10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

or

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

For the transition period from                   to                  

Commission File Number 000-19119

Cephalon, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	23-2484489
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
41 Moores Road
P.O. Box 4011
Frazer, Pennsylvania	19355
(Address of Principal Executive Offices)	(Zip Code)

(610) 344-0200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

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

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

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

Large accelerated filer x	Accelerated filer o
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 Exchange Act). Yes o  No x.

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

Class	Outstanding as of April 27, 2011
Common Stock, par value $.01	76,217,384 Shares

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements		ii
PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Operations — Three months ended March 31, 2011 and 2010	1
	Consolidated Balance Sheets — March 31, 2011 and December 31, 2010	2
	Consolidated Statement of Changes in Equity — Three months ended March 31, 2011 and 2010	3
	Consolidated Statements of Cash Flows — Three months ended March 31, 2011 and 2010	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II — OTHER INFORMATION		38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 5.	Other Information	52
Item 6.	Exhibits	53
SIGNATURES		54

i

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements contained in this report or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission and are not statements of historical fact.  You can identify these statements by the fact that they do not relate strictly to historical or current facts.  Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development.  In particular, these forward-looking statements include, among others, statements about:

·      the proposed acquisition of us by Teva Pharmaceutical Industries Ltd.;

·our dependence on sales of PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil) Tablets [C-IV] in the United States and the market prospects and future marketing efforts for PROVIGIL, NUVIGIL, FENTORA® (fentanyl buccal tablet) [C-II], AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) and TREANDA® (bendamustine hydrochloride);

·any potential approval of our product candidates, including with respect to any expanded indications for TREANDA, NUVIGIL and/or FENTORA;

·our anticipated scientific progress in our research programs and our development of potential pharmaceutical products including our ongoing or planned clinical trials, the timing and costs of such trials and the likelihood or timing of revenues from these products, if any;

·our ability to adequately protect our technology and enforce our intellectual property rights and the future expiration of patent and/or regulatory exclusivity on certain of our products;

·our ability to comply fully with the terms of our settlement agreements (including our Corporate Integrity Agreement) with the U.S. Attorney’s Office (“USAO”), the U.S. Department of Justice (“DOJ”), the Office of the Inspector General of the Department of Health and Human Services (“OIG”) and other federal government entities, the Offices of the Attorneys General of Connecticut and Massachusetts and the various states;

·our ongoing litigation matters, including the patent infringement lawsuits and other proceedings described in Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference;

·our future cash flow, our ability to service or repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected level of operations, acquisition activity and general economic conditions; and

·other statements regarding matters that are not historical facts or statements of current condition.

Any or all of our forward-looking statements in this report and in the documents we have referred you to may turn out to be wrong.  They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.  Therefore, you should not place undue reliance on any such forward-looking statements.  The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, among others:

·any delays or unexpected events related to the proposed acquisition of Cephalon by Teva Pharmaceutical Industries Ltd.;

·the acceptance of our products by physicians and patients in the marketplace, particularly with respect to our recently launched products;

·our ability to obtain regulatory approvals to sell our product candidates, including any additional future indications for TREANDA, FENTORA and NUVIGIL, and to launch such products or indications successfully;

·scientific or regulatory setbacks with respect to research programs, clinical trials, manufacturing activities

ii

and/or our existing products;

·the timing and unpredictability of regulatory approvals;

·unanticipated cash requirements to support current operations, expand our business or incur capital expenditures;

·a finding that our patents are invalid or unenforceable or that generic versions of our marketed products do not infringe our patents or the “at risk” launch of generic versions of our products;

·the loss of key management or scientific personnel;

·the activities of our competitors in the industry;

·regulatory, legal or other setbacks or delays with respect to the settlement agreements with the USAO, the DOJ, the OIG and other federal entities, the state settlement agreements and Corporate Integrity Agreement related thereto, the settlement agreements with the Offices of the Attorneys General of Connecticut and Massachusetts, our settlements of the PROVIGIL patent litigation and the ongoing litigation related to such settlements, and the patent infringement lawsuits and other proceedings described in Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q which is incorporated herein by reference;

·our ability to integrate successfully technologies, products and businesses we acquire (or have a right to acquire) and realize the expected benefits from those acquisitions, including our recent acquisitions of Mepha GmbH, Ception Therapeutics, Inc. and BioAssets Development Corporation, Inc., our option to acquire Alba Therapeutics Corporation, our second quarter 2011 acquisition of Gemin X Pharmaceuticals, Inc., our equity position in, and possible acquisition by takeover bid of, ChemGenex Pharmaceuticals Limited and our strategic alliance with Mesoblast Ltd.;

·adverse decisions of government entities and third-party payers regarding reimbursement for our products;

·unanticipated conversion of our convertible notes by our note holders;

·market conditions generally or in the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both;

·the effect of volatility of currency exchange rates;

·enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to us or our interests; and

·pending, threatened or future legal proceedings, including in connection with the unsolicited acquisition proposal and consent solicitation initiated by Valeant Pharmaceuticals International, Inc. and the signing of a merger agreement with Teva Pharmaceutical Industries Ltd.

We do not intend to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We discuss in more detail the risks that we anticipate in Part II, Item 1A of this Quarterly Report on Form 10-Q. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

iii

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)

	Three Months Ended
	March 31,
	2011			2010
REVENUES:
Net sales	$	736,002		$	576,681
Other revenues	9,111			19,904
	745,113			596,585
COSTS AND EXPENSES:
Cost of sales	157,983			105,043
Research and development	122,313			105,377
Selling, general and administrative	250,686			204,641
Change in fair value of contingent consideration	1,801			—
Restructuring charges	858			744
Acquired in-process research and development	30,000			—
Impairment and (gain) loss on sale of assets	5,648			—
	569,289			415,805
INCOME FROM OPERATIONS	175,824			180,780
OTHER INCOME (EXPENSE):
Interest income	1,017			1,930
Interest expense	(24,207		)	(26,791		)
Change in fair value of investments	164,735			—
Other income (expense), net	(3,028		)	(7,271		)
	138,517			(32,132		)
INCOME BEFORE INCOME TAXES	314,341			148,648
INCOME TAX EXPENSE	102,731			48,311
NET INCOME	211,610			100,337
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST	(522		)	10,228
NET INCOME ATTRIBUTABLE TO CEPHALON, INC.	$	211,088		$	110,565
BASIC INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.	$	2.79		$	1.47
DILUTED INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.	$	2.64		$	1.35
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ATTRIBUTABLE TO CEPHALON, INC.	75,743			74,990
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION ATTRIBUTABLE TO CEPHALON, INC.	79,836			81,811

