Fresenius Kabi Pharmaceuticals Holding, Inc. - FORM 10-Q

Fresenius Kabi Pharmaceuticals Holding, Inc. - FORM 10-Q - November 2, 2009

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EX-32.1 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Fresenius Kabi Pharmaceuticals Holding, Inc.	dex321.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER - Fresenius Kabi Pharmaceuticals Holding, Inc.	dex322.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Fresenius Kabi Pharmaceuticals Holding, Inc.	dex311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - Fresenius Kabi Pharmaceuticals Holding, Inc.	dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2009

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

For the transition period from to

Commission file number 001-34172

Fresenius Kabi Pharmaceuticals Holding, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		98-0589183
(State of Incorporation)		(I.R.S. Employer Identification No.)

Else-Kroener-Strasse 1 61352 Bad Homburg v.d.H. Germany
(Address of principal executive offices)		(Zip Code)

+49 (6172) 608 0

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address or Former Fiscal Year, if Changed Since Last Report)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 2, 2009, all of the shares of the registrant’s common stock were held by Fresenius Kabi AG.

Fresenius Kabi Pharmaceuticals Holding, Inc.

INDEX


		Page
PART I. Financial Information

Item 1.	Financial Statements (Unaudited)	3

	Condensed consolidated balance sheets – September 30, 2009 and December 31, 2008	3

	Condensed consolidated statements of operations – Successor periods for the three and nine months ended September 30, 2009 and July 2, 2008 through September 30, 2008, and Predecessor periods from July 1, 2008 through September 9, 2008, and January 1, 2008 through September 9, 2008	4-5

	Condensed consolidated statements of cash flows – Successor periods for the nine months ended September 30, 2009 and July 2, 2008 through September 30, 2008, and Predecessor period from January 1, 2008 through September 9, 2008	6

	Notes to condensed consolidated financial statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

PART II. Other Information

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

Signatures		41

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Fresenius Kabi Pharmaceuticals Holding, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)


	September 30, 2009			December 31, 2008
	(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents	$	5,770		$	8,441
Note receivable from Parent		—			33,800
Accounts receivable, net		60,504			86,557
Inventories		209,549			170,354
Prepaid expenses and other current assets		31,641			19,961
Current receivables from related parties		2,227			—
Income taxes receivable		60,084			30,695
Deferred income taxes		11,414			10,712

Total current assets		381,189			360,520

Property, plant and equipment, net		124,469			150,693
Intangible assets, net		513,584			532,306
Goodwill		3,661,535			3,669,677
Deferred income taxes, non-current		20,262			22,296
Deferred financing costs		128,853			96,242
Non-current receivables from related parties		12,673			27,832
Other non-current assets, net		43,408			4,197

Total assets	$	4,885,973		$	4,863,763


Liabilities and stockholder’s equity
Current liabilities:
Cash overdraft	$	4,255			—
Accounts payable		55,668			38,777
Accrued liabilities		51,109			53,066
Accrued intercompany interest		26,596			26,640
Current portion of long-term debt		52,975			43,719
Current portion of intercompany debt		283,059			99,892
Deferred income taxes, current		5,781			2,046

Total current liabilities		479,443			264,140


Long-term debt		927,294			953,781
Deferred income taxes, non-current		95,329			104,888
Fair value of interest rate swaps with Parent and affiliates		60,905			65,377
Intercompany notes payable to Parent and affiliates		2,619,260			2,764,541
Intercompany payable to Parent and affiliates		102,773			100,125
CVR payable		94,686			57,138
Other non-current liabilities		17,466			3,049

Total liabilities		4,397,156			4,313,039

Stockholder’s equity:
Common stock - $0.001 par value; 1,000 shares authorized in 2009 and 2008; 1,000 shares issued and outstanding in 2009 and 2008		—			—
Additional paid-in capital		900,257			900,019
Accumulated deficit		(388,468	)		(312,445	)
Accumulated other comprehensive loss		(22,972	)		(36,850	)

Total stockholder’s equity		488,817			550,724

Total liabilities and stockholder’s equity	$	4,885,973		$	4,863,763

See accompanying notes to condensed consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Successor			Successor			Predecessor
	Three Months ended September 30 2009			July 2 through September 30 2008			July 1 through September 9, 2008
				(in thousands)
Net revenue	$	224,654		$	48,080		$	149,800
Cost of sales		116,770			34,778			68,452

Gross profit		107,884			13,302			81,348
Operating expenses:
Research and development		6,444			2,066			8,970
Selling, general and administrative		17,454			5,508			18,305
Amortization of merger in-process research and development		—			252,000			—
Amortization of merger related intangibles		9,163			3,389			2,571
Impairment of fixed assets		5,372			—			—
Merger related costs		715			1,188			43,611
Separation related costs		345			—			235

Total operating expenses		39,493			264,151			73,692

Income (loss) from operations		68,391			(250,849	)		7,656
Interest expense		(8,807	)		(27,866	)		(14,497	)
Intercompany interest expense		(71,551	)		—			—
Unrealized gain (loss) in the fair value of contingent value rights		(50,608	)		52,241			—
Interest income and other, net		(893	)		(16	)		231

Loss before income taxes		(63,468	)		(226,490	)		(6,610	)
Provision (benefit) for income taxes		(2,242	)		(8,135	)		16,896

Net loss	$	(61,226	)	$	(218,355	)	$	(23,506	)

See accompanying notes to condensed consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Successor			Successor			Predecessor
	Nine Months ended September 30, 2009			July 2 through September 30, 2008			January 1 through September 9, 2008
				(in thousands)
Net revenue	$	632,186		$	48,080		$	495,797
Cost of sales		314,516			34,778			247,637

Gross profit		317,670			13,302			248,160
Operating expenses:
Research and development		20,822			2,066			35,133
Selling, general and administrative		64,641			5,508			62,896
Amortization of merger in-process research and development		—			252,000			—
Amortization of merger related intangibles		27,487			3,389			10,283
Impairment of fixed assets		5,372			—			—
Merger related costs		1,223			1,188			44,220
Separation related costs		491			—			2,239

Total operating expenses		120,036			264,151			154,771

Income (loss) from operations		197,634			(250,849	)		93,389
Interest expense		(61,166	)		(27,866	)		(45,124	)
Intercompany interest expense		(191,029	)		—			—
Unrealized gain (loss) in the fair value of contingent rights		(37,548	)		52,241			—
Interest income and other, net		3,677			(16	)		1,593

(Loss) income before income taxes		(88,432	)		(226,490	)		49,858
(Benefit) provision for income taxes		(12,409	)		(8,135	)		40,315

Net (loss) income	$	(76,023	)	$	(218,355	)	$	9,543

See accompanying notes to condensed consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Successor			Successor			Predecessor
	Nine Months ended September 30, 2009			July 2 through September 30, 2008			January 1 through September 9, 2008
				(in thousands)
Cash flows from operating activities:
Net (loss) income	$	(76,023	)	$	(218,355	)	$	9,543
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation		13,584			1,633			12,503
Amortization		28,685			790			1,633
Amortization of product rights		—			4			10,960
Amortization of merger related inventory step-up		—			12,588			—
Amortization of merger related in-process research and development charge		—			252,000			—
Amortization of merger related intangibles		27,486			3,389			10,284
Unrealized gain (loss) in fair value of contingent value rights		37,548			(52,241	)		—
Write-off of deferred financing fees		14,661			12,241			—
Gain on non-cash foreign currency transactions		(4,667	)		—			—
Stock-based compensation		237			—			5,749
Impairment of fixed assets		5,372			—			—
Loss on disposal of property, plant and equipment		396			—			87
Excess tax benefit from stock-based compensation		—			—			(493	)
Stock option grants/forfeitures		—			—			(328	)
Deferred income taxes		(4,933	)		19,492			(2,054	)
Other non cash charges		773			—			—
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable, net		26,053			(42	)		5,816
Inventories		(40,736	)		(1,109	)		(32,344	)
Income tax receivable		6,626			—			—
Prepaid expenses and other current assets		(7,094	)		2,914			(1,460	)
Current receivables from related parties		(2,227	)		—			—
Non-current receivables from related parties		15,159			—			37,223
Other non-current liabilities		14,417			(1,518	)		314
Accrued intercompany interest		(43	)		—			—
Income taxes payable		—			—			6,696
Accounts payable and accrued liabilities		(2,353	)		(96,606	)		41,386
Non-current payables from related parties		2,927			—			—

Net cash provided by (used in) operating activities		55,849			(64,820	)		105,515
Cash flows from investing activities:
Purchases of property, plant and equipment		(13,714	)		(12,645	)		(13,039	)
Purchases of other non-current assets		(9,413	)		(26,566	)		(800	)
Cash paid for acquisition of business		(2,000	)		(3,626,203	)		—

Net cash used in investing activities		(25,127	)		(3,665,414	)		(13,839	)

See accompanying notes to condensed consolidated financial statements


	Successor			Successor			Predecessor
	Nine Months ended September 30, 2009			July 2 through September 30, 2008			January 1 through September 9, 2008
				(in thousands)
Cash flows from financing activities:
Cash overdraft		4,255			—			—
Proceeds from the exercise of stock options		—			—			7,815
Proceeds of borrowings under unsecured credit facility, net		4,111			—			—
Proceeds of borrowings under secured credit facility, net		(17,231	)		—			—
Proceeds from issuance of debt		—			3,856,243			—
Proceeds from note receivable from Parent		33,800			—			—
Excess tax benefit from stock-based compensation		—			—			493
Repayment of borrowings		—			(997,500	)		(2,500	)
Payment of deferred financing costs, excluding amount paid by Fresenius		(62,679	)		(25,523	)		(792	)
Equity contribution from Fresenius		—			900,000			—

Net cash (used in) provided by financing activities		(37,744	)		3,733,220			5,016
Effect of exchange rates on cash		4,351			8			(2,283	)

Net (decrease) increase in cash and cash equivalents		(2,671	)		2,994			94,409
Cash and cash equivalents, beginning of period		8,441			—			31,788

Cash and cash equivalents, end of period	$	5,770		$	2,994		$	126,197

Supplemental disclosure of cash flow information:
Cash received/ (paid) during the period for:
Interest	$	(207,921	)	$	(6,524	)	$	(47,008	)

Income taxes	$	17,212		$	(2,865	)	$	(45,270	)

Supplemental schedule of noncash investing and financing activities:
Conversion of group and target revolver to intercompany debt	$	225,000		$	—		$	—

See accompanying notes to condensed consolidated financial statements

FRESENIUS KABI PHARMACEUTICALS HOLDING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

(1) Summary of Significant Accounting Policies

Basis of Presentation

On September 10, 2008, APP Pharmaceuticals, Inc. (“APP” or “the Predecessor”) became a direct, wholly-owned operating subsidiary of Fresenius Kabi Pharmaceuticals Holding, Inc. (“FKP Holdings” or “the Company”) and an indirect wholly-owned subsidiary of Fresenius SE (“Fresenius” or “the Parent”) a societas europaea organized under the laws of the European Union and Germany, upon completion of the merger (the “Merger”) of a wholly-owned subsidiary of FKP Holdings (“Merger Sub”) with and into APP pursuant to the Agreement and Plan of Merger dated July 6, 2008 (the “Merger Agreement”) by and among Fresenius, FKP Holdings, Merger Sub and APP.

FKP Holdings is a Delaware corporation and an indirect wholly-owned subsidiary of Fresenius. FKP Holdings was formed on July 2, 2008, and prior to the Merger had not carried on any activities or operations except for those activities incidental to its formation and in connection with the transactions related to the Merger. Following the Merger, the assets and business of FKP Holdings consist exclusively of those of APP prior to the Merger. Accordingly, for accounting purposes FKP Holdings is considered the successor to APP and the accompanying condensed consolidated results of operations are presented for two distinct periods: the periods preceding the Merger, or “predecessor” periods (from July 1, 2009 through September 9, 2009 and January 1, 2008 through September 30, 2008), and the periods after the merger, or “successor” periods (from the inception of FKP Holdings on July 2, 2008), which include the results of APP from September 10, 2008, the date of acquisition. The Company applied purchase accounting to the opening balance sheet on September 10, 2008. The Merger resulted in a new basis of accounting for the assets acquired and liabilities assumed in connection with the acquisition of APP beginning on September 10, 2008.

The Company incurred indebtedness in connection with the Merger, the aggregate proceeds of which were sufficient to pay the aggregate Merger consideration, repay a portion of the Company’s then outstanding indebtedness and pay fees and expenses related to the Merger. The Company also issued contingent value rights (“CVRs”) to the holders of APP common stock and the holders of stock options and restricted stock issued by APP prior to the Merger. The term “Transactions” refers to, collectively, (1) the Merger, (2) the incurrence of the initial merger-related indebtedness, and (3) the issuance of the CVRs. Fresenius has committed to the Company that it will provide financial support to FKP Holdings sufficient for it to satisfy its obligations and debt service requirements arising under the Company’s existing financing instruments that were incurred in connection with the Merger as they come due until at least January 1, 2010.

APP is a Delaware corporation that was formed in 2007. American Pharmaceutical Partners, Inc. (“Old APP”) was a Delaware corporation formed in 2001. On April 18, 2006, Old APP completed a merger with American BioScience Inc. (or “ABI”), Old APP’s former parent. In connection with the closing of that merger, Old APP’s certificate of incorporation was amended to change its original name of American Pharmaceutical Partners, Inc. to Abraxis BioScience, Inc., which we refer to as “Old Abraxis.”

