JUNIPER PHARMACEUTICALS INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - JUNIPER PHARMACEUTICALS INC	Financial_Report.xls
EX-32.1 - EXHIBIT 32,1 - JUNIPER PHARMACEUTICALS INC	a2011q3ex321.htm
EX-32.2 - EXHIBIT 32.2 - JUNIPER PHARMACEUTICALS INC	a2011q3ex322.htm
EX-31.2 - EXHIBIT 31.2 - JUNIPER PHARMACEUTICALS INC	a2011q3ex-312.htm
EX-31.1 - EXHIBIT 31.1 - JUNIPER PHARMACEUTICALS INC	a2011q3ex-311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2011



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

For the transition period from ______________ to ______________

Commission File Number 1-10352

COLUMBIA LABORATORIES, INC.

(Exact name of Registrant as specified in its charter)



Delaware		59-2758596
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

354 Eisenhower Parkway
Livingston, New Jersey		07039
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (973) 994-3999

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 o

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 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o

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

No x

Number of shares of Common Stock of Columbia Laboratories, Inc. issued and outstanding as of November 2, 2011: 87,267,865.

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



		Page
Part I - Financial Information
Item 1.	Condensed Consolidated Financial Statements	3
	Balance Sheets	4
	Statements of Operations	5
	Statements of Comprehensive Income (Loss)	6
	Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

Part II - Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	30
Item 4.	(Removed and Reserved)	30
Item 5.	Other Information	30
Item 6.	Exhibits	31

SIGNATURES		32

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

The following unaudited, condensed consolidated financial statements of Columbia Laboratories, Inc. (“Columbia” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and therefore omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the three- and nine- months ended September 30, 2011 are not necessarily indicative of the results for the year ending December 31, 2011. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related disclosures for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2011.

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents of which $5,218,499 in 2011 and $8,245,818 in 2010 is interest bearing	$	11,327,465		$	21,630,979
Short term investments	14,988,328			—
Accounts receivable, net of allowances for doubtful accounts of $100,000 in 2011 and 2010 (including amounts from related party: 2011 - $932,052; 2010 - $2,101,161)	3,099,756			4,141,026
Inventories	3,343,237			2,586,207
Prepaid expenses and other current assets	560,166			497,947
Total current assets	33,318,952			28,856,159
Property and equipment, net	851,343			518,542
Other assets	464,306			484,141
TOTAL ASSETS	$	34,634,601		$	29,858,842

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable	$	2,906,871		$	5,393,966
Accrued expenses	3,613,674			4,491,074
Deferred revenue (amounts from related party)	—			16,974,383
Total current liabilities	6,520,545			26,859,423
Deferred revenue	49,815			154,187
Redeemable warrants	—			13,471,832
Common stock warrant liability	5,935,171			9,286,906
TOTAL LIABILITIES	12,505,531			49,772,348
COMMITMENTS AND CONTINGENCIES
Contingently redeemable series C preferred stock, 600 shares issued and outstanding (liquidation preference of $600,000)	600,000			600,000
SHAREHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value;1,000,000 shares authorized
Series B convertible preferred stock, 130 shares issued and outstanding (liquidation preference of $13,000)	1			1
Series E convertible preferred stock, 24,000 shares issued and outstanding (liquidation preference of $2,400,000) in 2011 and 59,000 shares issued and outstanding (liquidation preference of $5,900,000) in 2010	240			590
Common stock $.01 par value; 150,000,000 authorized; 87,304,313 and 84,434,611 shares issued in 2011 and 2010, respectively	873,043			844,345
Capital in excess of par value	277,903,393			260,600,989
Less cost of 36,448 and 3,462,124 treasury shares in 2011 and 2010, respectively	(125,381		)	(3,346,090		)
Accumulated deficit	(257,265,396		)	(278,809,945		)
Accumulated other comprehensive income	143,170			196,604
Shareholders' equity (deficiency)	21,529,070			(20,513,506		)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)	$	34,634,601		$	29,858,842

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Nine Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
REVENUES
Net product revenues (including amounts from related party:
nine months 2011 - $1,513,296; 2010 - $581,104
three months 2011 - $574,956; 2010 - $581,104)	$	12,536,141		$	21,702,045		$	4,129,112		$	5,117,378
Royalties (including amounts from related party:
nine months 2011 - $1,845,154; 2010 - $450,000
three months 2011 - $702,336; 2010 - $450,000)	2,070,226			544,349			782,694			540,380
Other revenues (including amounts from related party:
nine months 2011 - $21,974,383; 2010 - $8,487,192
three months 2011 $0; 2010 - $8,487,192 )	22,078,785			8,537,003			34,888			8,503,655
Total net revenues	36,685,152			30,783,397			4,946,694			14,161,413
COST OF PRODUCT REVENUES
Cost of product revenues (including amounts from related party:
nine months 2011 - $1,453,720; 2010 - $528,473
three months 2011 - $636,232; 2010 - $528,473)	8,161,210			6,232,062			3,124,284			2,969,827
Gross profit	28,523,942			24,551,335			1,822,410			11,191,586
OPERATING EXPENSES:
Selling and distribution	87,669			9,882,039			—			3,925,408
General and administrative	6,765,420			12,451,067			1,908,616			4,339,349
Research and development (net of reimbursement from related party:
nine months 2011 - $2,690,163; 2010 - $0
three months 2011 - $474,987; 2010 - $0)	2,362,434			6,609,318			508,884			2,034,183
Net gain on U.S. sale of STRIANT	(2,533,127		)	—			—			—
Amortization of licensing right	—			2,522,364			—			—
Total operating expenses	6,682,396			31,464,788			2,417,500			10,298,940
Income (loss) from operations	21,841,546			(6,913,453		)	(595,090		)	892,646
OTHER INCOME (EXPENSE):
Interest income	36,395			24,625			31,868			22,416
Interest expense	(11,663		)	(4,832,641		)	(3,887		)	(12,549		)
Change in fair value of derivative	—			—			—			4,829,036
Loss on extinguishment of debt	—			(5,156,775		)	—			(5,156,775		)
Change in fair value of redeemable warrants	(2,721,205		)	(133,128		)	—			(133,128		)
Change in fair value of stock warrants	2,790,337			—			5,050,520			—
Other, net	(353,151		)	(201,684		)	(32,964		)	(184,024		)
Total other income (expense)	(259,287		)	(10,299,603		)	5,045,537			(635,024		)
Income (loss) before taxes	21,582,259			(17,213,056		)	4,450,447			257,622
Provision for income taxes	(37,710		)	(2,200		)	(33,206		)	—
NET INCOME (LOSS)	$	21,544,549		$	(17,215,256	)	$	4,417,241		$	257,622
NET INCOME (LOSS) PER COMMON SHARE:
Basic	$	0.25		$	(0.24	)	$	0.05		$	0.00
Diluted	$	0.20		$	(0.24	)	$	(0.01	)	$	0.00
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic	85,998,197			70,987,668			87,269,433			82,010,063
Diluted	92,561,710			70,987,668			89,240,246			82,010,063

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Nine Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
NET INCOME (LOSS)	$	21,544,549		$	(17,215,256	)	$	4,417,241		$	257,622
Other comprehensive income (loss):
Foreign currency translation	(10,356		)	(11,479		)	(15,586		)	12,032
Unrealized loss on short term investments	(43,078		)	—			(43,078		)	—
COMPREHENSIVE INCOME (LOSS)	$	21,491,115		$	(17,226,735	)	$	4,358,577		$	269,654

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	21,544,549		$	(17,215,256	)
Adjustments to reconcile net income (loss) to net cash used in operating activities-
Depreciation and amortization	120,646			3,107,178
Amortization on beneficial conversion features	—			918,710
Amortization on warrant valuation	—			673,852
Gain on sale of STRIANT	(2,533,127		)	—
Change in value of redeemable warrants	2,721,205			133,128
Change in value of stock warrants	(2,790,337		)	—
Recognition of deferred income	(16,924,568		)	(8,537,003		)
Provision for sales returns	358,287			1,633,424
Writeoff of accounts receivable	7,616			67,744
Writeoff of inventories	58,612			42,595
Loss on extinguishment of debt	—			5,156,775
Share-based compensation	649,658			2,685,621
Non-cash interest expense on financing agreements	—			1,137,222
Loss on disposal of fixed assets	3,780			—
Changes in assets and liabilities-
(Increase) decrease in:
Accounts receivable	1,033,654			1,747,119
Inventories	(1,103,674		)	(276,639		)
Prepaid expenses and other current assets	(167,256		)	879,356
Other assets	19,835			(737		)
Increase (decrease) in:
Accounts payable	(2,487,095		)	(1,717,776		)
Other accrued expenses	(1,247,092		)	704,747
Deferred revenue	(154,187		)	—
Net cash used in operating activities	(889,494		)	(8,859,940		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(631,031		)	(34,864		)
Additions to short term investments	(15,031,406		)	—
Proceeds from sale of assets	—			35,240,000
Proceeds from sale of STRIANT	3,100,000			—
Net cash (used in) provided by investing activities	(12,562,437		)	35,205,136
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock	—			11,643,897
Proceeds from financing agreements - Watson Note	—			15,000,000
Proceeds from exercise of stock options	2,641,950			—
Proceeds from exercise of warrants	653,299			—
Payment of note payable	—			(25,999,999		)
Payments pursuant to financing agreements	—			(16,155,903		)
Repurchase of company stock	—			(3,059,996		)
Payments for purchase of treasury stock	(125,381		)	(62,281		)
Dividends paid	(22,500		)	(22,500		)
Net cash provided by (used in) financing activities	3,147,368			(18,656,782		)

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)



	Nine Months Ended September 30,
	2011			2010

EFFECT OF EXCHANGE RATE CHANGES ON CASH	1,049			(11,471		)
NET (DECREASE) INCREASE IN CASH	(10,303,514		)	7,676,943
CASH, BEGINNING OF PERIOD	21,630,979			14,757,615
CASH, END OF PERIOD	$	11,327,465		$	22,434,558

SUPPLEMENTAL INFORMATION
Interest paid	$	—		$	1,600,000
Taxes paid	$	199,775		$	58,256
NON-CASH FINANCING ACTIVITIES
Reclassification of redeemable warrant liability to capital in excess of par value	$	16,193,037		$	—
Retirement of warrant liability	$	561,398		$	—
Forgiveness of Watson Note	$	—		$	15,000,000
Net issuance of Common Stock for debt retirement	$	—		$	7,738,883
Issuance of warrants for debt retirement	$	—		$	5,509,893

See notes to condensed consolidated financial statements

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(1)	SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies followed for quarterly financial reporting are the same as those disclosed in Note (1) of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 with the exception of the addition of the following accounting policy related to the accounting for short term investments.