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

1

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	March 31,			December 31,
	2011^			2010
CURRENT ASSETS:
Cash and cash equivalents	$	1,160,657		$	1,160,239
Receivables, net	506,437			431,333
Inventory, net	293,905			291,360
Deferred tax assets, net	211,523			213,798
Other current assets	72,360			54,845
Total current assets	2,244,882			2,151,575
INVESTMENTS ($471,254 and $155,808 at fair value in 2011 and 2010, respectively)	493,509			168,494
PROPERTY AND EQUIPMENT, net	499,672			502,856
GOODWILL	836,636			822,071
INTANGIBLE ASSETS, net	1,248,622			1,212,387
DEBT ISSUANCE COSTS	13,101			14,196
OTHER ASSETS	24,254			20,254
	$	5,360,676		$	4,891,833
CURRENT LIABILITIES:
Current portion of long-term debt, net	$	663,684		$	651,997
Accounts payable	119,777			104,477
Accrued expenses	550,443			460,141
Total current liabilities	1,333,904			1,216,615
LONG-TERM DEBT	398,475			391,416
DEFERRED TAX LIABILITIES, net	182,100			172,589
OTHER LIABILITIES	258,952			273,438
Total liabilities	2,173,431			2,054,058
COMMITMENTS AND CONTINGENCIES	—			—
REDEEMABLE EQUITY	161,969			170,183
EQUITY:
Cephalon Stockholders’ Equity
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding	—			—
Common stock, $0.01 par value, 400,000,000 shares authorized, 79,297,764 and 79,091,532 shares issued, and 75,928,068 and 75,722,274 shares outstanding	793			791
Additional paid-in capital	2,477,973			2,428,450
Treasury stock, at cost, 3,369,696 and 3,369,258 shares	(225,874		)	(225,870		)
Accumulated earnings	458,174			247,086
Accumulated other comprehensive income	246,528			182,975
Total Cephalon stockholders’ equity	2,957,594			2,633,432
Noncontrolling Interest	67,682			34,160
Total equity	3,025,276			2,667,592
	$	5,360,676		$	4,891,833

^Amounts include assets and liabilities of our variable interest entities (VIEs).  Our interests and obligations with respect to VIEs’ assets and liabilities are limited to those accorded to us in our agreements with our VIEs. See Note 2 to these consolidated financial statements for amounts.

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

2

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share data)

(Unaudited)

																Total
													Accumulated			Stockholders
				Additional									Other			Equity
	Common Stock			Paid-in		Treasury Stock				Accumulated			Comprehensive			Attributable			Noncontrolling
	Shares	Amount		Capital		Shares	Amount			Deficit			Income			to Cephalon			Interest			Total
BALANCE, JANUARY 1, 2010	78,002,764	$	780	$	2,534,070	3,085,844	$	(208,427	)	$	(178,659	)	$	114,194		$	2,261,958		$	216,115		$	2,478,073
Net income										110,565						110,565			(10,228		)	100,337
Foreign currency translation losses													(29,034		)	(29,034		)				(29,034		)
Prior service costs and gains on retirement-related plans													(25		)	(25		)				(25		)
Comprehensive income																81,506			(10,228		)	71,278
Stock options exercised	266,888	3		13,801												13,804						13,804
Tax benefit from equity compensation				7												7						7
Stock-based compensation expense	1,250	—		8,830												8,830						8,830
Treasury stock acquired						502	(33		)							(33		)				(33		)
Change in redeemable equity associated with convertible debt				10,745												10,745						10,745
Other																—			104			104
BALANCE, March 31, 2010	78,270,902	$	783	$	2,567,453	3,086,346	$	(208,460	)	$	(68,094	)	$	85,135		$	2,376,817		$	205,991		$	2,582,808
																Total
										Accumulated			Accumulated			Stockholders
				Additional						(Deficit)/			Other			Equity
	Common Stock			Paid-in		Treasury Stock				Retained			Comprehensive			Attributable			Noncontrolling
	Shares	Amount		Capital		Shares	Amount			Earnings			Income			to Cephalon			Interest			Total
BALANCE, JANUARY 1, 2011	79,091,532	$	791	$	2,428,450	3,369,258	$	(225,870	)	$	247,086		$	182,975		$	2,633,432		$	34,160		$	2,667,592
Net income										211,088						211,088			522			211,610
Foreign currency translation gains													63,577			63,577						63,577
Gains or losses associated with pension benefits and prior service costs on retirement-related plans													(24		)	(24		)				(24		)
Comprehensive income																274,641			522			275,163
Stock options exercised	200,284	2		11,743												11,745						11,745
Tax benefit from equity compensation				1,262												1,262						1,262
Stock-based compensation expense	—	—		5,870												5,870						5,870
Treasury stock acquired						438	(4		)							(4		)				(4		)
Stock issued for employee stock purchase plan	5,948	—		349												349						349
Change in redeemable equity associated with convertible debt				8,214												8,214						8,214
Finalization of acquisition of Ception Therapeutics, Inc. noncontrolling interest				22,085												22,085						22,085
Alba Therapeutics, Inc. noncontrolling interest upon consolidation																—			33,000			33,000
BALANCE, March 31, 2011	79,297,764	$	793	$	2,477,973	3,369,696	$	(225,874	)	$	458,174		$	246,528		$	2,957,594		$	67,682		$	3,025,276

