UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

for the fiscal year ended December 31, 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
(Address of principal executive offices)		(Zip Code)

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

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

Title of each class		Name of each exchange on which registered
Common Stock, $0.02 par value		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o   NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o   NO þ

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

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

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Title of Class		Aggregate Market Value *		As of Close of Business on
Common Stock, $0.02 par value		$183,234,580		June 30, 2007

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Title of Class		Shares Outstanding		As of Close of Business on
Common Stock, $0.02 par value		22,449,814		March 15, 2008

DOCUMENTS INCORPORATED BY REFERENCE

 

 

Part I

Item 1. Business

Overview

     We are an international specialty pharmaceutical company, headquartered in the U.S., that is 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.

     Our pharmaceutical product sales and licensing activities are based primarily in Spain, where we have a significant commercial presence and manufacture and market approximately 200 product presentations (also known as stock keeping units, or SKUs) through three wholly-owned Spanish subsidiaries: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Our products are in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. Although the majority of our sales of these products are currently in the Spanish market, we have recently focused on increasing sales in other European countries and other geographic regions through strategic alliances with companies in these territories. We continually add to our product portfolio in response to increasing market demand for generic and branded generic therapeutic agents and, when appropriate, divest portfolio products considered to be redundant or that have become non-strategic. We manufacture our finished dosage pharmaceutical products in our Spanish manufacturing facility which received approval from the U.S. Food and Drug Administration (“FDA”) in late 2006 for the manufacture of our first U.S. generic product. We own 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. We market our API products through our Spanish subsidiary, Bentley A.P.I. We also have an Irish subsidiary, Bentley Pharmaceuticals Ireland Limited, which launched its first product in late 2006.

     We are also in the business of development, licensing and commercialization of pharmaceutical products utilizing our validated drug delivery technology. We have U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. We develop and co-develop products that incorporate our drug delivery technologies. Our platform drug delivery technology utilizes CPE-215 to enhance permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye. We have licensed applications of our proprietary CPE-215 drug delivery technology to Auxilium Pharmaceuticals, Inc. (“Auxilium”), which launched Testim, the first product incorporating our CPE-215 drug delivery technology, in the United States in February 2003.

     Our development activities are primarily focused on the development of Nasulin, our intranasal insulin product candidate, which is based on our CPE-215 technology. In 2004 we concluded a Phase IIA study for Nasulin in Type 1 diabetic patients using our CPE-215 technology. In 2006, we completed an additional Phase I study in Ireland and advanced our Phase IIA studies in the U.S. in Type 1 diabetic patients. In the first quarter of 2007 we completed preparations for a Phase II study in India in Type 2 diabetic patients, which began in the second quarter of 2007. We expect the U.S. development and clinical programs for Nasulin to continue and expand both outside and inside the U.S.

     We believe, based upon our experience with Testim and Nasulin, that our CPE-215 formulation technology constitutes a broad platform that has the ability to significantly enhance the permeation of a wide range of therapeutic molecules. To expand the development and commercialization of products using our CPE-215 drug delivery technology, we are pursuing strategic alliances with partners including large pharmaceutical, specialty pharmaceutical and biotechnology companies.

     Bentley Pharmaceuticals, Inc., is incorporated in the State of Delaware. References in this report to “the Company”, “we”, “us”, “our” or “Bentley” refer to our parent company and its subsidiaries as a group, without regard to the separate operations and obligations of each entity in the group, unless the context clearly indicates otherwise. Our Common Stock trades on the New York Stock Exchange (NYSE) under the trade symbol BNT.

Proposed Spin-Off Transaction

     On October 23, 2007 we announced a plan to spin-off our drug delivery business. This transaction is subject to a number of conditions. Management expects that shares of the new specialty pharmaceutical drug delivery company, CPEX Pharmaceuticals, Inc. (which may be referred to as CPEX), will be distributed to Bentley stockholders by means of a stock dividend. On the record date, which has not yet been set, each Bentley stockholder will be entitled to receive shares of CPEX in connection with the spin-off of the drug delivery business. The spin-off would result in CPEX operating as an independent entity with publicly traded common stock. Bentley would not have any ownership interest in CPEX subsequent to the spin-off.

     In connection with the spin-off, CPEX and Bentley expect to enter into a series of agreements, including a separation and distribution agreement, a transition services agreement, an employee matters agreement and a tax allocation agreement. Consummation of the spin-off is subject to several conditions, including final approval by the Bentley Board of Directors, approval for listing of CPEX common stock on a national securities exchange, and the effectiveness of the Form 10 filed with the Securities and Exchange Commission for the registration of the securities of CPEX. Approval by Bentley’s stockholders is not required as a condition to the consummation of the proposed spin-off.

Industry Overview

Pharmaceutical Industry in Europe

     The European Union, with an increasingly affluent population of approximately half a billion people and approximately $161 billion in pharmaceutical sales in 2005, represents the second largest pharmaceutical market in the world, according to IMS Health.

     Many European countries exercise strict controls over the prices of, and reimbursement for, pharmaceutical products. These countries often have national health insurance systems that provide reimbursement for prescription pharmaceuticals. The price that these systems are willing to pay for products affects the profitability of the product sales. However, given the varying priorities and economies of each of the European countries, price consistency has not been achieved and both the prices and reimbursement rates often vary dramatically from country to country.

     A basic tenet of the European Union has been encouraging the free movement of goods among all member states. Many European governments have policies in place that encourage sale of pharmaceutical products at the lowest price available. As a result, an active network of parallel importation has evolved in which products manufactured in one country flow into other European countries. This effectively favors

manufacturers whose costs of goods are lower, enabling them to more effectively compete on the basis of price.

     Since Spain’s entry into the European Union in 1986, the Spanish pharmaceutical market has been evolving steadily into a market that is increasingly similar to those of other countries in Western Europe and the U.S. With a population of approximately 44.7 million in 2007, Spain was ranked as the seventh largest pharmaceutical market in the world and fifth largest in the European Union. Pharmaceutical sales in Spain reached approximately $13.7 billion in 2007, according to IMS Health.

     Over the past decade, there has been significant evolution of patent protections of pharmaceutical products in Spain. Prior to 1992, manufacturing processes for active pharmaceutical ingredients could be patented in Spain, but not the active pharmaceutical ingredients resulting from the manufacturing process. Commencing in late 1992 active ingredients could be patented in Spain with protection running for 20 years from the date of application. This was followed by Spanish legislation in December 1996 that created a legal class of generic pharmaceuticals. In Spain, generic products are required to be therapeutically equivalent, have a similar composition to that of the original branded product and have demonstrated safety and efficacy. Safety and efficacy is presumed if the original reference product has been commercialized in Spain for 10 years. Generic products also must comply with product labeling requirements and be priced at a discount, which is typically at least 30% lower than the original branded product price.

     Although comprising approximately 6.6% of sales in the Spanish pharmaceutical market (approximately 13.2% of the units of pharmaceutical products sold in Spain), generic pharmaceuticals are expected to significantly increase their market penetration due to increases in drug usage driven by an aging population and opportunities to launch new generic products as patents expire for blockbuster drugs. In response to the rise in healthcare costs, several initiatives are underway by the Spanish government to stimulate the use of generic pharmaceuticals, including education, financial incentives to prescribing physicians and public campaigns. Due to the structure of the Spanish market for pharmaceutical products, producers generally market their products to physicians and pharmacies to whom they emphasize a combination of quality and price.

     Generic pharmaceutical products in other European countries have attained greater market share, with generics in major markets such as the United Kingdom and Germany achieving over 40% market share. Generic products have achieved a high proportion of the market in many of these countries due to government programs that encourage the prescription of generic pharmaceuticals. In some of these markets, competition has made price the single most significant factor in determining market share. This has favored producers of products that have cost structures that can support competitive pricing. In these markets, emphasis can be placed on selling to distributors at favorable prices rather than the more expensive alternative of marketing to physicians or consumers.

Drug Delivery Industry

     The drug delivery technology industry is experiencing increasing demand from biotechnology, genomics and pharmaceuticals companies. Advanced therapies created by recent advances in biotechnology and genomics are requiring complex delivery technologies. Pharmaceutical companies are looking for solutions to offset anticipated revenue losses as their products lose patent protection and experience competition from generic pharmaceutical introductions. Drug delivery technologies provide a potential path to extend the life cycle of these products that are losing their patent protection.

     Drug delivery technology companies typically form a partnership or licensing relationship with the company owning the intellectual property rights to a compound. However there has been a recent

trend where a number of drug delivery companies have started to develop their own formulations to use in combination with their proprietary drug delivery platforms.

     Targeted routes of administration are trending towards non-invasive technologies rather than injections initially used for many biotherapeutics. These non-invasive delivery systems are often easier to administer, have less severe side effects, and potentially could allow for reduced dosing frequency. These benefits to the patient could improve patient compliance and provide sufficient value to the patient to support stronger pricing to the manufacturer. While the oral delivery route is expected to be the most popular, inhalable, buccal, lingual and nasal routes are considered essential for effective delivery of biological therapies.

Our Strategy

     Our objective is to be a leading international specialty pharmaceutical company 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.

     Our strategies to accomplish this objective include:

Increase our product sales in Spain through targeted promotion and expansion of our product portfolio and increase international sales

     We plan to increase our generic and branded generic product sales by expanding the portfolio of products manufactured in Spain and by forming strategic alliances to increase our sales outside of Spain. We are expanding our product portfolio through the acquisition or licensing of currently marketed and late stage pharmaceutical products. We directly promote and sell these products in Spain through our own sales force of approximately 170 full-time personnel focused on major cities throughout Spain. Outside Spain we sell through alliances with partners in other countries in Europe and elsewhere.

     We focus on obtaining the rights to pharmaceutical products that are less actively promoted by larger pharmaceutical companies or are in a late stage of development and have good potential for acceptance in our markets. We believe that we have expertise in assessing potential market opportunities related to particular pharmaceuticals and in negotiating and acquiring from pharmaceutical companies the rights to market pharmaceuticals in Spain and other countries. Products that already are selling in the U.S. or other major markets demonstrate commercial viability and typically encounter fewer barriers to regulatory approval for introduction into other countries. The acquisition and subsequent manufacture of these products will permit our Spanish operations to more fully utilize our existing manufacturing capacity and allow us to further leverage our sales force by providing them with more products to sell. We believe that we have developed particular expertise in marketing pharmaceutical products to physicians and pharmacies in Spain.

     We are expanding the sales of products outside of Spain by developing alliances with strategic partners in targeted markets that offer compatible regulatory approval regimes and attractive margins. Most of these alliances relate to specific products that our partners have expertise in marketing. We have already developed alliances in Portugal, Greece, the United Kingdom, Germany, Austria, Morocco, Poland and the

Czech Republic for targeted products in these and other countries. In certain European countries that have a highly developed competitive market for generics based primarily on price, we intend to sell either directly or through our alliances to distributors. In countries that require a sales force to market to physicians or consumers, we intend to continue to concentrate our efforts through alliances with entities that have sales and marketing forces already in place. We have made and will continue to make, as necessary, modifications to our finished pharmaceutical products manufacturing facility so that it will comply with Good Manufacturing Practices, or GMP, of the FDA. These modifications should enable us to submit our products for U.S. marketing approval by the FDA.

Focus on commercializing our CPE-215^® permeation platform technology and developing proprietary products based on our other technologies

     Our strategy is focused on developing a portfolio of products utilizing our proprietary CPE-215 drug delivery technology. Our development program will identify potential molecules that address a commercially viable market, an unmet clinical need, and are compatible with our proprietary drug delivery technology. Initially we expect to form partnerships through collaboration with pharmaceutical and biotechnology companies to develop and finance product candidates. These partnerships, in addition to funding, provide access to product candidates and a sharing of the risks associated with development. We plan to expand our pipeline with our own product candidates by applying our drug delivery technologies to products that have come off patent or others that we may in-license.

     Our immediate focus is on completing Phase II clinical trials for Nasulin and establishing a partnership with a large pharmaceutical company for Phase III clinical trials and commercialization.

Key Drivers of Our Drug Delivery Businesses

The key drivers of our drug delivery business include:

	•		Continuing growth of Testim royalty revenues,
	•		Establishing a partnership to further develop and commercialize Nasulin,
	•		Identifying and developing new product candidates for our internal pipeline, and
	•		Developing strong alliances providing us scale advantages in clinical research, product manufacturing and marketing.

Continued growth of Testim royalty revenues

     Royalty income from Testim is our only source of current revenue in our drug delivery business. Continuation of this income stream is needed, and expected, to fund further development and defray other administrative and operating costs.

Development and commercialization of Nasulin

     Nasulin is currently in Phase II clinical trials in the United States and India for the treatment of Type 1 and Type 2 diabetes. We believe an intranasal route of administration will yield significant improvements in patient compliance and avoid the potential pulmonary disadvantages of competitive candidates that use an inhalation route of administration. Our expectation is to substantially complete Phase II trials in Type 2 diabetics in 2009 while simultaneously seeking a pharmaceutical partner to support Phase III clinical trials and product commercialization upon regulatory approval.

Identifying new product candidates that leverage our CPE-215 technology and formulation expertise

     We intend to apply our CPE-215 drug delivery technologies in an effort to improve the performance of existing pharmaceutical products and advanced research candidates with respect to their method of delivery and effectiveness. Candidates will be prioritized for selection based on compatibility with CPE-215, clinical need, market size, and potential for the associated intellectual property to be protected through patents. We are targeting therapeutic areas with high clinical need with compounds that have established market demand or that face limited market acceptance as a result of less efficient drug delivery methods.

     Once we bring our products to an advanced stage of development, we intend to develop collaboration relationships that leverage the clinical development, marketing and sales capabilities of strategic partners. We hope to collaborate with partners to commercialize our internal product candidates by utilizing their late stage clinical development, regulatory, marketing and sales capabilities. We believe that this will allow us to license our products on terms that are more favorable than those that would be possible earlier in the development cycle. As we succeed with this strategy, we expect to identify product candidates that we can bring to late stage development for ourselves.