Short Term Investments. Investments consist of actively traded mutual funds that invest in U.S. Treasury and agency securities. The Company's investments are classified as available-for-sale and are recorded at fair value, based upon quoted market prices. Unrealized temporary adjustments to fair value are included on the balance sheet in a separate component of stockholders' equity as unrealized gains and losses and reported as a component of accumulated other comprehensive income. No gains or losses on investments are realized until shares are sold or a decline in fair value is determined to be other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.


(2)	WATSON TRANSACTIONS:

On July 2, 2010, the Company sold to Watson Pharmaceuticals, Inc. ("Watson"), (i) substantially all of its assets primarily relating to the research, development, regulatory approval, manufacture, distribution, marketing, sale and promotion of pharmaceutical products containing progesterone as an active ingredient, including CRINONE® 8% progesterone gel, PROCHIEVE® 4% progesterone gel and PROCHIEVE® 8% progesterone gel (collectively, the “Progesterone Products”), including certain intellectual property, promotional materials, contracts, product data and regulatory approvals and regulatory filings (the “Purchased Assets”), and (ii) 11,200,000 shares (the “Shares”) of the Company's common stock ("Common Stock"). The Company retains certain assets and rights relating to its progesterone business, including all rights necessary to perform its obligations under its agreement with Merck Serono S.A. ("Merck Serono"). These transactions are referred to collectively as the “Watson Transactions.”

Watson paid the Company $47 million in cash, forgave $15 million in debt, payable under a note described in Note 10 (the Watson Note), and assumed certain liabilities associated with the Purchased Assets. The Watson Transactions allow for certain milestone payments that can be earned by the successful completion of clinical development milestones in the Company's Phase III study designed to evaluate the ability of progesterone vaginal gel 8% to reduce the risk of preterm birth in women with premature cervical shortening (the “PREGNANT study”), regulatory filings, receipt of regulatory approvals and product launches. Watson will also make royalty payments to the Company of 10 to 20 percent of annual net sales of certain Progesterone Products provided, however, that royalty rates would be reduced by 50% in a particular country if a generic entry by a third party occurs in such country and certain other circumstances are fulfilled. In addition, if Watson commercializes a product through a third party outside of the U.S., in lieu of royalties, the Company will be entitled to 20% of gross profits associated with such commercialization. If Watson or its affiliates effects a generic entry with respect to a Progesterone Product in a particular country in the circumstances permitted by the Purchase and Collaboration Agreement, dated as of March 3, 2010, between the Company and Watson (the “Purchase Agreement”), in lieu of royalties payable in respect of net sales for such generic product, the Company will be entitled to 20% of the gross profits associated with the commercialization of such generic product in such country.The Company and Watson are collaborating with respect to the development of Progesterone Products. In connection therewith, the parties have established a joint development committee to oversee and supervise all development activities. The Company was responsible for completing the PREGNANT study and will be responsible for such other activities as determined by the joint development committee. The Company is responsible for the costs of the preparation, filing and approval process of the new drug application (“NDA”) in the preterm birth indication with the Food and Drug Administration ("FDA") up to a maximum of $7.0 million incurred after January 1, 2010. All other development costs incurred in connection with the development collaboration will be paid by Watson. As of September 30, 2011, the Company has spent $9.7 million in costs related to the PREGNANT study and related NDA. Watson has reimbursed the Company for $2.4 million of these costs and has been invoiced for $0.3 million. The $2.7 million in reimbursable costs were credited to research and development expense.

The parties also entered into various ancillary agreements in connection with the Purchase Agreement, including an Investor's Rights Agreement (pursuant to which Watson designated a member of the Company's board of directors for the period set forth therein, Watson obtained certain registration rights pertaining to the Shares, and Watson agreed to certain transfer restrictions pertaining to the Shares), a Supply Agreement pursuant to which the Company will supply Progesterone Products to Watson for sale in the U.S. at a price equal to 110% of cost of goods sold, and a License Agreement relating to the grant of certain intellectual property licenses.

As part of the Purchase Agreement, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions, from July 2, 2010,

Table of Contents

(the date of the closing of the Watson Transactions) until the second anniversary of the date on which the Company and Watson terminate their relationship with respect to the joint development of Progesterone Products. The joint development collaboration is terminable by either party on or after July 2, 2015.


(3)	DEFERRED REVENUE:

Upon the closing of the Watson Transactions on July 2, 2010, the Company allocated the $47 million initial proceeds plus the $15 million in forgiven debt plus accrued interest to the fair value of the Shares and the elimination of the remaining book value of the CRINONE intangible assets in the amount of $16.2 million. The excess has been recorded as deferred revenue and was being amortized over the remaining research and development period for the PREGNANT study including the Company's submission to, and the FDA's filing of the related NDA. On April 26, 2011, the Company submitted an NDA related to the Preterm birth indication. On June 27, 2011, the FDA accepted for filing the NDA, which triggered a $5.0 million milestone payment from Watson to the Company and was recorded as other revenue in the three month period ended June 30, 2011. The payment was received in July 2011.



	September 30,		December 31,
	2011		2010
Net deferred revenue - Watson	$	—	$	16,974,383

Deferred revenue - other	49,815		154,187

Total deferred revenue	$	49,815	$	17,128,570

The Company recognized revenue from the amortization of deferred revenues of $17,078,785 and $8,537,003 for the nine months ended September 30, 2011 and September 30, 2010, respectively.


(4)	STRIANT ASSET PURCHASE AGREEMENT:

On April 20, 2011, the Company entered into an asset purchase agreement (“Asset Purchase Agreement”) and a license agreement (“License Agreement”) with Actient Pharmaceuticals, LLC (“Actient”), Lake Forest, IL, relating to the sale of certain assets and the licensing of certain intellectual property related to STRIANT® (testosterone buccal system), ("STRIANT") in the United States.

Under the Asset Purchase Agreement, the Company sold to Actient certain assets primarily related to STRIANT in the United States, its territories, and possessions (“Territory”), including, but not limited to the STRIANT NDA and other regulatory approvals in the Territory; the STRIANT trademark, trade dress and other promotional materials used primarily to promote, market and sell STRIANT in the Territory; on-hand STRIANT inventories as of the closing; and other ancillary assets and rights.

In consideration of the assets and rights acquired under the Asset Purchase Agreement, Actient made a one-time payment at closing to Columbia of $3.1 million. Columbia recognized a gain in the second quarter of 2011 of $2.5 million on the sale of STRIANT, net of the transfer of inventory, fixed assets related to STRIANT, and the residual prepaid FDA fees.

Under the License Agreement, Columbia has granted to Actient an exclusive (even as to Columbia) irrevocable, perpetual and transferable license in the Territory to the intellectual property primarily related to STRIANT, including a license relating to Columbia's progressive hydration technology used in STRIANT, for use in the treatment of hypogonadism and other indications related to low testosterone levels in men.

In consideration of the rights granted under the License Agreement, Actient will pay Columbia a royalty on Actient's net sales of STRIANT in the Territory. No royalty is payable on net sales less than ten million dollars ($10,000,000) annually. A seven percent (7%) royalty is payable on sales between ten million dollars ($10,000,000) and twenty million dollars ($20,000,000) annually. A ten percent (10%) royalty is due on sales in excess of twenty million dollars ($20,000,000) annually. The royalty is reduced by fifty percent (50%) upon the expiration or other termination of the STRIANT patent and eliminated in the event of the launch of a generic product to STRIANT after the expiration or other termination of the STRIANT patent. No royalty is due after ten years from closing.


(5)	REVENUE RECOGNITION AND SALES RETURNS RESERVES:

Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and sales of STRIANT through April, 2011), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues, (primarily the amortization of the deferred revenue and milestone payments from the Watson Transactions).

Net product revenues are recognized when shipped, except in the case of product shipments to Watson, which are recognized when received at Watson's warehouse. Royalty revenues, based on sales by licensees, are recorded as revenues as those sales are made by the licensees.

