UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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

For the transition period from                      to

Bentley Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE		No. 59-1513162
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Bentley Park, 2 Holland Way, Exeter, New Hampshire 03833
(Current Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (603) 658-6100

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 þ       NO o

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

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o       NO þ

The number of shares of the registrant’s common stock outstanding as of August 9, 2007 was 22,308,129.

 

 

Bentley Pharmaceuticals, Inc. and Subsidiaries
Form 10-Q for the Quarter Ended June 30, 2007

Index

		Page
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006			3
Consolidated Income Statements for the three months ended June 30, 2007 and 2006, and the six months ended June 30, 2007 and 2006			4
Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2007			5
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006			6
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			36
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 6. Exhibits			37
Ex-10.1 Loan Agreement dated June 29, 2007
Ex-10.2 Letter of guarantee dated June 29, 2007
Ex-10.3 Form of Restricted Stock Unit Certificate
Ex-31.1 Certification of CEO
Ex-31.2 Certification of CFO
Ex-32.1 Certification of CEO
Ex-32.2 Certification of CFO

Bentley Pharmaceuticals, Inc. and Subsidiaries

(in thousands, except per share data)		June 30,				December 31,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	35,661			$	12,424
Marketable securities			529				3,177
Receivables, net			34,222				32,963
Inventories, net			15,801				16,279
Deferred taxes			1,257				1,049
Prepaid expenses and other			2,116				1,798
Total current assets			89,586				67,690
Non-current assets:
Fixed assets, net			51,404				48,556
Drug licenses and related costs, net			16,425				16,026
Restricted cash			1,000				1,000
Deferred taxes			148				240
Other			1,009				844
Total non-current assets			69,986				66,666
		$	159,572			$	134,356
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	16,224			$	14,566
Accrued expenses			12,180				9,704
Short-term borrowings			—				247
Current portion of long-term debt			—				307
Deferred income			853				1,045
Other current liabilities			1,253				1,518
Total current liabilities			30,510				27,387
Non-current liabilities:
Long-term debt			14,807				—
Deferred income			4,305				3,899
Other			3,772				2,739
Total non-current liabilities			22,884				6,638
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 2,000 shares, issued and outstanding, none			—				—
Common stock, $0.02 par value, authorized 100,000 shares, issued and outstanding, 22,297 and 22,262 shares			445				445
Additional paid-in capital			141,194				140,030
Accumulated deficit			(46,351	)			(49,016	)
Accumulated other comprehensive income			10,890				8,872
Total stockholders’ equity			106,178				100,331
		$	159,572			$	134,356

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

Bentley Pharmaceuticals, Inc. and Subsidiaries

		For the Three Months Ended								For the Six Months Ended
(in thousands, except per share data)		June 30,								June 30,
		2007				2006				2007				2006
Revenues:
Net product sales		$	28,353			$	26,457			$	57,467			$	53,027
Licensing and collaboration revenues			2,826				2,526				5,103				4,234
Total revenues			31,179				28,983				62,570				57,261
Cost of net product sales			15,790				12,471				31,687				25,404
Gross profit			15,389				16,512				30,883				31,857
Operating expenses:
Selling and marketing			4,813				4,242				9,258				8,381
General and administrative			4,579				3,665				8,225				7,569
Research and development			3,502				2,495				6,177				5,403
Litigation settlement			—				733				—				1,337
Depreciation and amortization			546				445				1,054				881
Total operating expenses			13,440				11,580				24,714				23,571
Income from operations			1,949				4,932				6,169				8,286
Other income (expenses):
Interest income			185				185				367				438
Interest expense			(51	)			(34	)			(101	)			(94	)
Other, net			144				36				233				36
Income before income taxes			2,227				5,119				6,668				8,666
Provision for income taxes			1,517				2,484				3,598				4,877
Net income		$	710			$	2,635			$	3,070			$	3,789
Net income per common share:
Basic		$	0.03			$	0.12			$	0.14			$	0.17
Diluted		$	0.03			$	0.12			$	0.14			$	0.16
Weighted average common shares outstanding:
Basic			22,318				22,170				22,305				22,063
Diluted			22,892				22,876				22,695				23,380

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

Bentley Pharmaceuticals, Inc. and Subsidiaries

																		Accumulated
		$0.02 Par Value								Additional								Other
(in thousands)		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Income				Total
Balance at December 31, 2006			22,262			$	445			$	140,030			$	(49,016	)		$	8,872			$	100,331
Cumulative effect change in accounting from the implementation of FIN No. 48			—				—				—				(405	)			—				(405	)
Comprehensive income (loss):
Net income			—				—				—				3,070				—				3,070
Other comprehensive loss:
Foreign currency translation adjustment			—				—				—				—				2,018				2,018
Comprehensive income																						$	5,088
Exercise of stock options			25				—				25				—				—				25
Purchase of treasury shares			(4	)			—				(52	)			—				—				(52	)
Stock-based compensation			14				—				1,191				—				—				1,191
Balance at June 30, 2007			22,297			$	445			$	141,194			$	(46,351	)		$	10,890			$	106,178