Developing strong alliances providing us scale advantages in clinical research, product manufacturing and marketing

     In addition to pursuing our own proprietary compounds, we will continue to establish strategic collaborations with pharmaceutical and biotechnology companies marketing our CPE-215 technology for application with their branded or generic products. We will assist our collaboration partners in developing more effective drug delivery methods for their product candidates that have already completed early stage clinical trials, or are even currently marketed. We believe pharmaceutical and biotechnology companies will be motivated to co-develop products utilizing CPE-215 technology to achieve these benefits through:

	•		improving efficacy as compared to oral administration, which subjects the drug to the effects of first pass metabolism;
	•		improving utilization of costly and/or scarce drugs and active ingredients;
	•		expanding the market to patients less suitable for injection, especially children and the elderly;
	•		improving patient convenience and compliance, and lowering costs relative to a doctor’s office visit for an injection;
	•		potentially extending the period of market exclusivity for a branded compound based on the grant of a patent that incorporates new drug delivery methods;
	•		allowing branded and generic drug companies to differentiate their products from those of competitors; and
	•		reducing the high capital investment needed to introduce and manufacture injectable drugs.

     We generally structure our collaborative arrangements to receive research and development funding and milestone payments during the development phase and upon commercialization, and patent-based royalties on future sales of products.

Our Proprietary Drug Technologies

Proprietary Drug Manufacturing Technologies

     We believe that there are several opportunities to enter into additional collaborations with pharmaceutical and biotechnology companies and expand our product lines using our proprietary drug technologies.

CPE-215, Proprietary Permeation Enhancement Platform Technology

     Permeation enhancement with CPE-215 is our patented drug delivery technology. CPE-215 enhances the absorption of drugs across a variety of biological membranes including the skin, mouth, nose and eye. The technology can be adapted to products formulated as creams, ointments, gels, solutions, lotions, sprays or patches. CPE-215 also has maintained a record of safety as a direct and indirect food additive and fragrance, and is listed on the FDA’s inactive ingredient list for approved use in drug applications.

We believe that key benefits of the patented drug permeation technology using CPE-215 may include the following therapeutic and commercial opportunities and advantages:

	•		Improve compliance and convenience to patients requiring ongoing injection therapies and provide earlier entry into prophylactic treatment for patients reluctant to injections;
	•		Application to other injectable peptides that can be administered intranasally;
	•		Application to therapeutic molecules that are degraded by passage through the liver or would benefit from intra-nasal administration to eliminate first-pass metabolism;
	•		Application to a variety of metabolic, neurological, and other serious medical conditions;
	•		Opportunities for life-cycle extension strategies for existing marketed products; and
	•		Opportunities for allowing product differentiation based on benefits of administration.

Solubility Enhancement Technology

     Our solubility enhancement technology involves chemical and manufacturing procedures that enhance compound solubility without changing the compound’s therapeutic properties. Although this technology may be applied to other chemical entities, to date we have incorporated this technology only in acetaminophen compounds, which are known to have problems of insolubility and undesirable taste. Based upon clinical studies completed in Europe in 2001 and 2002, we believe that our technology enables us to develop and deliver dosages of acetaminophen that make it highly dispersible, rapidly soluble in water, better tasting and faster in reaching peak blood levels to deliver pain relief and reduce fever than other tablets or capsules. We believe the use of our technology will increase solubility, which will lessen undesirable side effects, such as flatulence in effervescent formulations and the bitter taste of pills, which commonly are associated with acetaminophen and many other oral medications. We have filed patents on this technology, of which one has been granted in the United States and others are pending in Europe and elsewhere.

Oral Formulation Technologies

     Our oral formulation technologies involve the application of a proprietary manufacturing process as well as specialized equipment, each of which plays a role in producing pharmaceutical products, while reducing manufacturing time and costs. We have developed new methods for manufacturing products such as omeprazole, lansoprazole and other similar products that are stability-sensitive to humidity and

temperature. We have been granted a Spanish patent relating to these processes. The patent claims as innovative the manufacturing process that renders these products more stable, while protecting active substances from gastric degradation utilizing microgranulation and microencapsulation techniques. These patented technologies can contribute to our ability to compete against other companies whose manufacturing processes are more costly and time consuming.

Nanocaplet Technology

     In May 2005 we announced the discovery and synthesis of a thermodynamically stable, biodegradable Nanocaplet technology for the delivery of macromolecule therapeutics. This proprietary technology was discovered as part of our four-year sponsored research program with the University of New Hampshire Nanostructured Polymers Research Center. We discontinued our early research stage nanocaplet project in December 2007 to focus on advancing Nasulin through clinical trials while working on a pipeline of other projects that could be advanced into Product Development.

Licensed Product

Testim, Licensed Topical Testosterone Gel

     We earn royalty revenues on sales of Testim, a testosterone gel that incorporates the CPE-215 drug delivery technology. The product is licensed to Auxilium and was successfully launched in the U.S. in early 2003 as a testosterone replacement therapy. Testim has been approved for marketing in Canada and 15 countries in Europe. Royalties received from Testim sales were $11.1 million, $8.3 million and $6.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. Auxilium uses its sales force to market Testim in the U.S. and has partnered with Paladin Labs Inc. to market the drug in Canada and with Ipsen to market the drug in Europe.

     The testosterone replacement market has increased as more baby-boomers enter middle age and more attention is focused on male hormonal deficiency and the benefits of replacement therapy. A recent study published in the July 2006 International Journal of Clinical Practice indicates that 39% of U.S. males over 45 years have hypogonadism, a condition in men where insufficient amounts of testosterone are produced. Symptoms associated with low testosterone levels in men include depression, decreased libido, erectile dysfunction, muscular atrophy, loss of energy, mood alterations, increased body fat and reduced bone density. The condition is significantly under-treated. Growing patient awareness and education continue to spur demand for testosterone replacement therapy.

     Currently marketed testosterone replacement therapies deliver hormones through injections, transdermal patches or gels. The transdermal delivery from gels provide commercially attractive and efficacious alternatives to other current methods of delivery by providing a more steady state of absorption rather than the bolus surge of injection or the irritation caused by patches resulting in a less desirable dosing regimen.

     The primary competition for Testim is AndroGel^®, marketed by Solvay Pharmaceuticals, Inc., and others. In addition to Solvay Pharmaceuticals, Inc., MacroChem Corp. has developed a testosterone gel that is currently in Phase I studies. Ardane plc., has announced plans to develop a testosterone cream for the U.S. market. Indevus Pharmaceuticals, Inc. has licensed a long acting testosterone injection that is currently marketed in Europe and we believe that this product could be launched in the U.S. in 2008 if approved by the FDA. Another potential introduction into the marketplace is an oral therapy called Androxal. Other new treatments are being sought for testosterone replacement therapy; these products are in development and their future impact on the treatment of testosterone deficiency is unknown.

Manufactured and Marketed Products

     In Spain, we manufacture and market approximately 200 presentations, or SKUs, in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. We market these products primarily in Spain and have developed alliances with other companies that market our products, pursuant to license and supply agreements, in other countries, including Portugal, Greece, the United Kingdom, Germany, Austria, Morocco, Poland and the Czech Republic. In addition, we manufacture products that are marketed by other companies both in Spain and elsewhere. Our generic and branded generic products are marketed to physicians, pharmacists and hospitals by our three Spanish sales and marketing organizations, Laboratorios Belmac, Laboratorios Davur, and Laboratorios Rimafar. We also market over-the-counter products through Laboratorios Rimafar. There are approximately 179,000 physicians and 21,000 pharmacies in Spain.

     We continually review and modify our product portfolio. We add to our portfolio to respond to increasing market demand for generic and branded generic products in Spain and, when appropriate, we divest from our portfolio products that we consider to be redundant or that have become non-strategic. We export a growing percentage of the pharmaceuticals manufactured by Laboratorios Belmac outside of Spain through local distributors and brokers, particularly in Europe and Northern Africa.

Branded Generic Pharmaceutical Products

     Our branded generic pharmaceutical product line consists of 46 products of various dosages and strengths represented by approximately 20 trademarked brand names. Most of our branded generic products are known in the industry as “branded generics” because they are being marketed by us under a “brand” name even though we are not the innovator of the product. Sales of branded generic pharmaceuticals accounted for approximately 21% of our revenues in 2007, compared to 22% in 2006 and 23% in 2005. We market our branded generic products and, to a lesser extent, certain of our generic and over-the-counter products through our Laboratorios Belmac subsidiary, which has approximately 77 full-time sales personnel who focus on major cities throughout Spain. Several of our branded generic products are also marketed by the sales forces of Laboratorios Davur and Laboratorios Rimafar. We supplement our sales and marketing efforts for branded generic products through advertising in trade publications.

The following are descriptions of the branded generic products that contribute significantly to our sales and gross profits:

Our Branded Generic
Product Name		Active Ingredient		Innovator Product (Company)		Used to Treat
Belmalipâ		simvastatin		Zocorâ (Merck)		elevated cholesterol
Belmazolâ		omeprazole		PrilosecÒ (AstraZeneca)		gastroesophageal reflux disease
Cimascal D Forteâ		calcium carbonate and vitamin D3		Calcite-Dâ (Riva)		osteoporosis
Codeisanâ		codeine		Tricodeinâ (Solco)		cough and bronchitis
Enalapril Belmacâ		enalapril maleate		Vasotecâ (Merck)		cardiovascular disease and hypertension
IbumacÒ		ibuprofen		Motrinâ (McNeil)		rheumatoid arthritis
Lanzol®		lansoprazole		Prevacidâ (Tap)		gastroesophageal reflux disease
Mio RelaxÒ		carisoprodol		Somaâ (MedPointe)		muscle spasms
Pentoxifilina Belmacâ		pentoxifylline		Trentalâ (Aventis)		peripheral arterial disease
Senioralâ		oxymetazoline and chlorpheniramine		Denoralâ (Aventis)		cold and sinus congestion
XetinÒ		paroxetine		Paxilâ (GlaxoSmithKline)		depression

Generic Pharmaceutical Products

     Our generic pharmaceutical product line consists of 95 products of various dosages and strengths. We entered the generic pharmaceutical market in Spain in September 2000. Sales of generic pharmaceuticals accounted for approximately 32% of our revenues in 2007, compared to 36% in 2006 and 2005. Laboratorios Davur, our sales and marketing organization devoted primarily to generic products, markets pharmaceutical products to physicians and pharmacists through a sales force of approximately 66 full-time sales personnel who focus on major cities throughout Spain. Laboratorios Rimafar, our sales and marketing organization devoted primarily to generics and over-the-counter products, markets to pharmacists through a sales force of approximately 24 full-time sales personnel throughout Spain. Laboratorios Belmac, to a lesser extent, also sells selected generic products through its sales force. We supplement our sales and marketing efforts for generic products through advertising in trade publications.

     We believe we can grow by providing a more extensive line of products to our generic products sales force for marketing to our physician and pharmacy clients.

     The following are descriptions of our generic products that contribute significantly to our sales and gross profits:

Our Generic Product Name		Active Ingredient		Innovator Product (Company)		Used to Treat
Amlodapino Davurâ		amlodapine		Norvasc® (Pfizer)		arterial hypertension
Amlodapino Rimafarâ
Amoxicilina Davurâ		amoxicillin		Amoxilâ (GlaxoSmithKline)		infections
Amoxicilina Belmacâ		trihydrate
Amox/Clavulanico Davurâ		amoxicillin/		Augmentinâ		infections
		clavulanate		(GlaxoSmithKline)
		potassium
Azitromicina Davurâ		azithromycin		Zithromaxâ (Pfizer)		infections
Cardidopa/Levodopa Davurâ		cardidopa/levodopa		Sinemet® (Bristol-Myers Squibb)		Parkinson's disease
Ciprofloxacino Davurâ		ciprofloxacin		Ciproâ (Bayer)		microbial infections,
		hydrochloride				including anthrax
Ebastina Davurâ		ebastine		Ebastel®, Ebastle Forte®		seasonal allergic
				(Almirall)		rhinitis
Enalapril Davurâ		enalapril maleate		Vasotecâ (Merck)		cardiovascular disease
						and hypertension
Finasterida Davurâ		finasteride		Proscar® (Merk)		enlarged prostate
Fluoxetina Davurâ		fluoxetine		Prozacâ (Eli Lilly)		depression
Fluoxetina Rimafarâ		hydrochloride
Fluoxetina Belmacâ
Ibuprofeno Davurâ		ibuprofen		Motrinâ (McNeil)		pain, fever
Lansoprazol Davurâ		lanoprazole		Prevacidâ (TAP)		gastroesophageal
Lansoprazol Rimafarâ						reflux disease
Mirtazapina Davurâ		mirtazapine		Remeronâ (Organon)		depression
Omeprazol Davur â		omeprazole		Prilosecâ (AstraZeneca)		gastroesophageal
Omeprazol Rimafarâ						reflux disease
Paroxetina Davurâ		paroxetine		Paxilâ (GlaxoSmithKline)		depression
Paroxetina Rimafarâ
Pentoxifilina Davurâ		pentoxifylline		Trentalâ (Aventis)		peripheral arterial
						disease

Our Generic Product Name		Active Ingredient		Innovator Product (Company)		Used to Treat
Pravastatina Davurâ		pravastatin		Pravachol® (Bristol-Myers		elevated cholesterol
Pravastatina Rimafarâ				Squibb)
Selegilina Davurâ		selegiline		Eldeprylâ (Somerset)		Parkinson’s disease
		hydrochloride
Sertralina Davurâ		sertraline		Zoloftâ (Pfizer)		Depression
		hydrochloride
Simvastatina Davurâ		simvastatin		Zocorâ (Merck)		elevated cholesterol
Simvastatina Rimafarâ
Trimetazidina Davurâ		trimetazedine		Idaptanâ (Servier)		coronary therapy

Sales to Licensees and Others

     In addition to manufacturing and selling our own branded generic and generic products, we license the right to market products to others within and outside of Spain. These license agreements are usually accompanied by long-term exclusive supply agreements, whereby our licensees purchase the licensed products from our manufacturing facility. As of December 31, 2007, our Spanish operations have executed 251 license agreements, of which 29 with customers in Spain and 124 with customers outside of Spain cover actively marketed products that are generating revenues. The remaining licenses, 2 with customers in Spain and 68 with customers outside of Spain, are for products that are awaiting regulatory approvals. Our Irish subsidiary has executed 10 license agreements that have been approved to actively market products and 2 licenses agreements which are for products that are awaiting regulatory approvals. Additionally, we have 16 contract manufacturing agreements in effect in Spain. Our clients market these products under their own names and with their own labeling. Many of the products we manufacture for others use the same active ingredients that are used in our own marketed products.