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

3

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	211,610		$	100,337
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit)	9,609			(1,045		)
Shortfall tax benefits from stock-based compensation	(243		)	—
Depreciation and amortization	47,469			48,353
Stock-based compensation expense	5,870			8,830
Amortization of debt discount and debt issuance costs	16,217			18,144
Changes in fair value of investments	(164,735		)	—
Loss on foreign exchange contracts	506			6,169
Impairment and (gain) loss on sale of assets	5,648			—
Other	(25		)	239
Changes in operating assets and liabilities, net of acquisitions:
Receivables	(64,528		)	20,308
Inventory	8,269			(2,383		)
Other assets	(16,795		)	(348		)
Accounts payable and accrued expenses	104,700			39,449
Other liabilities	(15,814		)	(4,498		)
Net cash provided by operating activities	147,758			233,555
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(11,671		)	(9,613		)
Proceeds from sale of property and equipment	818			—
Cash balance from consolidation of variable interest entity	15,513			—
Purchases of investments	(176,104		)	—
(Cash settlements of) proceeds from foreign exchange contracts	1,516			(6,155		)
Net cash used for investing activities	(169,928		)	(15,768		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under the employee stock purchase plan	349			—
Proceeds from exercises of common stock options	11,745			13,804
Windfall tax benefits from stock-based compensation	1,505			23
Acquisition of treasury stock	(4		)	(33		)
Payments on and retirements of long-term debt	(711		)	(2,577		)
Net cash provided by financing activities	12,884			11,217
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	9,704			(2,186		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	418			226,818
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,160,239			1,647,635
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,160,657		$	1,874,453

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

4

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”), which includes audited financial statements as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010. The results of our operations for any interim period are not necessarily indicative of the results of our operations for any other interim period or for a full year.

Recent Accounting Pronouncements

In October 2009, the FASB issued revised accounting guidance for multiple-deliverable arrangements.  The amendment requires that arrangement considerations be allocated at the inception of the arrangement to all deliverables using the relative selling price method and provides for expanded disclosures related to such arrangements.  It is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  We adopted this guidance for agreements entered into or materially modified after January 1, 2011.  The adoption did not have a significant impact on our consolidated financial statements; however, this guidance may impact the timing of revenue recognition related to certain arrangements entered into prospectively.

In March 2010, the FASB issued revised accounting guidance for milestone revenue recognition. The new guidance recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development transactions. It is effective on a prospective basis to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  We adopted this guidance beginning with agreements entered into after January 1, 2011. The adoption did not have a significant impact on our consolidated financial statements.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, imposes an annual fee on the pharmaceutical manufacturing industry for each calendar year beginning on or after January 1, 2011. In accordance with guidance issued by the FASB, we will estimate and record the liability for the fee in full upon the first qualifying sale each calendar year and will record a corresponding deferred cost to be amortized to operating expense using a straight-line method of allocation over the remaining calendar year.  We have recorded an estimated liability on our consolidated balance sheet of $10.4 million for the 2011 annual fee.  For the quarter ended March 31, 2011, we expensed  $2.6 million related to the 2011 annual fee.

2.   ACQUISITIONS AND TRANSACTIONS

ChemGenex Pharmaceuticals Limited

In 2010, we signed a convertible note subscription agreement with ChemGenex Pharmaceuticals Limited, an Australian-based oncology focused biopharmaceutical company (“ChemGenex”).  Under the terms of the agreement, we provided Australian Dollar (“A$”) $15 million to ChemGenex in return for a note that was convertible at A$0.50 per share.  The funding will support ChemGenex operations, including clinical activities to complete a planned New Drug Application submission to the U.S. Food and Drug Administration for omacetaxine for the treatment of chronic myelogenous leukemia (CML) patients who have failed two or more tyrosine kinase inhibitor (TKIs).  Separately, we also entered into option agreements with two of ChemGenex’s major shareholders, Stragen International N.V. and Merck Santé S.A.S.  Under those option agreements, we had the right to acquire up to an additional 19.9% of ChemGenex’s outstanding shares at A$0.70 per share before the later of March 31, 2011, and ten business days after receipt of certain clinical trial data and related analyses from ChemGenex (the “Exercise Period”).  At December 31, 2010 the notes were accounted for under the fair value option.  Additionally, the option to purchase the 19.9% of ChemGenex shares was a freestanding derivative and was marked to market.

5

The convertible notes and purchase option assets of $9.9 million and $0.9 million were included within long-term investments and other current assets on our December 31, 2010 consolidated balance sheet, respectively.

In March 2011, we provided notice to convert our convertible notes and elected to exercise our call options for $40.6 million resulting in the acquisition of a 27.6% interest of total issued share capital in ChemGenex.  The change in fair value of our investment in ChemGenex notes and the purchase options between December 31, 2010 and the conversion date was recorded as a change in fair value of investments within other income (expense) on the consolidated statement of operations.  At March 31, 2011, we believe our 27.6% interest in ChemGenex allows us to exercise significant influence over ChemGenex and therefore consider our investment to be an equity method investment.  We have elected to account for our equity method investment under the fair value option.  We measure the fair value of our investment utilizing the company’s publicly traded stock price. On March 31, 2011, the ChemGenex stock price was A$0.64 and we remeasured the fair value of our equity interest at $56.7 million.  We recorded the difference between the consideration paid for the options and fair value at the date of acquisition as a change in fair value of investments within other income (expense) on the statement of operations. Additionally, the change in fair value between the date of acquisition and the balance sheet date was also recorded as a change in fair value of investments within other income (expense) on the consolidated statement of operations.   At March 31, 2011 our investment in ChemGenex equity securities was a recorded as a long term investment.  The net impact of all changes in fair value for the investment in ChemGenex notes, purchase options and equity interest during the three months ended March 31, 2011 was a $5.1 million dollar gain.

In April 2011 we launched our takeover offer for ChemGenex (through our wholly owned subsidiary Cephalon CXS Holdings Pty ltd.).  The offer terms consist of the following:

·Payment of  A$0.70 cash for each ChemGenex Share, cum dividend rights

·An offer of A$0.02 cash for each ASX listed ChemGenex Option

The offer has the support of the ChemGenex independent directors and was recommended to ChemGenex shareholders in the absence of a superior offer. The offer is currently subject to certain basic conditions including a 90% minimum acceptance condition.  As of March 31, 2011 assuming a purchase price of A$0.70 per share, the total offer value (including the options and notes) was approximately $172 million (A$167 million).