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

Bentley Pharmaceuticals, Inc. and Subsidiaries

		For the Six Months Ended
(in thousands)		June 30,
		2007				2006
Cash flows from operating activities:
Net income		$	3,070			$	3,789
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,259				2,630
Non-cash charge for inventory write-down and reserves			422				—
Foreign currency gains			(56	)
Equity-based compensation expense			1,191				958
Change in fair value of derivative instrument			31
Loss on disposal of assets			353				52
Other non-cash items			6				6
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables			(503	)			(4,117	)
Inventories			429				(2,073	)
Deferred income taxes			(82	)			(112	)
Prepaid expenses and other current assets			(287	)			208
Other assets			(131	)			(187	)
Accounts payable and accrued expenses			3,535				2,828
Deferred income			89				863
Other liabilities			270				—
Net cash provided by operating activities			11,596				4,845
Cash flows from investing activities:
Additions to fixed assets			(4,258	)			(7,316	)
Additions to drug licenses and related costs			(1,205	)			(871	)
Purchase of investments			—				(2,377	)
Proceeds from investments			2,661				—
Net cash used in investing activities			(2,802	)			(10,564	)

(Continued on following page)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

Bentley Pharmaceuticals, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Concluded)

		For the Six Months Ended
(in thousands)		June 30,
		2007				2006
Cash flows from financing activities:
Proceeds from the exercise of stock options		$	25			$	115
Remittance of employee tax liabilities in exchange for common stock tendered to the Company			(52	)			(1,713	)
Proceeds from borrowings			14,807				1,404
Repayment of borrowings			(554	)			(2,870	)
Net cash provided by (used) in financing activities			14,226				(3,064	)
Effect of exchange rate changes on cash			217				360
Net increase (decrease) in cash and cash equivalents			23,237				(8,423	)
Cash and cash equivalents at beginning of period			12,424				32,384
Cash and cash equivalents at end of period		$	35,661			$	23,961
Supplemental Disclosures of Cash Flow Information
The Company paid cash during the period for:
Interest		$	11			$	90
Foreign income taxes		$	1,541			$	2,152
Supplemental Disclosures of Non-Cash Financing and Investing Activities
The Company has issued Common Stock as equity-based compensation in lieu of cash during the period as follows:
Shares			15				9
Amount		$	139			$	127
Amounts included in accounts payable at end of period for fixed asset and drug license purchases		$	1,326			$	2,096

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

Bentley Pharmaceuticals, Inc. and Subsidiaries

History and Operations

          Bentley Pharmaceuticals, Inc. and Subsidiaries (which may be referred to as Bentley or the Company), headquartered in the U.S., is an international specialty pharmaceutical company, incorporated in the State of Delaware, focused on:

	•		Specialty Generics: development, licensing and sales of generic and branded generic pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing of pharmaceuticals for others; and
	•		Drug Delivery: research, development and licensing/commercialization of advanced drug delivery technologies and pharmaceutical products.

          Bentley’s pharmaceutical product sales and licensing activities are based primarily in Spain, where it has a significant commercial presence and manufactures and markets approximately 180 product presentations (stock keeping units, or SKUs) through three wholly-owned Spanish subsidiaries: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Bentley’s products are in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. Although most of the Company’s sales of these products are currently in the Spanish market, it has recently focused on increasing sales in other European countries and other geographic regions through strategic alliances with companies in these territories. The Company continually adds to its product portfolio in response to increasing market demand for generic and branded generic therapeutic agents and, when appropriate, divests portfolio products considered to be redundant or that have become non-strategic. The Company manufactures its finished dosage pharmaceutical products in its Spanish manufacturing facility which received approval from the U.S. Food and Drug Administration (“FDA”) in late 2006 for the manufacture of its first U.S. generic product. The Company owns a manufacturing facility in Spain that specializes in the manufacturing of several API products. This facility has also been approved by the FDA for the manufacture of one ingredient for marketing and sale in the U.S. The Company markets its API products through its Spanish subsidiary, Bentley A.P.I. The Company also has an Irish subsidiary, Bentley Pharmaceuticals Ireland Limited, which launched its first product in late 2006.

          The Company has U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Bentley is developing products that incorporate its drug delivery technologies and has licensed applications of its proprietary CPE-215^® drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim^® in the U.S. market in February 2003. Testim, which incorporates Bentley’s CPE-215 drug delivery technology, is a gel indicated for testosterone replacement therapy. Bentley continues to seek other pharmaceutical and biotechnology companies to form additional strategic alliances to facilitate the development and commercialization of other products using its drug delivery technologies, including the delivery of insulin to diabetic patients intranasally and the treatment of nail fungus infections topically. In addition, Bentley continues to seek alliances with academic organizations to explore the delivery of macromolecules, including research using biodegradable Nanocaplet^TM technology.

Basis of Condensed Consolidated Financial Statements

          The Condensed Consolidated Financial Statements of Bentley as of June 30, 2007 and for the three and six months ended June 30, 2007 and 2006, included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted insofar as such information was disclosed in the Company’s consolidated financial statements for the year ended December

31, 2006. These Condensed Consolidated Financial Statements should be read in conjunction with the summary of significant accounting policies and the audited consolidated financial statements and notes thereto included in Bentley’s Annual Report on Form 10-K for the year ended December 31, 2006, referred to as our 2006 Form 10-K.

          In the opinion of management, the accompanying unaudited condensed consolidated financial statements as of June 30, 2007 and for the three and six months ended June 30, 2007 and 2006 are presented on a basis consistent with the audited consolidated financial statements for the year ended December 31, 2006 and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly Bentley’s financial position as of June 30, 2007 and the results of its operations and cash flows for the three and six months ended June 30, 2007 and 2006. The results of operations for the three and six months ended June 30, 2007 should not necessarily be considered indicative of the results to be expected for any subsequent period or for the full year ending December 31, 2007.

Cash and cash equivalents

          The Company considers all highly liquid investments with remaining maturities of three months or less when purchased to be cash equivalents for purposes of classification in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows. Investments in securities that do not meet the definition of cash equivalents are classified as marketable securities in the Consolidated Balance Sheets.