Strategic Alliance with Perrigo Company

     We entered into a product development, license and manufacturing agreement with Perrigo Company in November 2004. Together, we co-developed a generic version of simvastatin. The finish dosage forms were produced by our manufacturing subsidiary, Laboratorios Belmac, which received approval from the FDA in 2006. We have not been able to yield any material profits as a result of the highly competitive simvastatin market in the U.S. We have not received any additional orders for our U.S. generic simvastatin and do not expect to generate any profits from this product for the foreseeable future.

Alliance with Teva

     After terminating our strategic alliance and rights agreement with Teva earlier in 2007, we entered into a series of new agreements whereby we will be providing Teva with the right to use certain of our products in several territories. Product supply will be provided by our finish dose manufacturing plant in Spain.

Manufacturing

     Our 108,000 square-foot pharmaceutical product manufacturing facility is located in Zaragoza, Spain. Our manufacturing facility complies with GMP in Europe and is capable of producing tablets, capsules, ointments, lotions, liquids and sachets, as well as microgranulated products. The facility also

includes analytical chemistry, quality control, quality assurance and formulation research laboratories. We have also made modifications to this manufacturing facility so that it complies with U.S. GMPs. In 2006 we received FDA approval of this facility for simvastatin, our first generic product in the U.S.

     In April 2004, we purchased an 11,000 square foot manufacturing facility located in Zaragoza, Spain that specializes in the manufacture of active pharmaceutical ingredients. The facility has been approved by the FDA for the manufacture of one ingredient for marketing and sale in the U.S. We are manufacturing and marketing these products through our subsidiary, Bentley API.

     We have fully integrated manufacturing support systems, including quality assurance, quality control, regulatory compliance and inventory control. These support systems are designed to maintain high standards of quality for our products and deliver reliable products and services to our customers on a timely basis. We require a supply of quality raw materials and packaging materials to manufacture and package drug products. Historically we have not had difficulty obtaining raw materials and packaging materials from suppliers. Currently, we rely on over 100 suppliers to deliver our required raw materials and packaging materials, most of which are supplied by approximately one third of these entities. We have no reason to believe that we will be unable to procure adequate supplies of raw materials and packaging materials on a timely basis. Union Quimico Farmaceutica, S.A. is our primary supplier of omeprazole. We believe that alternative sources of omeprazole are available and we will obtain required governmental approval to source from them, if necessary.

Products in Development

     The following are our major priorities for products that we are currently developing. Before they are commercialized, they must be approved by regulatory authorities, such as the FDA or the Spanish Ministry of Health, in each jurisdiction where they will be marketed or sold. See “Regulation” section of Item 1 for a discussion of the regulatory approval process.

Product Candidate		Technology		Used to Treat		Status
Generic products		Various		Various		Bioequivalence and/or submitted for approval in the U.S., Spain, Europe and other countries.
Intranasal insulin		CPE-215		Diabetes		Phase I/II

Generic Products

     We continually evaluate which pharmaceutical products are good candidates for us to develop, test and market as generic products in Spain, the U.S. and elsewhere. We select products based on factors including the timing of expiration of the patent on the innovator’s product, the ability of our manufacturing facility to efficiently produce the product, the availability and cost of the raw materials to produce the product as well as the potential market size and pricing that can be obtained for the product. Once we select a product, our scientists develop a generic formulation of the product, which then must be tested to determine if it is bioequivalent to the innovator’s product. Products are then submitted for marketing approval by the relevant regulatory authorities, generally starting with Spain’s Ministry of Health.

     In addition, under strategic alliances, we have the capability to co-develop generic pharmaceutical products for sale in the U.S. that can be manufactured by our active pharmaceutical ingredients

manufacturing subsidiary, Bentley API, and related finish dosage forms produced by our manufacturing subsidiary, Laboratorios Belmac.

     We attempt to have several generic products in each stage of development so that we can have a steady pipeline of generic product introductions. For competitive reasons, we generally do not disclose which generic products we are developing.

Nasulin, Proprietary Intranasal Insulin Product

     Nasulin is the patented intranasal insulin spray of Bentley which incorporates CPE-215 as a permeation facilitator that addresses the need for an improved delivery method for insulin, which we believe could potentially reshape the insulin market. Based on market reports and projections, we have estimated the insulin market to be approximately $8.0 billion. In general, drugs entering the nasal cavity are readily absorbed across the highly vascularized nasal mucosa directly into the circulatory system, thereby avoiding first-pass metabolism in the liver. The speed of absorption affords a faster onset of action compared to the most rapid-acting, injectable insulin formulations. A series of studies have confirmed that Nasulin delivers insulin quickly through the nasal mucosa, even more rapidly than subcutaneous injection.

     The U.S. Center for Disease Control and Prevention (“CDC”) estimates there were approximately 14.6 million diagnosed diabetics in the United States in 2005. A study published by Diabetes Care in 2006 projects that the number of diagnosed diabetics in the U.S. will reach 48.3 million by 2050 due to an aging population, rising obesity rates and poor health habits. Prescription trends show a preference for combining rapid-acting injections during mealtimes with a once daily basal insulin injection. Injectable insulin treatments create a general level of patient dissatisfaction and, as a result, compliance can be a challenge. Poor patient compliance or under-treatment causes serious diabetic complications. Nasulin is specifically designed to facilitate compliance, provide a very rapid effect, and avoid long-term consequences brought on by inconsistent treatments.

     Nasulin is currently in Phase II clinical trials for the treatment of Type 1 and Type 2 diabetes. We believe an intranasal route of administration will yield significant improvements in patient compliance and avoid the potential pulmonary disadvantages of competitive candidates that use an inhalation route of administration. Our expectation is to complete all Phase II trials in 2009 while simultaneously seeking a pharmaceutical partner to support Phase III clinical trials and product commercialization upon regulatory approval. While the terms of any future alliance will be determined through negotiation, we would look to license the product in return for upfront payments, milestones and royalties that reflect our research investment, innovation and potential market size.

     The primary competition for Nasulin is from injectable and oral insulin currently on the market, pulmonary insulin in development, another early stage intranasal insulin product in development from Nastech, and other oral insulin in development.

Products Available for Licensing

Antifungal Nail Lacquer

     We have developed a topical nail lacquer for treating fingernail and toenail fungal infections (onychomycosis). We completed two Phase I/II clinical trials for the treatment of nail fungal infections at the University of Alabama at Birmingham in 2002 and 2003 utilizing a clotrimazole lacquer formulation containing CPE-215. According to the National Onychomycosis Society, nail fungus affects almost 30

million people in the U.S., primarily between the ages of 40 and 65. Patients electing to take oral therapy must undergo blood monitoring during the course of treatment to monitor for liver damage. There have been no clinical developments with respect to this product since 2003, but the Company is actively pursuing licensing opportunities for this product.

Topical Hormonal Therapy

     Our topical hormonal therapy incorporates the use of metabolic steroids that regulate most of the hormonal action in adult males. Hormone replacement therapies using these metabolic steroids may have significant benefits in treating a number of medical afflictions, including osteoporosis and sexual dysfunction. We have granted to Auxilium an exclusive worldwide license to develop, market and sell a topical hormonal therapy containing our CPE-215 technology. Since 2004, we have earned approximately $28,000 in revenues under this agreement. Our expenses during this period, generally consisting of patent maintenance costs, have not been material.

Intranasal Pain Management

     Under a research agreement with Auxilium, we formulated the intranasal delivery of a pain management chemical agent using our CPE-215 technology. Auxilium has the exclusive right to license this product application pursuant to our research agreement, but has not activated the license to date. We have received immaterial revenues and incurred some nominal expenses under this license.

Intellectual Property

     We actively seek to protect our products and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. Our success will depend in part on our ability to obtain and enforce patents on our products, processes and technologies to preserve our trade secrets and other proprietary information and to avoid infringing on the patents or proprietary rights of others.

Material patents related to our CPE-215 technology

Patent/Technology		Jurisdiction		Expiration
Hsieh patents entitled Lactone/cyclic ketone delivery enhancer relate to the CPE-215 technology platform		United States Canada Italy, Luxembourg			2008 2010 2011
Testosterone gel-macrocyclic enhancer patents relate to the Testim product		Australia, Bulgaria, Europe, Greece, Lebanon, Mexico, New Zealand, Saudi Arabia, South Africa and Singapore			2023
		United States			2025
Pharmaceutical Compositions and Methods patent entitled for Insulin Treatment relates to the Nasulin product		United States			2024
Pharmaceutical Compositions and Methods patent entitled for Peptide Treatment covers potential products slated for further development		United States			2024

     Our CPE-215 technology is covered by U.S. and foreign patents covering many major market countries. Although the initial patent for our CPE-215 technology expires in the U.S. in June 2008 and expires in Canada in 2010, Italy and Luxembourg in 2011, and expired in all markets outside the U.S. in 2006, patent extensions of our technology to other drugs continue for specific medical uses through 2025. For example, patents that cover intranasal delivery utilizing CPE-215 technology for insulin and other peptides continue through 2025. Recently issued patents that also cover the application of testosterone with CPE-215 in the U.S. and in foreign countries continue through 2023. Additional patents, using both CPE-215 and other technologies have been applied for and are pending although we cannot be certain that a patent will issue from any of those applications.

Other patents and intellectual property

     Bentley entered into an Assignment Agreement with MacroChem Corporation (“MacroChem”), dated June 24, 2003, pursuant to which Bentley purchased from MacroChem all of MacroChem’s right, title and interest to U.S. Patent Number 6,495,124 B1 and any and all related patents and patent applications which are divisions, continuations, continuations-in-part, reissues, renewals, extensions and supplementary protection certificates (the “MacroChem Patent Rights”). As a result of the assignment, MacroChem retained no interest whatsoever in the MacroChem Patent Rights. To date, the Company has not generated any revenue from the MacroChem Patent Rights, which expire in 2020.

     We have also been granted a Spanish patent for our oral formulations of omeprazole and lansoprazole which expires in 2023.

     We own approximately 110 trademarks for pharmaceutical products in Spain. In addition, we also rely on unpatented proprietary technologies in the development and commercialization of our products.

     We also rely on unpatented proprietary technologies in the development and commercialization of our products. We also depend upon the skills, knowledge and experience of our scientific and technical personnel, as well as those of our advisors, consultants and other contractors. To help protect our proprietary know-how that may not be patentable, and our inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require employees, consultants and advisors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third party’s proprietary technology.

Research and Development

     Research and development expenses were $13,600,000, $10,459,000 and $5,800,000 in the years ended December 31, 2007, 2006 and 2005, respectively. The steady increase in these expenses is attributed to continued investments in our research and development programs for our drug delivery technologies, primarily for Nasulin^TM, our intranasal insulin product candidate. We recently announced the expansion of our Nasulin Phase II studies to include clinical evaluations in Type II diabetic patients in the U.S and India. We plan to incur increased research and development costs as we continue to conduct our clinical trials.

Competition

     All of our current and future products face strong competition both from new and existing drugs and drug delivery technologies. This competition includes national and multi-national pharmaceutical and healthcare companies of all sizes. Many of these other pharmaceutical and healthcare companies have far greater financial resources, technical staffs, research and development, and manufacturing and marketing capabilities. We believe that owning our own development, manufacturing and marketing facilities in Spain allows us to effectively compete with other pharmaceutical companies in many markets. Our access to these resources enables us to control costs otherwise associated with contracting for the development, manufacture or marketing of our products by other companies. These lower costs allow us to sell our products at competitive prices while maintaining profitable margins.

     In Spain, we compete with both large multinational companies and national Spanish companies, several of which produce products that compete with most of the products that we manufacture and market. In Spain, our principal competitors include companies such as Ratiopharm International GmbH, Laboratorios Cinfa S.A., Laboratorios Bayvit S.A. and Merck Sharp & Dohme de España, S.A.

Customers

     In Spain, our sales representatives from Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar actively promote our products to physicians and retail pharmacists. We sell our products directly to pharmaceutical distributors and indirectly to customers who purchase our products from distributors. Outside Spain, we currently sell our products to our strategic partners who then distribute our products directly or through distributors in their respective territories. We have begun to market certain products directly to distributors in selected markets outside of Spain. Our manufacturing facility also supplies branded generic and generic products to customers both within and outside of Spain, including the European Union, geographical Europe, Northern Africa and the Middle East, under licensing and supply agreements or contract manufacturing arrangements. The wholesale distributor network for pharmaceutical products in Europe and more specifically in Spain in recent years has been subject to increasing consolidation, which we expect will continue to increase our, and other industry participants’, customer concentration.

     In the United States, we have entered into research and license agreements with pharmaceutical companies, whereby we perform research activities and license product candidates in exchange for milestone payments and royalties and/or a share of profits derived from product sales.

     In the past three years, only one of our customers, Cofares, accounted for more than ten percent of our consolidated total revenues. Sales to this customer accounted for approximately 9% of our consolidated total revenues in 2007, 11% in 2006 and 12% in 2005.

Financial Information About Geographic Areas

     The majority of our revenues are generated from products sold in Spain. Spain revenues totaled $81,206,000, $77,228,000, and $69,845,000 in the years ended December 31, 2007, 2006 and 2005, respectively. Long-lived assets in Spain at December 31, 2007, 2006 and 2005 were $69,598,000, $56,435,000 and $40,120,000, respectively. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14 of the Notes to Consolidated Financial Statements in Item 15 for additional financial information regarding geographic areas.

Seasonality

     See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for information regarding the impact of seasonality on our results of operations.

Employees

     We employ approximately 470 people, 22 of whom are employed in the U.S. and 448 of whom are employed in Spain, as of December 31, 2007. Approximately 229 of these employees are principally engaged in manufacturing activities, 167 in sales and marketing, 26 in product development and 48 in management and administration. In general, we consider our relations with our employees to be good.