On November 13, 2007, Old Abraxis separated into two independent publicly-traded companies, APP Pharmaceuticals Inc., which held the Abraxis Pharmaceutical Products business, focusing primarily on manufacturing and marketing our oncology, anti-infective and critical care hospital-based generic injectable products and marketing our proprietary anesthetic/analgesic products (which we refer to collectively as the “hospital-based business”), and Abraxis BioScience, Inc. (“New Abraxis”), which held the Abraxis Oncology and Abraxis Research businesses (which we refer to as the “proprietary business”). APP continued to operate the hospital-based business under the name APP Pharmaceuticals, Inc. APP and New Abraxis entered into a series of agreements in connection with the separation, including a credit facility under which APP borrowed $1 billion, a portion of which was paid to New Abraxis in connection with the separation, and a $150 million revolving credit facility. These credit facilities were retired in connection with the Merger and replaced with a similar external facility.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the predecessor and successor periods described above are not necessarily indicative of the results that may be expected for the year ending December 31, 2009, or for any other future periods. In addition, the results of the successor period are not comparable to the results of the predecessor period due to the difference in the basis of presentation as a result of the application of purchase accounting as of the Merger date as well as the effect of the Transactions as described above.

Certain prior period balances have been reclassified to conform to the presentation adopted in the current period. These reclassifications were necessary to conform the Company’s financial statement presentation to those of its Parent.

The balance sheet information at December 31, 2008 has been derived from the audited consolidated financial statements of FKP Holdings as of that date, but does not include all of the information and notes required by GAAP for complete financial statements. These interim unaudited condensed consolidated financial statements of the Company and its Predecessor should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed on February 19, 2009.

Principles of Consolidation

The unaudited condensed consolidated financial statements of FKP Holdings include: (a) the assets, liabilities and results of operations of FKP Holdings, and (b) the assets, liabilities and results of operations of APP and its wholly owned subsidiaries (Pharmaceutical Partners of Canada, Inc. and APP Pharmaceuticals Manufacturing, LLC). All material intercompany balances and transactions have been eliminated in consolidation. APP is a wholly owned subsidiary of FKP Holdings, which itself is a wholly-owned subsidiary of its sole stockholder Fresenius Kabi AG. Fresenius Kabi AG is a wholly-owned subsidiary of Fresenius.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates may also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that eliminates the exceptions to the rules requiring consolidation of qualifying special-purpose entities (the “QSPE”) which means more entities will be subject to consolidation assessments and reassessments. The guidance also requires ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity (“VIE”) and clarifies characteristics that identify a VIE. In addition, additional disclosures about a company’s involvement with a VIE and any significant changes in risk exposure due to that involvement are required. This guidance is effective for the Company beginning in 2010. The Company is currently evaluating the impact of the adopting this guidance but does not anticipate it will have a material impact on our results of operations or financial condition.

Recently Adopted Accounting Pronouncements

In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162” (“the ASC” or “the Codification”). Effective for interim and annual periods ended after September 15, 2009, the Codification became the source of authoritative U.S. generally accepted accounting principles (GAAP) and reporting standards recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement is not intended to change existing GAAP and as such did not have an impact on the consolidated financial statements of the Company. The Company has updated its references in these condensed consolidated financial statements to reflect the Codification.

In December 2007, the FASB issued new accounting guidance on business combinations and non-controlling interests in consolidated financial statements. The new guidance revises the method of accounting for a number of aspects of business combinations and non-controlling interest, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets attributable to non-acquired minority interests) and post-acquisition exit activities of acquired businesses. The new guidance is effective for the Company for business combinations completed and non-controlling interests acquired or created after January 1, 2009. The adoption of this guidance on January 1, 2009 did not impact the accompanying condensed consolidated financial statements.

In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and requires enhanced disclosures relating to: (a) the entity’s accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset; (b) in the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit), by major intangible asset class; and (c) for an entity that capitalizes renewal or extension costs, the total amount of costs incurred to renew or extend the term of a recognized intangible asset for each period for which a statement of financial position is presented, by major intangible asset class. The adoption of this new guidance on January 1, 2009 did not impact the accompanying condensed consolidated financial statements.

In March 2008, the FASB issued updated guidance that requires qualitative disclosures about the objectives and strategies for using derivatives, quantitative disclosures about the fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The effective date for adoption of this guidance by the Company was the first quarter of 2009. We have incorporated the required disclosures into these condensed consolidated financial statements. In September 2006, the FASB issued guidance that essentially redefined fair value, established a framework for measuring fair value in accordance with GAAP, and expanded disclosures about fair value measurements. This guidance applies where other accounting pronouncements require or permit fair value measurements and was effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in the financial statements. In November 2007, the FASB provided a one year deferral for the implementation of this guidance for other non-financial assets and liabilities. Our Predecessor adopted this guidance for financial assets and liabilities measured at fair value on a recurring basis on January 1, 2008, and the Company adopted it for non-financial assets and liabilities effective at the beginning of fiscal year 2009. The effects of its adoption were determined by the types of instruments carried at fair value in our financial statements at the time of adoption as well as the methods utilized to determine their fair values prior to adoption. The adoption of this guidance on January 1, 2008 did not have a significant impact on the consolidated financial statements of our Predecessor. The adoption of the guidance for non-financial assets and liabilities had no impact on our condensed consolidated financial statements for fiscal 2009.

In April 2009, the FASB issued updated guidance under related to fair-value measurements to clarify the guidance related to measuring fair-value in inactive markets, modify the recognition and measurement of other- than-temporary impairments of debt securities, and require public companies to disclose the fair values of financial instruments in interim periods. The updated guidance is effective for interim and annual periods ended after June 15, 2009, with early adoption permitted for periods ended after March 15, 2009. The Company adopted the updated guidance in the first quarter of fiscal year 2009, which required certain additional disclosures regarding the fair value of financial instruments in the financial statements.

In May 2009, the FASB issued guidance which establishes accounting and disclosure requirements for subsequent events. This guidance details the period after the balance sheet date during which the Company should evaluate events or transactions that occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events. The Company adopted this guidance in the second quarter of 2009, and has evaluated subsequent events through the filing date of this report. See Note 15—Subsequent Events.

(2) Merger with APP

On September 10, 2008, FKP Holdings completed the Merger, following which APP became a wholly-owned subsidiary of FKP Holdings. The results of APP’s operations have been included in the consolidated financial statements of FKP Holdings since September 10, 2008. APP is a fully-integrated pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products with a primary focus on the oncology, anti-infective, anesthetic/analgesic and critical care markets. APP manufactures a comprehensive range of dosage formulations, and its products are used in hospitals, long-term care facilities, alternate care sites and clinics within North America. The Merger is an important step in Fresenius’ growth strategy. Through the merger with APP, Fresenius gains entry to the U.S. pharmaceuticals market and achieves a leading position in the global I.V. generics industry. The North American platform also provides further growth opportunities for Fresenius’ existing product portfolio.

Effective with the Merger, each outstanding share of common stock of APP and certain stock options and restricted stock units of APP were converted into the right to receive $23.00 in cash, without interest, and one CVR issued by FKP Holdings and representing the right to receive a cash payment, without interest, of up to $6.00 determined in accordance with the terms of the CVR Agreement. The aggregate consideration paid in the Merger was $4,908.1 million (including assumed APP debt), comprised as follows (in millions):


Purchase of outstanding common stock (cash portion)	$	3,702.7
Buy-out of restricted stock units and stock options under stock compensation plans		27.7
Estimated fair value of CVRs		158.4
Direct acquisition costs		21.8

Fair value of consideration paid		3,910.6
Assumption of APP debt		997.5

Total aggregate consideration	$	4,908.1

The CVRs were issued on the acquisition date and are traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol “APCVZ.” The fair value of the CVRs at the date of the acquisition was estimated based on the average of their closing prices for the five trading days following the acquisition. Direct costs of the acquisition include investment banking fees, legal and accounting fees and other external costs directly related to the acquisition.

As the APP acquisition occurred prior to December 15, 2008, the acquisition was accounted for under the purchase method of accounting with the Company treated as the acquiring entity in accordance with the transition guidance in ASC 805-10-65. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is non-amortizing for financial statement purposes and is not tax deductible.

During the period ended September 30, 2009, the Company finalized its estimates of the fair values of the assets acquired and liabilities assumed at the acquisition date. The following summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Net working capital and other assets	$	322.4
Property, plant and equipment		112.4
In-process research and development		365.7
Identifiable intangible assets		542.0
Deferred tax liability, net		(95.9	)
Long-term debt		(997.5	)
Goodwill		3,661.5

Total	$	3,910.6

The changes in goodwill from December 31, 2008 to September 30, 2009 are primarily due to (i) finalization of a plan to close the acquired Barceloneta, Puerto Rico manufacturing facility and to transfer its production operations to existing Company plants in the United States; (ii) tax adjustments resulting from the decision to close the Puerto Rico manufacturing facility, filing of tax returns covering the pre-acquisition period and other acquisition-related matters; (iii) changes in the estimated fair value of acquired fixed assets, in part due to the finalization of the decision to close the Puerto Rico facility; (iv) revisions to the estimated fair values of certain acquired assets and assumed liabilities related to the APP acquisition. The purchase price allocation is considered final as of September 30, 2009 in accordance with SFAS 141.

On September 8, 2009, the Board of Directors of FKP Holdings formally approved management’s plan to close the Barceloneta, Puerto Rico manufacturing facility and the transfer production operations to existing Company plants in the United States. This action is consistent with the Company’s objective to lower overall manufacturing costs and to strengthen the Company’s long-term competitive position. The closure is expected to be substantially completed by April 30, 2010. The Company acquired the Barceloneta, Puerto Rico manufacturing facility in connection with the September 2008 acquisition of APP. Various plans to lower the Company’s overall manufacturing costs, including the closure of the Puerto Rico manufacturing facility along with the transfer of its production operations to existing Company plants in the United States, have been under consideration since the date of the acquisition and, accordingly, the decision to close this facility resulted in various adjustments to the estimated amounts assigned to certain assets acquired, liabilities assumed and residual goodwill in connection with the APP acquisition. These adjustments included a reduction in the estimated fair value of the acquired plant and equipment at the Puerto Rico facility, the recognition of estimated liabilities for employee severance and contract termination costs related to the Puerto Rico facility, and the recording of associated tax effects.

Due to the decision to close the Puerto Rico facility and the recognition of the related impairments for tax purposes, the Company expects to be able to file a carryback claim and recover approximately $39.2 million of taxes paid by APP in prior years. The portion of this benefit attributable to the assets acquired and liabilities assumed in connection with the purchase of APP has been reflected as an adjustment to goodwill in the condensed consolidated balance sheet.

Because the Company continued to operate the Puerto Rico facility subsequent to the acquisition date, a portion of the adjustment to the carrying value of property and equipment (approximately $5.4 million) and the anticipated tax benefit (approximately $7.9 million) resulting from the decision to close the facility have been reflected in the condensed consolidated statement of operations for the quarter ended September 30, 2009.

Approximately $365.7 million of the purchase price represents the estimated fair value of acquired in-process research and development (R&D) projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the successor period, $252.0 million as of the acquisition date and $113.7 million upon finalization of the fair value of the R&D projects during the fourth quarter 2008. The value assigned to the acquired in-process R&D was determined by project using a discounted cash flow model. The discount rates used take into consideration the stage of completion and the risks surrounding the successful development and commercialization of each of the acquired in-process R&D projects that were valued.

Identifiable intangible assets consist of developed product technology and are amortized using the straight-line method over the estimated useful life of the assets of 20 years. Refer to Note 9—Goodwill and Other Intangibles.

(3) Adjusted EBITDA Calculation for Contingent Value Rights

In connection with the Merger, each APP shareholder was issued one CVR of FKP Holdings for each share held. The CVRs are intended to give holders an opportunity to participate in any excess Adjusted EBITDA, as defined in the CVR Indenture, generated by FKP Holdings during the three years ending December 31, 2010, referred to as the “CVR measuring period,” in excess of a threshold amount. Each CVR represents the right to receive a pro rata portion of an amount equal to 2.5 times the amount by which cumulative Adjusted EBITDA of FKP Holdings and its subsidiaries on a consolidated basis, exceeds $1.267 billion for the three years ending December 31, 2010. If Adjusted EBITDA for the CVR measuring period does not exceed this threshold amount, no amounts will be payable on the CVRs and the CVRs will expire valueless. The maximum amount payable under the CVR Indenture is $6.00 per CVR. The cash payment on the CVRs, if any, will be determined after December 31, 2010, and will be payable June 30, 2011, except in the case of a change of control of FKP Holdings, which may result in an acceleration of any payment. The acceleration payment, if any, is payable within six months after the change of control giving rise to the acceleration payment.

The CVRs do not represent equity, or voting securities of FKP Holdings, and they do not represent ownership interests in FKP Holdings. Holders of the CVRs are not entitled to any rights of a stockholder or other equity or voting securities of FKP Holdings, either at law or in equity. Similarly, holders of CVRs are not entitled to any dividends declared or paid with respect to any equity security of FKP Holdings. A holder of a CVR is entitled only to those rights set forth in the CVR Indenture. Additionally, the right to receive amounts payable under the CVRs, if any, is subordinated to all senior obligations of FKP Holdings.

Because any amount payable to the holders of CVRs must be settled in cash, the CVRs are classified as liabilities in the accompanying unaudited condensed consolidated financial statements. The estimated fair value of the CVRs at the date of acquisition was included in the cost of the acquisition. At each reporting date, the CVRs are marked-to-market based on the closing price of a CVR as reported by NASDAQ, and the change in the fair value of the CVR for the reporting period is included in non-operating income. At September 30, 2009 and December 31, 2008, the carrying value of the CVR liability was approximately $94.7 million and $57.1 million, respectively.

