice President in January 2002. Prior to
joining us, from 2000 to 2001, Mr. Offen was Senior Vice President and Managing
Director at A.M. Pappas & Associates, an international life science venture
capital company. From 1991 through 1999, Mr. Offen was Senior Vice President of
Commercial Operations, Vice President of Business Development and Vice President
of Marketing of Solvay Pharmaceutical, Inc. From 1971 to 1991, Mr. Offen worked
at Burroughs Wellcome Co. (now GlaxoSmithKline). Mr. Offen attended the Advanced
Executive Program at the Kellogg School of Business at Northwestern University,
received an M.B.A. degree from George Mason University concentrating in
Marketing/Management and a B.S. degree in Pre-Medicine from The Catholic
University of America.

Robert D. Godfrey, Jr. was appointed as Vice President of Sales in 1998 and
Senior Vice President of Sales and Sales Operations in January 2002. He served
as the National Sales Manager between 1996 and 1998. He began his career with us
in 1992 as a Sales Representative for the Jacksonville, Florida territory and
was promoted in 1994 to District Manager of the entire Florida sales territory.
At that time, in addition to his managerial responsibilities, he continued to
promote our products to physicians and pharmacies until 1995. Prior to his
career with us, Mr. Godfrey was a market research consultant with MGT
Information Systems. Mr. Godfrey received an M.B.A. degree and a B.S. degree in
Marketing from Jacksonville University.

William G. Campbell was appointed as Controller and Treasurer in 1998 and
Vice President of Administration in January 2002. Prior to joining us, from 1995
to 1998, Mr. Campbell was the Controller/Chief Financial Officer of
DialysisAmerica, Inc. He was the Associate Administrator/Chief Financial Officer
of Stringfellow Memorial Hospital from 1993 to 1995, and from 1989 to 1993, he
was the Director of Budgets, Costs and Reimbursement at Grady Memorial Hospital.
His prior professional experience also includes a number of for-profit and
not-for-profit consulting, big five public accounting, governmental auditing and
internal audit positions. Mr. Campbell is a Certified Public Accountant and
received a B.A. degree in Accounting from Walsh College of Accountancy and
Business Administration and an M.B.A. degree in Accounting from Kennesaw State
College.

Andrew D. Shales was appointed as Vice President of Marketing in May 2001.
From 1997 to May 2001, Mr. Shales held various marketing managerial positions at
UCB Pharma, Inc., a global, research-based pharmaceutical company headquartered
in Brussels, Belgium. From 1996 to 1997, Mr. Shales directed the marketing of
products in the cardiovascular and obesity markets while working at Medeva
Pharmaceutical, Inc. Mr. Shales started his career at Solvay Pharmaceuticals,
Inc. as a sales representative and also worked as a Market Research Analyst and
Product Manager. Mr. Shales graduated from King's College in Wilkes-Barre,
Pennsylvania with a B.A. degree in Psychology.

Michael A. Leone was appointed as Vice President of Sales in January 2002.
From 1999 to 2000, Mr. Leone was a consultant to a number of biotechnology and
pharmaceutical firms, creating strategically aligned sales and managed care
organizations and developing customer focused strategies for those
organizations. From 1977 to 1999, Mr. Leone worked at E.R. Squibb & Sons, Inc.
and Bristol-Myers Squibb Company in positions of increasing responsibility
including National Accounts Director, Regional Business Director, and National
Director, Federal and Institutional Sales. Mr. Leone received a B.S. degree in
Biology from the University of South Florida.

33

Jerry N. Ellis was elected a director in November 2000. His term as
director will expire at the annual meeting of stockholders to be held in 2003.
Mr. Ellis has over thirty years of auditing and accounting experience. From 1994
to 2000, Mr. Ellis was a consultant to Arthur Andersen LLP for services focusing
on international auditing, audit committee practices, business risk management
and training. From 1973 to 1994, he was a partner at Arthur Andersen in their
Dallas, Madrid and Chicago offices. From 1962 to 1973, Mr. Ellis was an auditor
at Arthur Andersen. Mr. Ellis is a director of Akorn, Inc. and an Adjunct
Professor of Advanced Auditing at the University of Iowa. Mr. Ellis is a
Certified Public Accountant and received B.B.A. and M.B.A. degrees from the
University of Iowa.

John N. Kapoor, Ph.D. has been one of our directors since 1996, and his
present term as director will expire at the annual meeting of stockholders to be
held in 2003. Dr. Kapoor has over twenty years of experience in the healthcare
field through his ownership and management of healthcare-related businesses. In
1990, Dr. Kapoor founded Kapoor-Pharma Investments, L.P., our largest
stockholder, and its managing partner, EJ Financial Enterprises, Inc., of which
he is the president and sole stockholder. EJ Financial provides general funds
and strategic advice to healthcare businesses. Dr. Kapoor is the Chairman of
Optioncare, Inc., Akorn, Inc., Introgen Therapeutics, Inc. and Neopharm, Inc.
Dr. Kapoor is a Chairman of several private companies and a director of several
other private companies. Dr. Kapoor received a B.S. degree from Bombay
University and a Ph.D. in Medicinal Chemistry from the State University of New
York.

Dr. Kapoor was previously the Chairman and President of Lyphomed Inc.
Fujisawa Pharmaceutical Co. Ltd. was a major stockholder of Lyphomed from the
mid-1980s until 1990, at which time Fujisawa completed a tender offer for the
remaining shares of Lyphomed, including the shares held by Dr. Kapoor. In 1992,
Fujisawa filed suit in federal district court in Illinois against Dr. Kapoor
alleging that between 1980 and 1986, Lyphomed filed a large number of allegedly
fraudulent new drug applications with the FDA, and that Dr. Kapoor's failure to
make certain disclosures to Fujisawa constituted a violation of federal
securities laws and the Racketeer Influenced and Corrupt Organizations Act.
Fujisawa also alleged state law claims. Dr. Kapoor countersued, and in 1999, the
litigation was settled on terms mutually acceptable to the parties. The terms of
the settlement are subject to a confidentiality agreement. Dr. Kapoor also
controls Inpharmakon Corporation, a party to one of our development agreements.
Dr. Kapoor is the trustee of the John N. Kapoor Trust, dated September 30, 1989
which is a partner in Kapoor-Pharma Investments, L.P.