          Included in cash and cash equivalents at June 30, 2007 and December 31, 2006 are approximately $9,839,000 and $357,000, respectively, of short-term investments considered to be cash equivalents, as the original maturity dates of such investments were three months or less when purchased.

Receivables

          Receivables consist of the following (in thousands):

		June 30, 2007				December 31, 2006
Trade receivables (of which $0 and $2,595, respectively, collateralize short-term borrowings with Spanish financial institutions)		$	27,207			$	27,880
VAT receivable			4,783				3,151
Royalties receivable			2,675				2,261
Other			90				82
			34,755				33,374
Less-allowance for doubtful accounts			(533	)			(411	)
		$	34,222			$	32,963

Inventories

          Inventories are stated at the lower of cost or market, cost being determined on the first in, first out (“FIFO”) method. Reserves for slow moving and obsolete inventories are provided based on historical experience and current product demand.

          Balances are comprised of the following (in thousands):

		June 30, 2007				December 31, 2006
Raw materials		$	10,382			$	8,669
Finished goods			6,196				7,621
			16,578				16,290
Less allowance for slow moving inventory			(777	)			(11	)
		$	15,801			$	16,279

          Included in the Company’s inventories at June 30, 2007 and December 31, 2006 are $298,000 and $1,338,000, respectively, related to the Company’s first U.S. generic product which was launched in late December 2006. The Company has accounted for these goods as consigned inventories that have been shipped to the Company’s collaborator. Market price conditions and demand for this product are less favorable than originally estimated. As a result, in the six months ended June 30, 2007, the Company recorded adjustments totaling $1,035,000 to write-down these inventories to their net realizable value and reserve for slow moving inventories. In accordance with its collaboration agreement, the Company is liable for a portion of these adjustments and has therefore recorded a charge of approximately $422,000 to cost of sales, reflecting its share of these adjustments.

          The Company has received certain payments from its collaborator in anticipation of future sales of the consigned products. As of June 30, 2007 and December 31, 2006, the Company has recorded $132,000 and $481,000, respectively, as payments from its collaborator net of adjustments, which have been recorded in other current liabilities on the Condensed Consolidated Balance Sheets.

Fixed assets

          Fixed assets consist of the following (in thousands):

		June 30, 2007				December 31, 2006
Land		$	2,926			$	2,875
Buildings and improvements			23,822				17,538
Equipment			23,831				20,591
Furniture and fixtures			2,108				2,138
Other			284				394
			52,971				43,536
Capital in-progress			16,264				20,213
			69,235				63,749
Less accumulated depreciation			(17,831	)			(15,193	)
		$	51,404			$	48,556

          Depreciation expense of approximately $179,000 and $148,000 has been charged to operations as a component of depreciation and amortization expense in the Consolidated Income Statements for the six months ended June 30, 2007 and 2006, respectively. Depreciation totaling approximately $2,205,000 and $1,749,000 has been included in cost of net product sales during the six months ended June 30, 2007 and 2006, respectively.

Long-term debt

          Long-term debt consists of the following (in thousands):

		June 30, 2007				December 31, 2006
Loans payable		$	14,807			$	307
Less-current portion of long-term debt			—				(307	)
		$	14,807			$	—

     On June 29, 2007, the Company’s subsidiary, Laboratorios Belmac (“Belmac”), entered into a loan agreement with a Spanish financial institution, pursuant to which Belmac borrowed 11,000,000 Euros (approximately $14,807,000 at June 30, 2007). In accordance with the loan agreement, Belmac will be charged interest on the loan at a variable rate, reset quarterly, equal to the Euro Interbank Offered Rate, plus 0.5%, plus a single, up-front fee of 0.2%. The interest rate under the loan was 5.02% at June 30, 2007. The principal of the loan will be repaid in quarterly installments of 412,500 Euros (approximately $555,300) beginning December 31, 2008, with the balance due on December 31, 2013. Maturities on the long-term debt are as follow (in thousands):

2007		$	--
2008			555
2009			2,221
2010			2,221
2011			2,221
2012 and 2013			7,589
Total		$	14,807

     Pursuant to financial covenants in the loan agreement, Belmac must (i) maintain a net financial debt to net equity ratio of less than 0.33 to 1; (ii) maintain a net financial debt to operating profit ratio of less than 2.75 to 1; and (iii) not have either such ratio increase in any fiscal year by more than 20% over the respective ratio from the prior fiscal year. In addition, Belmac’s obligations under the loan agreement have been guaranteed by Bentley and Bentley’s other subsidiaries in Spain. Belmac has agreed to pledge assets at the request of the financial institution if Belmac fails to comply with these financial covenants and Belmac has also agreed to not pledge any assets to any other party. The loan may be prepaid at any time without a fee.

     In previous years, the Company entered into loan agreements with the Spanish government as a part of government-sponsored research-funding programs. The loans were non-interest bearing and payable in annual installments beginning in 2005. These loans were repaid in full in the six months ended June 30, 2007.

Stockholders’ equity

     A substantial amount of the Company’s business is conducted in Europe and is therefore influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, specifically the Euro. The exchange rates at June 30, 2007 and December 31, 2006 are as follows:

U.S. Dollars per Euro		June 30, 2007				December 31, 2006
YTD weighted average exchange rate			1.33				1.26
Exchange rate			1.35				1.31

          The net effect of foreign currency translation on our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2007 was a net increase of $808,000 and $2,018,000, respectively, and the cumulative historical effect as of June 30, 2007 was an increase of $10,890,000, as reflected in our Consolidated Balance Sheets as accumulated other comprehensive income. The carrying value of assets and liabilities can be materially affected by changes in foreign currency exchange rates, as can the revenues and expenses.