(4) Inventories

Inventories are valued at the lower of cost or market as determined under the first-in, first-out, or FIFO method, as follows:


	For the Period Ended
	September 30, 2009						December 31, 2008
	Approved		Pending Regulatory Approval		Total Inventory		Approved		Pending Regulatory Approval		Total Inventory
	(in thousands)
Finished goods	$	88,752		—	$	88,752	$	72,677		—	$	72,677
Work in process		28,485		1,500		29,985		16,574		1,512		18,086
Raw materials		87,413		3,399		90,812		75,482		4,109		79,591

	$	204,650	$	4,899	$	209,549	$	164,733	$	5,621	$	170,354

Inventories consist of products currently approved for marketing and costs related to certain products that are pending regulatory approval. From time to time, we capitalize inventory costs associated with products prior to regulatory approval based on our judgment of probable future regulatory approval, commercial success and realizable value. Such judgment incorporates our knowledge and best judgment of where the product is in the regulatory review process, our required investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. In evaluating the market value of inventory pending regulatory approval as compared to the capitalized cost, we consider the market, pricing and demand for competing products, our anticipated selling price for the product and the position of the product in the regulatory review process. If final regulatory approval for such products is denied or delayed, we revise our estimates and judgments about the recoverability of the capitalized costs and, where required, provide reserves for or write-off such inventory in the period those estimates and judgments change. At September 30, 2009 and December 31, 2008, inventory included $4.9 million and $5.6 million, respectively, in costs related to products pending approval from the United States Food and Drug Administration (FDA).

We routinely review our inventory and establish reserves when the cost of the inventory is not expected to be recovered or the cost of a product exceeds estimated net realizable value. In instances where inventory is at or approaching expiration, is not expected to be saleable based on our quality and control standards, or is selling for a price below cost, we reserve for any inventory impairment based on the specific facts and circumstances. Provisions for inventory reserves are reflected in the unaudited condensed consolidated financial statements as an element of cost of sales; inventories are presented net of related reserves.

(5) Long-Term Debt and Credit Facilities

Fresenius Merger—Credit Agreements

On August 20, 2008, in connection with the acquisition of APP described in Note 2—Merger with APP, Fresenius entered into a $2.45 billion credit agreement with Deutsche Bank AG, London Branch, as administrative agent, Deutsche Bank AG, London Branch, Credit Suisse, London Branch, and J.P. Morgan plc, as arrangers and book running managers, and the other lenders party thereto (the “Senior Credit Facilities Agreement”) and a $1.3 billion bridge credit agreement with Deutsche Bank AG, London Branch, as the administrative agent, Deutsche Bank AG, London Branch, Credit Suisse, London Branch, and J.P. Morgan plc, as arrangers and book running managers, and the other lenders party thereto (the “Bridge Facility Agreement”) to assist in the funding of the transaction. The $2.45 billion Senior Credit Facilities Agreement includes a $1 billion term loan A, a $1 billion term loan B, and revolving credit facilities of $300 million, which may be increased to $500 million, and $150 million. Proceeds from borrowings under these credit facilities, together with other available funds provided by Fresenius through equity contributions and loans to FKP Holdings and its subsidiaries, were utilized to complete the purchase of APP on September 10, 2008.

The Senior Credit Facilities Agreement provides APP Pharmaceuticals, LLC, a wholly owned subsidiary of APP, with two term loan facilities: a Tranche A2 Term Loan (“Term Loan A2”) for $500 million and Tranche B2 Term Loan (“Term Loan B2”) for $497.5 million. The Senior Credit Facilities Agreement also provides APP Pharmaceuticals, LLC with a $150 million revolving credit facility. The revolving credit facility includes a $50 million sub-limit for swingline loans and a $20 million sub-limit for letters of credit. The Term Loan A2 and B2 loan facilities mature on September 10, 2013 and September 10, 2014, respectively, and the revolving credit facility expires on September 10, 2013. We incurred and capitalized approximately $25 million in debt issue costs in connection with the Senior Credit Facilities Agreement. As of September 30, 2009, the balance outstanding on APP Pharmaceuticals, LLC senior credit facilities was $980.3 million and the revolving credit facility had no outstanding balance.

Pursuant to the Senior Credit Facilities Agreement, Fresenius Kabi Pharmaceuticals, LLC (which was merged with and into APP Pharmaceuticals, Inc. upon consummation of the Merger) entered into an intercompany loan with the borrower of the $500 million Tranche A1 Term Loan and the $502.5 million Tranche B1 Term Loan, and an affiliate of FKP Holdings entered into an intercompany loan with the borrower under the $300 million revolving facility under the Senior Credit Facilities Agreement (collectively, the “Senior Intercompany Loans”), the amount, maturity and other financial terms of which correspond to those applicable to the loans provided to such borrowers under the Senior Credit Facilities Agreement described above. The Senior Intercompany Loans are guaranteed by FKP Holdings and certain of its affiliates and subsidiaries and secured by the assets of FKP Holdings and certain of its affiliates and subsidiaries. The Senior Intercompany Loans provide for an event of default and acceleration if there is an event of default and acceleration under the Senior Credit Facilities Agreement, but acceleration of the Senior Intercompany Loans may not occur prior to acceleration of the loans under the Senior Credit Facilities Agreement. By entering into certain of the Senior Intercompany Loans with Fresenius Kabi Pharmaceuticals, LLC, Fresenius effectively pushed-down its Merger-related term loan borrowings under the Senior Credit Facilities Agreement to the FKP Holdings group. The Senior Intercompany Loans bear interest at a variable rate based on the rates applicable to the corresponding loans under the Senior Credit Facilities Agreement, plus a margin, as discussed below, and are due in 2013 and 2014, as applicable. The balance of the Senior Intercompany Loans outstanding at September 30, 2009 was $1,484.8 million.

The interest rate on each borrowing under the Senior Credit Facilities Agreement is a rate per annum equal to the aggregate of (a) the applicable margin and (b) LIBOR or EURIBOR for the relevant interest period, subject, in the case of Term Loan B, to a minimum LIBOR or EURIBOR. The applicable margin for Term Loan A Facilities and the Revolving Credit Facilities is variable and depends on the Fresenius Leverage Ratio as defined in the Senior Credit Facilities Agreement.

The Senior Credit Facilities Agreement contains a number of affirmative and negative covenants that are assessed at the Fresenius level and are not separately assessed at APP Pharmaceuticals, LLC. The obligations of APP Pharmaceuticals, LLC under the Senior Credit Facilities Agreement are unconditionally guaranteed by Fresenius SE, Fresenius Kabi AG, Fresenius ProServe GmbH and APP Pharmaceuticals, Inc. and are secured by a first-priority security interest in substantially all tangible and intangible assets of APP Pharmaceuticals, Inc. and APP Pharmaceuticals, LLC.

Pursuant to the Bridge Facility Agreement, FKP Holdings entered into an intercompany loan (the “Bridge Intercompany Loan”) with an affiliate of FKP Holdings who was the borrower under the Bridge Facility Agreement, the amount, maturity, and other financial terms of which correspond to those applicable to the loans provided to such borrower under the Bridge Facility Agreement. The Bridge Intercompany Loan is guaranteed by certain of its affiliates and subsidiaries and secured by the assets of FKP Holdings and certain of its affiliates and subsidiaries. The Bridge Intercompany Loan provides for an event of default and acceleration if there is an event of default and acceleration under the Bridge Facility Agreement, but acceleration of the Bridge Intercompany Loan may not occur prior to acceleration of the loans under the Bridge Facility Agreement. By entering into the Bridge Intercompany Loan with FKP Holdings, Fresenius effectively pushed-down its Merger-related borrowings under the Bridge Credit Facility Agreement to FKP Holdings. The Bridge Intercompany Loan bears interest at the rate applicable to the corresponding loan under the Bridge Facility Agreement, plus a margin, if extended. In addition, Fresenius SE made two other intercompany loans totaling $456.2 million to FKP Holdings as part of the acquisition. These intercompany loans include fixed interest rates and mature on September 10, 2014. As described below, the original borrowing under the Bridge Facility Agreement was $1.3 billion, $650 million of which was repaid in October 2008 and the remainder of which was repaid in January 2009. Also as described below, the related intercompany loans were refinanced in connection with the repayments made on the Bridge Facility Agreement.

In connection with the intercompany loans described above, Fresenius also pushed-down to the Company approximately $101.1 million in fees and costs incurred in connection with establishing the Senior Credit Facilities Agreement and Bridge Facilities Agreement, the proceeds of which were used to finance the Merger.

Post-Merger Activity

On October 6, 2008, the amount available under the Senior Credit Facilities Agreement was increased to approximately $2.95 billion by increasing the amount of the Tranche B1 Term Loan facility by $483.1 million. On October 10, 2008, the full amount of the increase to the Tranche B1 Term Loan facility under the Senior Credit Facilities Agreement was drawn down. These funds, along with an additional $166.9 million (comprised of an additional $50 million drawn on the $300 million revolving credit facility under the Senior Credit Facilities Agreement and $116.9 million advanced by Fresenius under the terms of two Fresenius intercompany loans) were used to repay a portion of the $1.3 billion outstanding under the Bridge Facility Agreement, so that the aggregate amount outstanding under Bridge Facility Agreement, after these repayments, was $650 million. The $650 million repayment of the Bridge Intercompany Loan resulted in the write-off of $13.4 million in related debt issuance costs in the fourth quarter of 2008. These changes to the Senior Credit Facilities Agreement and Bridge Credit Facility Agreement were also reflected in the Senior Intercompany Loans and Bridge Intercompany Loan.

On January 21, 2009, the borrower under the Bridge Facility Agreement, which is an affiliate of Fresenius, issued two tranches of notes in a private placement. The issuer sold $500 million aggregate principal amount of fixed interest rate senior notes and €275 million aggregate principal amount of fixed interest rate senior notes. The notes are senior unsecured obligations of the issuer and mature on July 15, 2015. Proceeds of the notes issuance were used among other things, to repay in full the $650 million outstanding under the Bridge Facility Agreement. Upon the repayment of the bridge loan, the Bridge Intercompany Loan was refinanced and replaced with an Intercompany Dollar Loan of $500 million and an Intercompany Euro Loan of €115.7 million. The interest payments for these notes are at fixed interest rates and are due semi-annually on January 15 and July 15. These new intercompany loans are not guaranteed or secured and the principal for both of these loans is due July 15, 2015. As a result of the refinancing, in the first quarter of 2009, the Company wrote-off $14.6 million of Bridge Intercompany Loan unamortized debt issuance costs and incurred debt issuance costs of $64.3 million for the new Intercompany Dollar and Euro loans.

During the third quarter of 2009, the Company restructured certain of its unsecured intercompany loans. The Company did not receive or pay any cash as a result of the transactions described below. In connection with the restructuring, obligations related to $523.1 million of these unsecured intercompany loans were transferred from Fresenius SE to Fresenius Kabi AG along with the related outstanding accrued interest. The terms of these loans were unchanged in the transfer. Also, during the third quarter of 2009, the Company entered into $150 million in unsecured intercompany loans with Fresenius Kabi AG, and used the proceeds from the loans to pay down the entire $150 million balance outstanding under the $300 million revolving facility under the Senior Intercompany Loans. The Company also entered into $75 million in unsecured intercompany loans with Fresenius Kabi AG the proceeds of which were used to pay down the full amount outstanding under the APP Pharmaceuticals, LLC revolving credit facility under the Senior Credit Facilities Agreement. The $225 million of unsecured intercompany loans due to Fresenius Kabi AG are at fixed interest rates and mature monthly. These loans are intended to be extended monthly for the near term and are included in the current portion of intercompany debt in the condensed consolidated balance sheet. The balance of the unsecured intercompany loans at September 30, 2009 was $1,417.5 million.

The following is the repayment schedule for Term Loans A2 and B2 and the intercompany loans outstanding as of September 30, 2009 (in thousands):


	Term Loan A2		Term Loan B2		Intercompany Fresenius		Total
2009	$	24,000	$	2,488	$	254,029	$	280,517
2010		71,500		4,975		81,559		158,034
2011		122,500		4,975		132,559		260,034
2012		150,000		4,975		160,059		315,034
2013		118,500		4,975		128,558		252,033
2014 and thereafter		—		471,381		2,145,555		2,616,936

	$	486,500	$	493,769	$	2,902,319	$	3,882,588

Principal payments due on Term Loans A2 and B2 during the year ending September 30, 2010 are $52.9 million. Intercompany loan payments due over the next twelve months are $283.1 million.

(6) Derivatives

The Company does not engage in the trading of derivative financial instruments except where the Company’s objective is to manage the variability of forecasted principal and interest payments attributable to changes in interest rates or foreign currency exchange rate fluctuations. In general, the Company enters into derivative transactions in limited situations based on management’s assessment of current market conditions and perceived risks.

Included in our intercompany borrowings are two Euro-denominated notes, a €200 million note with a maturity in 2014 and a €115.7 million note with a maturity in 2015. In connection with these borrowings, we entered into intercompany foreign currency forward swap contracts in order to limit our exposure to changes in current exchange rates on the Euro-denominated notes principal balance and related future interest payments. We have entered into foreign currency swaps with affiliates of Fresenius for the total of the Euro-denominated notes principal balance. These agreements began to mature in June 2009, with the latest maturity in January 2012, and are not designated as hedging instruments for accounting purposes.

As the Euro-denominated intercompany notes payable represent a foreign currency transaction to us, during the three and nine month periods ended September 30, 2009, we recognized a $15.9 million and $33.8 million foreign currency transaction loss in order to adjust the carrying value of the Euro-denominated notes to reflect the September 30, 2009 exchange rate, and an offsetting foreign currency transaction gain of $15.3 million and $37.8 million related to the change in fair value of these swap agreements from a $4.1 million asset as of December 31, 2008 to a $41.9 million asset as of September 30, 2009.