Alba Therapeutics Corporation

In February 2011, we entered into agreements with Alba Therapeutics Corporation (“Alba”), a privately held biopharmaceutical company, providing us an option to purchase all of Alba’s assets relating to larazotide acetate, a tight junction modulator, progressing toward a Phase IIb clinical trial for the treatment of celiac disease. Under the terms of the option agreement, we paid Alba a $7 million upfront option payment and agreed to provide a credit facility of up to $22 million to fund Alba’s Phase IIb clinical trial expenses. We may exercise the option at any time prior to expiration of a specified period after receipt of the final study report for the Phase IIb clinical trial. If we exercise the option, we will purchase all of Alba’s assets relating to larazotide acetate for $15 million.  As of March 31, 2011, we have provided $10.0 million in loans to Alba under the credit facility.  Alba could receive additional payments related to clinical and regulatory milestones.

We have determined that, because of our rights under the Alba option agreement, effective February 9, 2011, Alba is a variable interest entity (“VIE”) for which we are the primary beneficiary.  As a result, as of February 9, 2011 we have included the financial condition and results of operations of Alba in our consolidated financial statements.  However, we do not have an equity interest in Alba and, therefore, we have allocated the Alba losses to noncontrolling interest in the consolidated statement of operations.   If the Alba option expires unexercised, we will deconsolidate Alba and recognize a loss of $7.0 million, equal to our investment in Alba, plus any outstanding borrowings under the credit facility.  It is also expected the loans under the $22 million credit facility will be forgiven in all cases with the exception of an event of default by Alba.  We have therefore, considered the $22 million in estimating the fair value of Alba.  Alba did not have a material impact on our revenues or earnings attributable to our Cephalon shareholders for the period ended March 31, 2011 or on a pro forma basis for the periods ended March 31, 2011 and 2010.  Alba is included in our U. S. operating segment.

The following summarizes the fair values and classification of Alba’s assets and liabilities included in our consolidated balance sheet as of February 9, 2011 and March 31, 2011:

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	February 9, 2011		March 31, 2011
Cash and cash equivalents	$	15,513	$	11,272
Other current assets	45		10
Property and equipment, net	—		10
Goodwill	2,122		2,122
Intangible assets	40,000		40,000
Current portion of long-term debt, net	3,560		3,560
Accounts payable	3,167		185
Accrued expenses	953		431
Noncontrolling interest	33,000		32,141

Alba’s intangible assets represent in process research and development related to larazotide acetate.

Although Alba is included in our consolidated financial statements, our interest in Alba’s assets are limited to that accorded to us in the agreements with Alba as described above.  Alba’s creditors have no recourse to the general credit of Cephalon.

SymBio Pharmaceuticals Limited

In February 2011, Cephalon entered into a Stock Investment Agreement with SymBio Pharmaceuticals Limited (“SymBio”).  Under the stock investment agreement, Cephalon purchased additional common shares of SymBio for  approximately $9.4 million.  As of March 31, 2011, Cephalon holds an 18.5% interest in SymBio.  Our investment in Symbio is recorded as a cost basis investment.

Mesoblast Limited

In December, 2010, we entered into a strategic alliance with Mesoblast Limited (“Mesoblast”) to develop and commercialize novel adult Mesenchymal Precursor Stem Cell (MPC) therapeutics for degenerative conditions of the cardiovascular and central nervous systems. These conditions include Congestive Heart Failure, Acute Myocardial Infarction, Parkinson’s Disease, and Alzheimer’s Disease. The alliance also extends to products for augmenting hematopoietic stem cell transplantation in cancer patients.

As part of the development and commercialization agreement, in exchange for exclusive world-wide rights to commercialize specific products based on Mesoblast’s proprietary adult stem cell technology platform, we agreed to pay Mesoblast a nonrefundable up front payment of $130 million. In December 2010, we paid $100.0 million, which was expensed as acquired in process research and development expense.  In February 2011, we paid and expensed, as acquired in process research and development expense, the remaining $30 million of upfront fees as part of the collaboration agreement, as we received Mesoblast shareholder and regulatory approval for us to purchase additional shares, as agreed to under our share purchase agreement.

Additionally, in 2010 we made a $133.9 million equity investment in Mesoblast common stock, representing a 12.2% interest in the company, included in non-current assets on our consolidated balance sheet. In February 2011, we acquired an additional 7.8% interest in Mesoblast, for $109.1 million.  We believe we exercise significant influence over the company due to our ownership of 20.0%, our Chief Executive Officer holding a voting seat on the Mesoblast Board of Directors and the existence of various revenue arrangements between us and Mesoblast. Therefore, we consider our investment in Mesoblast to be an equity method investment.  We have elected to account for our equity method investment under the fair value option. We measured the fair value of our investment at the date of acquisition and prospectively utilizing the company’s publicly traded stock price.  As of December 31, 2010, our existing 12.2% interest was valued at a fair value of A$4.67 or $145.9 million.  On the date we acquired the additional 7.8% interest, Mesoblast’s share price was A$5.57 and the fair value of our additional investment was $138.1 million.  We recorded the difference between the consideration paid and fair value at the date of acquisition as a change in fair value of investments within other income (expense) on the statement of operations.  On March 31, 2011, Mesoblast’s share price was A$7.25 and we remeasured the fair value of our entire  investment at $414.6 million.  The change in fair value between December 31, 2010 for our existing 12.2% investment and since the date of acquisition for our February 2011 7.8% investment was also recorded as a change in fair value of investments within other income (expense) on the

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consolidated statement of operations.  The total change in fair value of investments recorded for the three months ended March 31, 2011 was $159.6 million.  We consider Mesoblast a related party.

With respect to each product the Company chooses to commercialize, Mesoblast could receive up to $1.7 billion upon the achievement of certain regulatory milestones.  The $1.7 billion of milestone payments is estimated based on the approval of the product for the treatment of ten indications in various territories.  Mesoblast will be responsible for the conduct and expenses of certain Phase IIa clinical trials and commercial supply of the products.  Cephalon will be responsible for the conduct and expenses of all Phase IIb and III clinical trials and subsequent commercialization of the products.  If the products are commercially sold, Mesoblast will retain all manufacturing rights and will receive a percentage of net product sales.

Mepha GmbH

During the first quarter of 2011, we finalized the acquisition accounting for certain tax liabilities, which resulted in an adjustment to goodwill of $3.0 million.  The acquisition accounting for the Mepha acquisition is now complete.