Supplemental disclosures related to Consolidated Statements of Cash Flows

          During the six months ended June 30, 2007, the Chief Executive Officer (“CEO”), the President, and the Chief Medical Officer (“CMO”) of the Company were issued an aggregate of 11,150 shares of Bentley Common Stock upon vesting of their respective restricted stock unit awards before tax withholdings. At the request of the recipients, the Company withheld approximately 3,783 shares of Common Stock, with a fair market value of approximately $45,000, in order to satisfy minimum federal and statutory tax withholding requirements. These shares of Common Stock were recorded at fair market value and are held by the Company as treasury shares. As of June 30, 2007 and December 31, 2006, the Company has recorded approximately 853,000 and 849,100 shares, respectively, as treasury stock, with an historical cost of $10,833,300 and $10,781,700, respectively, which has been accounted for as a reduction of additional paid in capital.

          During the six months ended June 30, 2006, the CEO and the CMO of the Company exercised stock options to purchase an aggregate of 533,300 shares of the Company’s Common Stock. In satisfaction of the option exercise prices, the Company received an aggregate of approximately 177,800 shares of previously acquired Bentley Common Stock, with a fair market value of approximately

$2,347,500. The Company withheld a total of approximately 129,600 shares of Common Stock, with a fair market value of approximately $1,712,800, from these employees in order to satisfy minimum federal and statutory tax withholding requirements. The shares of Common Stock acquired by the Company in connection with these stock option exercises were recorded at fair market value and are held by the Company as treasury shares.

Revenue recognition

          Revenue on product sales is recognized when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price and considers delivery to have occurred when the customer takes possession of the product. The Company provides its customers with a limited right of return. Revenue is recognized upon delivery and a reserve for sales returns is recorded when considered appropriate. The Company has demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists, (SFAS No. 48) and of allowances for doubtful accounts based on significant historical experience.

          Revenue from service, research and development, and licensing agreements is recognized when the service procedures have been completed or as revenue recognition criteria have been met for each separate unit of accounting as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The Company has deferred the recognition of approximately $4,491,000 and $4,797,000 of licensing revenues as of June 30, 2007 and December 31, 2006, respectively, for which the earnings process has not been completed.

          The Company earns royalty revenues on Auxilium’s sales of Testim, which incorporates the Company’s CPE-215 permeation enhancement technology. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased product prior to the units being dispensed through patient prescriptions. Historically, customer returns were not able to be reasonably estimated. Therefore, in accordance with SFAS No. 48, the Company deferred the recognition of royalty revenues on product shipments of Testim until the units were dispensed through patient prescriptions. In June 2006, the Company determined that it could reasonably estimate future product returns on sales of Testim based on historical return experience. As a result the Company recorded a change in estimate and recognized its deferred Testim royalties. The Company recognized royalty revenues of $4,810,000 and $3,982,000 in the six months ended June 30, 2007 and 2006, respectively.

Provision for income taxes

          The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”) an interpretation of FASB Statement No. 109, Accounting for Income Taxes, (“SFAS No. 109”) on January 1, 2007. The purpose of FIN No. 48 is to clarify and set forth consistent rules for accounting for uncertain tax positions in accordance with SFAS No. 109 by requiring the application of a “more likely than not” threshold for the recognition and derecognition of tax positions. As a result of the implementation of FIN No. 48, the Company recorded a $405,000 increase in its non-current liabilities during the quarter ended March 31, 2007 for uncertain tax positions which was accounted for as an increase to the January 1, 2007 accumulated deficit. In order to conform with the balance sheet disclosure requirements of FIN No. 48, the Company also reclassified its previously recorded liabilities of $546,000 for uncertain tax positions from accrued expenses to other non-current liabilities during the quarter ended March 31, 2007. The Company had $935,000 of unrecognized tax benefits at the adoption date, all of which would affect its effective tax rate if recognized. The Company’s unrecognized tax benefits decreased by $272,000 during the six months ended June 30, 2007 as a result of the expiration of certain foreign tax contingencies. The Company recognizes interest and penalties related to uncertain tax positions as a component of the provision for

income taxes. As of the date of adoption, the Company had approximately $249,000 of accrued penalties and $51,000 of accrued interest related to its uncertain tax positions. Tax years ranging from 2002 to 2006 remain open to examination by the major taxing authorities in jurisdictions where the Company is subject to taxation, principally the U.S. and Spain.

          As a result of reporting taxable income in Spain, the Company recorded provisions for foreign income taxes totaling $3,598,000 and $4,877,000 for the six months ended June 30, 2007 and 2006, respectively. The provisions represented 31% and 34% of the pre-tax income reported in Spain for the six months ended June 30, 2007 and 2006, respectively. The provisions represented 54% and 56% of consolidated pre-tax income for the six months ended June 30, 2007 and 2006, respectively.

          The Company maintains various agreements by and between Bentley Pharmaceuticals, Inc. and its subsidiaries. Income and expenses resulting from these agreements are eliminated in consolidation; however, the related transactions affect the Company’s consolidated income tax provision. See further information regarding the Company’s consolidated tax provision by tax jurisdiction in the Results of Operations section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

          As future operating profits in the U.S. and Ireland cannot be reasonably assured, no tax benefit has been recorded for the related losses, which totaled approximately $5,078,000 and $5,510,000 for the six months ended June 30, 2007 and 2006, respectively. Accordingly, the Company has established valuation allowances equal to the full amount of the U.S. and Irish deferred tax assets. Should the Company determine that it is more likely than not that it will realize certain of its net deferred tax assets for which it has previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance.