On November 3, 2008, we entered into four interest rate swap agreements with Fresenius for an aggregate notional principal amount of $900 million. These agreements require us to pay interest at an average fixed rate of 3.97% and entitle us to receive interest at a variable rate equal to three-month LIBOR, which is equal to the benchmark for the term A Loans being hedged, on the notional amount. The interest rate swaps expire in October 2011 and December 2013. These swaps have been designated as hedges of our exposure to fluctuations in interest payments on outstanding variable rate borrowings due to changes in interest rates (a cash flow hedge).

The fair value amounts in our consolidated balance sheet at September 30, 2009, related to foreign currency forward and interest rate swap contracts were as follows:


	Asset Derivatives			Liability Derivatives
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivates designated as hedging instruments
Foreign currency forward contracts-Interest (current)	Prepaid expense and other current assets	$	3.1	Other accrued expenses	$	—
Foreign currency forward contracts-Interest (non-current)	Other non-current assets, net		3.2	Other non-current liabilities		—
Interest rate swap contracts(non-current)	Other non-current assets, net		—	Fair value of interest rate swaps with Parent and affiliates		60.9

Total		$	6.3		$	60.9


	Asset Derivatives			Liability Derivatives
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivates not designated as hedging instruments
Foreign currency forward contracts (current)	Prepaid expense and other current assets	$	5.1	Other accrued expenses	$	—
Foreign currency forward contracts (non-current)	Other non-current assets, net		36.8	Other non-current liabilities		—

Total		$	41.9		$	—

The pretax derivative gains and losses in our condensed consolidated statement of operations for the three months ended September 30, 2009, related to our foreign currency forward and interest rate swap contracts were as follows:


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative			Gain (Loss) on Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Loss			Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
(In millions)	Amount			Location	Amount		Location	Amount
Foreign currency forward contracts-Interest	$	1.1		Interest income and other, net	$	—	Interest income and other, net	$	—
Interest rate swap contracts		(8.2	)	Interest income and other, net		—	Interest income and other, net		(0.7	)

Total	$	(7.1	)		$	—		$	(0.7	)

Derivatives Not Designated as Hedging Instruments

Location of

Gain (Loss)

Recognized in

Income on

Derivative

Gain (Loss)
Recognized
in Income
on
Derivative

Foreign currency forward contracts

Interest income and other, net

15.3

The pretax derivative gains and losses in our consolidated statement of operations for the nine months ended September 30, 2009, related to our foreign currency forward contracts were as follows:


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative		Gain (Loss) on Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Loss			Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
(In millions)	Amount		Location	Amount		Location	Amount
Foreign currency forward contracts-Interest	$	6.3	Interest income and other, net	$	—	Interest income and other, net	$	—
Interest rate swap contracts		9.2	Interest income and other, net		—	Interest income and other, net		(0.8	)

Total	$	15.5		$	—		$	(0.8	)

Derivatives Not Designated as Hedging Instruments

Location of

Gain (Loss)

Recognized in

Income on

Derivative

Gain (Loss)
Recognized in
Income on
Derivative

Foreign currency forward contracts

Interest income and other, net

37.8

(7) Fair Value Measurements

Accounting guidance on fair value measurements sets a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value for certain financial assets and liabilities. The basis of the fair value measurement is categorized in three levels, in order of priority, as described below:


Level 1:		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:		Quoted prices in markets that are not active, or financial instruments for which all significant inputs are observable; either directly or indirectly.

Level 3:		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable; thus, reflecting assumptions about the market participants.

In valuing assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculated the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable instruments. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

The following table sets forth the Company’s financial assets and liabilities as of September 30, 2009 that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:


			Basis of Fair Value Measurement (in thousands)
	Balance at September 30, 2009		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets – fair value of foreign currency swaps	$	48,237	$	—	$	48,237	$	—
Liabilities:
Contingent value rights	$	94,686	$	94,686		—		—
Fair value of interest rate swaps		60,905		—	$	60,905		—

Total liabilities	$	155,591	$	94,686	$	60,905	$	—

(8) Related Party Transactions

Net receivables and payables due from (to) related parties for the successor period ended September 30, 2009 pertain to amounts due from (to) Fresenius and its direct and indirectly owned subsidiaries. See below for a detailed discussion of these transactions.

Transactions with Fresenius

In connection with the Merger and associated financing transactions, FKP Holdings and its subsidiaries entered into a number of intercompany loan agreements with financing subsidiaries of Fresenius, the Company’s parent, as described in Note 5—Long-Term Debt and Credit Facility. At September 30, 2009, the principal amount outstanding under these loans was $2,902.3 million. Interest expense recognized on these intercompany loans for the three and nine months ended September 30, 2009 was $71.6 million and $191.0 million, respectively. Accrued interest of $26.6 million was due on these intercompany loans at September 30, 2009. As described in Note 5—Long-Term Debt and Credit Facility, in the nine months ended September 30, 2009, the Company paid $64.3 million in issuance costs related to the refinancing of the Bridge Intercompany Loan. In addition, during the successor period ended December 31, 2008, Fresenius pushed-down approximately $101.1 million in issuance costs associated with these intercompany loans. These costs are expected to be repaid and are therefore included in the intercompany payable to Parent and affiliates balance reflected in the accompanying condensed consolidated balance sheets.

(9) Goodwill and Other Intangibles

As of September 30, 2009 and December 31, 2008, goodwill had a carrying value of $3,661.5 million and $3,669.7 million, respectively, with the decrease in carrying value resulting from the finalization of fair value estimates offset by the recognition of additional direct costs associated with the Merger between APP and FKP Holdings on September 10, 2008 as described in Note 2—Merger with APP.

All of our intangible assets, other than goodwill, are subject to amortization. Amortization expense on intangible assets attributable to operations for the three months and nine months ended September 30, 2009 (successor period) was $9.4 million and $27.7 million, respectively. Amortization expense for the period from July 2, 2008 through September 30, 2008 (successor period)

was $3.4 million and for the period from July 1 through September 9, 2008 and January 1 through September 9, 2008 (predecessor period) was $2.6 million and $10.3 million, respectively. At September 30, 2009, the weighted average expected lives of intangibles was approximately 18.5 years.

The following table reflects the components of identifiable intangible assets, all of which have finite lives, as of September 30, 2009 and December 31, 2008:


	September 30, 2009				December 31, 2008				Category Amortization Period
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Category Amortization Period
	(in thousands)				(in thousands)
Product rights	$	489,000	$	25,815	$	489,000	$	7,478	20 years
Customer relationships		12,000		4,223		12,000		1,223	3 years
Developed product technology		2,300		75		1,550		35	10 years
Patent defense costs		6,163		199		—		—	5 years
Contracts and other		43,500		9,067		41,000		2,508	5 years

Total	$	552,963	$	39,379	$	543,550	$	11,244

Estimated annual amortization expense for identifiable intangible assets with finite lives in each of the five succeeding years is approximately $33.7 million.

We amortize all of our identifiable intangible assets with finite lives over their expected period of benefit using the straight-line method. In determining the appropriate amortization period and method for developed product technology, we considered, among other things, the nature of the products, the anticipated timing of cash flows and the relatively high barriers to entry for competition due to the complex development and manufacturing processes. In addition, the products all share similar attributes in that they have a favorable risk profile (e.g., minimal side effects, adverse experiences, etc.) and are easy to administer to patients. Based on the risk profile and ease of use of the related products, we do not expect that new competing products will enter the market in the foreseeable future, and that the barriers to entry will help to protect the market positions of the products and preserve their useful lives. We have manufactured and sold many of our products for more than 20 years. Accordingly, as future cash flows with respect to these and our other products are expected to exceed 20 years, we have utilized the straight-line amortization method and a 20-year expected period of benefit. However, we cannot predict with certainty whether new competing products will enter the market, the timing of such competition or the Company’s ability to protect the market positions of its products and preserve their useful lives. In the event that we experience stronger or more rapid competition or other conditions that change the market positions of our products, we may need to accelerate the amortization of our developed product technology intangibles or recognize an impairment charge.

The Company follows the policy of capitalizing patent defense costs when it determines that such costs are recoverable from future product sales and a successful defense is probable. These costs are amortized over the remaining useful life of the patent. Patent defense costs are expensed as incurred until the criteria for capitalization are met, previously capitalized costs are written-off when it is determined that the likelihood of success is no longer considered probable.

During the period ended September 30, 2009 the Company capitalized $6.2 million of patent defense costs related to the successful defense of its patents. In March 2007 we filed a complaint for patent infringement against Navinta LLC in the U.S District Court for the District of New Jersey. Navinta filed an abbreviated new drug application, or ANDA, seeking approval from the FDA, to market ropivacaine hydrochloride injection, in the 2 mg/ml, 5 mg/ml and 10 mg/ml dosage forms. The Reference Listed Drug for Navinta’s ANDA is APP’s proprietary product Naropin. This matter proceeded to trial on July 20, 2009. The U.S. District Court, District of New Jersey reached a judgment in favor of the Company on August 3, 2009, determining that Navinta’s ANDA product infringed on the Company’s proprietary product Naropin. The judgment is subject to appeal by Navinta. The Company expensed $4.5 million of legal costs related to the defense of the Naropin patent that were incurred prior to January 1, 2009, as a reasonable determination concerning the outcome of the suit could not be determined.

(10) Accrued Liabilities

Accrued liabilities consisted of the following at September 30, 2009 and December 31, 2008:


	September 30, 2009		December 31, 2008
	(in thousands)
Sales and marketing	$	21,366	$	22,808
Payroll and employee benefits		15,780		14,077
Legal and insurance		5,312		5,068
Accrued interest		7,730		5,903
Accrued separation costs		—		429
Other		921		4,781

	$	51,109	$	53,066

(11) Income Taxes

As of September 30, 2009, the total amount of gross unrecognized tax benefits, which are reported in other liabilities in our unaudited condensed consolidated balance sheet, was $16.9 million. This entire amount would impact net income if recognized. In addition, we accrue interest and any necessary penalties related to unrecognized tax positions in our provision for income taxes. For the nine month period ended September 30, 2009, $0.4 million of such interest was accrued.

A reconciliation of the beginning and ending gross unrecognized tax benefits is as follows:


	Amount
	(thousands)
Balance at December 31, 2008	$	2,714
Increase related to prior year tax positions		3,000
Decrease related to prior year tax positions		(1,572	)
Increase related to current year tax positions		12,934
Settlements		(175	)

Balance at September 26, 2009	$	16,901

Deferred tax assets are recognized if, in management’s judgment, it is more likely than not such assets will be realized. The Company had determined that it cannot conclude that it is more likely than not that deferred tax assets related to carryovers of net operating losses in Puerto Rico will be realized. Accordingly, the Company recorded a valuation allowance of $1.0 million related to these future deductible amounts as of December 31, 2008. This total represented the entire deferred tax asset resulting from the Puerto Rican loss carryovers. Because of the decision to shut down the Puerto Rican plant, the deferred tax asset relating to the net operating losses in Puerto Rico was written off in September 2009, as was the related valuation allowance. There was no net effect to income tax expense. Management believes that all other deferred tax assets will be fully realized.

Through the date of the Merger, APP and its subsidiaries filed income tax returns in the U.S. Federal jurisdiction, Canada, Puerto Rico, and various state jurisdictions. APP is currently undergoing a federal income tax examination for tax years 2006 and 2007. APP is also currently under state income tax examinations in California, Illinois and North Carolina for various tax years. Although not currently under examination or audit, APP’s Canadian income tax returns for the 2005 through 2008 tax years, its Puerto Rico income tax returns for the 2006 through 2008 tax years, and its state income tax returns for the 2004 through 2008 tax years remain open for possible examination by the appropriate governmental agencies. There are no other open federal, state, or foreign government income tax audits at this time.

On September 10, 2008, the date of the Merger, a wholly-owned subsidiary of FKP Holdings merged with and into APP pursuant to and by the Agreement and Plan of Merger dated July 6, 2008. Accordingly, FKP Holdings became the parent company of APP and its subsidiaries. For periods beginning January 1, 2009, APP and its subsidiaries will be included in the consolidated US Federal income tax return of FKP Holdings.

(12) Other Comprehensive Income

Elements of other comprehensive income, net of income taxes, were as follows:


	Successor			Successor			Predecessor			Successor			Successor			Predecessor
	Three months Ended September 30 2009			July 2 through September 30 2008			July 1 through September 9, 2008			Nine months Ended September 30 2009			July 2 through September 30 2008			January 1 through September 9 2008
	(in thousands)									(in thousands)
Foreign currency translation adjustments	$	2,496		$	8		$	(1,389	)	$	4,378		$	8		$	(2,302	)
Change in fair value of interest rate swaps		(5,048	)		—			1,280			5,653			—			—
Change in the fair value of foreign currency hedges		699			—			—			3,847			—			—

Other comprehensive gain (loss), net of tax		(1,853	)		8			(109	)		13,878			8			(2,302	)
Net (loss) income		(61,226	)		(218,355	)		(23,506	)		(76,023	)		(218,355	)		9,543

Comprehensive (loss) income	$	(63,079	)	$	(218,347	)	$	(23,615	)	$	(62,145	)	$	(218,347	)	$	7,241

At September 30, 2009 and 2008, FKP Holdings had a cumulative loss from the change in the fair value of interest rate swaps, net of tax of $26.7 million and $0 million, respectively. During the predecessor periods ended September 30, 2008, APP reclassified the cumulative unrecognized loss on its interest rate swaps of $1.3 million to operations in connection with the settlement of the swaps on September 5, 2008. The cumulative change in foreign currency swaps was a gain of $3.8 million as of September 30, 2009. There were no foreign currency swaps during the nine months ended September 30, 2008. The cumulative foreign currency translation adjustment was a loss of $0.1 million as of September 30, 2009 and a gain of $0 million as of September 30, 2008.