The Watson Transactions included allocated proceeds for licenses to the Progesterone Products and the continuation of development of the Progesterone Products through the filing of the related NDA with the FDA. The Company could not determine the fair value of the continuation of development of the Progesterone Products and concluded the license fee and continuation of development to be a single unit of account resulting in the deferral of allocated proceeds and recognition as revenue over the estimated development period. The adoption of Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements by the Company on January 1, 2011, did not alter the revenue recognition for the Watson Transactions as ASU 2009-13 is only applicable to revenue arrangements entered into or materially modified after adoption.

The Purchase Agreement with Watson entitles the Company to milestone payments based upon the successful completion of clinical development milestones in the PREGNANT study, regulatory filings, receipt of regulatory approvals and product launches. The Company applies the Milestone Method and recognizes the entire amount as revenue in the period earned for all milestones considered substantive. The Company considers a number of factors in determining if a milestone payment is substantive including: if the payment is commensurate with the Company's performance to achieve the milestone or the enhancement of the value of the delivered items as a result of a specific outcome resulting from the Company's performance to achieve the milestone; if the milestone relates only to past performance and if the milestone is reasonable relative to all of the deliverables and payment terms within the Purchase Agreement. The Company earned a $5.0 million milestone payment upon the FDA acceptance of the Preterm Birth NDA. The Company determined this to be a substantive milestone and recognized the entire amount as revenue in the three month period ended June 30, 2011.

The Company's policy for sales to the trade, domestically, allows product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated based on a percentage of sales, using such factors as historical sales information, distributor inventory levels and product prescription data, and are recorded as a reduction to sales in the same period as the related sales are recognized. The Company assumes that its customers are using the first-in, first-out method in filling orders so that the oldest saleable product is used first. The Company recorded a provision for returns on a quarterly basis using an estimated rate and adjusts the provision if its analysis indicates that the potential for product non-salability exists. With regard to sales returns for CRINONE and PROCHIEVE, the Company is only responsible for returns of products sold prior to the closing of the Watson Transactions on July 2, 2010. In addition, with the sale of STRIANT, the Company is only responsible for returns of products sold prior to the closing under the STRIANT Asset Purchase Agreement on April 20, 2011. The Company is not responsible for returns for international sales. Sales adjustments for international sales are estimated to recognize changes in foreign exchange rates and government tenders that may fluctuate within a year.

An analysis of the reserve for sales returns follows:



	Nine Months Ended September 30,
	2011			2010
Balance at beginning of year	$	2,663,648		$	1,883,623

Provision:
Related to current period sales	52,487			745,405
Related to prior period sales	305,800			888,019
	358,287			1,633,424
Returns:
Related to current period sales	—			(61,013		)
Related to prior period sales	(1,093,307		)	(745,945		)
	(1,093,307		)	(806,958		)
Balance at end of quarter	$	1,928,628		$	2,710,089

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(6)	INVENTORIES:

Inventories consisted of the following:



	September 30, 2011		December 31, 2010
Finished goods	$	1,932,215	$	1,491,057
Raw materials	1,411,022		1,095,150
Total Inventories	$	3,343,237	$	2,586,207


(7)	NOTES PAYABLE:

On December 22, 2006, the Company raised approximately $40 million in gross proceeds to the Company from the offering and sale of convertible subordinated notes (the "Notes") to a group of institutional investors. The Notes accrued interest at a rate of 8% per annum and were subordinated to the Company's obligations under the STRIANT Financing Agreement (see Note 8) and had a stated maturity date of December 31, 2011. They were convertible into a total of approximately 7.6 million shares of Common Stock at a conversion price of $5.25. Investors also received warrants to purchase 2,285,714 shares of Common Stock at an exercise price of $5.50 per share. The warrants have a stated expiration date of December 22, 2011, unless earlier exercised or terminated. The Company used the proceeds of this offering to acquire from Merck Serono the U.S. marketing rights to CRINONE for $33.0 million and Merck Serono’s existing inventory of that product. The balance of the proceeds was used to pay other costs related to the transaction and for general corporate purposes.

The Company recorded original issue discounts of $6.3 million to the Notes based upon the fair value of warrants granted. In addition, beneficial conversion features totaling $8.5 million have been recorded as a discount to the Notes. These discounts were amortized at an imputed rate over the five-year term of the Notes. For the nine month period ended September 30, 2010, $0.8 million of amortization related to these discounts were classified as interest expense in the Company's consolidated statements of operations; there was no amortization taken in the period ended September 30, 2011 because the discounts were fully written off as a result of the closing of the Watson Transactions and the Note Purchase Agreements (described below).

On March 3, 2010, the Company entered into Note Purchase and Amendment Agreements (the “Note Purchase Agreements”) with all of the holders (the “Holders”) of the Notes. Under the Note Purchase Agreements, the Company agreed to purchase, subject to the satisfaction of certain conditions, the approximately $40 million in aggregate principal amount of Notes held by the Holders. The aggregate purchase price for the Notes was $26 million in cash (plus accrued and unpaid interest through but excluding the date of the closing of the Note purchases), warrants to purchase 7,750,000 shares of Common Stock at an exercise price of $1.35 per share (the “Warrants”) and 7,407,407 shares of Common Stock. The closings of the transactions contemplated by the Note Purchase Agreements were subject to various conditions, including the consummation of the Watson Transactions. Pursuant to the Note Purchase Agreements, the Holders consented, effective on March 3, 2010, to an amendment to the Notes (the “Amendment”) that eliminated the right of any holder of the Notes to cause the Company to redeem the Notes by virtue of the Watson Transactions. The Amendment would have terminated if the Note purchase closings did not occur on or prior to August 31, 2010, and, in certain other circumstances. On July 2, 2010, the closings under the Note Purchase Agreements occurred and the Notes were canceled.

The Notes contained an embedded derivative that allowed the Holders to redeem the Notes at face value in the event of the sale of substantially all of the assets of the Company. Prior to the signing of the Watson Transactions (See Note 2) on March 3, 2010, this feature was assigned a nominal value as the Company assessed the potential for such sale to be remote. The Watson Transactions resulted in the sale of substantially all of the assets of the Company and, therefore, the associated value of the embedded derivative was increased to the difference between the fair value of the consideration, as determined on March 31, 2010, to be paid at the closing of the Watson Transactions and the carrying value of the Notes. Accordingly, the Company recorded a non-cash charge of $5,848,150 on March 31, 2010.

The value of the embedded derivative fluctuated as long as the Notes remained outstanding, based on changes in the fair value of the consideration and the carrying value of the Notes. On June 30, 2010, the non-cash charge for the embedded derivative was $4,829,036. With the closing of the Watson Transactions on July 2, 2010, the value of the embedded derivative was reversed. The embedded derivative was classified as a Level 2 valuation as described in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10, “Fair Value Measurements and Disclosures.”

The Warrants issued under the Note Purchase Agreements on July 2, 2011 are exercisable, subject to the limitations set forth therein, during the period commencing 180 days after, and ending on the fifth anniversary of their issuance, unless earlier exercised or terminated as provided in such Warrants. The Warrants contained a feature requiring the Company to purchase the Warrants issued under the Note Purchase Agreements if the Company had issued shares of Common Stock (or equivalents) for a price less than $2.00 per share until 45 days after the Company's public announcement of the results of the PREGNANT study. This resulted in the Warrants being recorded as a liability; the Company determined the fair value using the Black-Scholes model. The Company recorded a liability at the closing of the Watson Transactions in the amount of $5,509,893 as of the close of business on July 1, 2010. It was adjusted, as of December 31, 2010, to $13,471,832. The results of the PREGNANT study were announced in December 2010 and on January 20, 2011, when the contingent purchase rights on the Warrants expired, the value of the Warrants was determined under the Black-Scholes model to be $16,193,037 and reclassified to Capital in Excess of Par Value. These Warrants are no longer marked to market.


(8)	FINANCING AGREEMENTS-STRIANT:

In an agreement dated March 5, 2003 (the “STRIANT Financing Agreement”), PharmaBio Development Inc. ("PharmaBio") agreed to pay the Company $15 million in five quarterly installments commencing with the signing of the STRIANT Financing Agreement. In return, PharmaBio received a 9% royalty on net sales of STRIANT in the United States up to agreed annual sales revenues and a 4.5% royalty on net sales above those levels. The royalty term was seven years. Royalty payments commenced in the 2003 third quarter and were subject to minimum ($30 million) and maximum ($55 million) amounts; because the minimum amount exceeded the $15 million received by the Company, the Company recorded the amounts received as liabilities. The excess of the minimum ($30 million) to be paid by the Company over the $15 million received by the Company was recognized as interest expense over the seven-year term of the STRIANT Financing Agreement, assuming an interest rate of 15%. Interest expense was $1.2 million for the nine months ended September 30, 2010. There was no interest in the nine months ended September 30, 2011 due to the termination of the STRIANT Financing Agreement following the Watson Transactions, as described below.

On July 22, 2009, the Company and PharmaBio entered into an amendment to the STRIANT Financing Agreement, in which they agreed that when the minimum royalty payment would become due the Company would be entitled, in its sole discretion, either to pay the balance due under the STRIANT Financing Agreement or issue to PharmaBio a secured promissory note for that balance. In consideration for the right to issue the secured promissory note, the Company granted PharmaBio a warrant to purchase 900,000 shares of Common Stock at an exercise price of $1.15. This warrant had a stated expiration date of July 22, 2014, unless earlier exercised or terminated. Using the Black-Scholes valuation model, the Company determined the value of the initial warrant to purchase 900,000 shares of the Common Stock to be $719,904, or $0.80 per share, which was being amortized over the 16 month period through November 2010. The amortization expense recorded in the nine months ended September 30, 2010 was approximately $0.3 million.