3.   RESTRUCTURING

CIMA restructuring

On January 15, 2008, we announced a restructuring plan under which we intend to (i) transition manufacturing activities at our CIMA LABS INC. (“CIMA”) facility in Eden Prairie, Minnesota, to our expanded manufacturing facility in Salt Lake City, Utah, and (ii) consolidate at CIMA’s Brooklyn Park, Minnesota, facility certain drug delivery research and development activities performed in Salt Lake City. The phased transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed in 2011.  The consolidation of drug delivery research and development activities at Brooklyn Park was completed in 2008.  The plan is intended to increase efficiencies in manufacturing and research and development activities, reduce our cost structure and enhance competitiveness.

As a result of this plan, we will incur certain costs associated with exit or disposal activities.  As part of the plan, we estimate that approximately 90 jobs will be eliminated in total, with approximately 175 net jobs eliminated at CIMA and approximately 85 net jobs added in Salt Lake City.

The total estimated pre-tax costs of the plan are as follows:

Severance costs	$	14-16 million
Manufacturing and personnel transfer costs	$	7- 8 million
Total	$	21-24 million

The estimated pre-tax costs of the plan are being recognized between 2008 and 2011 and are included in the United States segment.  Through March 31, 2011, we have incurred a total of $20.2 million related to the restructuring plan.

In September 2010, we sold the Eden Prarie facility and certain associated equipment for proceeds of $4.7 million.  Pursuant to the sales agreement, we are leasing the Eden Prarie facility and certain associated equipment from the buyer through December 31, 2011 with aggregate remaining lease payments totaling $0.4 million.  Through March 31, 2011, we have incurred a total of $21.7 million in pre-tax, non-cash accelerated depreciation of plant and equipment related to the restructuring. We will continue to incur non-cash accelerated depreciation of equipment not associated with the sale through the completion of the restructuring project.

Total charges and payments related to the restructuring plan recognized in the consolidated statement of operations and included in the United States segment are as follows:

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	Three months ended March 31,
	2011			2010
Restructuring reserves, beginning of period	$	9,968		$	7,083
Severance costs	469			527
Manufacturing and personnel transfer costs	427			217
Payments	(525		)	(473		)
Restructuring reserves, end of period	$	10,339		$	7,354

4.  ASSETS HELD FOR SALE

In March 2011, we finalized our plan to divest our manufacturing facility in Mitry Mory, France.  As part of the transaction, the acquirer has agreed to continue the operation of the facility and the employment of all current personnel so that no restructuring charges will be required. We also intend to enter into an agreement with the acquirer to purchase an annual minimum amount of raw material used in the production of SPASFON.  As a result, we intend to transfer the facility for a nominal amount and have recognized an impairment of $6.1 million in the first quarter of 2011.  We signed the Transfer Agreement with the acquirer for the transfer of the facility in April 2011 and we expect the facility to be transferred before the end of 2011.  As of March 31, 2011, the remaining value of the facility included on our balance sheet was insignificant.

5.   OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following:

	Three months ended
	March 31,
	2011			2010
Losses on foreign exchange derivative instruments	$	(506	)	$	(6,169	)
Foreign exchange losses	(2,522		)	(1,102		)
Other income (expense), net	$	(3,028	)	$	(7,271	)

In 2010, Cephalon entered into a foreign exchange forward contract related to our Mesoblast transaction.  This contract protected against fluctuations between the Australian Dollar and the U.S. Dollar and changes in the value of this contract were recognized within net income.  This contract settled in February 2011.  For the period ended March 31, 2011, we recognized a loss of $0.5 million from the decrease in fair value of this foreign exchange contract.

In 2010, Cephalon entered into foreign exchange forward contracts related to our Mepha GmbH transaction.  These contracts protected against fluctuations between the Swiss Franc and the U.S. Dollar.  Changes in the value of these contracts were recognized within net income. For the period ended March 31, 2010, we recognized a loss of $6.2 million from the decrease in fair value of these foreign exchange contracts.

6.  ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income consisted of the following:

	March 31, 2011		December 31, 2010
Foreign currency translation gains	$	242,382	$	178,805
Prior service gains and losses on retirement-related plans	4,146		4,170
Accumulated other comprehensive income	$	246,528	$	182,975

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Accumulated other comprehensive income balances related to our noncontrolling interests are insignificant.

7.  FAIR VALUE DISCLOSURES

The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and debt instruments other than our convertible debt approximate their respective fair values.

At March 31, 2011, long term assets recorded at fair value include our 27.6% investment in ChemGenex and our 20.0% investment in Mesoblast Limited.  Long-term liabilities recorded at fair-value include contingent consideration attributable to Ception and BioAssets Development Corp. (“BDC”).

At December 31, 2010, other current assets recorded at fair value include an asset recorded for our option to purchase additional ChemGenex shares which represents a free standing derivative.  Long term assets recorded at fair value include our investment in ChemGenex convertible note securities and our 12.2% equity investment in Mesoblast Limited.  Long-term liabilities recorded at fair-value include contingent consideration attributable to Ception and BDC.

Current accounting guidance provides a three-tier fair value hierarchy, which prioritize the inputs used in measuring fair value as follows:

·Level 1: Observable inputs such as quoted prices in active markets for identical assets and liabilities;

·Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table sets forth the fair value hierarchy for financial assets and liabilities carried at fair value and measured on a recurring basis as of March 31, 2011 and December 31, 2010.

			Fair Value Measurements at Reporting Date Using
Description	March 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Long term assets
Investment in ChemGenex	$	56,669	$	56,669	$	—	$	—
Investment in Mesoblast	414,585		414,585		—		—
Total assets	$	471,254	$	471,254	$	—	$	—
Long term liabilities
Ception contingent consideration	$	104,264	$	—	$	—	$	104,264
BDC contingent consideration	32,745		—		—		32,745
Total liabilities	$	137,009	$	—	$	—	$	137,009

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			Fair Value Measurements at Reporting Date Using
Description	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Current assets
Purchase Option for ChemGenex Equity Securities	$	984	$	—	$	984	$	—
Long term assets
Investment in ChemGenex convertible note securities	9,885		—		—		9,885
Investment in Mesoblast	145,923		145,923		—		—
Total assets	$	156,792	$	145,923	$	984	$	9,885
Long term liabilities
Ception contingent consideration	$	102,942	$	—	$	—	$	102,942
BDC contingent consideration	32,266		—		—		32,266
Total liabilities	$	135,208	$	—	$	—	$	135,208

For further details on our investment in Mesoblast and ChemGenex equity securities recorded on a recurring basis and a description of the fair value methodologies utilized, see Note 2 herein.