(13) Contingencies

Litigation

We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims have included assertions that our products infringe existing patents, allegations of product liability and also claims that the uses of our products have caused personal injuries. We believe we have substantial defenses in these matters, however litigation is inherently unpredictable. Consequently any adverse judgment or settlement could have a material adverse effect on our results of operations, cash flows or financial condition for a particular period. We record accruals for such contingencies to the extent that we conclude a loss is probable and the amount can be reasonably estimated. We also record receivables for probable and estimable insurance recoveries from third party insurers.

Summarized below are the more significant legal matters pending to which we are a party:

Patent Litigation

Pemetrexed Disodium

We have filed an abbreviated new drug application, or “ANDA”, seeking approval from the United States Food and Drug Administration (“FDA”) to market pemetrexed disodium for injection, 500 mg/vial. The Reference Listed Drug for APP’s ANDA is Alimta^®, a chemotherapy agent for the treatment of various types of cancer marketed by Eli Lilly. Eli Lilly is believed to be the exclusive licensee of certain patent rights from Princeton University. We notified Eli Lilly and Princeton University of our ANDA filing pursuant to the provisions of the Hatch-Waxman Act and, in June 2008, Eli Lilly and Princeton University filed a patent infringement action in the U.S. District Court for the District of Delaware seeking to prevent us from marketing this product until after the expiration of U.S. Patent 5,344,932, which is alleged to expire in 2016. We filed our Answer and Counterclaims in August 2008 and are currently engaged in discovery.

Naropin^®

In March 2007 we filed a complaint for patent infringement against Navinta LLC in the U.S District Court for the District of New Jersey. Navinta filed an ANDA seeking approval from the FDA to market ropivacaine hydrochloride injection, in the 2 mg/ml, 5 mg/ml and 10 mg/ml dosage forms. The Reference Listed Drug for Navinta’s ANDA is APP’s proprietary product Naropin^®. This matter proceeded to trial on July 20, 2009. The U.S. District Court, District of New Jersey reached a judgment in favor of the Company on August 3, 2009, determining that Navinta’s ANDA product infringed on the Company’s proprietary product Naropin. The judgment is subject to appeal by Navinta.

Oxaliplatin

We have filed ANDAs seeking approval from the FDA to market oxaliplatin for injection, 10 mg and 50mg vials, and oxaliplatin injection, in 5mg/ml, 10ml, 20ml and 40 ml dosage forms. The Reference Listed Drug is the chemotherapeutic agent Eloxatin^® marketed by Sanofi-Aventis that is approved for the treatment of colorectal cancer. Sanofi-Aventis is believed to be the exclusive licensee of certain patent rights from Debiopharm. We notified Sanofi-Aventis and Debiopharm of the ANDA filings pursuant to the provisions of the Hatch-Waxman Act, and Sanofi-Aventis and Debiopharm filed a patent infringement action in the U.S. District Court for the District of New Jersey seeking to prevent us from marketing these products until after the expiration of various U.S. patents. Multiple cases proceeding against other generic drug manufacturers were consolidated pursuant to a pre-trial scheduling order in April 2008. The defendants motion for summary judgment on one of the patent’s at issue was granted and an order entered by the U.S. District Court. The order was successfully challenged by Sanofi-Aventis and the matter has been set for hearing on November 17, 2009 on Sanofi-Aventis’s motion seeking a preliminary injunction to prevent sales of oxaliplatin by generic drug manufacturers.

Product Liability Matters

Sensorcaine

We have been named as a defendant in approximately one hundred and thirteen personal injury/product liability actions brought against us and other pharmaceutical companies and medical device manufacturers by plaintiffs claiming that they suffered injuries resulting from the post-surgical release of certain local anesthetics via a pain pump into the shoulder joint. We acquired several generic anesthetic products from AstraZeneca in June 2006. Pursuant to the Asset Purchase Agreement with AstraZeneca we are responsible for indemnifying Astra Zeneca for defense of suits alleging injuries occurring after the acquisition date (unless the drugs are determined to be defective in manufacturing, in which case AstraZeneca will indemnify us pursuant to that certain Manufacturing and Supply Agreement entered into by us and AstraZeneca). Likewise Astra Zeneca agreed to indemnify us for suits alleging injuries occurring prior to the acquisition date. Forty of the actions involve an alleged event after the acquisition date. All of our local anesthetic products are approved by the FDA and continue to be marketed and sold to customers.

The cases have been filed in various jurisdictions around the country, including Indiana, Kentucky, New York, Colorado, Ohio, Minnesota, and California. Some are in state court, and most are in federal court. Discovery has just begun in most cases. We anticipate additional cases will be filed throughout the U.S. and we maintain product liability insurance for these matters.

Aredia and Zometa

We have been named as a defendant in several personal injury/product liability cases brought against us and other manufacturers by plaintiffs claiming that they suffered injuries resulting from the use of pamidronate (the generic equivalent of Aredia^®) prescribed for the management of metastic bone disease. Plaintiffs’ allege Aredia causes osteonecrosis to the jaw. Four cases have been consolidated into multi-district litigation before the Court in the U.S. District Court, Middle District Tennessee. We filed answers in three of the cases and filed a joinder in October 2008 with another defendant’s Motion to Dismiss for failure to serve the plaintiff’s complaint within 120 days of filing. The case was dismissed in November 2008. Defendants in these cases are opposed to the multi-district litigation Court issuing a remand order, and a ruling on this issue is pending before a United States Judicial Panel. Until a decision is reached, discovery in these cases remains stayed. Recently, four additional cases have been filed against us in a coordinated proceeding in the Superior Court of New Jersey, Middlesex County. One of those four complaints has yet to be served. Discovery has not yet started in these cases.

Breach of Contract Matters

On February 9, 2005, Pharmacy, Inc. filed suit against us in the U.S. District Court for the Eastern District of New York alleging our predecessor breached an Asset Purchase Agreement entered into September 30, 2002 by the parties. In its complaint Pharmacy seeks to recover monetary damages and other relief for the alleged breach of the contract. Discovery and dispositive motions have been substantially completed and the parties submitted an amended pre-trial order on December 10, 2008. The parties participated in a court ordered mediation which resulted in the Company agreeing to pay Pharmacy $3 million in consideration for a settlement and release of all claims with respect to this matter. The funds were paid in October 2009 and the case has been dismissed by the court.

Regulatory Matters

We are subject to regulatory oversight by the FDA and other regulatory authorities with respect to the development and manufacture of our products. Failure to comply with regulatory requirements can have a significant effect on our business and operations. Management has designed and operates a system of controls to attempt to ensure compliance with applicable regulatory requirements.

(14) Revenue by Product Line

Total revenues by product line were as follows (in thousands):


	Successor		Predecessor				Successor		Predecessor
	Three Months Ended September 30 2009		July 2 through September 30 2008		July 1 through September 9 2008		Nine Months Ended September 30 2009		July 2 through September 30 2008		January 1 through September 9 2008
Critical care	$	142,227	$	29,755	$	100,834	$	416,967	$	29,755	$	306,977
Anti-infective		63,182		13,792		40,064		155,038		13,792		142,384
Oncology		16,390		4,310		7,176		52,270		4,310		40,262
Contract manufacturing and other		2,855		223		1,726		7,911		233		6,174

Total revenue	$	224,654	$	48,080	$	149,800	$	632,186	$	48,080	$	495,797

(15) Subsequent Events

The Company has evaluated events and transactions subsequent to September 30, 2009 through November 2, 2009, the date these condensed consolidated financial statements were included in Form 10-Q and filed with the SEC. We have not identified any events that occurred subsequent to September 30, 2009 and through November 2, 2009, that require recognition or disclosure in the condensed consolidated financial statements.

ITEM 2.

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

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and other documents we file with the Securities and Exchange Commission contain forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which could cause our actual results and those of our consolidated subsidiaries to differ materially from those implied by such forward-looking statements, due to a number of factors, many of which are beyond our control, which include, but are not limited to:

•

the market adoption of and demand for our existing and new pharmaceutical products;

•

our ability to maintain and/or improve sales and earnings performance;

•

the ability to successfully manufacture products in an efficient, time-sensitive and cost effective manner;

•

our ability to service our debt;

•

the impact on our products and revenues of patents and other proprietary rights licensed or owned by us, our competitors and other third parties;

•

our ability, and that of our suppliers, to comply with laws, regulations and standards, and the application and interpretation of those laws, regulations and standards, that govern or affect the pharmaceutical industry, the non-compliance with which may delay or prevent the sale of our products;

•

the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals;

•

the availability and price of acceptable raw materials and components from third-party suppliers;

•

evolution of the fee-for-service arrangements being adopted by our major wholesale customers;

•

risks inherent in divestitures and spin-offs, including business risks, legal risks and risks associated with the tax and accounting treatment of such transactions;

•

inventory reductions or fluctuations in buying patterns by wholesalers or distributors;

•

the effect of the Merger on APP’s customer and supplier relationships, operating results and business generally;

•

risks that the Merger will disrupt APP’s current plans and operations, and the potential difficulties in retaining APP’s employees as a result of the Merger;

•

the outcome of any pending or future litigation and administrative claims;

•

the impact of recent legislative changes to the governmental reimbursement system;

•

potential restructurings of FKP Holdings and its subsidiaries (which include APP and its subsidiaries) which could affect its ability to generate Adjusted EBITDA;

•

the ability of FKP Holdings to generate Adjusted EBITDA sufficient to trigger a payment under the CVRs;

•

challenges of integration and restructuring associated with the Merger or other planned acquisitions and the challenges of achieving anticipated synergies; and

•

the impact of any product liability, or other litigation to which the company is, or may become a party.

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” and similar expressions are generally intended to identify forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise. Readers should carefully review the factors described in “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, and in “Item 1A: Risk Factors” of Part II of this Form 10-Q and other documents we file from time to time with the Securities and Exchange Commission. Readers should understand that it is not possible to predict or identify all such factors. Consequently, readers should not consider any such list to be a complete set of all potential risks or uncertainties.

OVERVIEW

The following management’s discussion and analysis of financial condition and results of operations, or MD&A, is intended to assist the reader in understanding our company. The MD&A is provided as a supplement to, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, including the information in “Item 1: Business”; “Item 1A: Risk Factors”, “Item 6: Selected Financial Data”; and “Item 8: Financial Statements and Supplementary Data.”

Background

Fresenius Kabi Pharmaceuticals Holding, Inc. (“FKP Holdings” or “the Company”), including its operating subsidiary APP Pharmaceuticals, Inc. (“APP”) is an integrated pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, and freeze-dried.

Our products are generally used in hospitals, long-term care facilities, alternate care sites and clinics within North America. Unlike the retail pharmacy market for oral products, the injectable pharmaceuticals marketplace is largely made up of end users who have relationships with group purchasing organizations, or GPOs, and/or specialty distributors who distribute products within a particular end-user market, such as oncology clinics. GPOs and specialty distributors generally enter into collective product purchasing agreements with pharmaceutical suppliers in an effort to secure more favorable drug pricing on behalf of their members.

American Pharmaceutical Partners, Inc. (“Old APP”) began in 1996 with an initial focus on U.S. marketing and distribution of generic pharmaceutical products manufactured by others. In June 1998, Old APP acquired Fujisawa USA, Inc.’s generic injectable pharmaceutical business, including manufacturing facilities in Melrose Park, Illinois and Grand Island, New York and our research and development facility in Melrose Park, Illinois. Old APP also acquired additional assets in that transaction, including inventories, plant and equipment and abbreviated new drug applications that were approved by or pending with the FDA.

FKP Holding is a Delaware company formed in connection with the Fresenius merger discussed below. APP is a Delaware corporation that was formed in 2007. Old APP was a Delaware corporation formed in 2001 and a California corporation formed in 1996. On April 18, 2006, Old APP completed a merger with American BioScience, Inc., or ABI, APP’s former parent. In connection with the closing of that merger, Old APP’s certificate of incorporation was amended to change its original name of American Pharmaceutical Partners, Inc. to Abraxis BioScience, Inc. which we refer to as “Old Abraxis.” Old Abraxis operated in two distinct business segments: Abraxis BioScience, representing the combined operations of Abraxis Oncology and Abraxis Research; and Abraxis Pharmaceutical Products, representing the hospital-based operations.

On November 13, 2007, Old Abraxis separated into two independent publicly-traded companies, New APP, which held the Abraxis Pharmaceutical Products business, focusing primarily on manufacturing and marketing our oncology, anti-infective and critical care hospital-based generic injectable products and marketing our proprietary anesthetic/analgesic products (which we refer to collectively as the “hospital-based business”), and Abraxis BioScience Inc. (“New Abraxis”) which held the Abraxis Oncology and Abraxis Research businesses (which we refer to as the “proprietary business”). New APP continued to operate the hospital-based business under the name APP Pharmaceuticals, Inc. New APP and New Abraxis entered into a series of agreements in connection with the separation, including a credit facility under which New APP borrowed $1 billion, a portion of which was paid to New Abraxis in connection with the separation, and a $150 million revolving credit facility.