Pierre Lapalme was elected a director in April 2000. His term as director
will expire at the annual meeting of the stockholders to be held in 2002. Mr.
Lapalme has served as the President and Chief Executive Officer of Ethypharm
Inc. (North America), a global drug delivery systems company, since 1997. He is
non-executive Chairman of the Board of DiagnoCure Inc., a biopharmaceutical
company specializing in the development and marketing of products aimed at the
diagnosis and treatment of genito-urinary cancers. He is a director of Ferring
Canada Inc., a global pharmaceutical company, and Biovet Inc., a
greater-Montreal based veterinary product company. He is a former member of the
Board of the National Pharmaceutical Council U.S.A. and of the Pharmaceutical
Manufacturers Association of Canada (PMAC). From 1979 to 1990, Mr. Lapalme was
Chief Executive Officer and President of Rhone-Poulenc Canada Inc. and
Rhone-Poulenc Pharmaceuticals North America. He was appointed Senior Vice
President and General Manager Rhone-Poulenc Rorer North America in 1990 and
served in that position until 1994. Mr. Lapalme attended the University of
Western Ontario and INSEAD France.

Jon S. Saxe was elected a director in January 2000. His term as director
will expire at the annual meeting of stockholders to be held in 2004. He also
serves as a director of Protein Design Labs, Inc. Mr. Saxe served as President
of Protein Design Labs, Inc. from January 1995 to May 1999. In addition, he is a
director of Protein Design Labs, Inc., Questcor Pharmaceuticals Inc., Incyte
Genomics Inc., ID Biomedical Corporation, Insite Vision, SciClone Pharmaceuti-

34

cals, Inc. and is Chairman of Point Biomedical Corporation and Iconix
Pharmaceuticals. Mr. Saxe served as President of Saxe Associates, a
biotechnology consulting firm, from May 1993 to December 1994 and is currently a
Principal. He served as the President, Chief Executive Officer and a director of
Synergen, Inc., a biopharmaceutical company, from October 1989 to April 1993.
Mr. Saxe served in various positions including Vice President of Licensing and
Corporate Development and Head of the Patent Law Department for
Hoffmann-LaRoche, Inc. from 1960 through 1989. Mr. Saxe received a B.S. Ch.E.
degree from Carnegie-Mellon University, a J.D. degree from George Washington
University School of Law and an L.L.M. degree from New York University School of
Law.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our executive officers, directors and 10% stockholders
to file reports regarding initial ownership and changes in ownership with the
Securities and Exchange Commission and the Nasdaq Stock Market. Executive
officers, directors and 10% stockholders are required by Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a) forms they
file. Based solely on our review of copies of forms filed with the Securities
and Exchange Commission pursuant to Section 16(a) of the Exchange Act or written
representations from reporting persons, we believe that with respect to 2001,
all Section 16(a) filing requirements applicable to our executive officers,
directors and greater than 10% beneficial owners were complied with other than
the following: The Form 4 reporting Brent Dixon's December 2001 sale of 25,000
shares of common stock and gift of 200,000 shares of common stock was filed late
and the Form 4 reporting Kapoor-Pharma Investments, L.P.'s December 2001
distribution of shares of common stock to its partners was filed late.

ITEM 11. EXECUTIVE COMPENSATION

This information is incorporated by reference from our Proxy Statement for
the 2002 Annual Meeting of Stockholders under the heading "Executive
Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information is incorporated by reference from our Proxy Statement for
the 2002 Annual Meeting of Stockholders under the heading "Security Ownership of
Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is incorporated by reference from our Proxy Statement for
the 2002 Annual Meeting of Stockholders under the heading "Certain Relationships
and Related Transactions."

35

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this report:

(1) Financial Statements
40
Report of Independent Public Accountants....................
41
Consolidated Balance Sheets as of December 31, 2000 and
2001........................................................
42
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001............................
43
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 2000, and 2001...............
44
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000, and 2001...........................
45
Notes to Consolidated Financial Statements..................

(2) Financial Statement Schedule
63
Report of Independent Public Accountants....................
64
Valuation and Qualifying Accounts...........................
All other schedules have been omitted because of the absence
of conditions under which they are required or because the
required information is given in the above-listed financial
statements or notes thereto

(3) The following Exhibits are filed herewith or incorporated herein by
reference.

- ------------

* Incorporated by reference from the Registrant's Form S-1 (Commission File
No. 333-30764).
** Incorporated by reference from the Registrant's Form S-1 (Commission File
No. 333-56954).
*** Incorporated by reference from the Registrant's Form S-1 (Commission File
No. 333-83698).
+**** Incorporated by reference from the Registrant's Form S-1 (Commission File
No. 333-83698). The Registrant has requested confidential treatment for
certain portions of this exhibit pursuant to Rule 406 of the Securities
Act of 1933, as amended.
+ Confidential treatment was granted for certain portions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933, as amended.
++ Incorporated by reference from the Registrant's Form 10-Q for the quarter
ended September 30, 2001 (Commission File No. 000-30123). The Company has
requested confidential treatment of portions of this exhibit pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934.
+++ Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on December 13, 2001 (Commission File No. 000-30123). The Registrant
has requested confidential treatment of portions of this exhibit pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934.
++++ Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on January 7, 2001 (Commission File No. 000-30123). The Registrant
has requested confidential treatment of portions of this exhibit pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934.
++*** Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on March 20, 2002 (Commission File No. 000-30123). The Registrant
has requested confidential treatment of portions of this exhibit pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934.

38

(b) Reports on Form 8-K.

On December 13, 2001, we filed a Form 8-K pursuant to Item 5 to report that
we had entered into a manufacturing and supply agreement for our Robinul
products. No financial statements were filed with this report.

39

SIGNATURES

In accordance with the requirements Section 13 or 15(d) 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.

FIRST HORIZON PHARMACEUTICAL
CORPORATION

March 26, 2002 By: /s/ MAHENDRA G. SHAH, PH.D.
------------------------------------
Mahendra G. Shah, Ph.D.
Chairman of the Board, Chief
Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and the dates indicated:

40

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
First Horizon Pharmaceutical Corporation

We have audited the accompanying consolidated balance sheets of FIRST
HORIZON PHARMACEUTICAL CORPORATION (a Delaware corporation) and subsidiary as of
December 31, 2000 and 2001 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Horizon Pharmaceutical
Corporation and subsidiary as of December 31, 2000 and 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
February 12, 2002

41

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated balance
sheets.

42

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated statements.

43

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated statements.

44

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated statements.