Regulation

     Numerous governmental authorities in the U.S., Spain and other countries extensively regulate the activities of pharmaceutical manufacturers. If we fail to comply with the applicable requirements of governmental authorities, we may be subject to administrative or judicial sanctions such as refusal of or delay in the approval of pending marketing applications or supplements to approved applications, warning letters, total or partial suspension of production, fines, injunctions, product seizures or recalls, as well as criminal prosecution.

United States

     Prior to marketing most pharmaceutical products in the U.S., the product must first be approved by the FDA. For new compounds, the regulatory approval process begins with preclinical laboratory and animal testing. The approval process generally consists of the following five principal stages:

	•		Preclinical testing;
	•		Submission and review by the FDA of an Investigational New Drug Exemption (IND) Application;
	•		Clinical trials;
	•		Preparation and submission of the NDA; and
	•		FDA’s review and approval/disapproval of the NDA.

     In some cases, further clinical trials may also be required following approval.

     The IND is submitted to the FDA when the appropriate preclinical studies are completed and must be submitted to the FDA 30 days before beginning clinical studies. The IND becomes effective if the FDA does not put the investigations described in the IND on clinical hold within 30 days of receiving the IND for filing.

     Human clinical trials typically are conducted in three sequential phases. Some clinical trials may include aspects of more than one phase.

	•		Phase I involves the initial introduction of the pharmaceutical compound into patients or healthy human volunteers; the emphasis is on testing for dosage tolerance, metabolism, excretion, clinical pharmacology, safety (adverse effects) and possibly early evidence of effectiveness.
	•		Phase II involves the first controlled clinical trial involving patients who have the targeted disease or condition and consists of safety and efficacy studies. The studies may be divided into early

Phase II (or II A), during which studies are performed to determine initial efficacy and late Phase II (or II B) which may consist of placebo-controlled trials in a larger number of patients.

•

Phase III involves large scale, longer-term, well controlled efficacy and safety studies within an expanded patient population, frequently at multiple clinical study sites.

     Throughout the drug development process, the IND must be updated continually with protocol amendments, information amendments, IND Safety Reports and Annual Reports. The FDA carefully reviews all data submitted and holds meetings with the sponsor at key stages to discuss the preclinical and clinical plans and results.

     The clinical, chemistry, statistics, biopharmaceuticals, microbiology (if applicable) and nonclinical data that has been collected over many years of development is submitted to the FDA in an NDA. Additionally, an NDA will contain complete chemistry, manufacturing and controls information, demonstrating that the applicant is capable of consistently manufacturing a drug product of appropriate strength, quality and purity. An NDA is an application requesting FDA approval to market a new drug for human use in interstate commerce.

     NDAs are allocated varying review priorities based on a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indications, further clinical trials are necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing to monitor for adverse effects, and in some cases to provide additional information on efficacy, which can involve significant expense. Our products under development and future products to be developed must go through the approval process delineated above prior to gaining approval by the FDA for commercialization.

     FDA approval is also required for the marketing of generic equivalents of an existing drug. An ANDA is required to be submitted to the FDA for approval. When processing an ANDA, the FDA, in lieu of the requirement for conducting complete clinical studies, requires bioavailability and/or bioequivalence studies. Bioavailability indicates the rate and extent of absorption and levels of concentration of a drug product in the body. Bioequivalence compares the bioavailability of one drug product (in this case, the generic product under review) with another (usually the innovator product). When bioequivalence is established, the rate of absorption and levels of concentration of the generic drug in the body will closely approximate those of the previously approved drug. An ANDA may only be submitted for a drug on the basis that it is the equivalent to a previously approved drug.

     In addition to obtaining FDA approval for each product, each manufacturer of drugs must register its manufacturing facilities with the FDA, and must list the drug products it manufactures at each facility. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with current GMPs for drugs. To supply products for use in the U.S., foreign manufacturing establishments must also comply with U.S. GMPs and are subject to inspection by the FDA. Such inspections generally take place upon submission of an NDA or ANDA to the FDA or at any other time deemed necessary by the FDA and can impact both the approval of drugs, and a company’s ability to continue manufacturing following approval.

Europe

     As a pharmaceutical manufacturer in Spain, which is a member of the European Union, we are subject to the regulations enacted by the European Union that require us to obtain manufacturing, marketing and pricing authorizations to commercialize pharmaceutical products in Spain.

     Pharmaceutical manufacturers in Europe must obtain marketing approval from the regulatory authority of each country in which they intend to market a product. In Spain, that authority is the Spanish Ministry of Health. The development process in Europe is similar to that in the United States described above, with the same three clinical phases for branded drugs and bioequivalence studies for generic drugs to assure their safety and efficacy. A dossier must be prepared for each pharmaceutical product and, upon approval of the product, it may be marketed in that country. In Spain, generic products are generally approved approximately one year after submission, while branded products take considerably longer. Spain and several other European countries also regulate the price that can be charged to the patient for each product in addition to setting the amount that the public insurance programs will reimburse for each product, which directly affects a product’s profitability.

     Spain, and many other European governments, have historically implemented reduced pricing strategies to mitigate rising healthcare costs. The most recent price reduction was effective on March 1, 2007, and has required our sales force to begin marketing our products at lower prices. In addition, the impending price changes reduced our sales levels in the fourth quarter of 2006 as wholesalers and pharmacies reduced orders to minimum quantities until they were able to purchase at the new lower prices. We faced similar regulation in Spain in late October 2003 which reduced the prices of our top selling products. Since then we have continued to seek out new ways to improve the efficiency of our manufacturing operations, reduce our costs and increase sales volumes to help mitigate lower prices. We are also focused on increasing our sales in other countries and other geographic regions, including the U.S., through strategic alliances with distributors and collaborators in those territories. We also target markets that offer compatible regulatory approval regimes and attractive product margins. In August 2005, we formed an Irish subsidiary, Bentley Pharmaceuticals Ireland Limited, to assist in our European expansion strategy. Bentley Pharmaceuticals Ireland Limited received its first marketing approval by the Irish Medicines Board in November 2005 and launched its first product in late 2006. (See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for more discussion of regulations in Spain.)

     In order to expedite approvals within European Union countries, the European Union has established a mutual recognition procedure. When a manufacturer submits a pharmaceutical product for marketing approval, it must designate whether the filing will serve as a reference authorization for other European Union countries and, if so, which specific European countries. If the filing is not designated as a mutual recognition reference filing, then other applications must be made individually to other countries for approval to be granted in those other countries. If the filing is designated as a reference authorization, then the authority in the initial country is required to evaluate the submission on the basis of its own domestic standards as well as the standards of each of the countries listed by the manufacturer. As the standards for pharmaceutical approvals have not been harmonized among the various European Union members, certain aspects of the filing must comply with standards that vary by country. In addition, the process for initial evaluation of mutual recognition filings is generally significantly longer than that for national filings and, as a result, companies often choose not to use this process for their first approval. However, if the filing is approved for the reference and the mutual recognition countries, the manufacturer would be permitted to market the product in all of the jurisdictions selected.

     A manufacturing facility is required to obtain a general permit to operate a pharmaceutical business certifying that its facilities comply with European GMPs. These permits are granted by the national authorities in the country of manufacture and other European countries rely on regulation by the authority of the country of manufacture.

Trends in Healthcare Regulation

     The cost of healthcare continues to be a subject of investigation and action by governmental agencies, legislative bodies and private organizations. Many countries, in Europe and elsewhere, directly or

indirectly through reimbursement limitations, control the selling prices and reimbursement prices of certain healthcare products. For example, in Spain, prices for prescription pharmaceutical products must be approved by Spain’s Ministry of Health. In order to help control rising healthcare costs, the Ministry of Health, in recent years, has encouraged the substitution of generic-equivalent products. However, as described above, the Spanish government has also historically implemented reduced pricing strategies to mitigate rising healthcare costs. There can be no assurance that the government in Spain or in other countries will not implement additional price reductions in the future.

     In Spain and in other European countries, there are regulations that prohibit a pharmacy from substituting another product if a doctor’s prescription has specified a specific product for that patient. Recently, there has been intense scrutiny of pharmacists to assure that they are complying with this regulation. Other European countries permit the pharmacist to substitute products more freely than Spain. Any change in this regulation may negatively affect our sales in Spain, as our products are often prescribed by brand name by the physicians.

     In Western Europe, efforts are under way by the European Union to harmonize technical standards for many products, including drugs, to make more uniform the requirements for marketing approval from the various regulatory agencies.

     In the United States, most states have enacted generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a generic version of a prescribed innovator drug. Federal and state governments continue their efforts to reduce costs of subsidized healthcare programs, including restrictions on amounts agencies will reimburse for the use of products. Efforts to reduce healthcare costs are also being made in the private sector. Healthcare providers have responded by instituting various cost reduction and containment measures of their own. It is not possible to predict the extent to which we or the healthcare industry in general might be affected by these changes.

     Continuing reviews of the utilization, safety and efficacy of healthcare products and their components are being conducted by industry, government agencies and others. These studies, which employ increasingly sophisticated methods and techniques, can call into question the utilization, safety and efficacy of previously marketed products and in some cases have resulted, and may in the future result, in the discontinuance of such products and give rise to claims for damages from persons who believe they have been injured as a result of their use. Similar consequences can arise as a result of adverse events, which can impact both innovator and generic versions of the same drug. We maintain product liability insurance for such potential claims; however, no such claims have ever been asserted against us.

Other Regulations

     We believe that we comply with environmental laws that apply to us and we do not anticipate that continuing compliance will have a material effect on our financial condition or results of operations.

Available Information

     Copies of reports filed by us pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports may be accessed from our website at www.bentleypharm.com, free of charge, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. Alternatively, these reports can be accessed through a query at the website of the Securities and Exchange Commission at www.sec.gov.

Item 1A. Risk Factors

     You should carefully consider the following discussion of risks and uncertainties relating to our business and ownership of our securities. The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition, or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all, or part of your investment.

Our growth depends on identifying drugs suitable for our drug delivery technologies and expanding our generic and branded generic drug operations.

     We believe that our growth depends on the identification of pharmaceutical products that are suitable for delivery using our proprietary technologies. Our principal drug delivery technology is our CPE-215 technology. This technology, like certain other drug delivery technologies, operates to increase the amount and rate of absorption of certain drugs across biological membranes. This technology does not operate independently and must be coupled with suitable pharmaceutical products in order to provide value. Consequently, our growth will depend to a great extent on identifying and commercializing these suitable drugs with respect to which we intend to expend significant resources and efforts. Identifying suitable products is a lengthy and complex process that may not succeed. Even if identified, products may not be available to us or we may otherwise be unable to enter into licenses or other agreements for their use. In our efforts to identify suitable products, we compete with other drug delivery companies with greater research and development, financial, marketing and sales resources. If we do not effectively identify drugs to be used with our technologies, improve the delivery of drugs with our technologies and bring the improved drugs to commercial success, then we may not be able to continue our growth and we will be adversely affected.

     We intend to expend significant resources and efforts toward identifying and commercializing products and technologies to expand our generic and branded generic drug operations in Spain and to expand sales of these products outside Spain. Although we already manufacture and market generic and branded generic drugs in Spain, the growth of these operations in particular and the Company in general will depend to a great extent on identifying and commercializing additional such drugs for which we have existing capacity and infrastructure and, to a lesser extent, on increasing sales of existing products. Identifying and pursuing these new opportunities involves significant time and expense and we may not succeed. Even if identified, these products and technologies may not be commercially successful. Once identified, products to be manufactured and/or marketed by us under generic or branded generic names are subject to successful negotiation of acceptable economic and legal terms, and successful progress of the product through commercialization, as to which we cannot assure you. When expanding outside Spain, we expect to compete in new geographic areas which are governed by regulatory regimes that we have not operated under before. In these efforts, we compete with other pharmaceutical companies having generic and branded drug operations with greater financial, marketing and sales resources and experience in the geographic areas in which they operate. If we do not effectively identify generic and branded generic drugs and technologies and bring them to commercial success, then we will not be able to continue our growth and we will be adversely affected.

Products using our technologies are in various stages of development and may not achieve commercial success.

     Independently as well as in conjunction with strategic partners, we are investigating the use of our technologies with respect to a variety of pharmaceutical compounds and products that are in various stages of development. We are unable to predict whether any of these products will receive regulatory approvals or be successfully developed, manufactured or commercialized. Further, due to the extended testing and

regulatory review process required before marketing clearance can be obtained, the time periods before commercialization of any of these products are long and uncertain. Risks during development include the possibility that:

	•		any or all of the proposed products will be found to be ineffective;
	•		the proposed products will have adverse side effects or will otherwise fail to receive necessary regulatory approvals;
	•		the proposed products may be effective but uneconomical to market; or
	•		other pharmaceutical companies may market equivalent or superior products.

If medical doctors do not prescribe our products or the medical profession does not accept our products, our ability to grow our revenues will be limited.

     Our business is dependent on market acceptance of our products by physicians, hospitals, pharmacists, patients and the medical community. Willingness to prescribe our products depends on many factors, including:

	•		perceived efficacy of our products;
	•		convenience and ease of administration;
	•		prevalence and severity of adverse side effects in both clinical trials and commercial use;
	•		availability of alternative treatments;
	•		cost effectiveness;
	•		effectiveness of our marketing strategy and the pricing of our products;
	•		publicity concerning our products or competing products; and
	•		our ability to obtain third-party coverage or reimbursement.

     Even though regulatory approval has been received for Testim, and even if we receive regulatory approval and satisfy the above criteria for any other product candidates developed by us or incorporating our drug delivery technology, physicians may not prescribe these products if we do not promote the products effectively. Factors that could affect our success in marketing our products include:

	•		the effectiveness of our sales force;
	•		the effectiveness of our production, distribution and marketing capabilities;
	•		the success of competing products; and
	•		the availability and extent of reimbursement from third-party payors.

     If any of our products or product candidates fails to achieve market acceptance, we may not be able to market and sell the products successfully, which would limit our ability to generate revenue.

We will rely on strategic partners to conduct clinical trials and commercialize products that use our drug delivery technologies.