Basic and diluted net income per common share

          Basic net income per common share is based on the weighted average number of shares of Common Stock outstanding during each period. The Company included the dilutive effect of outstanding stock options, as calculated using the treasury stock method and restricted stock units, when determining the diluted net income per common share for the three and six months ended June 30, 2007 and 2006.

          The following is a reconciliation between basic and diluted net income per common share for the three and six months ended June 30, 2007 and 2006. Dilutive securities issuable for the three and six months ended June 30, 2007 include approximately 574,000 and 390,000 dilutive incremental shares, respectively issuable as a result of various stock options that are outstanding.

          For the Three Months Ended June 30, 2007 (in thousands, except per share data):

						Effect of Dilutive
		Basic EPS				Securities				Diluted EPS
Net Income		$	710			$	—			$	710
Weighted Average Common Shares Outstanding			22,318				574				22,892
Net Income Per Common Share		$	0.03			$	—			$	0.03

          For the Three Months Ended June 30, 2006 (in thousands, except per share data):

						Effect of Dilutive
		Basic EPS				Securities				Diluted EPS
Net Income		$	2,635			$	—			$	2,635
Weighted Average Common Shares Outstanding			22,170				706				22,876
Net Income Per Common Share		$	0.12			$	—			$	0.12

          For the Six Months Ended June 30, 2007 (in thousands, except per share data):

						Effect of Dilutive
		Basic EPS				Securities				Diluted EPS
Net Income		$	3,070			$	—			$	3,070
Weighted Average Common Shares Outstanding			22,305				390				22,695
Net Income Per Common Share		$	0.14			$	—			$	0.14

          For the Six Months Ended June 30, 2006 (in thousands, except per share data):

						Effect of Dilutive
		Basic EPS				Securities				Diluted EPS
Net Income		$	3,789			$	—			$	3,789
Weighted Average Common Shares Outstanding			22,063				1,317				23,380
Net Income Per Common Share		$	0.17			$	(0.01	)		$	0.16

          Excluded from the diluted EPS presentation for the three and six months ended June 30, 2007 were options to purchase an aggregate of approximately 1,618,000 and 2,242,000 shares of Common Stock, respectively, at exercise prices greater than the average fair value of the Common Stock for the three and six months ended June 30, 2007.

          Excluded from the diluted EPS presentation for the three and six months ended June 30, 2006 were options to purchase an aggregate of approximately 644,000 and 10,000 shares of Common Stock, respectively, at exercise prices greater than the average fair value of the Common Stock for the three and six months ended June 30, 2006.

Share-based compensation

          The Company has in effect equity incentive plans (the “Plans”), pursuant to which directors, officers, employees and consultants of the Company have been awarded grants of restricted stock units and options to purchase the Company’s Common Stock. As of June 30, 2007, approximately 4,451,000 shares of Common Stock have been reserved for issuance under the Plans. Approximately 4,192,000 of the shares are outstanding, excluding 40,000 shares underlying restricted stock units, contingently issuable to non-employee directors pursuant to the terms and conditions of the respective restricted stock unit agreements. The balance of approximately 259,000 shares is available for future issuance for any type of award allowed under the plan.

          During the six months ended June 30, 2007, the Company issued approximately 20,200 shares of Common Stock upon the vesting of restricted stock units, approximately 4,700 shares of Common Stock upon exercise of stock options and approximately 14,500 shares of Common Stock as share-based compensation in lieu of cash contributions to the Company’s 401(k) Plan. The Company also withheld

approximately 4,300 shares upon the vesting of restricted stock units in order to satisfy minimum federal and statutory tax withholding requirements, which were recorded as treasury stock. An additional 20,000 restricted stock units vested during the period and are contingently issuable to non-employee directors pursuant to the terms and conditions of the respective restricted stock unit agreements.

          Share-based compensation expense recorded for stock option and restricted stock unit awards to employees and non-employee directors for the three months ended June 30, 2007 and 2006 was approximately $508,000 and $363,000, respectively. Share-based compensation expense recorded for stock option and restricted stock unit awards to employees and non-employee directors for the six months ended June 30, 2007 and 2006 was approximately $1,005,000 and $826,000, respectively.

          The related expenses were recorded in the Company’s Condensed Consolidated Income Statements as follows (in thousands):

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Cost of net product sales		$	7			$	5			$	15			$	15
Selling and marketing expenses			4				3				9				8
General and administrative expenses			309				217				619				521
Research and development expenses			188				138				362				282
		$	508			$	363			$	1,005			$	826

          No related compensation expense was capitalized as the cost of an asset and there was no impact on net cash provided by operating activities or net cash used in financing activities as a result of these share-based transactions.

          The Company issued 14,501 and 8,791 shares in the six months ended June 30, 2007 and 2006 as matching contributions for the Company’s 401(k) Plan. General and administrative expenses include approximately $63,800 and $60,000 of such non-cash share-based compensation for the six months ended June 30, 2007 and 2006, respectively. Research and development expenses include approximately $75,100 and $70,000 of such non-cash share-based compensation for the six months ended June 30, 2007 and 2006, respectively.

Business segment information

          SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, defines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company’s operating segments. The Company, headquartered in the U.S., is an international specialty pharmaceutical company which operates in two business segments, specialty generics and drug delivery, and two geographical locations (Europe and the U.S.).