45

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business. First Horizon Pharmaceutical Corporation
(formerly Horizon Pharmaceutical Corporation, the "Company"), a Delaware
corporation, is a specialty pharmaceutical company that markets and sells brand
name prescription products to primary care and select specialty physicians in
the United States through their nationwide sales and marketing force. In
addition, limited sales to European customers are made through local
distributors in the region. The Company focuses on the treatment of
cardiovascular, obstetrical and gynecological, pediatric and gastroenterological
conditions and disorders. The Company's strategy is to acquire or license
pharmaceutical products that other companies do not actively market, or that the
Company believes have high sales growth potential, are promotion-sensitive and
complement the Company's existing products. In addition, the Company seeks to
maximize the value of their drugs by developing new patentable formulations,
using new delivery methods and seeking regulatory approval for new indications
of existing drugs.

Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary. All intercompany
balances and transactions have been eliminated in consolidation.

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 certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.

Revenue Recognition. Revenues from product sales are recognized upon
shipment to customers and are shown net of sales adjustments for discounts,
rebates to customers, returns and other adjustments, which are provided in the
same period that the related sales are recorded.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 is applicable to public companies and provides guidance
on applying accounting principles generally accepted in the United States to
revenue recognition issues in financial statements. Management believes the
Company's revenue recognition criteria are consistent with the guidance provided
by SAB No. 101.

Cost of Revenues. Cost of revenues is comprised of purchased product
costs, and includes the amortization of intangible assets associated with
manufacturing and supply agreements entered into in connection with the purchase
of products.

Royalties. The Company pays royalties on the sale of certain products.
These costs are included in selling, general and administrative expenses in the
accompanying statements of operations. Total royalties were $620,000, $2.1
million and $3.4 million for the years ending December 31, 1999, 2000 and 2001,
respectively.

Research and Development. Research and development expenses consist
primarily of costs incurred to develop formulations, engage contract research
organizations to conduct clinical studies, test products under development and
engage medical and regulatory consultants. The Company expenses all research and
development costs as incurred. Research and development costs were $860,000,
$1.8 million and $1.8 million for the years ended December 31, 1999, 2000 and
2001, respectively.

Sales Deductions. Rebate costs, which are recorded as a reduction of
sales, include estimated amounts for volume rebate programs, contractual price
reductions with wholesalers

46

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and insurance providers, and certain other sales related deductions. Provision
for these estimated costs are recorded at the time of sale and are periodically
adjusted to reflect actual experiences.

Product Returns. The Company's customers generally may return product from
six months prior to the expiration date of the product until six months after
expiration. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition When Right of Return Exists," a provision
for these estimated returns is recorded at the time of sale and is periodically
adjusted to reflect actual experience. These costs are recorded as a reduction
to sales.

Cash and Cash Equivalents. The Company considers only those investments
that are highly liquid, and readily convertible to cash with an original
maturity of three months or less to be cash equivalents.

Concentration of Credit Risk. The Company extends credit on an
uncollateralized basis primarily to wholesale drug distributors and retail
pharmacy chains throughout the United States. Historically, the Company has not
experienced significant credit losses on its accounts. The Company's four
largest customers accounted for approximately 69% and 82% of accounts receivable
at December 31, 2000 and 2001, respectively.

The following table presents a summary of sales to significant customers as
a percentage of the Company's total revenues:

The mix of sales of the Company's products changes as products are added.
On a combined basis, products with sales greater than 10% of the Company's sales
comprised approximately 64%, 66%, and 66% of total sales in 1999, 2000 and 2001,
respectively.

The Company's international sales represent less than 3% of sales for the
periods presented.

Segment Reporting. The Company operates in a single segment, the sale and
marketing of prescription products.

Inventories. Inventories consist of purchased pharmaceutical products and
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method, and market is considered to be net realizable value.
Inventories consist of finished product and bulk product awaiting processing and
packaging into finished product. Inventories at December 31, 2000 and 2001
consisted of (in thousands):

Samples. Samples primarily consist of product samples used in the sales
and marketing efforts of the Company's products. Samples are expensed upon
distribution. Sample inventories at December 31, 2000 and 2001 were $1.1 million
and $827,000, respectively.

47

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment. Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Major improvements, which extend the
lives of existing property and equipment, are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is
recognized as other income (expense) in the statement of operations.

Depreciation is provided for on the straight-line basis over the estimated
useful lives of the assets as follows:

Office equipment............................................ five to ten years
Furniture and fixtures...................................... five to ten years
Computer hardware and software.............................. three to five years
Leasehold improvements...................................... based on term of lease

The components of property and equipment at December 31, 2000 and 2001 are
as follows (in thousands):

Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1999, 2000 and 2001 was $69,000, $141,000 and
$284,000, respectively.

In the event that facts and circumstances indicate that the carrying
amounts of property and equipment may be impaired, an evaluation of
recoverability is performed using the estimated future undiscounted cash flows
associated with the asset compared to the asset's carrying amount to determine
if a write-down is required, pursuant to the provisions of SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and its related interpretations.

Intangible Assets. Intangible assets, which include license rights,
tradenames, managed care contracts and distribution, manufacturing and supply
agreements, are stated at cost, net of accumulated amortization. These costs are
capitalized and amortized on a straight-line basis over the estimated periods
benefited by the asset (1 to 20 years). Amortization of such assets, excluding
distribution, manufacturing and supply agreements, is included in depreciation
and amortization expense in the accompanying statements of operations.
Amortization expense for the years ended December 31, 1999, 2000 and 2001
totaled $355,000, $950,000 and $2.6 million, respectively. Included in the $2.6
million of amortization expense in 2001 is $118,000 of amortization of the
upfront fees paid to secure distribution, manufacturing and supply agreements in
connection with two product acquisitions in 2001. This amortization expense of
$118,000 is included in cost of revenues. These distribution, manufacturing and
supply agreements are discussed in more detail in Notes 8 and 9.

48

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In accordance with SFAS No. 121, the Company continually reevaluates the
propriety of the carrying amount of intangibles as well as the related
amortization period to determine whether current events and circumstances
warrant adjustments to the carrying values and/or estimates of useful lives.
This evaluation is performed using the estimated projected future undiscounted
cash flows associated with the asset compared to the asset's carrying amount to
determine if a write-down is required. To the extent such projections indicate
that the undiscounted cash flows are not expected to be adequate to recover the
carrying amounts, the assets are written down to fair value as determined by
discounting future cash flows.

Shipping and Handling. Costs incurred related to freight-in are included
in cost of revenues and costs related to freight-out are included in selling,
general and administrative expense.

Income Taxes. The Company provides for income taxes in accordance with
SFAS No. 109 "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred tax assets and liabilities using currently enacted tax rates.