     In light of our limited development resources and the significant time, expense, expertise and infrastructure necessary to bring new drugs and formulations from inception to market, we are particularly dependent on resources from third parties to commercialize products incorporating our technologies. Our strategy involves forming alliances to develop, manufacture, market and sell our products in the United States and other countries. We may not be successful in finding strategic partners or in otherwise obtaining financing, in which case the development of our products would be delayed or curtailed.

     We must enter into agreements with strategic partners to conduct clinical trials, manufacturing, marketing and sales necessary to commercialize product candidates. In addition, our ability to apply our drug delivery technologies to any proprietary drugs will depend on our ability to establish and maintain

strategic partnerships or other collaborative arrangements with the holders of proprietary rights to such drugs. Arrangements with strategic partners may be established through a single comprehensive agreement or may evolve over time through a series of discrete agreements, such as letters of intent, research agreements and license agreements. We cannot assure you that we will be able to establish such strategic partnerships or collaborative arrangements on favorable terms or at all or that any agreement entered into with a strategic partner will lead to further agreements or ultimately result in commercialization of a product.

     In collaborative arrangements, we will depend on the efforts of our strategic partners and will have limited participation in the development, manufacture, marketing and commercialization of the products subject to the collaboration. We cannot assure you that these strategic partnerships or collaborative arrangements will be successful, nor can we assure you that strategic partners or collaborators will not pursue alternative technologies or develop alternative products on their own or with others, including our competitors. In addition, our collaborators or contract manufacturers may be subject to regulatory oversight which could delay or prohibit our development and commercialization efforts. Moreover, we could have disputes with our existing or future strategic partners or collaborators. Any such disagreements could lead to delays in the research, development or commercialization of potential products or could result in time-consuming and expensive litigation or arbitration.

If we are unable to meet our responsibilities under any of our agreements, we may lose potential business and be subject to penalties and other damages.

     We are a party to a number of agreements pursuant to which we are required to perform certain tasks in accordance with specified schedules such as manufacturing of products, timing and success of research and development goals, etc. Should we not meet these deadlines and requirements, our counterparties can take actions specified in these agreements which could substantially reduce the amount of revenues the Company would receive, or terminate the related agreements. Additionally, in accordance with the terms of these agreements, the Company may be forced to pay penalties or other damages to our counterparties for breaching these agreements.

     We expect to enter into additional agreements in the future. These agreements may impose various development, funding or other obligations on us. If we breach any of these obligations, the counterparty may have the right to terminate the agreement or seek other remedies, which could significantly reduce expected profits to the Company.

     Disputes may arise with respect to agreements regarding the manufacturing, development and commercialization of any products, including products which incorporate our intellectual property. These disputes could lead to delays in commercialization of products incorporating our technologies or termination of the agreements.

A significant portion of our revenues are generated by the sale of products formulated from one active ingredient.

     Spanish sales from our omeprazole product line accounted for approximately 14% and 18% of our consolidated total revenues in 2007 and 2006, respectively. The active pharmaceutical ingredient for our omeprazole products is currently purchased from one supplier. If we lose and cannot effectively replace our supplier or are otherwise unable to continue the sales of our omeprazole products, our revenues would decline significantly.

An interruption in the sourcing and availability of the active ingredient used in our CPE-215 technology could cause our drug delivery technology product development and commercialization to slow or stop.

     We do not own or operate manufacturing facilities for clinical or commercial production of our drug delivery product candidates. We lack the resources and the capability to manufacture any of our drug delivery product candidates on a clinical or commercial scale. We also lack the resources to manufacture the excipient CPE-215, which is the major component of our CPE-215 technology. Our technology is dependent upon obtaining pharmaceutical grade CPE-215 which is available from at least two major industrial manufacturers. If a third party supplier is unable to provide us with required quantities of pharmaceutical grade CPE-215 on commercially favorable terms, we may be unable to continue our drug delivery product development or commercialization activity.

If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

     The commercial success of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and coverage and reimbursement of them by third-party payors, including government payors. The degree of market acceptance of any of our approved products will depend on a number of factors, including:

	•		limitations or warnings contained in a product’s FDA-approved labeling;
	•		changes in the standard of care for the targeted indications for either of our product candidates could reduce the marketing impact of any superiority claims that we could make following FDA approval;
	•		limitations inherent in the approved indication for either of our product candidates compared to more commonly-understood or addressed conditions; and
	•		potential advantages over, and availability of, alternative treatments, including, in the case of Nasulin, a number of products already used to treat diabetes.

     Our ability to effectively promote and sell our product candidates will also depend on pricing and cost effectiveness, including our ability to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement. We will also need to demonstrate acceptable evidence of safety and efficacy as well as relative convenience and ease of administration. Market acceptance could be further limited depending on the prevalence and severity of any expected or unexpected adverse side effects associated with our product candidates. If our product candidates are approved but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

Pharmaceutical pricing, changes in third-party reimbursement and governmental mandates are uncertain and may adversely affect us.

     Our revenues and profitability may be adversely affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of healthcare. A substantial portion of our operations consists of marketing and manufacturing, primarily in Spain and other parts of Europe, generic and branded generic pharmaceutical products. The use of generic drugs is regulated in Spain, the U.S. and many other countries, and is subject to many changing and competing public policy considerations. In addition, in certain markets, such as Spain, pricing or profitability of prescription pharmaceuticals is subject to

government control through reimbursement limitations. Specifically, prices for prescription pharmaceutical products in Spain must be approved by Spain’s Ministry of Health. In order to help control rising healthcare costs, the Ministry of Health, in recent years, has encouraged the substitution of generic-equivalent products. In further efforts to reduce healthcare costs, the Ministry of Health had been contemplating new laws and regulations that would significantly reduce the market prices of certain pharmaceutical products, including generic-equivalent drugs. For example, the Spanish government enacted a regulation effective March 1, 2007 that reduced the prices that the government reimburses for many prescription pharmaceutical products. This new regulation affects the majority of the products we sell in Spain. Had this regulation been effective for 2006, our consolidated revenues would have been reduced by approximately 10% to 12%.

     Successful commercialization of many of our products, including those using our permeation technologies as well as our generic and branded generic products, may depend on the availability of reimbursement for the cost of such products and related treatment from third-party healthcare payors, such as the government, private insurance plans and managed care organizations. Third-party payors are increasingly challenging the price of medical products and services. Such reimbursement may not be available for any of our products at all or for the duration of the recommended treatment with a drug, which could materially adversely affect our ability to commercialize that drug. The increasing emphasis on managed care in the U.S. continues to increase the pressure on pharmaceutical pricing. Some governmental agencies, including those in Spain, can compel companies to continue to produce products that are not profitable for the company due to insufficient supply. In the U.S., there have been a number of federal and state proposals to implement similar government controls. We anticipate that there will continue to be a number of proposals in the U.S., as has been the case in many foreign markets. The announcement or adoption of such proposals could adversely affect us. Further, our ability to commercialize our products may be adversely affected to the extent that such proposals materially adversely affect the business, financial condition and profitability of companies that are prospective strategic partners.

     The cost of healthcare in Spain, the U.S. and elsewhere continues to be a subject of investigation and action by various governmental agencies. Certain resulting legislative proposals may adversely affect us. For example, governmental actions to further reduce or eliminate reimbursement for drugs may directly diminish our markets. In addition, legislative safety and efficacy measures may be invoked that lengthen and increase the costs of drug approval processes. Further, social, economic and other broad policy legislation may induce unpredictable changes in the healthcare environment. If any of these measures are enacted in some form, they may have a material adverse effect on our results of operations.

If our clinical trials fail, we will be unable to market products.

     Any human pharmaceutical product developed by us would require clearance by the FDA for sales in the United States, by Spain’s Ministry of Health for sales in Spain and by comparable regulatory agencies for sales in other countries. In the case of non-generic products, the process of conducting clinical trials and obtaining FDA and other regulatory approvals is lengthy and expensive and we cannot be assured of success. In order to obtain FDA approval of any new product candidates using our technologies, an NDA must be submitted to the FDA demonstrating that the product candidate, based on preclinical research, animal studies and human clinical trials, is safe for humans and effective for its intended use. Positive results from preclinical studies and early clinical trials do not ensure positive results in more advanced clinical trials designed to permit application for regulatory approval. We may suffer significant setbacks in clinical trials, even in cases where earlier clinical trials show promising results. Any of our new product candidates may produce undesirable side effects in humans that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. We, the FDA or other regulatory authorities, may suspend our clinical trials at any time if we or they believe the trial participants face unacceptable health risks or if they find deficiencies in any of our regulatory submissions. Other factors that can cause delay or terminate our clinical trials include:

	•		slow or insufficient patient enrollment;
	•		slow recruitment and completion of necessary institutional approvals at clinical sites;
	•		longer treatment time required to demonstrate efficacy;
	•		lack of sufficient supplies of the product candidate;
	•		adverse medical reactions or side effects in treated patients;
	•		lack of effectiveness of the product candidate being tested;
	•		regulatory requests for additional clinical trials; and
	•		instability of the pharmaceutical formulations.

     A delay or termination of any of our clinical trials may have a material adverse effect on our results of operations.

We rely on third parties to conduct clinical trials for our product candidates and plan to rely on third parties to conduct future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our current and future product candidates.

     We do not have the ability to conduct clinical trials for Nasulin or any other product candidate. We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct all of our clinical trials for our product candidates. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other non-U.S. regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Clinical Practices (“GCPs”), for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. If the third parties do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to GCPs or for any other reason, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. In addition, failure by such third parties to perform their obligations in compliance with GCPs may cause our clinical trials to fail to meet regulatory requirements, which may require us to repeat our clinical trials.

Our patent positions and intended proprietary or similar protections are uncertain.

     We have filed numerous patent applications and have been granted licenses to, or have acquired, a number of patents. We cannot assure you, however, that our pending applications will be issued as patents or that any of our issued or licensed patents will afford adequate protection to us or our licensees. We cannot determine the ultimate scope and validity of patents that are now owned by or may be granted to third parties, the extent to which we may wish, or be required, to acquire rights under such patents or the cost or availability of such rights. In the event that patent protection for technologies expire, or are not extended, revenues derived from such technologies may be reduced significantly.

     Competitors may interfere with our patent process in a variety of ways. Competitors may claim that they invented the claimed invention prior to us. Competitors also may claim that we are infringing their patents, interfering with or preventing the use of our technologies. Competitors also may contest our patents by showing the patent examiner that the invention was not original, was not novel or was obvious. A competitor could claim that our issued patents are not valid for a variety of other reasons as well.

     Legal proceedings have been commenced against in recent years by Merck & Co. Inc. and its Spanish subsidiary, GlaxoSmithKline S.A. and its Spanish subsidiaries, Ethypharm S.A. and its Spanish subsidiaries, and Pfizer Inc and its Spanish subsidiary Pfizer, S.A., in each case alleging that we violated their respective patents. As discussed in more detail in “Item 3—Legal Proceedings” we cannot assure you that similar actions will not be brought against us, or that these actions or any such similar actions will not have an adverse effect on us.

     We also rely on trade secrets, unpatented proprietary technologies and continuing technological innovations in the development and commercialization of our products. We cannot assure you that others will not independently develop the same or similar technologies or obtain access to our proprietary technologies. It is unclear whether our trade secrets will be protected under law. While we use reasonable efforts to protect our trade secrets, our employees or consultants may unintentionally or willfully disclose our information to competitors. Our employees and consultants with access to our proprietary information have entered into or are subject to confidentiality arrangements with us and have agreed to disclose and assign to us any ideas, developments, discoveries and inventions that arise from their activities for us. We cannot assure you, however, that others may not acquire or independently develop similar technologies or, if effective patents in applicable countries are not issued with respect to our products or technologies, that we will be able to maintain information pertinent to such research as proprietary technologies or trade secrets. Enforcing a claim that another person has illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable. In addition, we may be subject to the jurisdiction of courts outside the U.S., some of which may be less willing to protect trade secrets.

     Our generic and branded generic products may subject us to litigation and claims that we infringe the intellectual property of others.

     The growth of our generic and branded generic operations may be adversely impacted by claims by others that our products infringe on the proprietary rights of their existing “brand-name” products. Companies that produce brand pharmaceutical products routinely bring litigation against companies who seek regulatory approval to manufacture and market generic and branded generic forms of their branded products and may attempt to secure injunctions that will prevent competitors from eroding their market share. These companies may allege patent infringement or other violations of intellectual property rights, which must be decided by the courts.

     If a company claims we infringe its technology, we could face a number of consequences, including lawsuits, which take significant time and can be very expensive, payment of substantial damages for infringement, prohibition from selling or licensing the product unless the patent holder licenses the patent to us, or reformulation, if possible, of the product so it does not infringe, which could require substantial time and expense.

Regulatory approvals must be obtained and maintained for products incorporating our technologies and, if approvals are delayed or withdrawn, we will be unable to commercialize these products.

     Government regulations in the United States, Spain and other countries have a significant impact on our business and affect the research and development, manufacture and marketing of products incorporating our technologies. In the United States, Spain and other countries, governmental agencies have the authority to regulate the distribution, manufacture and sale of drugs. Failure to obtain or delay in obtaining regulatory approval for our products could result in a reduction of our expected revenues. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension or withdrawal of regulatory approvals, product recalls, operating restrictions and/or criminal prosecution. In addition, governmental regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products.

Our business will suffer if we fail to continue to comply with federal regulations and rules of the Securities and Exchange Commission and New York Stock Exchange relating to corporate governance reform.

     As a public company, we are subject to certain federal regulations and the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange. The Sarbanes-Oxley Act of 2002 required more stringent accounting, corporate fraud and securities laws. To implement this legislation, the Securities and Exchange Commission has adopted new rules and may adopt additional rules pertaining to, among other things, additional disclosure and reporting requirements, including requirements relating to internal control procedures. The New York Stock Exchange has also adopted various rules relating to corporate governance. Our reputation and financial results could be materially harmed by any failure by us to comply with any current or future rules or regulations relating to the Sarbanes-Oxley Act or to any other federal corporate or stock exchange reform measures.

Sustained compliance with the requirements of the Sarbanes-Oxley Act of 2002 may require a reallocation of resources that would otherwise be dedicated to operating our business.