We account for contingent consideration in accordance with applicable guidance provided within the business combination rules.  In conjunction with the exercise of our option to acquire the noncontrolling interest of Ception and BDC, we are contractually obligated to pay certain contingent consideration upon the achievement of certain regulatory and commercial milestones and therefore recorded a contingent consideration liability at the time of the acquisitions.  As a result, we are required to update our assumptions each reporting period based on new developments and record such amounts at fair value until such consideration is satisfied through payment or failure of the acquiree to meet the contingency.

It is currently estimated that the Ception milestone payments will occur in 2014 and 2015. The range of undiscounted amounts we could be required to pay under our agreement is between zero and $500.0 million. In conjunction with our BDC acquisition, it is currently estimated that the milestone payments will occur in 2014 and 2022.  The range of undiscounted amounts we could be required to pay under our agreement is between zero and $80.0 million.  We determined the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future milestone payments was based on several factors including:

·estimated cash flows projected from the success of unapproved product candidates in the U.S. and Europe;

·the probability of success for product candidates including risks associated with uncertainty, achievement and payment of milestone events;

·the time and resources needed to complete the development and approval of product candidates;

·the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the U.S. and Europe; and

·the risk adjusted discount rate for fair value measurement.

The fair value of the investment in ChemGenex convertible note securities at December 31, 2010 was determined based on both a probability weighted discounted cash flow analysis and a Black Scholes valuation for the conversion option.  This fair value measurement was based on inputs not observable in the market and thus represented a Level 3 measurement within the fair value hierarchy. Changes in the fair value of the investment in ChemGenex convertible notes were recorded in change in fair value of investments within other income (expense).  The notes were converted to equity securities in March 2011.

In accordance with GAAP, we are allowed to elect, at specified election dates, to measure many financial instruments at fair value (“the fair value option”) that would not otherwise be required to be measured at fair value.  If the fair

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value option is elected for a particular financial instrument or other items, we are required to report unrealized gains and losses on those items in earnings. Our investment in ChemGenex convertible note securities and investment in Mesoblast Limited and ChemGenex equity securities, investments that would otherwise be accounted for under the equity method absent the fair value option election, are the only eligible items for which the fair value option was elected commencing on the dates the investments were made.  Our investment in ChemGenex convertible notes was converted to equity securities in March 2011.  Currently, our investments in Mesoblast and ChemGenex equity securities are our only investments that would be accounted for under the equity method. Electing the fair value option for these investments eliminates some of the uncertainty involved with impairment considerations since quoted market prices for these investments provide a readily determinable fair value at the balance sheet date.  Our other available for sale investments are cost basis investments in entities that are not publicly traded and for these reasons we did not elect the fair value option for such securities.

The tables below reconcile the beginning and ending balances for assets and liabilities measured on a recurring basis using unobservable inputs (Level 3) during the period.

	Ception Contingent Consideration (Liability)			BDC Contingent Consideration (Liability)			Chemgenex Convertible Note Securities
Balance, January 1, 2011	$	(102,942	)	$	(32,266	)	$	9,885
Net transfer in to Level 3 (new transactions)	—			—			—
Unrealized gains/(losses) included in earnings	(1,322		)	(479		)	5,115
Conversion of Convertible Notes to Equity (Transfer Out)	—			—			(15,000		)
Ending Balance, March 31, 2011	$	(104,264	)	$	(32,745	)	$	—

See Note 2, for a description of Alba’s assets and liabilities recorded at fair value and measured on a nonrecurring basis.

Except for our convertible notes, our debt instruments do not have readily ascertainable market values; however, the carrying values approximate the respective fair values. As of March 31, 2011, the fair value and carrying value of our convertible debt, based on quoted market prices was:

	Fair Value^		Carrying Value		Face Value
2.0% convertible senior subordinated notes due June 1, 2015	$	1,367,883	$	658,031	$	820,000
2.5% convertible senior subordinated notes due May 1, 2014	601,900		395,723		500,000

^The fair value shown above represents the fair value of the total debt instrument, inclusive of both the liability and equity components, while the carrying value represents the carrying value of the liability.

8.   INVENTORY, NET

Inventory, net consisted of the following:

	March 31, 2011		December 31, 2010
Raw materials	$	42,856	$	37,433
Work-in-process	139,735		140,898
Finished goods	111,314		113,029
Total inventory, net	$	293,905	$	291,360

We have committed to make future minimum payments to third parties for certain raw material inventories, including agreements to purchase minimum amounts of modafinil through 2012.  Over the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil.  As a result of our plan to manufacture armodafinil in the future using this new process and the launch of NUVIGIL in 2009, we assessed the potential impact of these items on certain of our existing

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agreements to purchase modafinil and recorded charges and gains. As of March 31, 2011 and December 31, 2010, our aggregate future purchase commitments remaining totaled $7.7 million and $8.6 million, respectively, and are fully reserved.

9.  GOODWILL

Goodwill consisted of the following:

	United States		Europe			Total
December 31, 2010	$	486,619	$	335,452		$	822,071
Foreign currency translation adjustment	—		15,432			15,432
Mepha GmbH purchase accounting adjustment	—		(2,989		)	(2,989		)
Consolidation of Alba as a VIE	2,122		—			2,122
March 31, 2011	$	488,741	$	347,895		$	836,636

10.  INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

		March 31, 2011						December 31, 2010
	Estimated	Gross				Net		Gross				Net
	Useful	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Lives	Amount		Amortization		Amount		Amount		Amortization		Amount
Product Rights & Technology	5 - 20 years	$	1,173,400	$	562,201	$	611,199	$	1,161,807	$	540,425	$	621,382
IPR&D	Indefinite	417,241		—		417,241		374,376		—		374,376
Trademarks	10 - 20 years	271,745		53,427		218,318		261,566		47,315		214,251
Other agreements	1 - 2 years	4,349		2,485		1,864		4,162		1,784		2,378
		$	1,866,735	$	618,113	$	1,248,622	$	1,801,911	$	589,524	$	1,212,387

Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $29.1 million and $25.8 million for the three months ended March 31, 2011 and 2010, respectively.