Advertising Costs. The Company charges the costs of advertising to expense
as incurred. Advertising expenses were $179,000, $1.2 million and $2.9 million
for the years ending December 31, 1999, 2000 and 2001, respectively.

Financial Instruments. The Company's carrying value of financial
instruments approximates fair value due to the short maturity of those
instruments.

Foreign Currency Exposure. Certain of the Company's product purchases and
sales are denominated in foreign currencies. Gains or losses on foreign currency
transactions are included in income as incurred. The Company enters into short
term forward foreign exchange contracts in relation to certain purchases of one
of its products. These forward contracts are not designated as hedging
instruments and as such any change in fair value while open is recognized
currently in earnings. This gain or loss offsets the transaction gain or loss on
the underlying foreign denominated payables. Foreign denominated payables,
receivables and open exchange contracts as of December 31, 2001 are
insignificant.

Common Stock Split. On August 24, 2001 the Company's Board of Directors
authorized a three-for-two stock split effected in the form of a stock dividend
distributed on September 24, 2001 to stockholders of record as of September 10,
2001. As a result of the stock split, the accompanying consolidated financial
statements reflect an increase in the number of outstanding shares of common
stock and the transfer of the par value of these additional shares from paid-in
capital. All references to the number of shares (other than common stock issued
and outstanding on the 2000 Consolidated Balance Sheet and transactions prior to
September 10, 2001 on the Consolidated Statements of Stockholders' Equity), per
share amounts and any other reference to shares in the Consolidated Financial
Statements and the accompanying Notes to the Consolidated Financial Statements
have been adjusted to reflect the split on a retroactive basis.

Earnings Per Share. As required by SFAS No. 128, "Earnings Per Share," the
Company has presented basic and diluted earnings per common share amounts in the
accompanying financial statements. Basic earnings per common share are
calculated based on the weighted average common shares outstanding during the
year. Diluted earnings per common share are calculated similar to basic earnings
per common share except that the weighted average shares outstanding are
increased to include additional shares from the assumed exercise of stock
options, if dilutive. The number of additional shares is calculated by assuming
that outstanding stock options were exercised and that the proceeds from such
exercises were used to acquire shares of common stock at the average market
price during the period.

49

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Below is the calculation of basic and diluted net income per common share
(in thousands, except per share data):

The number of outstanding options which are excluded from the above
calculation as their impact would be anti-dilutive are 0, 122,850 and 692,650
for the years ended December 31, 1999, 2000 and 2001, respectively.

Reclassifications. Certain prior year amounts have been reclassified to
conform with the current year financial statement presentation.

Supplemental Cash Flow Disclosures. Supplemental cash flow information at
December 31, 1999, 2000 and 2001 is as follows (in thousands):

New Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 eliminates the pooling-of-interest method of accounting for business
combinations. SFAS No. 141 is effective for any business combination completed
after June 30, 2001. The Company does not expect the application of the
provisions of SFAS No. 141 will have a material impact on its financial position
or results of operations.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and indefinite lived intangible assets are
no longer amortized. Separate intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. SFAS No.
142 also establishes a new method of testing goodwill and other unamortized
intangible assets for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of that
goodwill or other intangible asset below its carrying value. The amortization
provisions of SFAS No. 142 apply to goodwill and other intangible assets
acquired after June 30, 2001. The Company does not expect the application of the
provisions of SFAS No. 142 will have a material impact on its financial position
or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets." SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets and is effective for financial periods after January 1, 2002. The Company
does not expect the application of the provisions of SFAS No. 144 will have a
material impact on its financial condition or results of operations.

50

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. REVOLVING LOAN AGREEMENT

In May 1998, the Company entered into a revolving loan agreement with a
bank under which the Company could borrow up to $1.0 million, subject to
borrowing base limitations based on eligible accounts receivable and inventory
balances, as defined in the agreement. Borrowings under the revolving loan
agreement bore an interest rate of the bank's prime rate and were secured by the
Company's assets. The revolving loan agreement was amended and restated on
December 22, 1998 to provide for partial financing of a product acquisition
through a term loan. Under the amended agreement, terms of the revolving loan
facility provided for up to $2.5 million, subject to borrowing base limitations
based on eligible accounts receivable and inventory, as defined in the
agreement. In January 2000, the loan agreement was amended and restated to
provide for borrowings up to $3.5 million through June 30, 2000, reverting back
to $2.5 million from June 30, 2000 to January 31, 2001. In April 2000, the
Company further amended its credit facility to include up to $13.0 million of
bridge financing to finance acquisitions, and to extend the term of the
revolving loan facility to May 2, 2001. On April 14, 2000, the Company borrowed
$9.5 million under the bridge loan for the acquisition of Ponstel. Borrowings
under the bridge loan bore an interest rate of the Company's choice of the
bank's prime rate or LIBOR plus 1.5%. The bridge loan matured, and was repaid,
upon the completion of the Company's initial public offering on May 31, 2000.
The weighted average outstanding balance under the revolving loan agreement for
the year ended December 31, 2000 was $1.9 million. As of December 31, 2000 and
2001 there were no borrowings against the revolving loan. The interest rate at
December 31, 2000 and 2001 was 9.0% and 4.8%, respectively, and the Company had
availability under the terms of the agreement of $2.5 million, and was subject
to a 0.25% fee on the unused portion. In May 2001, the term of the revolving
loan facility was extended to May 31, 2002. The revolving loan agreement
contains certain restrictive covenants including, among other things, minimum
EBITDA levels and a debt to equity ratio. The revolving loan agreement is to be
terminated as a condition of and in connection with the credit facility expected
to be entered into in 2002 with a syndicate arranged by Deutsche Bank Alex.
Brown, Inc. This facility is discussed in more detail in Note 14.

3. LONG-TERM DEBT

Long-term debt as of December 31, 2000 consisted of a note payable to the
seller in a product acquisition of $221,000, which was repaid during 2001.

4. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

51

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCKHOLDERS' EQUITY

In December 1999, the Company issued 837,593 shares of common stock to the
Company's majority stockholder upon the conversion of $1.6 million of
convertible debt incurred in January 1999 for the purchase of a product license
and accrued interest of $145,000 thereon to common stock. The shares were
converted at a rate of $2.083 as stipulated in the applicable agreement. The
original debt agreement stipulated an interest rate of prime plus 2.0% (10.25%
at the conversion date).