On March 3, 2010, the Company entered into an amendment (the “PharmaBio Amendment”) with PharmaBio to the STRIANT Financing Agreement. The PharmaBio Amendment provided for the early termination of the STRIANT Financing Agreement by permitting the Company to make certain payments required thereunder on an accelerated and discounted basis on the date the Company consummated (and contingent upon the Company consummating) a transfer of assets, sale of stock, licensing agreement and/or similar transaction yielding gross cash proceeds to the Company of $40 million or more.

On July 2, 2010, the Company paid $16.2 million to PharmaBio and the STRIANT Financing Agreement was terminated. In addition, the amortization of the remaining balance of $225,000 for the value assigned to the PharmaBio warrants was written off. PharmaBio retained the warrant to purchase 900,000 shares of Common Stock.

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(9)	DEBT EXTINGUISHMENT:

A charge to operations in the three months ended September 30, 2010 representing the loss on all debt extinguishment for the Notes, PharmaBio debt and the write-off of the remaining balance of the deferred financing costs was made as of the closing date of the Watson Transactions in the amount of $5,156,775, the proceeds from which were used to extinguish the debt.




Net book value of long-term notes payable		$	34,558,425
Consideration:	Number of shares
Stock issued to Noteholders	7,407,407	(7,777,777		)
Cash		(25,999,999		)
Warrants to purchase shares of Common Stock	7,750,000	(5,509,893		)
Loss on extinguishment of Notes		(4,729,244		)

Gain (loss) on debt extinguishment of PharmaBio debt		310,622
Write-off of deferred charges		(738,153		)
Net loss on debt extinguishment		$	(5,156,775	)


(10)	FINANCING AGREEMENTS-WATSON NOTE:

On June 1, 2010, the Company borrowed $15,000,000 from Watson pursuant to the Watson Note. Amounts due under the Watson Note accrued interest at the rate of 4% per annum. If the Watson Transactions closed prior to December 31, 2011, all amounts otherwise due and payable under the Watson Note would be forgiven in full; however, if the Company engaged in a Fundamental Transaction (as defined in the Watson Note) with any party other than as contemplated pursuant to the Watson Transactions, the Watson Note would accelerate, and the Company would be required to repay all amounts due under the Watson Note, plus accrued interest, on the earlier of (i) the date upon which all of the obligations in respect of the Company's Notes were paid in full or (ii) 21 Trading Days (as defined in the Watson Note) after the occurrence of such Fundamental Transaction. If neither the Watson Transactions nor another Fundamental Transaction closed, the Watson Note would become due and payable on December 31, 2011. If the Company were required to repay the Watson Note by reason of the occurrence of a Fundamental Transaction prior to August 31, 2011, then the Company would be required to pay to Watson on the date the Watson Note is to be repaid, in addition to all other amounts due and payable thereunder, a $2 million prepayment fee.

The proceeds of the Watson Note were intended to be used by the Company for purposes of financing product development activities as described in the Watson Note and for general corporate purposes.

The Watson Note was unsecured and subordinate in right of payment to the Company's obligations to PharmaBio under the STRIANT Financing Agreement. As required by the STRIANT Financing Agreement, pursuant to a Letter Agreement dated June 1, 2010 between the Company and PharmaBio, PharmaBio consented to the Company entering into, and incurring the debt under, the Watson Note. The Watson Note was also subordinate in right of payment to the Notes. The Watson Note contained certain covenants and representations and warranties, including a covenant which prohibited the Company from incurring any additional indebtedness that would rank senior or pari passu to the Watson Note, subject to certain exceptions specified in the Watson Note.


(11)	GEOGRAPHIC INFORMATION:

The Company and its subsidiaries are engaged in one line of business, the development, licensing, manufacturing and sale of pharmaceutical products. The Company conducts its international business through its Bermuda subsidiary which contracts with various manufacturers located in the United Kingdom, Switzerland and Italy, to make product for both its international and domestic operations. The Company’s international customers, Merck Serono and The Urology Company, sell its products into several countries.

As of July 2, 2010, with the completion of the Watson Transactions, Watson is responsible for the commercialization and sale of Progesterone Products domestically. The Company supplies Watson with finished products on a cost-plus-10% basis.

The following table shows selected information by geographic area:



	Net Revenues		Identifiable Assets
As of and for the nine months ended September 30, 2011
United States	$	26,094,314	$	28,748,775
Switzerland	10,590,838		3,428,553
Other countries	—		2,457,273
Total	$	36,685,152	$	34,634,601
As of and for the nine months ended September 30, 2010
United States	$	21,422,766	$	24,697,531
Switzerland	7,694,077		2,571,502
Other countries	1,666,554		1,647,256
Total	$	30,783,397	$	28,916,289

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(12)	INCOME (LOSS) PER COMMON AND POTENTIAL COMMON SHARE:

The calculation of basic and diluted income (loss) per common and common equivalent share is as follows:



	Nine Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
INCOME (LOSS) PER SHARE -Basic
NET INCOME (LOSS)	$	21,544,549		$	(17,215,256	)	$	4,417,241		$	257,622
Less: Preferred stock dividends	(22,500		)	(22,500		)	(7,500		)	(7,500		)
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK	$	21,522,049		$	(17,237,756	)	$	4,409,741		$	250,122

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: Basic:	85,998,197			70,987,668			87,269,433			82,010,063

NET INCOME (LOSS) PER COMMON SHARE: Basic	$	0.25		$	(0.24	)	$	0.05		$	0.00

INCOME (LOSS) PER SHARE -Diluted

NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK	$	21,522,049		$	(17,237,756	)	$	4,409,741		$	250,122
Add: Preferred stock dividends	22,500			—			—			—
Less: Fair value of stock warrants for dilutive warrants	(2,790,337		)	—			(5,050,520		)	—
NET INCOME (LOSS) APPLICABLE TO
DILUTIVE COMMON STOCK	$	18,754,212		$	(17,237,756	)	$	(640,779	)	$	250,122

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: Basic:	85,998,197			70,987,668			87,269,433			82,010,063
Effect of dilutive securities
Dilutive stock awards	1,503,743			—			—			—
Dilutive warrants	3,024,798			—			1,970,813			—
Dilutive preferred share conversions	2,034,972			—			—			—
	6,563,513			—			1,970,813			—
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - Diluted:	92,561,710			70,987,668			89,240,246			82,010,063

NET INCOME (LOSS) PER COMMON SHARE: Diluted	$	0.20		$	(0.24	)	$	(0.01	)	$	0.00

Basic income (loss) per share is computed by dividing the net income (loss) plus preferred dividends by the weighted-average number of shares of Common Stock outstanding during a period. The diluted earnings per share calculation gives effect to dilutive options, warrants, convertible notes, convertible preferred stock, and other potential dilutive Common Stock including selected restricted shares of Common Stock outstanding during the period. Diluted income (loss) per share is based on the treasury stock method and includes the effect from potential issuance of common stock, such as shares issuable pursuant to the exercise of stock options, assuming the exercise of all in-the-money stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive.

Shares to be issued upon the exercise of the outstanding options and warrants, convertible preferred stock and selected restricted shares of Common Stock excluded from the income (loss) per share calculation amounted to 17,344,134 and 28,705,906 for the nine months ended September 30, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share because the awards were anti-dilutive. Shares to be issued upon the exercise of the outstanding options and warrants, convertible preferred stock and selected restricted shares of Common Stock excluded from the income (loss) per share calculation amounted to 4,339,789 and 28,705,906 for the three months ended September 30, 2011, and 2010, respectively, but were not included in the computation of diluted earnings per share because the awards were anti-dilutive.


(13)	LEGAL PROCEEDINGS:

Claims and lawsuits are filed against the Company from time to time. Although the results of pending claims are always uncertain, the Company believes that it has adequate reserves or adequate insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance coverage in the event of any unfavorable outcome resulting from these actions.


(14)	STOCK-BASED COMPENSATION:

The Company’s net income (loss) for the nine months ended September 30, 2011 and September 30, 2010 included $0.6 million and $2.7 million, respectively, of stock based compensation expense. Stock based compensation for the nine months ended September 30, 2011 included $152,317 related to the accelerated vesting of certain stock options upon the acceptance by the FDA of the Company's preterm birth indication NDA in accordance with the original stock option agreements. Stock-based compensation expense in the amount of $1.4 million for the acceleration and modification of the vesting of stock options and restricted shares was recognized as a result of the Watson Transactions and was reflected in the total stock-based compensation reported for the nine months ended September 30, 2010.



	Nine Months Ended September 30,
Stock Based Compensation	2011		2010
Cost of revenues	$	9,422	$	133,543
Selling and distribution	—		1,118,221
General and administrative	578,936		1,200,860
Research and development	61,300		232,997
Total	$	649,658	$	2,685,621

During the nine months ended September 30, 2011, the Company granted 1,035,000 options to employees. During the nine months ended September 30, 2011, 519,050 options expired unexercised, most of which were out of the money options that had been granted to the previous sales and marketing organization.


(15)	FAIR VALUE OF FINANCIAL INSTRUMENTS:

Effective January 1, 2008, the Company adopted FASB ASC 820-10-25, "Fair Value Measurement and Disclosures." This standard establishes a framework for measuring fair value and expands disclosure about fair value measurements. The Company did not elect fair value accounting for any assets and liabilities allowed by FASB ASC 825, ”Financial Instruments.”