On September 10, 2008, APP was acquired by FKP Holdings pursuant to an Agreement and Plan of Merger dated July 6, 2008 (the “Merger Agreement”). FKP Holdings is an indirect, wholly owned subsidiary of Fresenius. In connection with the Merger, FKP Holdings purchased all of the outstanding common stock of APP for $23.00 per share and issued contingent value rights (CVRs) to APP shareholders. The outstanding debt arranged in connection with the spin-off of New Abraxis was retired and approximately $3,856 million in new external and intercompany debt due to Fresenius and its affiliates was issued in connection with the acquisition.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 and September 30, 2008

The following table sets forth the results of our operations for each of the three months ended September 30, 2009 and 2008, and forms the basis for the following discussion of our operating activities. For accounting purposes the Company has separated its historical financial results for the Predecessor Company (APP) for all periods prior to September 10, 2008, the effective date of the Merger, and the Successor Company (FKP Holdings) for all periods after July 2, 2008 (the date of inception). The presentation of the results of our operations for the three months ended September 30, 2008 reflects the historical financial results of the Predecessor Company and the Successor Company on a combined basis. The separate presentation is required as there was a change in accounting basis, which occurred when purchase accounting was applied in connection with the acquisition of the Predecessor. Purchase accounting requires that the historical carrying value of assets acquired and liabilities assumed be adjusted to fair value, which may yield results that are not comparable on a period-to-period basis due to the different, and sometimes higher, cost basis associated with the allocation of the purchase price.

Note: For purposes of discussing our historical results of operations, the following table compares the results of the Successor Company for the three months ended September 30, 2009 to the combined results of the Successor Company and our Predecessor for the three months ended September 30, 2008. This comparative presentation is intended to facilitate the discussion of relevant trends and changes affecting our operating results. Where significant, the effect of merger related transactions and the application of purchase accounting are highlighted.

FRESENIUS KABI PHARMACEUTICALS HOLDING, INC.

CONSOLIDATED RESULTS OF OPERATIONS

(Unaudited, in thousands)


	July 2 through September 30, 2008			July 1 through September 9, 2008			Three months Ended September 30, 2009			Three months Ended September 30, 2008			Increase/ (Decrease)
	July 2 through September 30, 2008			July 1 through September 9, 2008			Three months Ended September 30, 2009			Three months Ended September 30, 2008			$			%
	(Successor)			(Predecessor)			(Successor)			Combined
Net revenues
Critical care	$	29,755		$	100,834		$	142,227		$	130,589		$	11,638		9	%
Anti-infective		13,792			40,064			63,182			53,856			9,326		17	%
Oncology		4,310			7,176			16,390			11,486			4,904		43	%
Contract manufacturing and other		223			1,726			2,855			1,949			906		46	%

Total net revenue		48,080			149,800			224,654			197,880			26,774		14	%
Cost of sales		34,778			68,452			116,770			103,230			13,540		13	%

Gross profit		13,302			81,348			107,884			94,650			13,234		14	%

Percent to total revenue		27.7	%		54.3	%		48.0	%		47.8	%
Research and development		2,066			8,970			6,444			11,036			(4,592	)	-42	%
Selling, general and administrative		5,508			18,305			17,454			23,813			(6,359	)	-27	%
Write-off of in-process R&D		252,000			—			—			252,000			(252,000	)	-100	%
Amortization of merger-related intangibles		3,389			2,571			9,163			5,960			3,203		54	%
Impairment of fixed assets		—			—			5,372			—			5,372		NA
Separation costs		—			235			345			235			110		47	%
Merger-related costs		1,188			43,611			715			44,799			(44,084	)	-98	%

Total operating expenses		264,151			73,692			39,493			337,843			(298,152	)	-88	%

Percent to total revenue		549.4	%		49.2	%		17.6	%		170.7	%
(Loss) income from operations		(250,849	)		7,656			68,391			(243,193	)		311,584		128	%

Percent to total revenue		-521.7	%		5.1	%		30.4	%		-122.9	%
Interest expense		(27,866	)		(14,497	)		(8,807	)		(42,363	)		(33,556	)	-79	%
Intercompany interest expense		—			—			(71,551	)		—			71,551		NA
Unrealized gain (loss) in the fair value of contingent value rights		52,241			—			(50,608	)		52,241			(102,849	)	-196	%
Interest income and other, net		(16	)		231			(893	)		215			(1,108	)	-515	%

(Loss) income before income taxes		(226,490	)		(6,610	)		(63,468	)		(233,100	)		169,632		73	%
Income tax (benefit) expense		(8,135	)		16,896			(2,242	)		8,761			(11,003	)	-126	%

Net loss	$	(218,355	)	$	(23,506	)	$	(61,226	)	$	(241,861	)	$	180,635		75	%

Total Net Revenue

Total net revenue for the three months ended September 30, 2009 increased $26.8 million, or 14%, to $224.7 million as compared to $197.9 million for the same quarter in 2008.

Net revenue for our critical care products for the three months ended September 30, 2009 increased to $142.2 million, an increase of $11.6 million, or 9%, over the prior year period, driven primarily by greater market penetration of our pre-existing products and by new product launches in 2009. Net revenue from anti-infective products for the three months ended September 30, 2009 increased by $9.3 million, or 17%, to $63.2 million as compared to $53.9 million in the prior year period due to new product launches in 2009 and increased volume resulting from an increase in market penetration along with greater access to raw materials. Net revenue from oncology products for the three months ended September 30, 2009 increased $4.9 million, or 43%, to $16.4 million from $11.5 million in the prior year period, mainly due to new product launches. Contract manufacturing and other revenue increased by $0.9 million to $2.8 million in the third quarter of 2009 as compared to $1.9 million for the same quarter in the prior year.

Gross Profit

Gross profit for the three months ended September 30, 2009 was $107.9 million, or 48.0% of total net revenue, as compared to $94.7 million, or 47.8% of total net revenue in the same quarter of 2008. The increase in gross profit was principally due to higher revenue in the 2009 quarter. The overall change in gross profit percentage was primarily due to improved product mix, partially offset by the reporting of $6.2 million of our 2009 Puerto Rico facility costs in cost of sales as we completed our production validation and transfer of products to our Puerto Rico facility late in the third quarter of 2008. In 2008, we reported $5.9 million of our Puerto Rico facility costs in research and development as production validation and transfer of products to the facility were in process. Cost of sales for the three-month periods ended September 30, 2009 and 2008 included $0.2 million and $2.7 million, respectively, in non-cash amortization of intangible product rights associated with a product acquisition. Cost of sales for the three months ended September 30, 2008 also included $12.6 million of non-cash expense reflecting the portion of the purchase accounting step-up in inventory associated with the Merger attributable to inventory sold during the period. Excluding the impact of the 2009 Puerto Rico facility costs and these non-cash charges, gross profit margin for the three months ended September 30, 2009 and 2008 would have been 50.8% and 55.6%, respectively.

Research and Development

Research and development expense for the three months ended September 30, 2009 decreased $4.6 million, or 42%, to $6.4 million compared to $11.0 million for the same quarter in 2008. The decrease was due primarily to the reporting of 2009 costs associated with our Puerto Rico facility in cost of goods sold as described above.

Selling, General and Administrative

Selling, general and administrative expense for the three months ended September 30, 2009 decreased $6.4 million to $17.4 million, or 7.7% of total net revenue, from $23.8 million, or 12.0% of total net revenue, for the same period in 2008. The decrease in costs was due primarily to the capitalization of legal fees during the current period, associated with the defense of our Naropin patent. See Part II, Item 1 of this Form 10-Q.

Amortization, Impairment of Fixed Assets and Separation and Merger Costs

Results for the three months ended September 30, 2009 included $9.2 million of amortization of Merger-related intangibles and $0.3 million in other costs associated with the Merger with APP. The prior year period included amortization of intangibles of $5.9 million and $252.0 million related to the write-off of in-process R&D recorded in the connection with the Merger. In-process R&D related to the value assigned in purchase accounting to projects that had not yet reached technological feasibility and had no alternative future, which was immediately expensed in the condensed consolidated statement of operations as required under current GAAP. Additionally, APP recognized $44.8 million of direct professional fees and transaction related costs associated with the Merger. These costs were primarily recognized in the predecessor period ended September 9, 2008.

As a result of planned closure of the Puerto Rico manufacturing facility during the three months ended September 30, 2009, $5.4 million of impairment charges were included in the current period results. Separation costs for the three months ended September 30, 2009 totaled $0.7 million compared to $0.2 million for the same period ended September 30, 2008.

Interest Expense and Intercompany Interest Expense

Interest expense for three months ended September 30, 2009 decreased $33.6 million to $8.8 million, as compared to $42.4 million for the same period in 2008. The decrease in interest expense was primarily due to the decrease in the average outstanding third party debt balances during the period and lower average borrowing rates, as well as the recognition in the prior period of $12.2 million of interest expense resulting from the write-off of loan fees related to the credit facility established in connection with the November 13, 2007 spin-off of New Abraxis, which was assumed in the merger and repaid, as well as a loss on settlement of our predecessor’s interest rate swap of $2.7 million. The settlement of the interest rate swap occurred in the predecessor period ended September 9, 2008. Intercompany interest expense was $71.6 million for the three months ended September 30, 2009 reflecting the $2,902.3 million of outstanding intercompany debt and amortization of related debt issuance costs incurred in connection with the closing of the Merger on September 10, 2008.

Interest Income and Other

Interest income and other, net consists primarily of interest earned on invested cash and cash equivalents, the impact of foreign currency rate changes on intercompany trading and debt accounts denominated in Euros, and other financing costs. Interest income and other, net was $0.9 million of expense for the three months ended September 30, 2009 versus $0.2 million of income in the comparable 2008 period. The increase in expense was primarily due to foreign currency transaction losses during the period.

Additionally, in the three months ended September 30, 2009 we recognized $50.6 million of expense resulting from the change in fair value of the contingent value rights (CVRs) issued to APP shareholders in connection with the Merger. The estimated fair value of the CVRs at the date of the acquisition was included in the cost of the acquisition and is adjusted at each reporting date (marked-to-market) based on the closing price of a CVR as reported by NASDAQ, with the change in the fair value of the CVRs for the reporting period being included in non-operating income.

Provision for Income Taxes

For the three month period ended September 30, 2009, FKP Holdings reported an income tax benefit of $2.2 million on a pretax loss of $63.5 million, or an effective tax rate of 3.5%. This rate differs from the statutory U.S. federal tax rate of 35% due primarily to the effect of the tax cost of a hypothetical distribution of the profits of our foreign subsidiaries and the non-deductibility of the $50.6 million in expense recognized for accounting purposes as a result of the change in the liability related to the CVRs.

For the successor period ended September 30, 2008, FKP Holdings reported an income tax benefit of $8.1 million on a pretax loss of $226.5 million, or an effective benefit rate of 3.6%. This rate differs from the statutory U.S. federal tax rate of 35% due primarily to the inclusion in pretax loss of $252 million related to the write-off of in-process R&D costs recognized in accounting for the Merger and a $52.2 million gain related to the change in fair value of the CVRs during the period, which are not included in the determination of taxable income, as well as the effect of state and foreign income taxes.

Tax expense on the $6.6 million pretax loss for the predecessor period from July 1, 2008 through September 9, 2008 was $16.9 million. This was due primarily to the inclusion in pretax loss of approximately $42 million of estimated nondeductible costs incurred by APP and relating to the acquisition of APP by Fresenius, as well as the effect of state and foreign income taxes.

Nine Months Ended September 30, 2009 and September 30, 2008

The following table sets forth the results of our operations for each of the nine months ended September 30, 2009 and 2008, and forms the basis for the following discussion of our operating activities. For accounting purposes the Company has separated its historical financial results for the Predecessor Company (APP) for all periods prior to September 10, 2008, the effective date of the Merger, and the Successor Company (FKP Holdings) for all periods after July 2, 2008 (the date of inception). The presentation of the results of our operations for the nine months ended September 30, 2008 reflects the historical financial results of the Predecessor Company and the Successor Company on a combined basis. The separate presentation is required as there was a change in accounting basis, which occurred when purchase accounting was applied in connection with the acquisition of the Predecessor. Purchase accounting requires that the historical carrying value of assets acquired and liabilities assumed be adjusted to fair value, which may yield results that are not comparable on a period-to-period basis due to the different, and sometimes higher, cost basis associated with the allocation of the purchase price.

Note: For purposes of discussing our historical results of operations, the following table compares the results of the Successor Company for the nine months ended September 30, 2009 to the combined results of the Successor Company and our Predecessor for the nine months ended September 30, 2008. This comparative presentation is intended to facilitate the discussion of relevant trends and changes affecting our operating results. Where significant, the effect of merger related transactions and the application of purchase accounting are highlighted.