     The Sarbanes-Oxley Act of 2002 imposed significant new administrative burdens on publicly traded companies. We have incurred significant incremental costs in complying with the provisions of the Sarbanes-Oxley Act. We cannot assure you that these additional costs will result in any increase in revenue or that they will not have a material adverse effect on our financial results. In addition, because we are a small company with relatively few employees, the individuals responsible for complying with the statutory and regulatory requirements also have responsibility for business matters. As a result, our business may suffer if these individuals are forced to spend a disproportionate amount of time on compliance matters.

Implementation of new information systems could cause business interruptions and negatively affect our profitability and cash flows.

     We recently implemented a new inventory warehouse system to enhance operational efficiencies and provide more effective management of our logistics. This implementation enabled us to better meet the challenges related to our continued growth and the needs of our customers. We plan to continue to upgrade and replace certain of our systems, including our financial systems, to assist us in continuing to meet the challenges of the regulatory environment, including regulations imposed by the Sarbanes-Oxley Act of 2002. We expect that, over time, new systems will result in improved business processes and increased operating efficiencies. As our employees become familiar with the new systems, we expect that some errors may occur, some of which could adversely impact our business and financial results. There can be no assurance that the systems will perform as expected or that the anticipated improvements in business processes and operating efficiencies will be achieved. In the event of serious system malfunctions or deficiencies, we might experience business interruptions, which could adversely impact on our results of operations, financial condition and cash flows.

If we are unable to obtain marketing approvals to sell our products in countries other than Spain, we may not be able to obtain additional revenues from sales in those countries.

     We cannot assure you that products that have obtained marketing approval in Spain will be approved for marketing elsewhere. If we are unable to obtain marketing approval for our products in countries other than Spain, we may not be able to obtain additional revenues from sales in those countries.

We must comply with Good Manufacturing Practices in the production of pharmaceutical products.

     Any manufacturing facility for pharmaceutical products to be marketed in the United States is subject to FDA inspection and inspections by other government agencies both before and after approval of an NDA to determine compliance with the FDA’s GMP requirements, as well as local, state and other federal regulations. Manufacturing facilities for our compounds to be marketed in European countries and elsewhere are also subject to European Union and/or other applicable GMP regulations. Facilities used to produce our compounds may not achieve or maintain compliance with GMP or other requirements. The GMP regulations are complex and, if we fail to comply with them, it could lead to rejection or delay of an NDA or comparable application. Any delay in approval of an NDA or comparable application would delay product launch. Violation of GMP requirements after approval of an NDA or comparable application could result in remedial action, penalties and/or delays in production.

We are dependent on only one manufacturing facility that can be used to manufacture our pharmaceutical products and only one manufacturing facility that can be used to manufacture active pharmaceutical ingredients.

     All of our manufactured pharmaceutical products are manufactured in one factory in Zaragoza, Spain. Although we have constructed the factory with redundant lines for our most significant products that are in separate areas of the factory, and installed a fire suppression system, the destruction of the factory by a fire or other catastrophe would have a material impact on our revenues until we are able to rebuild the factory or secure an alternative manufacturing site.

     Similarly, all of our manufactured active pharmaceutical ingredients are manufactured in one factory in Zaragoza, Spain. A fire or other catastrophe would have a material impact on our revenues until we are able to rebuild the factory or secure an alternative manufacturing site.

We operate a significant portion of our business in, and plan to expand further into, markets outside the United States, which subjects us to additional business risks.

     During the year ended December 31, 2007, 65% of our revenues were derived from sales made by our Spanish subsidiaries in Spain and 26% of our revenues were derived from sales made by our Spanish subsidiaries to customers in other foreign countries. We believe that the most substantial portion of our revenues will continue to be derived from sales in foreign countries. Conducting business internationally subjects us to a number of risks and uncertainties, including:

	•		unexpected delays or changes in regulatory requirements;
	•		difficulties and costs related to complying with a wide variety of complex foreign laws and treaties;
	•		delays and expenses associated with tariffs and other trade barriers;
	•		restrictions on and impediments to repatriation of our funds and our customers’ ability to make payments to us;
	•		political and economic instability;
	•		acts of terrorism or war;
	•		difficulties and costs associated with staffing and managing international operations and implementing, maintaining and improving financial controls;
	•		dependence upon independent sales representatives and other indirect resellers who may not be as effective and reliable as our employees;
	•		inadequate or uncertain protection of intellectual property in foreign countries;
	•		increased difficulty in collecting accounts receivable and longer accounts receivable cycles in certain foreign countries;
	•		adverse tax consequences or overlapping tax structures; and

•

limitations on the remittance of dividends by foreign subsidiaries.

Currency fluctuations could have a material adverse impact on our business.

     Our revenues may be impacted by fluctuations in local currencies due to the fact that 91% of our revenues currently are generated by our Spanish subsidiaries, Laboratorios Belmac, Laboratorios Davur, Laboratorios Rimafar and Bentley API. Fluctuations in the value of the Euro, in relation to the U.S. Dollar, had a significant impact on our operations during 2007. Our foreign operations also expose us to a number of currency related risks, including the following:

	•		fluctuations in currency exchange rates;
	•		limitations on the conversion of foreign currency; and
	•		fluctuations of the carrying value of long lived assets.

     We do not currently engage in foreign exchange hedging transactions to manage our foreign currency exposure because much of our expenditures are in the same currency as our revenues. However, one of our subsidiaries has entered into a hedging arrangement to reduce the variability of future cash flows related to a foreign denominated liability recorded on its books.

If we cannot keep pace with rapid technological change and meet the intense competition in our industry, we may not succeed.

     Our success depends, in part, on achieving and maintaining a competitive position in the development of products and technologies in a rapidly evolving industry. If we are unable to continue to develop and/or acquire competitive products and technologies, our current and potential strategic partners may choose to adopt the drug delivery technologies of our competitors. We also compete generally with other drug delivery, biotechnology and pharmaceutical companies engaged in the development of alternative drug delivery technologies or new drug research and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do and represent significant competition for us. Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before we achieve success, if at all. The products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our existing or proposed products noncompetitive or obsolete.

     Our competitive positions in our generic and branded generic drug operations as well as with our drug delivery technologies are uncertain and subject to risks. In Spain, and in other countries, we must demonstrate bioequivalence of our generic and branded generic products, which may be challenged by branded and other generic competitors as well as regulatory authorities. In order to demonstrate bioequivalence of our generic products, we must show that the rate and extent of absorption and levels of concentration of our generic products are not statistically different from innovators’ products that have previously been approved by the regulatory authorities of the respective country, when administered at the same dosage level under similar clinical conditions.

     The competitive position of our drug delivery technologies is subject to the possible development by others of superior technologies. Other drug delivery technologies, including oral and injection methods, have wide acceptance, notwithstanding certain drawbacks, and are the subject of improvement efforts by other entities having greater resources. In addition, our drug delivery technologies are limited by the number and commercial magnitude of drugs with which they can successfully be combined.

We may be unable to meet increasing expenses and demands on our resources from future growth, if any, or to effectively pursue additional business opportunities.

     We routinely consider acquisition and investment opportunities, although we have no current agreements or commitments with respect to any acquisitions or investments. Any future acquisitions or investments would further challenge our resources. If we do not properly meet the increasing expenses and demands on our resources from future growth, we will be adversely affected. To properly manage our growth, we must, among other things, improve and implement additional administrative, financial, marketing, operational and research and development systems, procedures and controls on a timely basis. We may also need to expand our staff in these and other areas. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. We may not be able to hire, train, integrate, retain, motivate and manage required personnel, successfully integrate acquisitions or investments, nor successfully identify, manage and pursue existing and potential market opportunities. We plan to invest $11.0 million to $13.0 million in capital expenditures during the year ending December 31, 2008, including $3.9 million that was budgeted in 2007, but now planned for 2008. We plan to complete the expansion of our API manufacturing facility and of our pharmaceutical product manufacturing facility and add new production lines in order to be able to accommodate the level of operations and growth that is anticipated as a result of the Company’s expansion beyond the borders of Spain and the U.S. market. We plan to finance these expenditures from a combination of cash flow from operations, existing cash balances, and borrowings, if necessary. If we fail to generate additional revenue in excess of increased operating expenses in any fiscal period, we may incur losses.

Our operations could be adversely affected if we are unable to raise or obtain needed funding.

     Substantial time and financial and other resources will be required to complete ongoing development and clinical testing of our proprietary products. Regulatory efforts and collaborative arrangements also will be necessary for our products that are currently under development and testing in order for them to be marketed. Assuming we continue our operations as presently conducted, we believe that we have sufficient working capital to meet our needs for at least the next twenty-four months. However our revenues from operations and cash may not be sufficient over the next several years for commercializing all of the products we are currently developing. Consequently, we may seek strategic partners for various phases of development, marketing and commercialization of product candidates employing our technologies. Further, we cannot assure you as to the sufficiency of our resources or the time required to complete any ongoing development and clinical testing, since the extent to which we conduct such testing is dependent on resource allocation decisions that we make from time to time based on numerous financial as well as operational conditions.

     In addition to development and other costs, we expect to incur capital expenditures from time to time. These capital expenditures will be influenced by our regulatory compliance efforts, our success, if any, at developing collaborative arrangements with strategic partners, our needs for additional facilities and capital equipment and the growth, if any, of our business in general. There can be no assurance that we will receive additional funding on favorable terms if at all, or that we will be successful in attracting strategic partners. If we cannot raise funds or engage strategic partners on acceptable terms when needed, we may not be able to continue our research and development activities, develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements.

If we undertake an acquisition, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition.

     One of our strategies for business expansion is the acquisition of additional technologies, products and product candidates. We may attempt to acquire these product candidates, or other potentially beneficial technologies, through the acquisition of businesses, services or products that we believe are a strategic fit with our business. Although we currently have no commitments or agreements with respect to any acquisitions, if we undertake an acquisition, the process of integrating the acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. Moreover, we may fail to realize the anticipated benefits of any acquisition for a variety of reasons such as an acquired technology or product candidate proving to not be safe or effective in later clinical trials. We may fund any future acquisition by issuing equity or debt securities, which could dilute your ownership percentage or limit our financial or operating flexibility as a result of restrictive covenants related to new debt. Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote resources to potential acquisitions that are never completed.

If we do not successfully manage our growth, our business goals may not be achieved.

     Expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. To manage further growth, we will be required to continue to improve existing, and implement additional, operational and financial systems, procedures and controls, and hire, train and manage additional employees. Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth and we may not be able to hire, train, retain, motivate and manage required personnel. Our failure to manage growth effectively could limit our ability to achieve our business goals.

If we cannot attract and retain key personnel, we may not be able to execute our business plan as anticipated.

     Our success is dependent on our ability to attract and retain qualified, experienced personnel. We face significant competition in recruiting competent personnel. Because the location of our headquarters is in an area with relatively few pharmaceutical companies recruiting candidates has been more difficult, as many candidates prefer to work in places with a broad pharmaceutical industry presence. The loss of key personnel, or the inability to attract and retain additional, competent employees, could adversely affect our business and financial results.

     We have assigned many key responsibilities within our company to, and are dependent on, a relatively small number of individuals. If we lose the services of our Chief Executive Officer, President, Chief Financial Officer, Chief Medical Officer, or the Managing Director of European Subsidiaries, our ability to execute our business plan in the manner we currently anticipate would be adversely affected. We maintain key person life insurance only for our Chief Executive Officer and President. We have an employment agreement with each of our key personnel.

We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability claims.

     The testing and marketing of medical products entails an inherent risk of product liability. We may be held liable to the extent that there are any adverse reactions from the use of our products. Some of our products involve new methods of delivery for drugs, some of which may require precautions to prevent

unintended use, especially since they are designed for patients’ self-use rather than being administered by medical professionals. The FDA may require us to develop a comprehensive risk management program for our products. The failure of these measures could result in harmful side effects or death. As a result, consumers, regulatory agencies, pharmaceutical companies or others might make claims against us. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities, lose market share or be required to limit commercialization of our products.

Regardless of merit or eventual outcome, liability claims may result in:

	•		withdrawal of clinical trial participants;
	•		termination of clinical trial sites or entire trial programs;
	•		decreased demand for our product candidates;
	•		impairment of our business reputation;
	•		costs of related litigation;
	•		substantial monetary awards to patients or other claimants;
	•		loss of revenues; and
	•		the inability to commercialize our product candidates.

     Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could inhibit or prevent the commercialization of pharmaceutical products we develop alone or with corporate collaborators. In Spain, we maintain product liability insurance in the amount of €3 million (approximately $4.4 million U.S. Dollars) and clinical trial insurance in connection with our clinical testing activities in various amounts on a study-by-study basis. In the U.S. we maintain $10.0 million in product liability and clinical trials insurance. While management believes that this insurance is reasonable, we cannot assure you that any of this coverage will be adequate to protect us in the event of a claim. We, or any corporate collaborators, may not be able to obtain or maintain insurance at a reasonable cost, if at all. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate if any claim arises.

The discovery of any new side effects or negative efficacy findings for our products could significantly harm our business.

     While the safety of our products has been, is being, and will be extensively studied in clinical trials there can be no assurance that new or more serious side effects or negative efficacy findings may not be discovered based on long term safety and efficacy studies or required reporting of adverse events regarding any of our products after each such product has been marketed, any of which could severely harm our business and result in one or more of the following regulatory events:

	•		a voluntary or involuntary recall or market withdrawal of the applicable product;
	•		labeling changes such as restriction on intended uses, additional contraindications, warnings, precautions, or adverse reactions that would limit the applicable product’s market potential;
	•		a “boxed” warning on the label;
	•		imposition of post-marketing surveillance studies or risk management programs;
	•		distribution restrictions; and
	•		adverse publicity.

     In addition, one or more of the above factors would also have the potential to negatively impact regulatory registrations for the applicable product in other countries.

Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.

     Variations in our quarterly and year-end operating results are difficult to predict and may fluctuate significantly from period to period. If our sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the other factors discussed under these “Risk Factors,” specific factors that may cause fluctuations in our operating results include:

	•		demand and pricing for our products, including changes in wholesaler purchasing;
	•		government or private healthcare reimbursement policies;
	•		physician, pharmacy and patient acceptance of any of our current or future products;
	•		patterns or cost structures for our products;
	•		introduction of competing products, including generics;
	•		any interruption in the manufacturing or distribution of Testim or any of our future products;
	•		our operating expenses which fluctuate due to growth of our business;
	•		timing and size of any new product or technology acquisitions we may complete; and
	•		variations in our rates of product returns and allowances.