FASB ASC 820-10 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820-10 describes the following three levels of inputs that may be used:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The fair value of the short term investments are determined based on quoted market prices on the balance sheet date and are classified as a level 1 investment.

The estimated fair value of the Company's contingent obligation to purchase the Warrants issued under the Note Purchase Agreements, if the Company issued shares of Common Stock (or equivalents) for a price less than $2.00 per share until 45 days (January 20, 2011) after the Company's public announcement of the results of the PREGNANT study, was determined under the Black-Scholes model and recorded as a liability at the closing of the Watson Transactions in the amount of $5,509,893 as of the close of business on July 1, 2010. It was adjusted, as of December 31, 2010, to $13,471,832. The results of the PREGNANT study were announced in December 2010, and on January 20, 2011, when the contingent purchase rights on the Warrants expired, the value of the Warrants was determined under the Black-Scholes option pricing model to be $16,193,037, a change of $2,721,205 from the year ended December 31, 2010 and reclassified to Capital in Excess of Par Value. These Warrants will no longer be

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marked to market.

The estimated fair value of the Common Stock warrant liability resulting from the October 2009 registered direct offering of 10,900,000 shares of the Common Stock and warrants to purchase 5,450,000 shares of Common Stock was $5,935,171 and $9,286,906 as of September 30, 2011 and December 31, 2010, respectively. These values were determined by using the Black-Scholes option pricing model which is based on the Company's stock price at the measurement date, exercise price of this warrant, risk-free rate and historical volatility, and are classified as a Level 2 measurement. During the nine months ended September 30, 2011, the Company recorded income of $2,790,337 to adjust the value of the stock warrant liability to market.

The fair value of accounts receivable and accounts payable approximate their carrying amount.


(16)	RELATED PARTY TRANSACTIONS

The table below presents the transactions between the Company and Watson.



	Nine Months Ended September 30,				Three Months Ended September 30,
	2011		2010		2011		2010
REVENUES
Net product revenues	$	1,513,296	$	581,104	$	574,956	$	581,104
Royalties	1,845,154		450,000		702,336		450,000
Amortization of deferred revenue	16,974,383		8,487,192		—		8,487,192
Milestone payment	5,000,000		—		—		—
Other revenue	21,974,383		8,487,192		—		8,487,192

Total net revenues	$	25,332,833	$	9,518,296	$	1,277,292	$	9,518,296
COST OF PRODUCT REVENUES
Cost of product revenues	1,453,720		528,473		636,232		528,473
Gross profit	$	23,879,113	$	8,989,823	$	641,060	$	8,989,823


Accounts receivable	$	932,052	$	533,445

The Company has exceeded the cap of $7.0 million by $2.7 million for research and development spending on the PREGNANT study and related Preterm Birth NDA pursuant to the Watson Transactions and has recorded this amount as a reduction of research and development expenses. Watson has paid the Company for $2.4 million of these excess amounts and has been invoiced for the remaining $0.3 million.


(17)	RECENT ACCOUNTING PRONOUNCEMENTS:

In October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU became effective for revenue arrangements entered into or materially modified after the fiscal year 2010. Earlier application was permitted with required transition disclosures based on the period of adoption. The Company has adopted this standard and there is no effect of this standard on the Company's consolidated financial statements at this time.

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results in the deferral of some portion of the arrangement consideration. The ASU was effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. The Company has adopted this standard and there is no effect of this standard on the Company's consolidated financial statements at this time.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs, (ASU 2011-04), which amends ASC 820. This update clarifies the existing guidance and amends the wording used to describe many of the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with prospective application required. This update will not have a material effect on the Company's consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income (ASU 2011-05). This update requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retrospective applications required.

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

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.

Historically, we received revenues domestically from our Progesterone Products (CRINONE and PROCHIEVE) that we either promoted through our own sales force and sold to wholesalers and specialty pharmacies or sold to licensees. As of July 2, 2010, and the close of the Watson Transactions described below, we supply Watson with CRINONE products and Watson promotes and sells these products to wholesalers and specialty pharmacies in the United States. We also continue to supply Merck Serono with CRINONE 8% for resale outside the United States.



Products:

Progesterone Products	-	CRINONE® 8% (progesterone gel) formerly marketed and sold by the Company, and now sold to Watson for resale in the U.S.;

	-	CRINONE® 4% (progesterone gel) sold to Watson for resale in the U.S.;

	-	CRINONE® 8% sold to Merck Serono for resale outside the U.S.;

	-	PROCHIEVE® 8% (progesterone gel) formerly sold by the Company in the U.S.; and,

	-	PROCHIEVE® 4% formerly sold to Ascend Therapeutics, Inc. for resale in the U.S pursuant to an agreement that terminated on July 23, 2010.

Other Products	-	STRIANT® (testosterone buccal system) formerly marketed and sold by the Company in the U.S. and now marketed and sold by Actient; and

		STRIANT® sold to The Urology Company, Ltd. for resale in the U.K.

On July 2, 2010, we sold substantially all of our progesterone related assets and 11.2 million shares of Common Stock to Watson for a $47 million upfront payment, the forgiveness of $15 million in debt plus royalties on certain Progesterone Products and potential milestone payments. The Watson Transactions allow for certain milestone payments that can be earned by the successful completion of clinical development milestones in the PREGNANT study, regulatory filings, receipt of regulatory approvals and product launches. Additionally, Watson will fund the development of a next-generation vaginal Progesterone Product as part of a comprehensive life-cycle management strategy.

Effective May 19, 2010, our license and supply agreement with Merck Serono for the sale of CRINONE 8% outside the U.S. was renewed for an additional five year term.

Under the Asset Purchase Agreement, dated April 20, 2011, the Company sold to Actient certain assets primarily related to STRIANT in the United States, its territories, and possessions (the “Territory”) including, but not limited to the STRIANT NDA and other regulatory approvals in the Territory; the STRIANT trademark, trade dress and other promotional materials used primarily to promote, market and sell STRIANT in the Territory; on-hand STRIANT inventories as of the closing; and other ancillary assets

and rights. In consideration of the assets and rights acquired under the Asset Purchase Agreement, Actient made a one-time payment on April 20, 2011 to Columbia of $3.1 million. The $2.5 million gain, net of the transfer of inventory, fixed assets related to STRIANT, and the residual prepaid FDA fees, was recognized in the second quarter of 2011.

Columbia's business now consists of its product manufacturing revenues, royalties and potential milestone payments, its collaboration with Watson on the development of next-generation Progesterone Products, and its novel bioadhesive drug delivery technologies and other product candidates.

With the closing of the Watson Transactions, CRINONE products are marketed and sold in the U.S. by Watson. We manufacture and sell product to Watson at our cost plus 10%; these revenues are recorded within net product revenues. In addition, we receive royalties equal to a minimum of 10% of annual net sales of these products for annual net sales up to $150.0 million, 15% for sales above $150.0 million but less than $250.0 million; and 20% for annual net sales of $250.0 million and over. Outside the U.S., we supply Merck Serono with CRINONE 8% for resale at the greater of 30% of net sales or direct manufacturing costs plus 20%. These revenues are recorded within net product revenues.

Future recurring revenues will be derived primarily from product sales to and royalties from Watson, product sales to Merck Serono, and royalties on STRIANT sales by The Urology Company and Actient. Future revenues from STRIANT are not expected to be material. Future, non-recurring milestone payments will be recognized when and if the milestones are achieved. Operating expenses attributable to product selling, marketing and distribution activities have been eliminated with the exception of those expenses related to the distribution of STRIANT which ceased in the second quarter of 2011. Research and development expenses should decrease because the PREGNANT study has been completed and the related NDA filing has been submitted. In addition, the Company has reached the cap of $7.0 million for research and development spending on the PREGNANT study and related NDA pursuant to the Watson Transactions. Future spending on development related to Progesterone Products will be the responsibility of Watson.

All of our products are manufactured in Europe by third parties on behalf of our foreign subsidiaries who sell the products to our worldwide licensees, or supplied for resale in the United States. Because our European revenues reflect these sales and are reduced only by our product manufacturing costs, we have historically shown a profit from our foreign operations.

From July 2010 through June 2011, the Company recorded the amortization of the deferred revenue recognized as a result of the completion of the Watson Transactions, which totaled approximately $34 million. The Company charges our United States operations all selling and distribution expenses that support our marketing, sales and distribution efforts. Beginning in the fourth quarter of 2010, only distribution costs related to STRIANT are included in selling and distribution costs. Following the U.S. sale of STRIANT in April 2011, the Company no longer has any sales and distribution expenses. Research and development expenses are charged to our United States operations for product development which principally supports new products and new label indications for products to be sold in this country. In addition, the majority of our general and administrative expenses represent the Company's management activities as a public company and are charged to our United States operations. The amortization of the repurchase of the U.S. rights to CRINONE was charged to our United States operations. Amortization on these rights ceased with the closing of the Watson Transactions. As a result, we have historically shown a loss from our United States operations that has been significantly greater than, and offsets, the profits from our foreign operations.

In connection with the Watson Transactions, until the second anniversary of the date on which the Company and Watson terminate their relationship with respect to the joint development of Progesterone Products, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions. Either party may terminate the joint development collaboration five years after the closing of the Watson Transactions.