CONSOLIDATED RESULTS OF OPERATIONS

(Unaudited, in thousands)


	July 2 through September 30, 2008			January 1 through September 9, 2008			Nine months Ended September 30, 2009			Nine months Ended September 30, 2008			Increase/(Decrease)
	July 2 through September 30, 2008			January 1 through September 9, 2008			Nine months Ended September 30, 2009			Nine months Ended September 30, 2008			$			%
	(Successor)			(Predecessor)			(Successor)			Combined
Net revenues
Critical care	$	29,755		$	306,977		$	416,967		$	336,732		$	80,235		24	%
Anti-infective		13,792			142,384			155,038			156,176			(1,138	)	-1	%
Oncology		4,310			40,262			52,270			44,572			7,698		17	%
Contract manufacturing and other		223			6,174			7,911			6,397			1,514		24	%

Total net revenue		48,080			495,797			632,186			543,877			88,309		16	%
Cost of sales		34,778			247,637			314,516			282,415			32,101		11	%

Gross profit		13,302			248,160			317,670			261,462			56,208		21	%

Percent to total revenue		27.7	%		50.1	%		50.2	%		48.1	%
Research and development		2,066			35,133			20,822			37,199			(16,377	)	-44	%
Selling, general and administrative		5,508			62,896			64,641			68,404			(3,763	)	-6	%
Write-off of in-process R&D		252,000			—			—			252,000			(252,000	)	-100	%
Amortization of merger-related intangibles		3,389			10,283			27,487			13,672			13,815		101	%
Impairment of fixed assets		—			—			5,372			—			(5,372	)	NA
Merger-related costs		1,188			44,220			1,223			45,408			(44,185	)	-97	%
Separation costs		—			2,239			491			2,239			(1,748	)	-78	%

Total operating expenses		264,151			154,771			120,036			418,922			(298,886	)	-71	%

Percent to total revenue		549.4	%		31.2	%		19.0	%		77.0	%
(Loss) income from operations		(250,849	)		93,389			197,634			(157,460	)		355,094		226	%

Percent to total revenue		-521.7	%		18.8	%		31.3	%		-29.0	%
Interest expense		(27,866	)		(45,124	)		(61,166	)		(72,990	)		(11,827	)	-16	%
Intercompany interest expense		—			—			(191,029	)		—			191,029		NA
Unrealized gain (loss) in the fair value of contingent value rights		52,241			—			(37,548	)		52,241			(89,789	)	-172	%
Interest income and other, net		(16	)		1,593			3,677			1,577			2,100		133	%

(Loss) income before income taxes		(226,490	)		49,858			(88,432	)		(176,632	)		88,200		50	%
Income tax (benefit) expense		(8,135	)		40,315			(12,409	)		32,180			(44,589	)	-139	%

Net (loss) income	$	(218,355	)	$	9,543		$	(76,023	)	$	(208,812	)	$	132,789		64	%

Total Net Revenue

Total net revenue for the nine months ended September 30, 2009 increased $88.3 million, or 16%, to $632.2 million as compared to $543.9 million for the same period in 2008.

Net revenues for our critical care products for the nine months ended September 30, 2009 increased by $80.2 million, or 24%, to $416.9 million from $336.7 million for the prior period, due primarily to market conditions related to Heparin and new product launches. Net revenues for anti-infective products for the nine months ended September 30, 2009 decreased by $1.1 million, or 1%, to $155.0 million from $156.1 million in the prior year period, mainly due to delayed approvals for new products and pricing pressure. Net revenue for oncology products for the nine months ended September 30, 2009 increased by $7.7 million, or 17%, to $52.3 million from $44.6 million, mainly due to new product launches partially offset by pricing pressures. Contract manufacturing and other revenue for the nine months ended September 30, 2009 increased by $1.5 million to $7.9 million from $6.4 million for the same period in the prior year.

Gross Profit

Gross profit for the nine months ended September 30, 2009 was $317.7 million, or 50.2% of total net revenue, as compared to $261.5 million, or 48.1% of total net revenue, in the same period of 2008. The improvement in the overall gross profit percentage was primarily due to improved product mix, partially offset by the reporting of $17.5 million of our 2009 Puerto Rico facility costs in cost of sales as we completed our production validation and transfer of products to our Puerto Rico facility. In 2008, we reported $18.7 million of our Puerto Rico facility costs in research and development until we completed production validation and transfer of products to the facility, which occurred in September 2008. Cost of sales for the nine month periods ended September 30, 2009 and 2008 included $0.7 million and $10.9 million, respectively, in non-cash amortization of intangible product rights associated with a product acquisition. Cost of sales for the nine months ended September 30, 2008 also included $12.6 million of non-cash expense reflecting the portion of the purchase accounting step-up in inventory associated with the Merger attributable to inventory sold during the period. Excluding the impact of 2009 Puerto Rico facility costs and these non-cash charges, gross profit margin for the nine months ended September 30, 2009 and 2008 would have been 53.1% and 52.4%, respectively.

Research and Development

Research and development expense for the nine months ended September 30, 2009 decreased $16.4 million, or 44%, to $20.8 million as compared to the prior year period in 2008. The decrease was due primarily to the reporting of 2009 costs associated with our Puerto Rico facility in cost of goods sold as described above.

Selling, General and Administrative

Selling, general and administrative expense for the nine months ended September 30, 2009 decreased $3.8 million to $64.6 million, or 10.2% of total net revenue, from $68.4 million, or 12.5% of total net revenue, for the same period in 2008. The decrease in costs was due primarily to the capitalization of legal fees in 2009, associated with the defense of our Naropin patent.

Amortization, Impairment of Fixed Assets, Separation and Merger Costs

The nine months ended September 30, 2009 included $28.7 million of amortization of Merger-related intangibles and other costs associated with the Merger with APP. The prior year period included amortization of Merger-related intangibles and other merger costs of $59.1 million, and $252.0 million related to the write-off of in-process research and development representing the value assigned in purchase accounting to projects that had not yet reached technological feasibility and had no alternative future use, which was immediately expensed in the condensed consolidated statement of operations as required under current GAAP. Additionally, the predecessor recognized $45.4 million of direct professional fees and transaction related costs associated with the Merger. These costs were primarily recognized in the predecessor period ended September 9, 2008.

As a result of planned closure of the Puerto Rico manufacturing facility during the three months ended September 30, 2009, $5.4 million of impairment charges were included in the current period results. Separation costs for the nine months ended September 30, 2009 totaled $0.5 million compared to $2.2 million for the same period ended September 30, 2008.

Interest Expense and Intercompany Interest Expense

Interest expense decreased to $61.2 million for the nine months ended September 30, 2009, compared to $72.9 million for the same period in 2008. The decrease in interest expense was primarily due the lower average third party debt levels along with recognition in the prior year period of $12.2 million of interest expense resulting from the write-off of loan fees related to the credit facility established in connection with the November 13, 2007 spin-off of New Abraxis, which was assumed in the merger and repaid, as well as a loss on settlement of our predecessor’s interest rate swap of $2.7 million. The settlement of the interest rate swap occurred in the predecessor period ended September 9, 2008. Intercompany interest expense was $191.0 million for the nine months ended September 30, 2009 reflecting the $2,902.3 million of outstanding intercompany debt and amortization of related debt issuance costs, including $14.6 million in unamortized deferred financing costs that were written off in the first quarter of 2009 in connection with the refinancing and restructuring of the bridge financing that was put in place in connection with the Merger in September of 2008.

Interest Income and Other

Interest income and other, net consists primarily of interest earned on invested cash and cash equivalents, the impact of foreign currency rate changes on intercompany trading and debt accounts denominated in Euros, and other financing costs. Interest income and other, net was $3.7 million of income for the nine months ended September 30, 2009 compared to $1.6 million of income in the prior period. The increase was primarily due to higher foreign currency transaction gains.

Additionally, in 2009 we recognized $37.5 million of expense resulting from the change in fair value of the contingent value rights (CVRs) issued to APP shareholders in connection with the Merger. The estimated fair value of the CVRs at the date of the acquisition was included in the acquisition cost and is adjusted at each reporting date (marked-to-market) based on the closing price of a CVR as reported by NASDAQ, with the change in the fair value of the CVR for the reporting period being included in non-operating income.

Provision for Income Taxes

For the nine month period ended September 30, 2009, FKP Holdings reported an income tax benefit of $12.4 million on a pretax loss from operations of $88.4 million, or an effective benefit rate of 14.0%. This rate differs from the statutory U.S. federal tax rate of 35% due primarily to the tax cost of a hypothetical distribution of the profits of our foreign subsidiaries and by the non-deductibility of the $37.5 million in expense recognized for accounting purposes as a result of the change in the liability related to the CVRs.

Tax expense on pretax income for the predecessor period from January 1, 2008 through September 9, 2008 was $40.3 million, an effective rate of 80.9%. This rate differs from the statutory U.S. federal tax rate of 35% due primarily to the inclusion in pretax income of approximately $42 million of estimated nondeductible costs incurred by APP and relating to the acquisition of APP by Fresenius, as well as the effect of state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The following table summarizes key elements of our financial position and sources and (uses) of cash and cash equivalents for the periods indicated:

Liquidity and Capital Resources


	September 30, 2009			December 31, 2008
	(in thousands)
Summary Financial Position:
Cash and cash equivalents	$	5,770		$	8,441

Working capital	$	(98,254	)	$	108,310

Total assets	$	4,885,973		$	4,863,763

Total debt	$	3,882,588		$	3,861,933

Total stockholders’ equity (deficit)	$	488,817		$	550,724


	Successor July 2 through September 30, 2008			Predecessor January 1 through September 9, 2008			Successor Nine Months Ended September 30, 2009			Combined For the Nine Months Ended September 30, 2008
	(in thousands)						(in thousands)
Summary of Sources and (Uses) of Cash and Cash Equivalents:
Operating activities	$	(64,820	)	$	105,515		$	55,849		$	40,695

Purchase of property, plant and equipment	$	(12,645	)	$	(13,039	)	$	(13,714	)	$	(25,684	)

Purchase of other non-current assets	$	(26,566	)	$	(800	)	$	(9,413	)	$	(27,366	)

Assets acquired, net of cash	$	(3,626,203	)	$	—		$	(2,000	)	$	(3,626,203	)

Financing activities	$	3,733,220		$	5,016		$	(37,744	)	$	3,738,236

Sources and Uses of Cash

Operating Activities

Net cash provided by operating activities was $55.8 million for the nine months ended September 30, 2009 (successor period) as compared to net cash provided by operating activities of $40.7 million for the nine months ended September 30, 2008 (predecessor period). The change in cash provided by operating activities for the 2009 period as compared to the same period in 2008 was due primarily to higher net earnings (after non-cash charges) in 2009, and collections of outstanding trade receivables offset by a higher seasonal increase in inventory during 2009.

Investing Activities

Investing activities include cash paid for acquisitions, capital expenditures necessary to expand and maintain our manufacturing capabilities and infrastructure, and outlays to acquire various product or intellectual property rights needed to grow and maintain our business. Cash used in investing activities during the nine month period ended September 30, 2009 was $25.1 million as compared to $3,679.3 million during the nine month period ended September 2008. Investing activities in the prior period included $3,665.5 million cash used in the successor period and $13.8 million cash used in the predecessor period, which included the cash paid for the acquisition of APP, net of cash acquired of $3,626.2 million. The nine months ended September 30, 2009 included $2.0 million of Merger related payments of direct acquisition costs and $2.5 million of product rights purchased, as well as purchases of plant and equipment.

Financing Activities

Financing activities generally include external borrowings under our credit facility and intercompany borrowing activity with Fresenius and its affiliated companies, and, prior to the Merger, the issuance or repurchase of our common stock and proceeds from the exercise of employee stock options. Net cash used in financing activities for the nine month periods ended September 30, 2009 was $37.7 million. Net cash provided by financing activities for the nine months ended September 30, 2008 was $3,738.2 million ($3,733.2 million cash provided in the successor period and $5.0 million of cash provided in the predecessor period) which reflected the $900.0 million capital contribution received from Fresenius and proceeds from the external and intercompany borrowings incurred to finance the Merger totaling $3,856.2 million, offset by the retirement of pre-merger debt of $997.5 million and Merger-related payments of certain financing costs of $25.5 million, Financing inflows in the nine months ended September 30, 2009 included $33.8 million received upon the maturity of short-term notes receivable from affiliates and net borrowings under the unsecured intercompany debt facility of $4.1 million, offset by $62.7 million in debt issuance costs paid in the period related to the refinancing of our bridge loan facilities as a result of the private placement completed by Fresenius in January 2009.

Sources of Financing and Capital Requirements

Our primary sources of liquidity for our operating and working capital needs, including funding for our research and development activities, as well as to support the capital expenditures necessary to expand and maintain our manufacturing capabilities and infrastructure, and to acquire various product or intellectual property rights needed to grow and maintain our business is through cash flow generated from our operations and our existing credit facilities. Capital to expand our business through acquisition has been provided by Fresenius, our ultimate parent.

We are also party to a “keep well” agreement with Fresenius under which Fresenius has agreed to provide us with financial support sufficient to satisfy the obligations and debt service requirements that arise under our existing financial instruments that we incurred in connection with the Merger. The keep well agreement will extend until at least January 1, 2010.

Credit Agreement

Fresenius Merger—Credit Agreements

Pursuant to the Senior Credit Facilities Agreement, Fresenius Kabi Pharmaceuticals, LLC (which was merged with and into APP Pharmaceuticals, Inc. upon consummation of the Merger) entered into an intercompany loan with the borrower of the $500 million Tranche A1 Term Loan and the $502.5 million Tranche B1 Term Loan, and an affiliate of FKP Holdings entered into an intercompany loan with the borrower under the $300 million revolving facility under the Senior Credit Facilities Agreement (collectively, the “Senior Intercompany Loans”), the amount, maturity and other financial terms of which correspond to those applicable to the loans provided to such borrowers under the Senior Credit Facilities Agreement described above. The Senior Intercompany Loans are guaranteed by FKP Holdings and certain of its affiliates and subsidiaries and secured by the assets of FKP Holdings and certain of its affiliates and subsidiaries. The Senior Intercompany Loans provide for an event of default and acceleration if there is an event of default and acceleration under the Senior Credit Facilities Agreement, but acceleration of the Senior Intercompany Loans may not occur prior to acceleration of the loans under the Senior Credit Facilities Agreement. By entering into certain of the Senior Intercompany Loans with Fresenius Kabi Pharmaceuticals, LLC, Fresenius effectively pushed-down its Merger-related term loan borrowings under the Senior Credit Facilities Agreement to the FKP Holdings group. The Senior Intercompany Loans bear interest at a variable rate based on the rates applicable to the corresponding loans under the Senior Credit Facilities Agreement, plus a margin, and are due in 2013 and 2014, as applicable. The balance of the Senior Intercompany Loans outstanding at September 30, 2009 was $1,484.8 million.