     Forecasting our revenues is complicated by difficulties in estimating inventory levels at our wholesalers and pharmacies, the timing of purchases by wholesalers and retailers to replenish inventory and the occurrence and amount of product returns.

Your percentage of ownership and voting power and the price of our common stock may decrease as a result of events that increase the number of our outstanding shares.

     As of December 31, 2007, we had the following capital structure (in thousands):

		No. of Shares
Common stock outstanding			22,377
Common stock issuable upon:
Exercise of options which are outstanding			3,838
Vesting of restricted stock units which are outstanding			197
Contingently issuable shares			60
Exercise/vesting of options and restricted stock units which are available for grant			323
Total common stock outstanding assuming exercise of all of the above			26,795

     As of December 31, 2007, we had outstanding options to purchase approximately 3,838,000 shares of common stock at exercise prices ranging from $2.00 to $15.83 (exercisable at a weighted average of $9.97 per share), of which approximately 3,014,000 were then vested and exercisable. We may conduct future offerings of our common stock or other securities with rights to convert the securities into shares of our common stock. Exercise of our outstanding options into shares of our common stock may significantly and negatively affect the market price for our common stock as well as decrease your percentage ownership and voting power.

Our stock price is volatile.

     The market prices for our securities and for securities of emerging growth companies have historically been highly volatile. During the two years ended March 4, 2008, the price of our common stock has ranged from a high of $17.50 to a low of $7.51. Future announcements concerning us or our competitors may have a significant impact on the market price of our common stock. Factors which may affect our market price include:

	•		progress of our relationships with strategic partners;
	•		results of clinical studies and regulatory reviews;
	•		technological innovations by us or our competitors;
	•		market conditions in the pharmaceutical, drug delivery and biotechnology industries;
	•		effect of regulatory authorities on pricing of products;
	•		competitive products;
	•		financings;
	•		sales or the possibility of sales of our common stock;
	•		our results of operations and financial condition;
	•		proprietary rights and related litigation;
	•		public concern as to the safety or commercial value of our products; and
	•		general economic conditions.

     These uncertainties may adversely affect the market price of our common stock. Furthermore, the stock market has experienced significant price and volume fluctuation unrelated to the operating performance of particular companies. These market fluctuations may also adversely affect the market price of our common stock.

Delaware law and provisions in our certificate of incorporation, bylaws and stockholder rights plan may prevent or discourage third parties or stockholders from attempting to replace the management of the Company.

     As a Delaware company, we are subject to Section 203 of the Delaware General Corporation Law, as amended, which is a statutory provision intended to discourage certain takeover attempts that are not approved by the board of directors. Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder subject to certain exceptions.

     Our certificate of incorporation and bylaws include provisions that also may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable. Our board of directors is divided into three classes with staggered three-year terms, which makes it more difficult for an acquiror to change the overall composition of the board in a short period of time. The affirmative vote of at least two-thirds of our outstanding shares is required to approve a merger, a sale or lease of all or substantially all of our assets, certain other business combinations or dissolution or liquidation, and an affirmative vote of two-thirds of our outstanding shares is required to amend or repeal any provision in our certificate of incorporation relating to our directors and officers as well as certain other provisions in our certificate of incorporation. Additionally, our certificate of incorporation authorizes our board of directors to issue preferred stock in one or more series with the rights, obligations and preferences of each series to be determined by our board without stockholder approval.

     To the same potential effect, we have a stockholder rights plan designed to prevent a potential acquirer from gaining control of us without adequately compensating our shareholders and to protect us from coercive takeover attempts. The rights will become exercisable only if any person or group of affiliated

persons beneficially acquires 15% or more of our common stock. Under certain circumstances, each holder of a right (other than the person or group who acquired 15% or more of our common stock) is entitled to purchase a defined number of shares of our common stock at 50% of its market price at the time that the right becomes exercisable.

     Our staggered board, the super-majority voting provisions, the potential issuance of preferred stock and our stockholder rights plan may have the effect of delaying, preventing or discouraging third parties or stockholders from attempting to replace our management.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     We own a 15,700 square foot commercial building situated on approximately 14 acres of land in Exeter, New Hampshire that serves as our corporate headquarters and research and development laboratory. It is located approximately 45 minutes north of Boston, Massachusetts.

     We also own a 108,000 square foot facility in Zaragoza, Spain, which accommodates our pharmaceutical products manufacturing plant, warehouse, research and development laboratory and office space.

     We own an 11,000 square foot active pharmaceutical ingredients manufacturing facility in Zaragoza, Spain and during 2005 we purchased adjacent parcels of land totaling approximately four acres for expansion of our active pharmaceutical ingredients manufacturing operation. The API manufacturing facility is located in an industrial park and we have acquired sufficient acreage adjacent thereto to accommodate future expansion.

     We lease a 13,000 square foot facility in San Sebastian de los Reyes, Spain, an area northwest of Madrid, which houses the administrative offices for our Spanish and European operations. The lease for this facility expires in 2008.

     We believe that each of our facilities has sufficient space for our current needs and our contemplated expansion in the near future. Our manufacturing facilities are currently operating at approximately 70% of capacity, if operating for two shifts per day, five days per week.

Item 3. Legal Proceedings

     In October 2007, we were notified that a legal proceeding had been commenced against our subsidiaries, Laboratorios Belmac, S.A., Laboratorios Davur, S.L. and Laboratorios Rimafar, S.L. by Wyeth requesting an order requiring our subsidiaries to not manufacture or launch their venlaflaxine products. The case was brought in the 4th Commercial Court of the City of Madrid. After an initial hearing the court rejected Wyeth’s request for an interim injunction. The underlying proceedings are still pending.

     In September 2007, we were notified that a legal proceeding had been commenced against our subsidiaries, Laboratorios Davur, S.L. and Laboratorios Rimafar, S.L., jointly with other manufacturers,

by Merck & Co. Inc. and its Spanish subsidiary Merck Sharp & Dohme de España, S.A. requesting an order requiring our subsidiaries to not manufacture or launch certain of their alendronate products (70mg weekly). In October 2007, we filed a counterclaim against Merck seeking the revocation in Spain of European Patent 1.175.904. The case was brought in the 6th Commercial Court of the City of Barcelona and is currently pending.

     In June 2007, we were notified that a legal proceeding had been commenced against our subsidiary, Laboratorios Belmac S.A., jointly with three other Spanish manufacturers, by Warner-Lambert Company requesting an order requiring Belmac not to manufacture or launch their atorvastatin products. This patent infringement action is based on the Spanish counterpart of European patent EP 247.633 which expired on May 29, 2007. In January 2008, the court rejected the action filed by Warner-Lambert and awarded legal costs to Belmac.

     In January 2005, we were notified that a legal proceeding had been commenced against our subsidiary, Laboratorios Davur S.L., by Pfizer Inc. and its Spanish subsidiary Pfizer, S.A. requesting an order requiring Davur to not manufacture or market its amlodipine products. The case was brought against Davur in the 3rd Commercial Court of the City of Barcelona. After an initial hearing the court imposed an interim injunction, preventing Davur from launching its amlodipine products. However, upon appeal, the court lifted the requested injunction and awarded Davur with court costs and legal fees. Pfizer has appealed the judgment. A decision on the appeal is expected in mid 2008.

     In December 2004, our subsidiary, Laboratorios Belmac, S.A., jointly with three other Spanish manufacturers, initiated a legal proceeding in the 2nd Commercial Court of the City of Barcelona against Warner-Lambert Company requesting the partial revocation in Spain of European patent EP 409.281 concerning atorvastatin calcium. In turn, Warner-Lambert Company counterclaimed against the plaintiffs for alleged infringement of the patent in suit. The court ruled in favour of Belmac in a decision rendered on September 26, 2006, and Warner-Lambert Company has appealed the judgment. A decision on the appeal is expected in the beginning of 2008.

     From time to time we are a party to various other legal actions that arise in the ordinary course of business. We do not expect that resolution of these matters will have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.

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

     None.

Part II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Our common stock began trading on the New York Stock Exchange on May 12, 2004 and on NYSE Arca (formerly the Pacific Exchange) on March 27, 1996. We voluntarily withdrew our securities from listing with NYSE Arca in December of 2006. The withdrawal eliminates duplicative administrative requirements inherent in dual listings and avoids substantial new listing fees following the NYSE Group’s recent merger with Archipelago Holdings, the parent company of NYSE Arca. The following table sets forth, for the periods indicated, the range of quarterly high and low sales prices for our common stock as reported on the New York Stock Exchange under the symbol “BNT”.

		High				Low
Fiscal Year Ended December 31, 2006
First Quarter		$	22.90			$	12.78
Second Quarter			14.19				9.43
Third Quarter			13.07				8.78
Fourth Quarter			12.90				8.82
Fiscal Year Ended December 31, 2007
First Quarter			10.34				7.51
Second Quarter			13.54				8.10
Third Quarter			13.00				9.05
Fourth Quarter			15.70				11.99
Fiscal Year Ending December 31, 2008
First Quarter (through March 4, 2008)			15.89				13.17

     As of March 4, 2008 there were 948 holders of record of our common stock, which does not reflect stockholders whose shares are held in street name.

Dividends

     We have never paid cash dividends on our common stock and we do not intend to pay dividends in the foreseeable future. We intend to retain future earnings in order to finance the growth and development of our business.

Item 6. Selected Financial Data

     The following sets forth the selected Consolidated Income Statement data for the years ended December 31, 2003, 2004, 2005, 2006 and 2007 and Consolidated Balance Sheet data as of December 31, 2003, 2004, 2005, 2006 and 2007, all of which are derived from our audited Consolidated Financial Statements and related notes. The following Consolidated Income Statement data for the years ended December 31, 2005, 2006 and 2007 and Consolidated Balance Sheet data as of December 31, 2006 and 2007 should be read together with our Consolidated Financial Statements and related notes appearing elsewhere in Item 15 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. The Consolidated Income Statement data for the years ended December 31, 2003 and 2004 and the Consolidated Balance Sheet data as of December 31, 2003,

2004 and 2005 are derived from our audited Consolidated Financial Statements and related notes not included in this Annual Report on Form 10-K.

Consolidated Income Statement Data

		For the Year Ended December 31,
(in thousands, except per share data)		2003				2004(a)				2005(b)				2006(c)(d)				2007(e)
Total revenues		$	64,676			$	73,393			$	97,730			$	109,471			$	124,687
Cost of net product sales			26,399				34,893				46,161				49,850				64,010
Gross profit			38,277				38,500				51,569				59,621				60,677
Operating expenses			26,848				29,805				35,903				54,222				53,275
Gain (loss) on sale of drug licenses			—				—				—				38				(111	)
Other income (expenses)			91				1,800				729				619				928
Income before income taxes			11,520				10,495				16,395				6,056				8,219
Provision for income taxes			5,423				4,805				5,476				5,082				5,534
Net income		$	6,097			$	5,690			$	10,919			$	974			$	2,685
Net income per common share — basic		$	0.34			$	0.27			$	0.51			$	0.04			$	0.12
Net income per common share — diluted		$	0.28			$	0.25			$	0.48			$	0.04			$	0.12
Weighted average common shares outstanding — basic			17,997				20,901				21,558				22,141				22,339
Weighted average common shares outstanding — diluted			21,637				22,627				22,929				23,068				22,957

Consolidated Balance Sheet Data

		December 31,
(in thousands)		2003				2004				2005				2006				2007(a)
Working capital		$	46,181			$	47,114			$	46,397			$	40,303			$	61,597
Current assets		$	66,899			$	74,710			$	75,077			$	67,690			$	94,680
Non-current assets			33,564				47,220				49,143				66,666				78,416
Total assets		$	100,463			$	121,930			$	124,220			$	134,356			$	173,096
Current liabilities		$	20,718			$	27,596			$	28,680			$	27,387			$	33,083
Long-term debt			369				349				—				—				15,595
Other non-current liabilities			3,211				4,328				3,951				6,638				8,446
Total liabilities		$	24,298			$	32,273			$	32,631			$	34,025			$	57,124
Stockholders’ equity		$	76,165			$	89,657			$	91,589			$	100,331			$	115,972

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes included in Item 8 of this report. Except for the historical information contained herein the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein.

     Words such as “expect”, “anticipate”, “intend”, “believe”, “will”, “may”, “could”, “should”, “project”, “estimate” and similar words are used to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, including, but not limited to, the statements in “Business”, “Legal Proceedings”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” and other sections in this report, are not based on historical facts, but rather reflect our current expectations concerning future results and events. The forward-looking statements include statements about our strategy, the prospects of our technologies and research and development efforts, our plans to enter into more collaborative relationships, our prospects for revenue growth outside of Spain, anticipated financial results and the prospects for growth of our business. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements, including the risks outlined in the Risk Factors section and elsewhere in this report. You are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as may be required by law.

Planned Spin-off

     On October 23, 2007 the Company announced a plan to spin-off its drug delivery business. This transaction is subject to a number of conditions. Management expects that shares of the new specialty pharmaceutical drug delivery company, CPEX Pharmaceuticals, Inc. will be distributed to Bentley stockholders by means of a stock dividend. On the record date, which has not yet been set, each Bentley stockholder will be entitled to receive shares of CPEX in connection with the spin-off of the drug delivery business. The spin-off would result in CPEX operating as an independent entity with publicly traded common stock. Bentley would not have any ownership interest in CPEX subsequent to the spin-off.

     In connection with the spin-off, CPEX and Bentley expect to enter into a series of agreements, including a separation and distribution agreement, a transition services agreement, an employee matters agreement and a tax allocation agreement. Consummation of the spin-off is subject to several conditions, including final approval by the Bentley Board of Directors, approval for listing of CPEX common stock on a national securities exchange, and the effectiveness of the Form 10 filed with the Securities and Exchange Commission for the registration of the securities of CPEX. Approval by Bentley’s stockholders is not required as a condition to the consummation of the proposed spin-off.