The Company's March 3, 2010 Purchase Agreement with Watson provides for a Clinical Trial Results Milestone payment to Columbia of either $6 million or $8 million based upon certain statistical results of the PREGNANT study, as agreed to by the FDA. The Company provided statistical analyses to Watson and claimed the $6 million milestone. Watson did not agree that the milestone had been achieved pursuant to the terms of the Purchase Agreement. The parties tried without success to resolve the dispute. Columbia decided not to pursue this milestone further after careful review by legal counsel and consideration of the costs and uncertain outcome in arbitration of the dispute under the Purchase Agreement. The working relationship between the two parties remains collaborative in advancing the NDA submission and filing with the FDA and development of a next-generation vaginal progesterone product. No revenue was recognized for this milestone payment.The NDA for the progesterone vaginal gel 8% for the reduction of risk of preterm birth in women with premature cervical shortening in the mid-trimester of pregnancy was submitted to the FDA on April 26, 2011 and was accepted for filing by the FDA on June 27, 2011. This triggered a milestone payment of $5 million due from Watson pursuant to the Company's Purchase Agreement. The $5 million milestone payment was recorded in the second quarter of 2011 and the payment was received in the third quarter of 2011.

Results of Operations - Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010

Total net revenues in the nine months ended September 30, 2011 were $36.7 million as compared to $30.8 million in the nine months ended September 30, 2010. The presentation and results for net revenues have changed for Columbia from previous years due to the completion of the Watson Transactions and its effect on revenues. Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and, in 2010, to wholesalers and specialty pharmacies in the U.S., and sales of STRIANT), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (primarily amortization of the deferred revenue and milestone payments from the Watson Transactions).

Total net product revenues decreased by $9.2 million to $12.5 million in the nine months ended September 30, 2011 as compared to $21.7 million in the nine months ended September 30, 2010. This decrease takes into account the transfer of CRINONE and PROCHIEVE assets, including responsibility for product sales in the U.S., to Watson, the absence of sales in 2011 to Lil Drug Store Products, Inc. ("LDS") for Replens and RepHresh as a result of the contract expiration and to a smaller extent, the transfer of STRIANT product sales in the U.S. to Actient. Net product revenues from Merck Serono for international sales of CRINONE 8% increased by 37% due to higher volume. STRIANT net product revenues were $0.4 million lower than in the 2010 period, as a result of the sale to Actient.

Total royalty revenues were $2.1 million in the nine months ended September 30, 2011, as compared to $0.5 million in the nine months ended September 30, 2010, primarily as a result of royalty revenues from Watson on CRINONE products sold by Watson after the closing of the Watson Transactions.

Total other revenues were $22.1 million in the nine months ended September 30, 2011 as compared to $8.5 million in the nine months ended September 30, 2010, due to the amortization of the deferred revenue recognized from the sale of assets to Watson and the recognition of the $5.0 million milestone payment from Watson for the filing of the Preterm Birth study NDA with the FDA. The Company was amortizing $34 million in deferred gains over four quarters from July 2, 2010 through June 30, 2011, representing the estimated remaining development period for progesterone vaginal gel 8% for the preterm birth indication.

Gross profit increased 16% from $24.6 million in the nine months ended September 30, 2010 to $28.5 million for the nine months ended September 30, 2011, as a result of the inclusion of the royalties from Watson, the recognition of the amortization of the deferred revenue resulting from the Watson Transactions and the $5.0 million milestone payment from Watson. Gross margin as a percentage of total net revenues was lower at 78% for the nine months ended September 30, 2011 as compared with 80% with the same period in 2010. Excluding the amortization of deferred revenue and the $5.0 million milestone payment, gross profit margin was 59% for the nine months ended September 30, 2011 as compared with 72% in the same period in 2010. The decline in this gross profit margin is related to the product sales to Watson in the 2011 period at cost-plus-10%, versus direct sales to wholesalers and specialty pharmacies in the U.S. in the 2010 period at wholesale prices.

Selling and distribution expenses were $0.1 million in the nine months ended September 30, 2011, as compared to $9.9 million in the nine months ended September 30, 2010. The reduction in expenses is a result of the elimination of Columbia's sales and marketing organization following the closing of the Watson Transactions on July 2, 2010. Historically, selling and distribution expenses have included payroll, employee benefits, equity compensation and other personnel-related costs associated with sales and marketing personnel, and advertising, market research data capture, promotions, tradeshows, seminars, other marketing related programs and distribution costs. The costs for selling and distribution in the nine months ended September 30, 2011 are attributable to distribution costs related to STRIANT. For the nine months ended September 30, 2010, sales force and management costs were $5.1 million (including $0.5 million of severance), Bio-Mimetics expense of $2.2 million, product marketing expenses were approximately $1.9 million and sales information and distribution costs were approximately $0.7 million.

General and administrative expenses were $6.8 million in the nine months ended September 30, 2011, as compared to $12.5 million in the nine months ended September 30, 2010. The decrease in expenses from 2010 was mainly attributable to $4.2 million in costs related to the Watson Transactions, $0.6 million in severance costs and $0.2 million of higher investor relations costs in 2010. General and administrative expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees.

Research and development expenses were $2.4 million in the nine months ended September 30, 2011 as compared to $6.6 million for the nine months ended September 30, 2010. Research and development expenses include costs for product development, clinical development and regulatory fees, which is a combination of internal and third-party costs. Expenses in the first nine months of 2011 were lower than in 2010 due to completion of the PREGNANT study in December 2010. In addition, we have incurred the full $7.0 million for research and development spending on the PREGNANT study and related NDA for which we were responsible pursuant to the Watson Transactions. Expenses in excess of that amount are the responsibility of Watson. During the nine months ended September 30, 2011, $2.7 million in reimbursable costs were credited to research and development expense.

Amortization of the acquisition cost for the CRINONE U.S. marketing rights ceased in the third quarter of 2010 as a

result of the sale of these assets to Watson. The amortization in the nine months ended September 30, 2010 was $2.5 million.

Other expense amounted to $0.3 million for the nine months ended September 30, 2011, a decrease of $10.0 million over the same period in 2010. Other income/expense during the nine months ended September 30, 2011 included expense related to the recognition of the $5.0 million change in fair value of the warrants issued in conjunction with the July 2010 Note retirement ($2.7 million) which resulted from the increase in stock price from December 31, 2010 through January 20, 2011 and income related to the change in fair value of the warrants issued in conjunction with the October 2009 stock issuance ($2.8 million) which resulted from the decrease in stock price from December 31, 2010. On January 20, 2011, when the contingent purchase rights on the redeemable warrants expired, the value of the warrants was reclassified to Capital in Excess of Par Value. The warrants related to the July 2010 Note retirement are no longer be marked to market. Other income/expense during the nine months ended September 30, 2010 consisted primarily of $5.2 million for the recognition of the loss on the debt extinguishment for the retirement of the Notes and the PharmaBio debt and the write-off of the remaining balance of the deferred financing costs for the Notes and the PharmaBio warrant and interest expense of $4.8 million associated with the $40.0 million Notes and the financing agreements and PharmaBio warrant amortization.

As a result, the net income for the nine months ended September 30, 2011 was $21.5 million or $0.25 per basic and $0.20 per diluted share, as compared to the net loss for the nine months ended September 30, 2010 of $17.2 million, or $0.24 per basic and diluted share.Results of Operations - Three Months Ended September 30, 2011 versus Three Months Ended September 30, 2010

Total net revenues in the three months ended September 30, 2011 were $4.9 million as compared to $14.2 million in the three months ended September 30, 2010. The presentation and results for net revenues have changed from previous years for Columbia due to the completion of the Watson Transactions and its effect on revenues. Net Revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and, in 2010, to wholesalers and specialty pharmacies in the U.S., and sales of STRIANT), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (primarily amortization of the deferred revenue and milestone payments from the Watson Transactions).

Total net product revenues were $4.1 million in the three months ended September 30, 2011 as compared to $5.1 million in the three months ended September 30, 2010. This decrease takes into account $2.1 million of net revenues to LDS for Replens and RepHresh in the third quarter of 2010 with no revenues from LDS in 2011, offset to some extent by higher net product revenues from Merck Serono for international sales of CRINONE 8%, which increased by $1.3 million due primarily to higher volume. STRIANT net product revenues were $0.3 million lower than in the 2010 period, as a result of the April 2011 sale to Actient.

Total royalty revenues were $0.8 million in the three months ended September 30, 2011, compared to $0.5 million in the three months ended September 30, 2010, primarily as a result of royalty revenues from Watson on CRINONE products sold by Watson after the closing of the Watson Transactions.Total other revenues were $0.0 million in the three months ended September 30, 2011 as compared to $8.5 million in the three months ended September 30, 2010, due to the amortization of the deferred revenue recognized from the sale of assets to Watson. The Company amortized $34.0 million in deferred gains over four quarters from July 2, 2010 through June 30, 2011, representing the estimated remaining development period for for progesterone vaginal gel 8% in the Preterm Birth indication.

Gross profit decreased 84% from $11.2 million in the three months ended September 30, 2010 to $1.8 million for the three months ended September 30, 2011, primarily as a result of the recognition of the amortization of the deferred revenue resulting from the Watson Transactions in the three months ended September 30, 2010. Gross margin as a percentage of total net revenues was lower at 37% for the three months ended September 30, 2011 compared with 79% in the same period in 2010. Excluding the amortization of deferred revenue in 2010, gross profit margin was 37% for the three months ended September 30, 2011 as compared with 47% in the same period in 2010. The decline in gross profit margin is related to a higher proportion of product sales to Watson in the 2011 period at cost-plus-10% versus net product sales to Serono than in 2010.