In May 2000, the Company completed its initial public offering and issued
5,700,000 shares of common stock at a price of $5.33 per share. In June 2000,
the Company's underwriters exercised their over-allotment option and an
additional 855,000 shares of common stock were issued at a price of $5.33 per
share. These offerings generated proceeds, net of offering expenses, of $31.1
million, which the Company used to repay debt, finance product acquisitions, and
for general corporate purposes.

During 2000, the Company issued 12,441 shares of common stock under its
employee stock purchase plan.

In December 2000, the Company entered into a separation agreement with a
retiring executive, whereby the executive will receive severance and other
benefits. In addition, the vesting portion of his stock options was accelerated,
generating compensation expense of $361,000.

In May 2001, the Company completed a follow-on offering of 6,900,000 shares
of common stock at a price of $12.87 per share. The Company received net
proceeds of $83.6 million from the offering after deducting offering expenses.
The proceeds will be used to finance product acquisitions and for general
corporate purposes.

During 2001, the Company issued 12,742 shares of common stock under its
employee stock purchase plan.

Under the Company's Restated Certificate of Incorporation the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 1,000,000 shares of preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The issuance of preferred stock could adversely affect the voting
power of holders of common stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company, which could have a depressive effect on the
market price of our common stock. The Company has no present plan to issue any
shares of preferred stock. As of December 31, 2000 and December 31, 2001 there
were no shares of preferred stock outstanding.

6. STOCK OPTIONS

Pursuant to the Company's 1997 Non-Qualified Stock Option Plan (the "1997
Plan"), the Board of Directors approved the issuance of options to purchase
shares of common stock of the Company to various employees. Under the plan,
6,000,000 shares of common stock were reserved for issuance. Vesting periods
range from immediate to four years, and options granted generally expire seven
years from the date of grant. All options also include accelerated vesting

52

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provisions in the event of a change in control, as defined in the plan. In 2000,
the Company terminated the 1997 Plan and no additional grants of stock options
will be made under the 1997 Plan. At December 31, 2001, 1,228,280 options
remained issued and outstanding under the 1997 Plan.

On February 14, 2000, the Board of Directors and stockholders approved the
2000 Stock Plan (the "2000 Plan"). This plan provides for the granting of
incentive stock options, nonqualified stock options, stock awards or stock
bonuses, and sales of stock. The 2000 Plan provides for the grants of these
options and other awards to officers, directors, full- and part-time employees,
advisors and consultants. Only full-time employees may receive incentive stock
options. The Company has reserved 3,000,000 shares of common stock for issuance
under the 2000 Plan. The Company's compensation committee administers the 2000
Plan and has the sole authority to determine the meaning and application of the
terms of the plan and all grant agreements, the persons to whom option or stock
grants are made, the nature and amount of option or stock grants, the price to
be paid upon exercise of each option, the period within which options may be
exercised, the restrictions on stock awards, and the other terms and conditions
of awards. All options granted under the 2000 Plan include accelerated vesting
provisions in the event of a change in control, as defined in the plan. The 2000
Plan will terminate in February 2010. At December 31, 2001, 1,755,796 options
were issued and outstanding and 1,188,320 options were available for issue under
the 2000 Plan.

The Company has granted stock options to officers, directors, and employees
as follows:

53

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
similar price and grant date at December 31, 2001.

Upon the exercise of options, the Company became entitled to a tax effected
benefit of $415,000 and $8.9 million in 2000 and 2001, respectively, which is
equal to the number of options multiplied by the difference between the market
price of the options as of the date of exercise and the exercise price for the
options, adjusted for the impact of tax rates. The impact of the benefit has
been credited to additional paid-in capital.

The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its stock options issued to employees.
Accordingly, the Company records compensation expense for any stock option
grants with exercise prices lower than fair value, recognized ratably over the
vesting period. The Company has recognized compensation expense related to stock
option grants of $144,000, $769,000 and $373,000 in 1999, 2000 and 2001,
respectively. The 2000 compensation expense includes $361,000 related to
accelerated vesting granted to a retiring executive.

All option grants during 1999 were granted with exercise prices below the
fair market value at the date of grant. These options had a grant date weighted
average fair value of $2.75. All options granted in 2000 and 2001 have been
granted at exercise prices equal to fair market value at the date of grant.

Had compensation costs for the Company's options been determined using
option-pricing models prescribed by SFAS No. 123, "Accounting for Stock Based
Compensation," the Company's pro forma net income per common share would have
been reported as follows (in thousands, except per share amounts):

54

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average value of options granted during 1999, 2000 and 2001 is
estimated at $2.01, $4.88 and $11.98 per share, respectively. The value of
options is estimated on the date of the grant using the following weighted
average assumptions:

The Company adopted an employee stock purchase plan on February 14, 2000
that is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code. The Company has reserved
750,000 shares of common stock for the stock purchase plan. In order to
participate in the stock purchase plan, employees must meet eligibility
requirements, including length of employment. Participating employees will be
able to direct the Company to make payroll deductions of up to 7.0% of their
compensation during an offering period for the purchase of shares of the
Company's common stock. Each offering period will be six months. The stock
purchase plan will provide participating employees with the right, subject to
specific limitations, to purchase the Company's common stock at a price equal to
85.0% of the lesser of the fair market value of the Company's common stock on
the first or last day of the offering period. The Board of Directors has the
authority to amend, suspend or discontinue the stock purchase plan as long as
the change will not adversely affect participants without their consent and as
long as the Company receives the stockholder approval required by law. The stock
purchase plan will terminate on December 31, 2010.

7. INCOME TAXES

The income tax provision (benefit) for 1999, 2000 and 2001 consisted of the
following (in thousands):

A reconciliation of the statutory rate to the effective rate as recognized
in the statements of operations is as follows:

55

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets and liabilities reflect the impact of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts recognized for income tax purposes.
Significant components of the Company's net deferred tax assets as of December
31, 2000 and 2001 are as follows (in thousands):

8. ACQUISITIONS/INTANGIBLE ASSETS

On January 29, 1999, the Company acquired exclusive rights in the United
States to Robinul and Robinul Forte tablets from American Home Products
Corporation ("AHP") for $4.0 million in cash with an additional $1.8 million
financed by the seller. Pursuant to the acquisition, the Company also assumed
liabilities of $193,000 for returns of products shipped by the seller prior to
the acquisition date. The Company has recorded the total purchase price for this
acquisition including the liabilities assumed to the licensing rights within
intangible assets in its financial statements. The licensing rights are being
amortized over an estimated economic life of 20 years. The Company agreed to pay
royalties on net sales as long as the Company sells the product.