Pursuant to the Bridge Facility Agreement, FKP Holdings entered into an intercompany loan (the “Bridge Intercompany Loan”) with an affiliate of FKP Holdings who was the borrower under the Bridge Facility Agreement, the amount, maturity, and other financial terms of which correspond to those applicable to the loans provided to such borrower under the Bridge Facility Agreement. The Bridge Intercompany Loan is guaranteed by certain of its affiliates and subsidiaries and secured by the assets of FKP Holdings and certain of its affiliates and subsidiaries. The Bridge Intercompany Loan provides for an event of default and acceleration if there is an event of default and acceleration under the Bridge Facility Agreement, but acceleration of the Bridge Intercompany Loan may not occur prior to acceleration of the loans under the Bridge Facility Agreement. By entering into the Bridge Intercompany Loan with FKP Holdings, Fresenius effectively pushed-down its Merger-related borrowings under the Bridge Credit Facility Agreement to FKP Holdings. The Bridge Intercompany Loan bears interest at the rate applicable to the corresponding loan under the Bridge Facility Agreement, plus a margin, if extended. In addition, Fresenius SE made two other intercompany loans totaling $456.2 million to FKP Holdings as part of the acquisition. These intercompany loans include fixed interest rates and mature on September 10, 2014. The original borrowing under the Bridge Facility Agreement was $1.3 billion, $650 million of which was repaid in October 2008 and the remainder of which was repaid in January 2009. The related intercompany loans were refinanced in connection with the repayments made on the Bridge Facility Agreement.

Post-Merger Activity

The following is the repayment schedule for Term Loans A2 and B2 and the intercompany loans outstanding as of September 30, 2009 (in thousands):


	Term Loan A2		Term Loan B2		Intercompany Fresenius		Total
2009	$	24,000	$	2,488	$	254,029	$	280,517
2010		71,500		4,975		81,559		158,034
2011		122,500		4,975		132,559		260,034
2012		150,000		4,975		160,059		315,034
2013		118,500		4,975		128,558		252,033
2014 and thereafter		—		471,381		2,145,555		2,616,936

	$	486,500	$	493,769	$	2,902,319	$	3,882,588

Principal payments due on Term Loans A2 and B2 during the year ending September 30, 2010 are $52.9 million. Intercompany loan payments due over the next twelve months are $283.1 million.

The CVRs

In connection with the Merger, each APP shareholder was issued one contingent value right of FKP Holdings. The CVRs are intended to give holders an opportunity to participate in any excess Adjusted EBITDA, as defined in the CVR Indenture, generated during the three years ending December 31, 2010, referred to as the “CVR measuring period,” in excess of a threshold amount. Each CVR represents the right to receive a pro rata portion of an amount equal to 2.5 times the amount by which cumulative Adjusted EBITDA of APP and FKP Holdings and their subsidiaries on a consolidated basis, exceeds $1.267 billion for the three years ending December 31, 2010. The maximum amount payable under the CVR Indenture is $6.00 per CVR. If Adjusted EBITDA for the CVR measuring period does not exceed this threshold amount, no amounts will be payable on the CVRs and the CVRs will expire valueless. The cash payment on the CVRs, if any, will be determined after December 31, 2010, and will be payable June 30, 2011, except in the case of a change of control of FKP Holdings, which may result in an acceleration of any payment. The acceleration payment, if any, is payable within six months after the change of control giving rise to the acceleration payment.

Because any amount payable to the holders of CVRs must be settled in cash, the CVRs are classified as liabilities in the condensed consolidated financial statements. The estimated fair value of the CVRs at the date of acquisition was included in the cost of the acquisition. At each reporting date, the CVRs are marked-to-market based on the closing price of a CVR as reported by NASDAQ, and the change in the fair value of the CVR for the reporting period is included in non-operating income.

Assuming the Adjusted EBITDA threshold is met, the maximum amount payable under the CVR Indenture is $979.5 million. Such payment would be due on June 30, 2011. In the event that such a payment is required, we would likely need to seek financing from either an external source or Fresenius and its affiliates, in order to satisfy the obligation.

The CVRs do not represent equity, or voting securities of FKP Holdings, and they do not represent ownership interests in FKP Holdings. Holders of the CVRs are not entitled to any rights of a stockholder or other equity or voting securities of FKP Holdings, either at law or in equity. Similarly, holders of CVRs are not entitled to any dividends declared or paid with respect to any equity security of FK Holdings. A holder of a CVR is entitled only to those rights set forth in the CVR indenture. Additionally, the right to receive amounts payable under the CVRs, if any, is subordinated to all senior obligations of FKP Holdings. The CVRs trade on NASDAQ under the symbol “APCVZ.”

Under the terms of the CVR Indenture, the amount, if any, payable in respect of each CVR on June 30, 2011 is determined based on Adjusted EBITDA (as defined by the CVR indenture). As a result, in addition to reporting financial results in accordance with generally accepted accounting principles (“GAAP”), FKP Holdings also must calculate and present Adjusted EBITDA, which is a non-GAAP financial measure, for the cumulative period from January 1, 2008 to the current reporting date until the expiration of the CVR measurement period (December 31, 2010) and settlement of the CVRs.

The calculation of Adjusted EBITDA under the CVR Indenture for the nine month period ended September 30, 2009 and the cumulative period from January 1, 2008 to September 30, 2009 is as follows (in thousands):


	For the Nine Month Period Beginning January 1, 2009 and Ending September 30, 2009			For the Cumulative Period Beginning January 1, 2008 and Ending September 30, 2009
EBITDA CALCULATION:
Net loss	$	(76,023	)	$	(378,925	)

Interest expense (net of interest income)		252,102			415,220
Income tax (benefit)		(12,409	)		(1,515	)
Depreciation		15,376			34,774
Amortization		28,434			472,177

EBITDA	$	207,480		$	541,731


*Reconciliation to Adjusted EBITDA:*
Stock compensation (FAS 123(R))		237			6,006
Merger and separation related costs		1,223			48,531
Puerto Rico costs		9,535			32,803
Technology transfer		1,018			2,097
Change in the value of contingent value rights		37,547			(63,669	)
Other taxes		415			1,282
Loss on sale of fixed assets		396			478
Consulting fees		400			600
Foreign currency gain		(4,402	)		(2,840	)
Other charges		6,250			6,046

Adjusted EBITDA – per CVR Indenture	$	260,099		$	573,065

FKP Holdings believes that its presentation of these non-GAAP financial measures is consistent with the requirements of the CVR Indenture and also provides useful supplementary information to help investors in understanding the underlying operating performance and cash generating capacity of the Company. FKP Holdings uses these non-GAAP financial measures internally for operating, budgeting and financial planning purposes and also believes that its presentation of these non-GAAP financial measures can assist management and investors in assessing the financial performance and underlying strength of its core business. The non-GAAP financial measures presented by FKP Holdings may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measures are in addition to, and not a substitute for or superior to, measures of financial performance calculated in accordance with GAAP.

Capital Requirements

Our future capital requirements will depend on numerous factors, including:

•

the obligations placed upon our company from our credit agreements discussed above, including any debt covenants related to those obligations;

•

working capital requirements and production, sales, marketing and development costs required to support our business;

•

the need for manufacturing expansion and improvement;

•

our obligation to make a payment under the CVRs, and the amount of such payment;

•

the requirements of any potential future acquisitions, asset purchases or equity investments; and

•

the amount of cash generated by operations, including potential milestone and license revenue.

We anticipate that available cash and short-term investments, cash generated from operations and funds available under our credit facility will be sufficient to finance our operations, including ongoing product development and capital expenditures, for at least the next twelve months. In the event we engage in future acquisitions or major capital projects, we may have to raise additional capital through additional borrowings or the issuance of debt or equity securities.

As described above, we are responsible for servicing the external debt of $1.0 billion incurred in connection with the Merger, as well as to pay the principal and interest on the outstanding intercompany debt of $2.9 billion. While we expect that funds generated by our operations will be sufficient to enable us to satisfy our debt service obligations, our ability to meet our debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer preferences, the success of product and marketing innovations and pressure from competitors. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. At any given time, we may not be able to refinance this debt, sell assets or borrow more money on terms acceptable to us or at all; the failure to do any of which could have adverse consequences for our business, financial condition and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For information regarding critical accounting estimates, see the caption “Critical Accounting Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes to our critical accounting estimates during the third quarter of 2009.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for information related to recent accounting pronouncements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks associated with changes in interest rates and foreign currency exchange rates. Interest rate changes affect primarily the interest we earn on our short-term advances to our parent and its affiliates and the interest we pay on our debt obligations. Changes in foreign currency exchange rates can affect the amount of our debt and interest obligations as well as our operations outside of the United States.

Foreign Currency Risk: We have operations in Canada; however, both revenue and expenses of those operations are typically denominated in the currency of the country of operations, providing a partial hedge. Nonetheless, our Canadian subsidiary is presented in our financial statement in U.S. dollars and can be impacted by foreign currency exchange fluctuations through both (i) translation risk, which is the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and (ii) transaction risk, which is the risk that the currency impact of transactions denominated in currencies other than the subsidiary’s functional currency may vary according to currency fluctuations.

With respect to translation risk, even though there may be fluctuations of currencies against the U.S. dollar, which may impact comparisons with prior periods, the translation impact is included in accumulated other comprehensive income, a component of stockholders’ equity, and does not affect the underlying results of operations. Gains and losses related to transactions denominated in a currency other than the functional currency of the countries in which we operate are included in the condensed consolidated statements of operations.

We have also entered into foreign currency hedges for the €10.5 million of future cash flows related to the interest payments due on the €200 million note through December 10, 2010, and for the €25.4 million of future cash flows related to the interest payments on the €115.7 million note through January 17, 2012. These foreign currency agreements have been designated as hedges of our exposure to fluctuations in interest payments on outstanding Euro-denominated borrowings due to changes in Euro/U.S. dollar exchange rates (a cash flow hedge). The fair value of these foreign currency hedge agreements at September 30, 2009 is an asset of $6.3 million, and is included in long-term assets in our condensed consolidated balance sheets. Because we have hedged our exposures to changes in the Euro/ U.S. dollar exchange rate, we do not believe that fluctuations in the exchange rate would have a significant impact on our financial statements.

Investment Risk: The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our activities without increasing risk. Since our merger with Fresenius, we use its cash management system to invest excess cash not needed for current operations. Accordingly, our investments at December 31, 2008 consisted solely of short-term notes receivable received in exchange for our cash deposits with Fresenius. We did not have any investments with Fresenius at September 30, 2009.

Interest Rate Risk: We are also exposed to changes in interest rates on our variable rate borrowings. As of September 30, 2009, $980.3 million was outstanding on our credit facility and we had approximately $2,902.3 million of outstanding intercompany loans. If the interest rates on our outstanding borrowings were to increase by 1%, our interest expense would increase $30.0 million (after considering the impact of the swap agreement described below) based on our outstanding debt balances at September 30, 2009.

On November 3, 2008, we entered into four interest rate swap agreements with Fresenius for an aggregate notional principal amount of $900 million. These agreements require us to pay interest at an average fixed rate of 3.97% and entitle us to receive interest at a variable rate equal to three-month LIBOR, which is equal to the benchmark rate for the Term A Loans being hedged, on the notional amount. The interest rate swaps expire in October 2011 and December 2013. These swaps have been designated as hedges of our exposure to fluctuations in interest payments on outstanding variable rate borrowings due to changes in interest rates (a cash flow hedge). The fair value of these interest rate swap agreements at September 30, 2009 is a liability of $60.9 million, and is included in long-term liabilities in our consolidated balance sheets.

ITEM 4.

CONTROLS AND PROCEDURES

Under the rules and regulations of the Securities and Exchange Commission, we are not required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we file our Annual Report on Form 10-K for our fiscal year ending December 31, 2009. In our Annual Report on Form 10-K for our fiscal year ending December 31, 2009, management and our independent registered public accounting firm will be required to provide an assessment as to the effectiveness of our internal control over financial reporting.

We maintain disclosure controls and procedures, as such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance we necessarily are required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the quarterly period covered by this report. Based on their evaluation and subject to the foregoing, management has concluded that our disclosure controls and procedures were effective as of September 30, 2009.

There was no change in the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Summarized below are the more significant legal matters pending to which we are a party:

ITEM 1A.

RISK FACTORS

For information regarding risks related to our business and our outstanding contingent value rights, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes to our risk factors during the third quarter of 2009.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The exhibits are as set forth in the Exhibit Index.

SIGNATURES

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


FKP PHARMACEUTICALS HOLDING, INC.

By:		/s/ Richard J. Tajak
		Richard J. Tajak
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Date: November 2, 2009

Exhibit Index


Exhibit Number		Description
2.1		Separation and Distribution Agreement among APP, Abraxis BioScience, LLC, APP Pharmaceuticals, LLC and Abraxis BioScience, Inc. (f/k/a New Abraxis, Inc.) (Incorporated by reference to Exhibit 2.3 to APP’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2008)

2.2		Agreement and Plan of Merger, dated July 6, 2008 among APP, Fresenius SE, Fresenius Kabi Pharmaceuticals Holding LLC, and Fresenius Kabi Pharmaceuticals LLC (Incorporated by reference to Exhibit 2.1 to APP’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2008)

3.1		Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2008)

3.2		Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2008)

4.1		Reference is made to Exhibits 3.1 and 3.2

31.1†		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2†		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1†		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

32.2†		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

†	Filed herewith.

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