11.  LONG-TERM DEBT

Long-term debt consisted of the following:

	March 31,			December 31,
	2011			2010
2.0% convertible senior subordinated notes due June 1, 2015	$	820,000		$	820,000
Debt discount on 2.0% convertible senior subordinated notes due June 1, 2015	(161,969		)	(170,183		)
2.5% convertible senior subordinated notes due May 1, 2014	500,000			500,000
Debt discount on 2.5% convertible senior subordinated notes due May 1, 2014	(104,277		)	(111,357		)
Other	8,405			4,953
Total debt	$	1,062,159		$	1,043,413
Less current portion	(663,684		)	(651,997		)
Total long-term debt	$	398,475		$	391,416

At March 31, 2011, we have included $3.6 million of short-term debt related to Alba, a variable interest entity for which we are the primary beneficiary.  Alba’s liabilities represent contractual obligations of Alba for general corporate purposes. Alba’s creditors have no recourse to the general credit of Cephalon.

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Convertible Notes

The liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date. At March 31, 2011 and December 31, 2010, our stock price was $76.08 and $61.72, respectively, and therefore, the 2.0% Notes are considered to be current liabilities based on conversion price and are presented in current portion of long-term debt on our consolidated balance sheet.

In August 2008, we established a $200 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders.  The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries.  The credit agreement contains customary covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the credit agreement), senior debt to Consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates.  As of the date of this filing, we have not drawn any amounts under the credit facility.

In the event that a significant conversion of our convertible debt did occur, we believe that we have the ability to fund the payment of principal amounts due through a combination of utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

12.  LEGAL PROCEEDINGS AND OTHER MATTERS

PROVIGIL Patent Litigation and Settlements

In March 2003, we filed a patent infringement lawsuit against four companies—Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the abbreviated new drug applications (“ANDA”) filed by each of these firms with the FDA seeking approval to market a generic form of modafinil. The lawsuit claimed infringement of our U.S. Patent No. RE37,516 (the “‘516 Patent”) which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL and which expires on April 6, 2015. We believe that these four companies were the first to file ANDAs with Paragraph IV certifications and thus are eligible for the 180-day period of marketing exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act. In early 2005, we also filed a patent infringement lawsuit against Carlsbad Technology, Inc. (“Carlsbad”) based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

In late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr; in August 2006, we entered into a settlement agreement with Carlsbad and its development partner, Watson Pharmaceuticals, Inc., which we understand has the right to commercialize the Carlsbad product if approved by the FDA. As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date. Various factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due to an adverse judicial decision in a patent infringement lawsuit; (ii) all parties with first-to-file ANDAs relinquish their right to the 180-day period of marketing exclusivity, which could allow a subsequent ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable counterparty breaches a PROVIGIL settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania (“EDPA”) described below.

We filed each of the settlements with both the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”). The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us in the U.S. District Court for the District of Columbia challenging the validity of the settlements and related agreements entered into by us with each of Teva, Mylan, Ranbaxy and Barr. We filed a motion to transfer the case to the EDPA, which was granted in April 2008. The complaint alleges a violation

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of Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future. We believe the FTC complaint is without merit. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

Numerous private antitrust complaints have been filed in the EDPA, each naming Cephalon, Barr, Mylan, Teva and Ranbaxy as co-defendants and claiming, among other things, that the PROVIGIL settlements violate the antitrust laws of the United States and, in some cases, certain state laws. These actions have been consolidated into a complaint on behalf of a class of direct purchasers of PROVIGIL and a separate complaint on behalf of a class of consumers and other indirect purchasers of PROVIGIL. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. In addition, in December 2009, we entered a tolling agreement with the Attorneys General of Arkansas, California, Florida, New York and Pennsylvania to suspend the running of the statute of limitations to any claims or causes of action relating to our PROVIGIL settlements pending the resolution of the FTC litigation described above.

Separately, in June 2006, Apotex, Inc., a subsequent ANDA filer seeking FDA approval of a generic form of modafinil, filed suit against us, also in the EDPA, alleging similar violations of antitrust laws and state law. Apotex asserts that the PROVIGIL settlement agreements improperly prevent it from obtaining FDA approval of its ANDA, and seeks monetary and equitable remedies. Apotex also seeks a declaratory judgment that the ‘516 Patent is invalid, unenforceable and/or not infringed by its proposed generic. In May 2009, Apotex also filed a declaratory judgment complaint in the EDPA that our U.S. Patent No. 7,297,346 (the “‘346 Patent”) is invalid and/or not infringed by its proposed generic. The ‘346 Patent covers pharmaceutical compositions of modafinil and expires in May 2024.  In February 2011, the court bifurcated the patent claims, and in April 2011 we completed the trial against Apotex with respect to the validity and enforceability aspects of  the ‘516 Patent. Trial regarding Apotex’s infringement of the ‘516 patent is currently scheduled for July 2011.  We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust and declaratory judgment complaints are without merit. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) and Apotex, respectively, also filed Paragraph IV ANDAs with the FDA in which each firm is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit in the United States against either Caraco or Apotex, although Apotex has filed suit against us, as described above. In early August 2008, we received notice that Hikma Pharmaceuticals plc (“Hikma Pharmaceuticals”) filed a Paragraph IV ANDA with the FDA in which it is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit against Hikma Pharmaceuticals.  In March 2011 and April 2011, we received notice that Aurobindo Pharma Limited and Mylan, and Alembic Pharmaceuticals Limited, respectively, filed Paragraph IV ANDAs with the FDA in which each firm is seeking to market a generic form of PROVIGIL.