Selling and distribution expenses were $0.0 million in the three months ended September 30, 2011, as compared to $3.9 million in the three months ended September 30, 2010. The reduction in expenses is a result of the elimination of Columbia's sales and marketing organization following the closing of the Watson Transactions on July 2, 2010. Historically, selling and distribution expenses have included payroll, employee benefits, equity compensation and other personnel-related costs associated with sales and marketing personnel, and advertising, market research data capture, promotions, tradeshows, seminars, other marketing related programs and distribution costs. In the three months ended September 30, 2010, expenses primarily include the establishment of a reserve of $2.2 million for back royalties and pre-judgment interest related to Bio-Mimetics, Inc., $0.9 million in stock compensation costs from the accelerated vesting of all stock options and restricted shares as a result of the Watson Transactions and approximately $0.2 million in severance costs and $0.6 million in residual selling and marketing expenses.

General and administrative expenses were $1.9 million in the three months ended September 30, 2011, as compared to $4.3 million in the three months ended September 30, 2010. The decrease in expenses from 2010 was attributable to $1.7 million in costs related to the Watson Transactions and $0.3 million in stock compensation costs from the accelerated vesting of all stock options and restricted shares as a result of the Watson Transactions. General and administrative expenses include payroll, employee

benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees.Research and development expenses were $0.5 million in the three months ended September 30, 2011, as compared to $2.0 million in the three months ended September 30, 2010. Research and development expenses include costs for product development, clinical development and regulatory fees, which is a combination of internal and third-party costs. Expenses in the third quarter of 2011 were lower than in 2010 due to completion of the PREGNANT study in December 2010 and the reimbursement of R&D expenses by Watson. We have incurred the full $7.0 million for research and development spending on the PREGNANT study for which we were responsible under the Watson Transactions. Expenses in excess of that amount are the responsibility of Watson. During the three months ended September 30, 2011, $0.5 million in reimbursable costs were credited to research and development expense.

Amortization of the acquisition cost for the CRINONE U.S. marketing rights ceased in the third quarter of 2010 as a result of the sale of these assets to Watson. There was no amortization expense in the quarter ended September 30, 2010.

Other income/expense amounted to income of $5.0 million for the three months ended September 30, 2011, compared to expense of $0.6 million over the same period in 2010, consisting primarily of the recognition of the $5.1 million change in fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from June 30, 2011. Other income/expense for the quarter ended September 30, 2010 in the amount of $0.6 million consisted primarily of expenses related to the retirement of all our debt including a $5.2 million expense for the recognition of the loss on debt extinguishment for the Notes, PharmaBio debt under the STRIANT Financing Agreement, and the write-off of the remaining balance of deferred financing costs for the Notes and the PhamaBio warrant partially offset by income from the reversal of the $4.8 million expense recognized in the first half of 2010 for the fair value of the embedded derivative.As a result, the net income for the three months ended September 30, 2011 was $4.4 million or $0.05 per basic and $(0.01) diluted share, as compared to the net income for the three months ended September 30, 2010 of $0.3 million or $0.00 per basic and diluted share.

Liquidity and Capital Resources

Cash and cash equivalents were $11.3 million and $21.6 million at September 30, 2011 and December 31, 2010, respectively. Cash as of the quarter ended September 30, 2011 reflects the transfer of approximately $15.0 million of cash to short term investments. The Company believes its cash, cash equivalents and short term investments will sustain its operations for the foreseeable future.

Cash provided by (used in) operating, investing and financing activities is summarized as follows:



	Nine Months Ended September 30,
	2011			2010
Cash flows:
Operating activities:
Net income (loss)	$	21,544,549		$	(17,215,256	)
Non-cash charges	(18,328,228		)	7,019,246
Change in working capital	(4,105,815		)	1,336,070
Total operating activities	(889,494		)	(8,859,940		)

Investing activities
Purchase of property and equipment	(631,031		)	(34,864		)
Proceeds from sale of assets	—			35,240,000
Additions to short term investments	(15,031,406		)	—
Proceeds from sale of STRIANT	3,100,000			—
Investing activities	(12,562,437		)	35,205,136

Net proceeds from the sale of common stock	—			11,643,897
Proceeds from financing agreements - Watson Note	—			15,000,000
Proceeds from exercise of stock options	2,641,950			—
Proceeds from exercise of warrants	653,299			—
Payment of note payable	—			(25,999,999		)
Payments pursuant to financing agreements	—			(16,155,903		)
Repurchase of company stock	—			(3,059,996		)
All other financing activities	(147,881		)	(84,781		)
Financing activities	3,147,368			(18,656,782		)
Effect of exchange rate changes on cash	1,049			(11,471		)
NET INCREASE IN CASH	$	(10,303,514	)	$	7,676,943

Operating Activities:

Net cash used in operating activities for the nine months ended September 30, 2011 was $0.9 million and resulted primarily from $3.2 million in net operating income after applying non-cash charges and increases in working capital of $4.1 million. The net income of $21.5 million in the first nine months of 2011 included non-cash items for depreciation, amortization, change in valuation of redeemable warrants and stock warrants, recognition of deferred revenue, gain on the sale of STRIANT, stock-based compensation, write-down of inventories, provision for sales returns, and loss on disposal of fixed assets, which totaled $18.3 million, resulting in a net cash income of $3.2 million. Accounts receivable decreased by $1.0 million from the fourth quarter of 2010. Inventories grew by $1.1 million during the period to meet customer orders. Accounts payable decreased by $2.5 million due primarily to the $1.8 million payment for the Bio-Mimetics settlement coupled with payments related to completion of the PREGNANT study. Other accrued expenses decreased by $1.2 million, mainly related to the payment of bonuses in the first quarter of 2011.

Net cash used in operating activities for the nine months ended September 30, 2010 was $8.9 million and resulted primarily from $10.2 million in net operating losses after applying non-cash charges and decreases in working capital of $1.3 million. The net loss of $17.2 million in the first nine months of 2010 included non-cash items for depreciation, amortization, the loss on debt

extinguishment, stock-based compensation, provision for sales returns, and non-cash interest expense, which totaled $7.0 million, leaving a net cash loss of $8.9 million. Accounts receivable decreased by $1.7 million from the fourth quarter of 2009, primarily as a result of the sale of the CRINONE/PROCHIEVE assets to Watson and the collection of outstanding receivables. Inventories grew by $0.3 million during the period to meet specific customer orders. Accounts payable decreased by $1.7 million due primarily to payments for marketing programs and for the PREGNANT study. Other accrued expenses increased by $0.7 million and is related to a multitude of increases and decreases in the accruals including the $2.2 million Bio-Mimetics reserve offset by lower bonuses and interest during the nine months ended September 30, 2010.

Investing activities:

Net cash used in investing activities was $12.6 million in the nine months ended September 30, 2011 and net cash provided by investing activities was $35.2 million in the nine months ended September 30, 2010. During 2011, investing activities included an increase in short term investments of $15.0 million and investments of $0.6 million to increase manufacturing capacity primarily to ensure the Company's ability to meet Watson's forecasts for the anticipated launch of progesterone vaginal gel 8% and facility improvements to ensure compliant manufacturing operations offset by $3.1 million in proceeds from the sale of STRIANT. Net cash provided by investing activities was $35.2 million in the nine months ended September 30, 2010 as a result of the proceeds from the sale of the progesterone assets to Watson.

Financing Activities:

Net cash provided by financing activities in the nine months ended September 30, 2011 was $3.1 million, consisting of $2.6 million of proceeds from the exercise of employee stock options and $0.7 million of proceeds from the exercise of warrants offset by the purchase as related to treasury stock of $0.1 million. Net cash used in financing activities in the nine months ended September 30, 2010 was $18.6 million, consisting of $11.7 million in proceeds from the sale of Shares to Watson as a result of the Watson Transactions, the proceeds from the Watson Note which was later forgiven as part of the Watson Transactions, and the redemptions of the Notes in the amount of $26.0 million and the PharmaBio debt under the STRIANT Financing Agreement in the amount of $16.2 million, which eliminated all of the Company's debt. In addition, in the nine months ended September 30, 2011, the Company repurchased 3,333,330 shares of Common Stock for $3.1 million.

The Company has an effective registration statement on Form S-3 that it filed with the SEC using a shelf registration process. Under the shelf registration process, the Company may offer from time to time Common Stock, preferred stock, debt securities and warrants up to an aggregate amount of $50 million. To date, the Company has sold approximately $12.5 million in Common Stock under the registration statement. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct our business.

As of September 30, 2011, the Company had outstanding exercisable options and warrants that, if exercised, would result in approximately $26.6 million of additional capital and would cause the number of shares outstanding to increase; however, the cashless exercise feature of certain warrants may result in no cash to the Company. Options and warrants outstanding at September 30, 2011 were 5,164,965 and 12,179,169, respectively; however, there can be no assurance that any such options or warrants will be exercised. As of September 30, 2011, 1,685,014 employee stock options were exercised and 4,206,545 warrants were exercised. The aggregate intrinsic value of exercisable options and warrants was $5.3 million and $0.0 million at each period ended September 30, 2011 and September 30, 2010, respectively.