On April 14, 2000, the Company acquired exclusive rights from
Warner-Lambert Company to distribute, market, and sell the drug Ponstel in the
United States for $9.5 million in cash and a $3.5 million promissory note to the
seller. The Company also assumed liabilities of $1.1 million for certain returns
of products shipped by the seller prior to the acquisition date, and returned
after October 20, 2000. The Company financed $9.5 million of the transaction
under the bridge loan agreement described in Note 2. The acquisition agreement
includes the purchase of the license rights and certain trademarks. The value
allocated to tradename and license rights is being amortized over their
estimated useful lives of 20 years. In addition, the Company agreed to purchase
the entire outstanding inventory of Ponstel for approximately $100,000. The
promissory note was paid in full upon the receipt of proceeds from the Company's
initial public offering in June 2000.

On June 22, 2000, the Company acquired exclusive rights from Warner-Lambert
Company to market, distribute and sell the drug Cognex and a new unapproved
version of Cognex called Cognex CR, in the U.S. and other countries for $3.5
million in cash. The Company must also pay up to $1.5 million in additional
purchase price if the Company obtains FDA approval to market Cognex CR. The
Company also assumed liabilities of $799,000 for returns of products shipped by
Warner-Lambert prior to the acquisition date, and returned after June 22, 2001.
The

56

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase price was allocated among the fair values of intangible assets
(primarily tradename and licensing rights) and liabilities assumed and is being
amortized over 20 years.

On August 20, 2001, the Company acquired from Sanofi-Synthelabo Inc.
("Sanofi") the Prenate line of prescription prenatal vitamins (the "Prenate
Acquisition"), which it believes will complement its obstetrical/gynecological
line of products, including Ponstel. The purchase price was $51.9 million in
cash and the assumption of liabilities of $0.9 million for returns of product
shipped by Sanofi prior to the acquisition date, and returned after February 20,
2002 and for estimated contractual price reductions with wholesalers and
insurance providers. The agreement includes the purchase of the Prenate license
rights, certain tradenames and managed care contracts and a supply agreement.
The purchase price was allocated among the fair values of the intangible assets
acquired and the liabilities assumed and is being amortized over a period of
three to twenty years. The managed care contracts are being amortized over a
period of five years and the supply agreement is being amortized over a period
of three years. All other intangibles are being amortized over twenty years. The
weighted average amortization period is seventeen years. In addition, the
Company purchased the outstanding inventory of Prenate for approximately
$50,000. The results of the Prenate line are included in the consolidated
statements of operations from August 20, 2001 to December 31, 2001. The
preliminary purchase price allocation as of December 31, 2001 is as follows (in
thousands):

License rights.............................................. $44,926
Tradenames.................................................. 5,500
Managed care contracts...................................... 1,430
Supply agreement............................................ 940
-------
Total....................................................... 52,796
Accumulated amortization.................................... (1,151)
-------
Intangibles, net............................................ $51,645
=======

For the year ended December 31, 2001, aggregate amortization expense
related to the Prenate Acquisition was $1.2 million related to the period from
the purchase date to year-end.

On December 21, 2001, the Company acquired from Dura Pharmaceuticals Inc.,
an affiliate of Elan Pharmaceuticals PLC ("Elan"), the U.S. rights to
Furadantin, a prescription drug used for the treatment of urinary tract
infections in children, which the Company believes will complement its pediatric
line of products, which includes Tanafed and Tanafed DM, for approximately $16
million in cash plus the assumption of liabilities of $324,000 for the return of
product shipped by Elan prior to the acquisition date returned after December
31, 2002. The purchase price was allocated among the fair value of the
intangible assets acquired and liabilities assumed and is being amortized over a
weighted average amortization period of seventeen years. The purchase agreement
includes all assets related to Furadantin, including the NDA and the trademark.
The license rights and tradename are being amortized over 20 years.
Additionally, the Company purchased the outstanding inventory of Furadantin for
$252,000. The Company has also entered into a transitional supply agreement with
Elan Pharmaceuticals whereby they will supply the Company with Furadantin until
May 2003. The supply agreement

57

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is being amortized over its useful life of 17 months. The preliminary purchase
price allocation is as follows (in thousands):

License rights.............................................. $15,804
Tradename................................................... 320
Supply agreement............................................ 200
-------
Total....................................................... 16,324
Accumulated amortization.................................... (29)
-------
Intangibles, net............................................ $16,295
=======

For the year ended December 31, 2001, aggregate amortization expense
related to the Furadantin acquisition was $29,000 related to the 11 days from
the purchase date to year-end.

The unaudited pro forma summary below presents certain financial
information as if the Prenate and Furadantin acquisitions had occurred as of
January 1, 2000. These pro forma results have been prepared for comparative
purposes and do not purport to be indicative of what would have occurred had the
acquisitions been made on the first day of the respective years of acquisition.
Additionally, these pro forma results are not indicative of future results (in
thousands, except per share data):

The purchase price allocations of Prenate and Furadantin are preliminary
and subject to revision, with any such revision to be finalized upon the
ultimate resolution of the value of certain liabilities assumed, yet no later
than the one year anniversary of the purchase date. The Company does not expect
any such revisions will have a material impact on the Company's financial
position or results of operations.

The purchase prices paid for Prenate and Furadantin were determined based
on numerous considerations including a return on investment analysis as well as
the impact of competing buyers.

9. LICENSE AGREEMENTS AND PRODUCT RIGHTS

On January 1, 1996, the Company obtained exclusive distribution rights from
Unisource, Inc. for Tanafed in North America through December 31, 2003 with an
option for an additional seven years. The agreement requires the Company to
purchase all of their requirements for Tanafed from Unisource, including at
least certain minimum quantities of Tanafed in each year of the agreement. In
December 1998, the Company obtained exclusive distribution and supply rights
from Unisource, Inc. for Tanafed DM in North America through December 2005,
subject to an automatic seven year renewal. The agreement requires the Company
to purchase all of its requirements for Tanafed DM from Unisource, subject to
certain minimum purchase requirements. The Company entered into a patent and
license agreement with Jame Fine Chemicals, Inc., the raw materials supplier for
Tanafed in January 2000. The agreement grants the Company a semi-exclusive
license to use, sell and distribute finished products containing an active
ingredient used in Tanafed. Pursuant to the agreement, the Company must pay a
royalty

58

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on sales of Tanafed. The license continues through the life of the licensed
patent, which expires in 2014.