     The Company has incurred and is expected to continue to incur legal, tax and other strategic consulting costs specifically associated with the planned spin-off. These costs totaled $2,020,000 for the year ended December 31, 2007 and have been reported as separation costs within operating expenses in the Company’s Consolidated Income Statements.

Change in Estimate

     As discussed in “Critical Accounting Policies and Estimates” set forth below and explained in Note 1 to the Notes to Consolidated Financial Statements under “Revenue recognition”, during the quarter ended June 30, 2006, we recorded an increase in royalty revenues of approximately $479,000, or $0.02 per share, related to sales of Testim. In light of sufficient historical return experience on sales of Testim we were able to reasonably estimate future product returns and record those revenues upon shipment as opposed to when units were dispensed through patient prescriptions. This increase is reported in Licensing and collaboration revenues for the year ended December 31, 2006.

Litigation Settlement

     In 2006, we settled all outstanding litigation with Ethypharm S.A. Spain and Ethypharm S.A. France (together, “Ethypharm”). As a result of the settlement, we recorded a $7,546,000 charge in 2006 representing the present value of the $8,000,000 settlement, discounted at a rate of 4.72%. In accordance with the payment terms of the settlement, $4,000,000 was paid in the fourth quarter of 2006, $1,000,000 was paid in the fourth quarter of 2007 and the three remaining annual payments of $1,000,000 will be paid in each of the fourth quarters of 2008, 2009 and 2010. We incurred defense costs of approximately $3,368,000 and $593,000 related to this litigation in the years ended December 31, 2006 and 2005, respectively. The litigation related charges are recorded in litigation settlement expenses on the Company’s Consolidated Income Statements.

Overview

     We are an international specialty pharmaceutical company, headquartered in the U.S., 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.

Specialty Generic Pharmaceuticals

     Our pharmaceutical product sales and licensing activities are based primarily in Spain, where we have a significant commercial presence and manufacture and market approximately 200 product presentations (stock keeping units or SKUs) in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. In 2007, approximately 24% of our product revenues were derived from three of our top product lines. 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 several countries in the European Union. As of December 31, 2007 approximately 29% of our net product sales were derived from sales outside of Spain. Our generic simvastatin product, which is manufactured at our FDA approved finished 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 net charges of approximately $425,000 to cost of net product sales for inventory write-downs and obsolescence reserves, which reduced the carrying value of these inventories to zero at December 31, 2007. As a result of these market conditions and adjustments, we

have also reassessed the carrying value of our U.S. simvastatin drug license at December 31, 2007. Due to the inability to generate net profits on these products and the lack of additional orders, we have recorded an impairment charge of $949,000 to research and development expenses to reduce the carrying value of this drug license to zero at December 31, 2007.

     While the pricing of our pharmaceutical products is influenced by market forces (size of the market, number of competitors, etc.), our pricing in Spain and other countries is also subject to governmental price controls. 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 reimburses 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 substantially offset the impact of the reduced selling prices on our net product sales, our gross margins have decreased from 54% in the year ended December 31, 2006 to 49% in the year ended December 31, 2007 (excluding inventory write-downs associated with our U.S. generic simvastatin discussed above). The products most impacted by the price reductions are two of our top selling product lines, omeprazole and simvastatin. Despite increased sales volumes, our simvastatin and omeprazole revenues decreased by 21% and 7%, respectively, when compared to the prior year. We have implemented strategies to mitigate lower selling prices, including 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 sales organization and our strategic alliances. We launched six generic products in 2007 which added approximately $614,000 to our revenues in 2007. 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 through our subsidiary, Bentley API. 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 delivery of insulin to diabetic patients intranasally.

Research and Development Focus

     In 2004, we concluded a Phase IIA study for Nasulin in Type 1 diabetic patients using our CPE-215 technology. We reported the results of that trial in an abstract titled “Intranasal Insulin Administration in Type 1 Diabetic Patients Utilizing CPE-215 Technology” at the American Diabetes Association 65th Scientific Sessions, September 10-14, 2005, in San Diego, California. 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 in healthy non-diabetic volunteers, diabetic patients and advanced our Phase IIA studies in the U.S. in Type 1 diabetic patients. In the first quarter of 2007, we completed preparations for a Phase II study in India in Type 2 diabetic patients, 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 67th Scientific Sessions in Chicago, Illinois in June 2007. We expect the U.S. development and clinical programs for Nasulin to continue and expand domestically and internationally. We expect to incur increased costs from the advancement of our clinical programs and from continued product formulation and testing efforts.

Effect of Foreign Currency Fluctuations

     A substantial amount of our business is conducted in Europe and is therefore influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, particularly the Euro. An increase in the weighted average value of the Euro in relation to the U.S. Dollar in 2007 compared to 2006, had the following impact on the results of our operations when reported in U.S. Dollars: (1) total revenues were increased by approximately $9,533,000, (2) gross profit was increased by approximately $4,247,000, (3) operating expenses increased by approximately $2,799,000, (4) provision for income taxes was increased by approximately $470,000, which resulted in (5) an increase to net income of approximately $978,000.

Consolidated Results of Operations

Fiscal Year Ended December 31, 2007 Compared To Fiscal Year Ended December 31, 2006

Revenues

																		Change
(in thousands)		2007				%				2006				%				$				%
Specialty Generics
Net product sales		$	112,999				91	%		$	100,590				92	%		$	12,409				12	%
Licensing and collaboration revenues			561				*				515				*				46				9	%
			113,560				91	%			101,105				92	%			12,455				12	%
Drug Delivery
Licensing and collaboration revenues			11,127				9	%			8,366				8	%			2,761				33	%
Total revenues		$	124,687				100	%		$	109,471				100	%		$	15,216				14	%

     Total revenues for the year ended December 31, 2007 increased 14% from the year ended December 31, 2006. Our current year growth was driven primarily by increased net product sales in Spain, increased sales to licensees and others and increased Testim royalties.

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

     For the year ended December 31, 2007:

		Revenues Within Spain												Revenues
(in thousands)		Branded												Outside of								% of Total
Product Line		Generics				Generics				Other				Spain				Total				Revenues
Omeprazole		$	1,912			$	15,818			$	—			$	—			$	17,730				14	%
Enalapril			5,176				1,522				—				—				6,698				5	%
Simvastatin			1,022				4,866				—				—				5,888				5	%
Paroxetine			1,521				3,424				—				—				4,945				4	%
Lansoprazole			3,610				1,265				—				—				4,875				4	%
All other products			12,788				13,330				466				3,409				29,993				24	%
Sales to licensees and others			—				—				13,925				28,945				42,870				35	%
Licensing and collaborations			—				—				561				11,127				11,688				9	%
Total Revenues		$	26,029			$	40,225			$	14,952			$	43,481			$	124,687				100	%
% of 2007 Revenues			21	%			32	%			12	%			35	%			100	%

     For the year ended December 31, 2006:

		Revenues Within Spain												Revenues
(in thousands)		Branded												Outside of								% of Total
Product Line		Generics				Generics				Other				Spain				Total				Revenues
Omeprazole		$	2,679			$	16,451			$	—			$	—			$	19,130				18	%
Enalapril			4,826				1,824				—				—				6,650				6	%
Simvastatin			1,851				5,620				—				—				7,471				7	%
Paroxetine			1,449				3,045				—				—				4,494				4	%
Lansoprazole			2,689				852				—				—				3,541				3	%
All other products			10,628				11,263				795				1,763				24,449				22	%
Sales to licensees and others			—				—				12,741				22,114				34,855				32	%
Licensing and collaborations			—				—				515				8,366				8,881				8	%
Total Revenues		$	24,122			$	39,055			$	14,051			$	32,243			$	109,471				100	%
% of 2006 Revenues			22	%			36	%			13	%			29	%			100	%

     Spanish Operations. Net product sales increased by $12,409,000, or 12%, compared to the prior year. Net product sales increased by 3% when expressed in constant currency. In addition to fluctuations in foreign currency rates, we experienced a 23% increase in our sales to licensees and others compared to the prior year. Additionally, all other products combined to contribute an additional $5,544,000 to 2007 revenues over 2006.

     Branded Generic Pharmaceutical Products

																		Change
(in thousands)		2007				%				2006				%				$				%
Branded Generic Product Sales:
Enalapril		$	5,176				20	%		$	4,826				20	%		$	350				7	%
Codeisan			3,921				15	%			3,001				12	%			920				31	%
Lansoprazole			3,610				14	%			2,689				11	%			921				34	%
Ibuprofen			2,386				9	%			1,492				6	%			894				60	%
Omeprazole			1,912				7	%			2,679				11	%			(767	)			(29	)%
All other branded products			9,024				35	%			9,435				40	%			(411	)			(4	)%
Total branded generic sales		$	26,029				100	%		$	24,122				100	%		$	1,907				8	%

     Sales of our branded generic pharmaceutical products accounted for 21% of total revenues during 2007 and increased 8%, or approximately $1,907,000 over 2006. Codeisan and lansoprazole, two of our top-selling branded generic products, accounted for the majority of the increase in our branded generic sales from the prior year and represent 29% of our 2007 branded generic sales. Included in all other branded generic products are sales of our simvastatin which decreased 45% or approximately $830,000 as a result of the price reductions in the current year.

     Generic Pharmaceutical Products

																		Change
(in thousands)		2007				%				2006				%				$				%
Generic Product Sales:
Omeprazole		$	15,818				39	%		$	16,451				42	%		$	(633	)			(4	)%
Simvastatin			4,866				12	%			5,620				14	%			(754	)			(13	)%
Paroxetine			3,424				9	%			3,045				8	%			379				12	%
Trimetazidine			2,804				7	%			2,253				6	%			551				24	%
Pentoxifylline			2,799				7	%			2,571				7	%			228				9	%
All other generic products			10,514				26	%			9,115				23	%			1,399				15	%
Total generic sales		$	40,225				100	%		$	39,055				100	%		$	1,170				3	%

     Sales of our generic pharmaceutical products accounted for 32% of 2007 total revenues and increased 3%, or approximately $1,170,000 over 2006 generic sales. Six generic product launches in 2007 (included in “All other generic products” above) contributed approximately $614,000 to our 2007 generic sales and accounted for 52% of the generic sales growth from 2006.

     Sales to Licensees and Others

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	42,870			$	34,855			$	8,015				23	%

     Sales to licensees and others increased by $8,015,000 or 23% compared to 2006. The increased sales are due to our increased focus on geographic expansion and growth. Sales under our license agreements are generally larger order quantities which ship at less frequent intervals than our net product sales within Spain. As a result, a delay in the timing of such shipments could have a significant affect on recorded revenues from period to period.

     Licensing and Collaboration Revenues

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	561			$	515			$	46				9	%
Drug delivery			11,127				8,366				2,761				33	%
Total		$	11,688			$	8,881			$	2,807				32	%

     Licensing and collaboration revenues now account for approximately 9% of total revenues and increased by approximately $2,807,000, or approximately 32%, in 2007. These revenues in 2007 included royalties totaling $11,121,000 from sales of Testim. During the quarter ended June 30, 2006, we recorded an increase in royalty revenues of approximately $479,000, or $0.02 per share, due to a change in estimate which, based on historical experience, allowed it to reasonably estimate future product returns on sales of Testim. Testim is currently reported to have captured approximately 22% of all testosterone

replacement prescriptions in the market. Also included in licensing and collaboration revenues are revenues of approximately $561,000 related to specialty generic product licensing activities in Europe in 2007 compared to $515,000 in 2006.

     Gross Profit

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	49,550			$	51,255			$	(1,705	)			(3	)%
Drug delivery			11,127				8,366				2,761				33	%
Total		$	60,677			$	59,621			$	1,056				2	%

     Gross profit increased by approximately $1,056,000, or 2%, in 2007, when compared to 2006. Gross profit decreased $3,191,000 or 5.4% when expressed in constant currency. Gross margins on net product sales decreased from 50% in 2006 to 43% in 2007 primarily resulting from the 2007 price reductions. We expect our margins to gradually improve as we continue to implement our strategies to mitigate the price reductions.

     Selling and Marketing Expenses

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	18,523			$	16,153			$	2,370				15	%
Drug delivery			—				—				—				—
Total		$	18,523			$	16,153			$	2,370				15	%

     Selling and marketing expenses increased by approximately $2,370,000, or 15% in 2007, when compared to 2006 primarily due to fluctuations in foreign currency rates. Selling and marketing expenses remain consistent as a percentage of net product sales at 16% for 2007 and 2006. Selling and marketing expenses, such as commissions, increased as a result of increased sales volume in the year.

     General and Administrative Expenses

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	9,558			$	7,391			$	2,167				29	%
Drug delivery			7,515				7,410				105				1	%
Total		$	17,073			$	14,801			$	2,272				15	%

     General and administrative expenses for 2007 increased by $2,272,000 or 15% over the prior year. As a percentage of total revenues, general and administrative expenses were consistent at 14% for 2007 and 2006. General and administrative expenses also include intersegment allocations between the drug delivery and specialty generics businesses resulting from intercompany agreements. However, except in the presentation of our segment information, these allocations do not effect our consolidated results of operations. General and administrative expenses in 2007 also include approximately $1,547,000 of non-cash, stock-based compensation expense compared to $1,126,000 of such expense recorded in 2006, primarily related to our drug delivery business.

     Research and Development Expenses

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	3,026			$	1,777			$	1,249				70	%
Drug delivery			10,574				8,682				1,892				22	%
Total		$	13,600			$	10,459			$	3,141				30	%

     Research and development expenses increased 30% when compared to 2006. The increase related to our specialty generics business includes impairment charges totaling $1,433,000 associated with our U.S. simvastatin drug license and other U.S. generic drug projects. The increase related to our drug delivery business resulted from continued investments and advancements in our research and development programs for our drug delivery technologies, primarily Nasulin^TM, our intranasal insulin product. We plan to incur increased costs as we continue to conduct our clinical trials. Research and development expenses in 2007 also included approximately $1,075,000 of non-cash, stock-based compensation expense compared to $664,000 of such expense recorded in 2006, primarily related to our drug delivery business.

     Litigation Settlement Expenses

										Change
(in thousands)		2007				2006				$				%
Specialty generics		$	—			$	10,914			$	(10,914	)			*