Significant expenditures anticipated by the Company in the near future are concentrated on relatively fixed general and administrative expenses as well as product development and related staff costs. The Company will also be making investments to increase manufacturing capacity to ensure its ability to meet Watson's forecasts for the anticipated launch of progesterone vaginal gel 8% and making facility improvements to ensure compliant manufacturing operations.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

The Company's contractual obligations, commercial commitments and off-balance sheet arrangements disclosures in its Annual Report on Form 10-K for the year ended December 31, 2010 have not materially changed since that report was filed.

Recent Accounting Pronouncements

Table of Contents

fiscal year 2010. Earlier application was permitted with required transition disclosures based on the period of adoption. We have adopted this standard and there is no effect of this standard on our consolidated financial statements at this time.

In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition, which establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the ASU is limited to research or development arrangements and requires an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. However, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The ASU was effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. We have adopted this standard and there is no effect of this standard on our consolidated financial statements at this time.

In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-05 Presentation of Comprehensive Income (ASU 2011-05). This update requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retrospective applications required.

Critical Accounting Policies and Estimates

The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the consolidated financial statements included in Item 15 of the Annual Report on Form 10-K for the year ended December 31, 2010, beginning on page F-10. Note that the preparation of this Quarterly Report on Form 10-Q requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition. The Company’s revenue recognition is significant because revenue is a key component of our results of operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and royalties. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter.

Net revenues include net product revenues (sales of Progesterone Products to Watson and Merck Serono and sales of STRIANT through April 2011), royalty revenues (primarily royalty revenues from Watson on sales of Progesterone Products) and other revenues (primarily the amortization of the deferred revenue and milestone payments from the Watson Transactions).

The Watson Transactions included allocated proceeds for licenses to the Progesterone Products and the continuation of development of the Progesterone Products through the filing and acceptance of the related NDA with the FDA. The Company could not determine the fair value of the continuation of development of the Progesterone Products and concluded the license fee and continuation of development to be a single unit of account resulting in the deferral of allocated proceeds and recognition as revenue over the estimated development period. The adoption of Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements by the Company on January 1, 2011, did not alter the revenue recognition for the Watson Transactions as ASU 2009-13 is only applicable to revenue arrangements entered into or materially modified after adoption.

Sales Returns. Revenues from the sale of products are recorded at the time goods are shipped to customers. The Company believes that it has not made any shipments in excess of its customers' ordinary course of business inventory levels. Except for sales to licensees, our return policy allows product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Products sold to licensees are not returnable to us. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated based on a percentage of sales, using such

factors as historical sales information, distributor inventory levels and product prescription data, and are recorded as a reduction to sales in the same period as the related sales are recognized. The Company records a provision for returns on a quarterly basis using an estimated rate and adjusts the provision if its analysis indicates that the potential for product non-salability exists. With regard to sales returns for CRINONE and PROCHIEVE, the Company is only responsible for returns of products sold prior to the closing of the Watson Transactions on July 2, 2010. In addition, with the sale of STRIANT, the Company is only responsible for returns of products sold prior to the closing of the STRIANT Asset Purchase Agreement on April 20, 2011. The Company is not responsible for returns for international sales. Sales adjustments for international sales are estimated to recognize changes in foreign exchange rates and government tenders that may fluctuate within a year.

Stock-Based Compensation – Employee Stock-Based Awards. Commencing January 1, 2006, the Company adopted ASC 718, “Share Based Payment”, formerly SFAS 123(R), which requires all share based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) providing supplemental implementation guidance for SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of ASC 718. During the first six months of 2011, there were 1,035,000 options granted.



	Nine Months Ended September 30,
	2011		2010
Risk free interest rate	2.12	%	1.38	%
Expected term	4.75		4.75
Dividend yield	—		—
Expected volatility	92.7	%	92.45	%

Short Term Investments- Investments consist of U.S. Treasury and agency securities. The Company's investments are classified as available-for-sale and are recorded at fair value, based upon quoted market prices. Unrealized temporary adjustments to fair value are included on the balance sheet in a separate component of stockholders' equity as unrealized gains and losses and reported as a component of accumulated other comprehensive income. No gains or losses on investments are realized until shares are sold or a decline in fair value is determined to be other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Fair Value of Financial Instruments- Effective January 1, 2008, we adopted FASB ASC 820-10-25, "Fair Value Measurement and Disclosures." This standard establishes a framework for measuring fair value and expands disclosure about fair value measurements. We did not elect fair value accounting for any assets and liabilities allowed by FASB ASC 825, "Financial Instruments."

FASB ASC 820-10 defines fair value as the amount that would be receive for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820-10 describes the following three levels of inputs that may be used:

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

The fair value of the short term investments are determined based on quoted market prices on the balance sheet date and are classified as a level 1 investment.

The estimated fair value of our contingent obligation to purchase the Warrants issued under the Note Purchase Agreements, if we issued shares of Common Stock (or equivalents) for a price less than $2.00 per share until 45 days (January 20, 2011) after the Company's public announcement of the results of the PREGNANT study, was determined under the Black-Scholes model and recorded as a liability at the closing of the Watson Transactions in the amount of $5,509,893 as of the close of business on July 1, 2010. It was adjusted, as of December 31, 2010, to $13,471,832. The results of the PREGNANT study were announced in December 2010 and on January 20, 2011, when the contingent purchase rights on the Warrants expired, the value of the Warrants was determined under the Black-Scholes option pricing model to be $16,193,037, a change of $2,721,205 from the year ended December 31, 2010 and reclassified to Capital in Excess of Par Value. These warrants will no longer be marked to

market.

The estimated fair value of the Common Stock warrant liability resulting from the October 2009 registered direct offering of 10,900,000 shares of the Common Stock and warrants to purchase 5,450,000 shares of Common Stock was $5,935,171 and $9,286,906 as of September 30, 2011 and December 31, 2010, respectively. These values were determined by using the Black-Scholes option pricing model which is based on the Company's stock price at measurement date, exercise price of this warrant, risk-free rate and historical volatility, and are classified as a Level 2 measurement. During the nine months ended September 30, 2011, the Company recorded income of $2,790,337 to adjust the value of the stock warrant liability to market.

The fair value of accounts receivable and accounts payable approximate their carrying amount.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements, which statements are indicated by the words “may,” “will,” “plans,” “believes,” “expects,” “intends,” “anticipates,” “potential,” “should,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made.

Factors that might cause future results to differ include, but are not limited to, the following: the successful marketing of CRINONE by Watson in the United States; the successful marketing of CRINONE 8% by Merck Serono outside the United States; review by the FDA of the NDA for progesterone vaginal gel 8% in the preterm birth indication; the outcome of further analyses by the FDA of the clinical data within the Preterm Birth NDA; success in obtaining timely FDA approval of the Preterm Birth NDA; ; successful development of a next-generation vaginal progesterone product; the ability of our third-party manufacturers to supply Progesterone Products; the impact of competitive products and pricing; the timely and successful negotiation of partnerships or other transactions; the strength of the U.S. dollar relative to international currencies, particularly the euro; competitive economic and regulatory factors in the pharmaceutical and healthcare industry; general economic conditions; and other risks and uncertainties that may be detailed, from time-to-time, in Columbia’s reports filed with the SEC.

All forward-looking statements contained herein are neither promises nor guarantees. Columbia does not undertake any responsibility to revise or update any forward-looking statements.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not believe that it has material exposure to market rate risk. The Company may, however, require additional financing to fund future obligations and no assurance can be given that the terms of future sources of financing will not expose the Company to material market risk.

Expenditures, primarily related to manufacturing for the nine months ended September 30, 2011 were approximately $1.1 million more than they would have been if the average 2010 exchange rates had been in effect in 2011.

Item 4. Controls And Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation at September 30, 2011, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Claims and lawsuits are filed against the Company and its subsidiaries from time to time. Although the results of pending claims are always uncertain, the Company believes that it has adequate reserves or insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance coverage in the event of any unfavorable outcome resulting from these actions.

Item 1A. Risk Factors

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits


(a)	Exhibits



3.1	Amended and Restated Bylaws of Columbia Laboratories, Inc. (1)
3.2	Certificate of Designations of Series D Junior Participating Preferred Stock of Columbia Laboratories, Inc., included as Exhibit C to the Amended and Restated Rights Agreement, dated as of March 13, 2002. (2)
4.1	Amendment No. 1, dated as of September 20, 2011, to the Amended and Restated Rights Agreement, dated as of November 29, 2010, by and between Columbia Laboratories, Inc. and American Stock Transfer & Trust Company, LLC.(3)
4.2	Amended and Restated Rights Agreement, dated as of November 29, 2010, by and between Columbia Laboratories, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent. (4)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company.*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company.*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101	XBRL instance documents



*	Filed herewith.
**	Furnished herewith.
(1)	Incorporated by reference to the Registrant's Current Report on Form 8-K, dated July 15, 2011.
(2)	Incorporated by reference to the Registrant's Current Report on Form 8-K, dated March 12, 2002
(3)	Incorporated by reference to the Registrant's Current Report on Form 8-K, dated September 16, 2011.
(4)	Incorporated by reference to the Registrant's Current Report on Form 8-K, dated November 29, 2010.

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.

COLUMBIA LABORATORIES, INC.

/s/ Lawrence A. Gyenes

Lawrence A. Gyenes

Senior Vice President,

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

DATE: November 2, 2011

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