On October 31, 1998, the Company entered into an agreement with Inpharmakon
Corporation in which the Company acquired rights to the proprietary information
for a migraine product for which the Company plans to conduct clinical studies
and submit a new drug application. The agreement expires on October 31, 2008,
but the Company may renew it indefinitely after expiration. If the Company does
not obtain regulatory approval of the drug within a specified time after filing
for such approval and thereafter commence and continue to aggressively market
and sell the product, Inpharmakon may terminate the agreement. In the event that
Inpharmakon terminates the agreement for failure to achieve these milestones,
Inpharmakon may purchase rights to develop the drug. The Company must also pay
up to an aggregate of $950,000 in non-refundable fees to Inpharmakon at various
developmental milestones through and including regulatory approval of the
product, and, in the event of commercial sales of the product, the Company must
pay royalties at rates which management believes are within industry customary
ranges. If the Company elects to sell the business opportunity to a third party,
the Company must share the proceeds of the sale with Inpharmakon. On May 3,
2000, the Company amended the terms of the agreement with Inpharmakon. Under the
amended terms, the Company paid Inpharmakon $200,000 on June 15, 2000. In
addition, a $200,000 milestone payment was paid to Inpharmakon in December 2001.

In January 1999, the Company acquired exclusive rights in the United States
to Robinul and Robinul Forte tablets from American Home Products Corporation.
The Company must pay royalties on net sales under its license agreement with
American Home Products. The Company entered agreements with Mikart, dated April
23, 1999 and January 21, 2001, for Mikart to become qualified under applicable
regulations to manufacture and supply the Company's requirements for Robinul.
Mikart became qualified by the FDA to manufacture Robinul on December 3, 2001
and began supplying the Robinul products to the Company in December 2001. Under
these agreements, Mikart will manufacture the products for five years from the
time Mikart became a qualified manufacturer plus renewal terms of one year until
either party elects not to renew. The agreement with Mikart requires that the
Company purchase certain designated minimum quantities.

In January 2002, the Company entered into a license agreement with
Wyeth-Ayerst Canada Inc. and Whitehall-Robins Inc. under which the Company
acquired rights to have the product manufactured, and to market and sell Robinul
and Robinul Forte in Canada. The Company will pay Wyeth-Ayerst Canada a royalty
on net sales of Robinul in Canada.

On March 25, 1999, the Company acquired the rights from Penwest
Pharmaceuticals Co. to the application of Penwest's controlled release TIMERx
technology to the active ingredient in the migraine product. Under the Penwest
agreement, the Company has the right to manufacture, use and sell the developed
product in North America and Mexico for a period extending fifteen years from
the date a new drug application is issued for the product, as well as a license
to the TIMERx(R) patents for such purpose. The Company must pay Penwest an
aggregate of up to approximately $2.6 million of non-refundable fees upon
achieving specified development milestones through the first anniversary of the
first commercial sale of the product following regulatory approval and royalties
upon any sales of the migraine product. To date, the Company has paid Penwest
$427,000, which is included in research and development expense in the
accompanying statements of operations. Penwest may terminate the agreement in
the event the

59

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company fails to timely achieve designated performance milestones within
prescribed time periods.

In July 1999, the Company entered into an agreement with Pohl-Boskamp for
the exclusive rights to distribute, market and sell Nitrolingual Pumpspray
beginning on February 1, 2000 in the United States for five years plus an
additional five year renewal period subject to establishing mutually acceptable
minimum purchase requirements. Under the agreement, Pohl-Boskamp supplies the
Company with their requirements of product at prices that decrease as volume
purchased in each year increases. The Company must purchase designated minimum
quantities in each year of the agreement and pay a royalty on net sales of the
product. Aventis had exclusive rights through January 2000 to a version of the
product containing CFC named Nitrolingual spray. To promote earlier adoption of
Nitrolingual Pumpspray, the Company obtained exclusive rights from Aventis to
market this CFC product in the United States as of November 22, 1999.

In April 2000, the Company acquired exclusive rights from Pfizer to market,
distribute and sell Ponstel in the United States. The total purchase price was
$13.0 million. In April 2000, the Company also entered into a supply agreement
with Pfizer under which Pfizer was to supply us with designated quantities of
Ponstel through the expiration of the supply agreement, which occurred on March
31, 2001. Pfizer only delivered a portion of the quantity of Ponstel required by
the supply agreement during its term. Pfizer has continued to supply Ponstel to
us under the same terms. The Company pays Pfizer an agreed upon price for the
supply of Ponstel.

In December 2000, the Company signed an agreement with West-ward
Pharmaceuticals to manufacture Ponstel after West-ward obtains FDA approval to
manufacture the product. The Company anticipates that this will occur by the
fourth quarter of 2002. This agreement expires in April 2005 subject to
automatic annual renewals. The Company must purchase all of its requirements for
Ponstel from West-ward and is subject to minimum purchase requirements. The
Company must pay West-ward a price for Ponstel based on a multiple of
West-ward's direct cost of goods sold in the manufacture and supply of the
product. In addition, the Company must pay West-ward milestone payments, as long
as no generics have been introduced, upon certain anniversary dates of FDA
approval of the manufacture of Ponstel by West-ward. West-ward is currently in
the process of manufacturing the required pilot batches in order to obtain such
approval.

For the Cognex product, the Company negotiated a supply agreement with a
Warner-Lambert affiliate to continue to manufacture and supply Cognex and the
active ingredient in Cognex for two years subject to a one-year renewal. The
Company will pay Warner-Lambert's affiliate a production fee for its manufacture
of Cognex and the active ingredient. The supply agreement contains designated
quantities of Cognex and its active ingredient that Warner-Lambert's affiliate
will supply and that the Company must purchase.

In addition, the Company entered into a transition services agreement with
Warner-Lambert under which Warner-Lambert provided transitional administrative
services to the Company until December 31, 2000 in connection with the sale of
Cognex in European countries.

For the Prenate product line, under the terms of the asset purchase
agreement, the Company was assigned a contract between Sanofi and Patheon Inc.
to manufacture the product line. The term of the agreement is for five years
from October 1, 1999 subject to automatic one-year renewals. The Company also
assumed a supply and packaging agreement with Banner Pharmacaps Inc. ("Banner")
and Sanofi for the supply and packaging of the products. The agreement with
Banner is for a term of five years subject to two-year renewals. Under the

60

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

terms of the supply agreement with Banner, the Company will pay Banner a royalty
on net sales above a certain amount of net sales. The Sanofi packaging agreement
is for a term of three years subject to a three-year renewal.