          The Company’s specialty generics segment is based in Europe and develops and manufactures a growing portfolio of generic and branded generic pharmaceuticals in Europe for the treatment of cardiovascular, gastrointestinal, infectious and central nervous system diseases through its subsidiary, Laboratorios Belmac, and markets these pharmaceutical products through its subsidiaries, Laboratorios Belmac, Laboratorios Davur, Laboratorios Rimafar and Bentley Pharmaceuticals Ireland. The U.S. operations of this segment include any sales of generic pharmaceuticals in the U.S. and continued research and development activities to bring additional generic pharmaceutical products into the U.S. This segment also manufactures and sells active pharmaceutical ingredients through its subsidiary, Bentley A.P.I.

          The Company’s drug delivery segment is based in both the U.S. and Europe and is focused on the advancement of proprietary drug delivery technologies that enhance or facilitate the absorption of

pharmaceutical compounds across various membranes. In the U.S., the Company’s activities consist primarily of licensing, product research and development, business development activities, corporate management and administration.

          Set forth in the tables below is certain financial information with respect to the Company’s business and geographical segments as of and for the three and six months ended June 30, 2007 and 2006 and as of December 31, 2006. These segments use the same accounting policies as those described in the summary of significant accounting policies in Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”).

          As of and for the Three Months Ended June 30, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	28,161			$	192			$	—			$	—				28,353
Licensing and collaboration revenues			171				—				—				2,655				2,826
Total revenue			28,332				192				—				2,655				31,179
Cost of net product sales			15,447				343				—				—				15,790
Gross Profit			12,885				(151	)			—				2,655				15,389
Selling and marketing expense			4,813				—				—				—				4,813
General and administrative expense			2,393				(8	)			—				2,194				4,579
Research and development expense			519				—				1,491				1,492				3,502
Depreciation and amortization expense			284				39				—				223				546
Income from operations			4,876				(182	)			(1,491	)			(1,254	)			1,949
Interest income			70				—				—				115				185
Interest expense			(48	)			—				—				(3	)			(51	)
Other income (expense), net			144				—				—				—				144
Income before income taxes			5,042				(182	)			(1,491	)			(1,142	)			2,227
Provision for income taxes			1,517				—				—				—				1,517
Net income (loss)			3,525				(182	)			(1,491	)			(1,142	)			710
Expenditures for fixed assets			2,296				—				—				8				2,304
Expenditures for drug licenses			565				—				—				125				690

          As of and for the Three Months Ended June 30, 2006 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	26,457			$	—			$	—			$	—			$	26,457
Licensing and collaboration revenues			165				—				—				2,361				2,526
Total revenues			26,622				—				—				2,361				28,983
Cost of net product sales			12,471				—				—				—				12,471
Gross profit			14,151				—				—				2,361				16,512
Selling and marketing expense			4,242				—				—				—				4,242
General and administrative expense			1,710				—				19				1,936				3,665
Research and development expense			459				—				1,018				1,018				2,495
Litigation settlement			227				506				—				—				733
Depreciation and amortization expense			260				21				—				164				445
Income from operations			7,253				(527	)			(1,037	)			(757	)			4,932
Interest income			9				—				—				176				185
Interest expense			(34	)			—				—				—				(34	)
Other income (expense), net			36				—				—				—				36
Income before income taxes			7,264				(527	)			(1,037	)			(581	)			5,119
Provision for income taxes			2,484				—				—				—				2,484
Net income (loss)			4,780				(527	)			(1,037	)			(581	)			2,635
Expenditures for fixed assets			3,937				—				—				97				4,034
Expenditures for drug licenses			210				—				—				140				350

          As of and for the Six Months Ended June 30, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	57,067			$	400			$	—			$	—				57,467
Licensing and collaboration revenues			285				—				—				4,818				5,103
Total revenues			57,352				400				—				4,818				62,570
Cost of net product sales			30,843				844				—				—				31,687
Gross profit			26,509				(444	)			—				4,818				30,883
Selling and marketing expense			9,258				—				—				—				9,258
General and administrative expense			4,667				(28	)			—				3,586				8,225
Research and development expense			1,000				—				2,588				2,589				6,177
Litigation settlement			—				—				—				—				—
Depreciation and amortization expense			558				78				—				418				1,054
Income from operations			11,026				(494	)			(2,588	)			(1,775	)			6,169
Interest income			135				—				—				232				367
Interest expense			(93	)			—				—				(8	)			(101	)
Other income (expense), net			236				—				—				(3	)			233
Income before income taxes			11,304				(494	)			(2,588	)			(1,554	)			6,668
Provision for income taxes			3,598				—				—				—				3,598
Net income (loss)			7,706				(494	)			(2,588	)			(1,554	)			3,070
Expenditures for fixed assets			4,230				—				—				28				4,258
Expenditures for drug licenses			901				32				—				272				1,205

          As of and for the Six Months Ended June 30, 2006 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	53,027			$	—			$	—			$	—			$	53,027
Licensing and collaboration revenues			239				—				—				3,995				4,234
Total revenues			53,266				—				—				3,995				57,261
Cost of net product sales			25,404				—				—				—				25,404
Gross profit			27,862				—				—				3,995				31,857
Selling and marketing expense			8,381				—				—				—				8,381
General and administrative expense			3,486				—				68				4,015				7,569
Research and development expense			953				—				2,225				2,225				5,403
Litigation settlement			389				948				—				—				1,337
Depreciation and amortization expense			514				42				—				325				881
Income from operations			14,139				(990	)			(2,293	)			(2,570	)			8,286
Interest income			55				—				—				383				438
Interest expense			(94	)			—				—				—				(94	)
Other income (expense), net			36				—				—				—				36
Income before income taxes			14,136				(990	)			(2,293	)			(2,187	)			8,666
Provision for income taxes			4,877				—				—				—				4,877
Net income (loss)			9,259				(990	)			(2,293	)			(2,187	)			3,789
Expenditures for fixed assets			7,137				—				—				179				7,316
Expenditures for drug licenses			556				—				—				315				871

          As of June 30, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Receivables, net		$	31,438			$	—			$	—			$	2,784				34,222
Other current assets			44,676				248				—				10,440				55,364
Fixed assets			48,718				—				—				2,686				51,404
Drug licenses and related costs			11,312				1,783				—				3,330				16,425
Other non-current assets			917				—				—				1,240				2,157
Total assets			137,061				2,031				—				20,480				159,572
Current liabilities			27,108				250				—				3,152				30,510
Long term debt			14,807				—				—				—				14,807
Other non-current liabilities			8,077				—				—				—				8,077
Total liabilities			49,992				250				—				3,152				53,394

          As of December 31, 2006 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Receivables, net		$	30,558			$	39			$	—			$	2,366			$	32,963
Other current assets			21,758				1,338				—				11,631				34,727
Fixed assets			45,738				—				—				2,818				48,556
Drug licenses and related costs			10,697				1,833				—				3,496				16,026
Other non-current assets			885				—				—				1,199				2,084
Total assets			109,636				3,120				—				21,510				134,356
Current liabilities			24,651				—				—				2,736				27,387
Non-current liabilities			6,638				—				—				—				6,638
Total liabilities			31,289				—				—				2,736				34,025

Recently issued accounting pronouncements

          On January 1, 2007, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides guidance for measuring the fair value of assets and liabilities, as well as requires expanded disclosures about fair value measurements. SFAS No. 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

          In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 becomes effective for the Company as of January 1, 2008. The Company is currently evaluating the impact of SFAS No. 159 on the Company’s financial statements.

Reclassifications

          Certain costs incurred in general and administrative expenses in prior periods associated with a litigation settlement in December of 2006 have been reclassified from general and administrative expenses to litigation settlement to conform with the Company’s current presentation.

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

          You should read the following discussion and analysis together with all financial and non-financial information appearing elsewhere in this report and with our consolidated financial statements and related notes included in our 2006 Annual Report on Form 10-K, which has been previously filed with the SEC. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2006 Annual Report on Form 10-K under Item 1A, “Risk Factors”.

Overview

We are a specialty pharmaceutical company focused on:

	•		Specialty Generics: development, licensing and sales of generic and branded generic pharmaceutical products and active pharmaceutical ingredients and the manufacturing of pharmaceuticals for ourselves and others in Spain, other parts of Europe and international markets, including the U.S. market; and
	•		Drug Delivery: research, development and licensing/commercialization of advanced proprietary drug delivery technologies for new and existing pharmaceutical products.

Generic Pharmaceuticals

          Our pharmaceutical product sales activities are based in Spain, where we have a significant commercial presence and we manufacture and market approximately 180 product presentations or SKUs in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. Revenues derived from our top three product lines, represented approximately 26% of our net product revenues in the three months ended June 30, 2007. We market our branded generic and generic products to physicians, pharmacists and hospitals through our three separate sales and marketing organizations based in Spain: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. In past years we expanded our geographic sales to countries outside of Spain including the U.S. and several countries in the E.U. As of June 30, 2007 approximately 31% of our net product sales were derived from sales outside of Spain. Our generic simvastatin product, which is manufactured at our FDA approved finish dosage facility in Spain, was launched in the U.S. in December of 2006. The launch of our first U.S. generic product marked a significant strategic milestone for us; however, due to market price conditions and limited demand, sales of our generic simvastatin have been determined to be less favorable than our initial projections. As a result, we have recorded inventory write-downs and obsolescence reserves of approximately $422,000 to cost of sales in the six months ended June 30, 2007.

          While the pricing of our pharmaceutical products is influenced by market forces (size of the market, number of competitors, etc.), our pricing is also subject to governmental price controls in Spain and other countries. The majority of our products are subject to price controls set in place by the Spanish government. The Spanish government enacted legislation effective March 1, 2007 which reduced the amount it will reimburse for pharmaceutical products. As a result of the legislation our sales force began marketing our products at lower selling prices in Spain as early as February 2007. We also experienced reduced sales levels in the beginning of the first quarter of 2007 as Spanish wholesalers and pharmacies minimized order quantities until they were able to purchase our products at the new lower prices. Once we began selling at the new prices we experienced an increase in the number of our units sold. While the increased unit volume has offset the impact of the reduced selling prices on our net product sales, our gross margins have decreased from 52% in the six months ended June 30, 2006 to 46% in the six months ended June 30, 2007 (excluding inventory write-downs associated with our U.S. generic simvastatin discussed above). We have implemented strategies to mitigate lower selling prices which include strategies to reduce

manufacturing costs and increase sales volumes. We are seeking to continue expanding our product sales in other geographic regions, including the U.S., through strategic alliances. We are targeting markets that offer compatible regulatory approval regimes and attractive product margins. In addition, we expect to grow our business by developing and acquiring rights to market additional products to sell through our organization and our strategic alliances. We continually acquire rights to new products in response to increasing market demand for generic and branded generic therapeutic products.

          We also manufacture and market active pharmaceutical ingredients, or API, through our subsidiary, Bentley A.P.I. Our API facility has been approved by the FDA for the manufacture of one ingredient for marketing and sale in the U.S. In addition, our Spanish pharmaceutical product manufacturing facility produces pharmaceutical products that are marketed by other pharmaceutical companies both in Spain and in other international markets, including the U.S.