Each of the Company's third-party manufacturing agreements requires that
the Company purchase all of their product requirements from the manufacturers
that are a party to those agreements.

The Company uses third-party manufacturers for the production of its
products for development and commercial purposes. Given the general
under-utilization of resources, the availability of excess capacity for
manufacturing in the marketplace, and the lower cost of outsourcing, the Company
intends to continue to outsource manufacturing for the near-term.

The Company relies on third-party suppliers to produce its products. The
supplier for one product and the suppliers for components of two other products
hold patents relating to their respective products. Due to the patent
restrictions, the supply of these three products, whose sales comprised 50.1% of
the Company's sales in 2001 are exclusively available through these suppliers.

10. RETIREMENT PLAN

In 1996, the Company began a qualified defined contribution 401(k) plan,
which provides benefits to substantially all employees. The annual contribution,
if any, to the trust is at the discretion of the Board of Directors of the
Company. Employer contributions to the plan for the years ended December 31,
1999, 2000 and 2001 were $36,000, $52,000 and $184,000, respectively.

11. COMMITMENTS AND CONTINGENCIES

The Company leases its current facility under a non-cancelable operating
lease that expires in August 2003. The total rent expense was $212,000, $199,000
and $531,000 for the years ended December 31, 1999, 2000, and 2001,
respectively. The rent expense for 2001 includes a charge of $304,000 for the
remaining lease obligation under the Company's existing non-cancelable lease. In
December 2001, the Company entered into a new lease agreement for a new
facility. The move to the new facility is anticipated early in the second
quarter. Additionally, in early 2002, the Company expects to incur approximately
$280,000 in leasehold improvement costs related to the new facility.

The Company leases vehicles for certain employees under non-cancelable
lease agreements expiring in 2003. The total vehicle lease expense under the
lease agreements for the years ended December 31, 1999, 2000 and 2001 was
$434,000, $1.3 million and $1.9 million, respectively.

61

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total minimum future commitments under leases for years succeeding
December 31, 2001 is as follows (in thousands):

Period ending December 31,
2002................................................... $2,022
2003................................................... 1,294
2004................................................... 626
2005................................................... 626
2006................................................... 646
Thereafter............................................. 1,580
------
Total............................................. $6,794
======

The Company has employment contracts with certain executives, which provide
for certain levels of severance in the event of termination without cause or for
certain change of control events, as defined.

The Company is involved with various routine legal proceedings incident to
the ordinary course of business. None of these proceedings are expected to have
a material adverse effect on the consolidated financial statements.

12. RELATED-PARTY TRANSACTIONS

The Company purchases repackaging services from Diversified Healthcare
Services, a related party. For the years ended December 31, 1999, 2000 and 2001,
the amounts paid for repackaging were approximately $282,000, $136,000 and
$5,000, respectively.

The Company pays royalties to a related party for particular products sold.
For the years ended December 31, 1999, 2000, and 2001, the amounts paid for
royalties were approximately $163,000, $213,000 and $140,000, respectively.

The Chairman and Chief Executive Officer of the Company did not receive a
salary for the year ended December 31, 1999.

During 1998, the Company entered into a collaboration agreement with
Inpharmakon Corporation, an affiliate of an officer of the Company, under which
Inpharmakon will assist the Company in developing their FHPC 01 product. This
agreement was amended in May 2000 as discussed in Note 9. The Company paid
$1,000, $201,000 and $200,000 to Inpharmakon in 1999, 2000 and 2001,
respectively.

On January 11, 1999, Kapoor-Pharma Investments, L.P.,an affiliate of one of
the directors of the Company, loaned the Company $1.6 million at an interest
rate of 2.0% over the prime rate of interest. In November 1999, the Company
converted principal and $145,000 of accrued interest totaling $1.7 million into
837,593 shares of common stock at $2.083 per share, pursuant to the terms of the
loan agreement.

In connection with the bridge loan agreement discussed in Note 2, the
Company paid a fee of $17,000 to a trust affiliated with John N. Kapoor Ph.D., a
director of the Company, in return for the pledge of certain Trust assets as
collateral for the loan.

62

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth summary quarterly financial information for
the years ended December 31, 2000 and 2001 (in thousands):

Quarterly amounts do not add to annual amounts due to the effect of
rounding on a quarterly basis.

14. SUBSEQUENT EVENTS

On February 12, 2002, the Company entered into a definitive agreement to
acquire certain U.S. rights relating to the product, Sular, from AstraZeneca UK
Limited. The Company also entered into a long term manufacturing, supply and
distribution agreement with Sular's current manufacturer, Bayer AG. The purchase
price for the transaction is $185.0 million, plus the assumption of certain
liabilities. In addition, the Company will pay up to $30.0 million in additional
purchase price after closing, based on the achievement of certain performance
milestones. The Company anticipates that it will complete the transaction in the
first quarter of 2002, subject to the approval under the Hart-Scott-Rodino
Antitrust Improvements Act and the satisfaction of certain other customary
closing conditions.

In order to finance the acquisition, the Company received a commitment on
January 31, 2002 for a six-month $152.0 million senior secured credit facility
arranged through Deutsche Banc Alex. Brown Inc. consisting of a $127.0 million
term loan and a $25.0 million revolving loan. The Company expects to borrow
$127.0 million under the term loan and $10.0 million under the revolving loan to
partially fund the purchase of Sular. Borrowings under the term loan bear
interest at the Company's option at the base rate in effect from time to time
plus an applicable margin or the Eurodollar rate, plus an applicable margin, and
mature six months from the closing date of the Sular transaction. Borrowings
under the revolving loan bear interest at the Company's option at the base rate
in effect from time to time plus an applicable margin or the Eurodollar rate,
plus an applicable margin, and mature three years from the closing of the Sular
transaction, provided that, in the event the term loan is not repaid in full
from the proceeds of one or more stock offerings or other junior financing, on
or prior to the term loan maturity date, then the revolving loan will mature on
the same date as the term loan. In conjunction with this new facility, the
Company's existing revolving loan facility discussed in Note 2 will be
terminated.

63

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
First Horizon Pharmaceutical Corporation

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of First Horizon
Pharmaceutical Corporation (a Delaware Corporation) and subsidiary included in
this Annual Report and have issued our report thereon dated February 12, 2002.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule of Valuation and
Qualifying Accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
February 12, 2002

64

SCHEDULE II

FIRST HORIZON PHARMACEUTICAL CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)