Drug Delivery Technologies and Products

          We develop and co-develop products that incorporate our drug delivery technologies. We have licensed applications of our proprietary CPE-215 drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim, the first product incorporating our CPE-215 drug delivery technology, in the United States in February 2003. Testim is a gel indicated for testosterone replacement therapy. Testim is also approved for marketing in 15 European countries and Canada. We are in discussions with other pharmaceutical and biotechnology companies to form additional strategic alliances to facilitate the development and commercialization of other products using our drug delivery technologies, including the delivery of insulin to diabetic patients intranasally and the treatment of nail fungus infections topically. In addition, we continue to seek alliances with academic organizations to explore the delivery of macromolecules, including research using biodegradable Nanocaplet^TM technology.

Research and Development Focus

          Our U.S. research and development activities are primarily focused on the development of Nasulin^TM, our intranasal insulin product candidate. In 2004 we concluded a Phase IIA study of Nasulin in Type I diabetic patients using our CPE-215 technology. The full results of that trial were published in 2006 in the journal Diabetes Technology & Therapeutics, Volume 8, Number 1. In 2006, we completed an additional Phase I study in Ireland and advanced our Phase IIA studies in the U.S. In the first quarter of 2007 we completed preparations for a Phase II study in India which began in the second quarter of 2007. Portions of the results from our U.S. and Irish studies were presented at the American Diabetes Association 67^th Sessions in Chicago, IL in June 2007. We expect the U.S. development and clinical programs for Nasulin to continue and expand both outside and inside the U.S. We are also continuing our clinical programs to support our strategy for the distribution of our generic pharmaceutical products in other countries, including the U.S. We expect to continue to invest our resources to conduct clinical trials and support the required regulatory submissions for our clinical programs. As a result, we expect to incur increased costs for product formulation, research and clinical development efforts.

Effect of Foreign Currency Fluctuations

          A substantial amount of our business is conducted in Europe and, therefore our results, which are measured in U.S. Dollars, are influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, specifically the Euro. An increase in the weighted average value of the Euro in relation to the U.S. Dollar over the prior year second quarter, had the following impact on the results of our operations when reported in U.S. Dollars: (1) total revenues were increased by approximately $1,847,000, (2) gross profit was increased by approximately $842,000, (3) operating expenses and other income (expense) were increased by approximately $602,000, (4) provision for income taxes was increased by approximately $102,000, which resulted in (5) an aggregate increase in net income of approximately $138,000. An increase in the weighted average value of the Euro in relation to the U.S. Dollar over the first half of the prior year, had the following impact on the results of our operations when reported in U.S. Dollars: (1) total

revenues were increased by approximately $4,265,000, (2) gross profit was increased by approximately $1,979,000, (3) operating expenses and other income (expense) were increased by approximately $1,298,000, (4) provision for income taxes was increased by approximately $275,000, which resulted in (5) an aggregate increase in net income of approximately $406,000.

          This section includes “constant currency” measures. Constant currency removes from financial data the impact of changes in exchange rates between the U.S. Dollar and other currencies, particularly the Euro, by translating current period financial data into U.S. Dollars using the same foreign currency exchange rates that were used to translate the financial data for the previous period. We believe presenting certain results on a constant currency basis is useful to investors because it allows a more meaningful comparison of the performance of our European operations from period to period.

RESULTS OF OPERATIONS:

Three Months Ended June 30, 2007 versus Three Months Ended June 30, 2006

Revenues by Segment

		For the Three Months Ended June 30,																Change
(in thousands)		2007				%				2006				%				$				%
Specialty Generics
Net product sales		$	28,353				91	%		$	26,457				91	%		$	1,896				7	%
Licensing and collaboration revenues			171				*				166				1	%			5				3	%
			28,524				91	%			26,623				92	%			1,901				7	%
Drug Delivery
Licensing and collaboration revenues			2,655				9	%			2,360				8	%			295				13	%
Total revenues		$	31,179				100	%		$	28,983				100	%		$	2,196				8	%

          Total revenues for the three months ended June 30, 2007 increased $2,196,000, or 8% from the same period in the prior year. Our specialty generics business experienced increased demand when compared to the comparable quarter of 2006. However, price reductions in Spain have resulted in net product sales that are consistent with the comparable period of 2006 when expressed in constant currency. Our drug delivery licensing revenues grew to $2,655,000 in the second quarter of 2007 due to increased royalties earned on sales of Testim. Based on industry sources, Testim was reported to capture approximately 20% of all testosterone gel replacement prescriptions in the U.S. market as of June 30, 2007, compared to approximately 19% of all testosterone gel replacement prescriptions as of June 30, 2006.

          Our revenues are generated through our primary sales channels of branded generic pharmaceuticals, generic pharmaceuticals and sales to licensees and others, as well as licensing and collaboration arrangements. The following is a summary of our revenues by sales channel and top-selling product lines:

          For the three months ended June 30, 2007:

(in thousands)		Revenues Within Spain
														Revenues
		Branded												Outside of								% of Total
Product Line		Generics				Generics				Other				Spain				Total				Revenues
Omeprazole		$	410			$	3,955			$	—			$	—			$	4,365				14	%
Enalapril			1,237				373				—				—				1,610				5	%
Simvastatin			204				1,251				—				—				1,455				5	%
Lansoprazole			910				287				—				—				1,197				4	%
Paroxetine			366				793				—				—				1,159				4	%
All other products			2,880				3,353				92				1,157				7,482				24	%
Sales to licensees and others			—				—				3,317				7,768				11,085				35	%
Licensing and collaborations			—				—				171				2,655				2,826				9	%
Total Revenues		$	6,007			$	10,012			$	3,580			$	11,580			$	31,179				100	%
% of Q-2 2007 Revenues			19	%			32	%			12	%			37	%			100	%