In 2010, generic versions of modafinil were launched in Portugal, Sweden and Denmark.  We have filed lawsuits in each of these countries and intend to vigorously enforce our intellectual property rights.  A trial enforcing our intellectual property rights is scheduled to begin in May 2011 in the UK against Mylan in anticipation of sales of generic modafinil in the UK

The European Commission is conducting a pharmaceutical sector inquiry of over 100 companies regarding, among other matters, settlements by branded pharmaceutical companies (such as Cephalon) with generic pharmaceutical companies. We are cooperating with the European Commission’s inquiry and have provided questionnaire responses regarding our business and documents related to our 2005 PROVIGIL settlement with Teva’s UK affiliate. In April 2011, the European Commission announced the launch of a formal investigation regarding this matter.  The opening of proceedings does not mean that the European Commission has conclusive proof of an infringement, only that it will investigate the case as a matter of priority.

In July 2010, two purported stockholders of the company filed derivative suits on behalf of Cephalon in the EDPA naming each member of our Board of Directors as defendants. The two suits allege, among other things, that the defendants failed to exercise reasonable and prudent supervision over the management practices and controls of Cephalon, including with respect to the marketing and sale of PROVIGIL, ACTIQ and GABITRIL and the execution of the PROVIGIL settlement agreements, and in failing to do so, violated their fiduciary duties to the stockholders. The complaints seek an

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unspecified amount of money damages, disgorgement of all compensation and other equitable relief.  We believe the allegations in these matters are without merit, and we intend to vigorously defend them.  These efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

NUVIGIL Patent Litigation

In December 2009, January 2010, February 2010 and August 2010, we filed patent infringement lawsuits against seven companies—Teva, Actavis, Mylan, Watson, Sandoz, Lupin, and Apotex—based upon the ANDA filed by each of these firms with the FDA seeking approval to market a generic form of NUVIGIL. The lawsuits claimed infringement of our ‘570 Patent, ‘346 Patent and ‘516 Patent.  In March 2011, Actavis converted its Paragraph IV certification to a Paragraph III certification and was dismissed from our suit.  Including the six-month pediatric extension, the ‘516 Patent, the ‘346 Patent, and the ‘570 Patent expire on April 6, 2015, May 29, 2024, and June 18, 2024, respectively.

Under the provisions of the Hatch-Waxman Act, the filing of the Teva,  Mylan, Watson, Sandoz, Lupin and Apotex lawsuits stays any FDA approval of the applicable ANDA until the earlier of entry of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.  Assuming no earlier district court judgment, the earliest the 30-month stay will expire is in May 2012.

AMRIX Patent Litigation

In October 2008, Cephalon and Eurand, Inc. (“Eurand”), received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan and Barr, each requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. In November 2008, we received a similar certification letter from Impax Laboratories, Inc. Mylan and Impax each allege that the U.S. Patent Number 7,387,793 (the “Eurand Patent”), entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants,” issued to Eurand will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserves the right to challenge the validity and/or enforceability of the Eurand Patent. Barr alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. The Eurand Patent does not expire until February 26, 2025. In late November 2008, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Mylan and Barr for infringement of the Eurand Patent. In January 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Impax for infringement of the Eurand Patent.

In late May 2009, Cephalon and Eurand received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Anchen Pharmaceuticals, Inc. (“Anchen”) requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. Anchen alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. In July 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Anchen for infringement of the Eurand Patent.

In October 2010, through our subsidiary Anesta AG, we entered into a settlement agreement with Eurand and Impax to settle the parties’ patent litigation concerning AMRIX.  Under the agreement, Anesta and Eurand will grant Impax a non-exclusive, royalty-bearing license to Eurand’s patent and other current and future Orange Book-listable patents to market and sell a generic version of AMRIX in the United States.  Impax’s license becomes effective one year prior to expiration of the Eurand Patent, which is currently expected to expire in February 2025, or earlier under certain circumstances. The settlement agreement does not affect the status of the separate patent litigations with Mylan, Barr and Anchen.

Also in October 2010, we completed the trial against Anchen, Barr and Mylan with respect to the Eurand Patent.  We anticipate a decision by the U.S. District Court in Delaware at any time.  In April 2011, the court issued an injunction that prevents Anchen, Barr and Mylan from launching a generic version of AMRIX prior to issuance of the court’s decision.  We anticipate a separate trial against Anchen with respect to later-issued patents that also cover AMRIX.

FENTORA Patent Litigation

In April 2008, June 2008 and January 2010, we received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Watson Laboratories, Inc., Barr and Sandoz, respectively, requesting approval to market and sell a

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generic equivalent of FENTORA. Both Watson and Barr allege that our U.S. Patent Numbers 6,200,604 and 6,974,590 (“FENTORA Orange Book Patents”) covering FENTORA are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of the product described in their respective ANDAs. The FENTORA Orange Book Patents cover methods of use for FENTORA and do not expire until 2019. In June 2008, July 2008 and January 2010, we and our wholly-owned subsidiary, CIMA, filed lawsuits in U.S. District Court in Delaware against Watson, Barr and Sandoz for infringement of these patents.  In May 2010, the trial for the Watson FENTORA matter was completed.  In addition to the FENTORA Orange Book Patents, we asserted at trial that Watson has and will infringe another of our patents, U.S. Patent Number 6,264,981 (the “‘981 Patent”).    In March 2011, the court ruled in Watson’s favor on the FENTORA Orange Book Patents, upheld the validity of our ‘981 Patent and found that Watson’s proposed generic version of FENTORA infringes the ‘981 Patent.  Subsequently, the court entered an order giving effect to the parties’ stipulations providing that Watson will not sell its product before the ‘981 Patent expires, unless the stipulations are earlier vacated or dissolved.  Watson has appealed the court’s decision regarding the ‘981 Patent, and we have appealed the court’s decision regarding the FENTORA Orange Book Patents.  In the Sandoz FENTORA matter, the court has set a trial date in June 2011.

In November 2009, we entered into a binding agreement-in-principle (the “Barr Agreement”) with Barr to settle its pending patent infringement lawsuit related to FENTORA. The Barr Agreement does not affect the status of our separate FENTORA patent litigation with Watson and Sandoz. In connection with the Barr Agreement, we will grant Barr a non-exclusive, royalty-free right to market and sell a generic version of FENTORA in the United States. Barr’s license will become effective in October 2018 or earlier under certain circumstances.

In January 2011, we received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Mylan requesting approval to market and sell a generic equivalent of FENTORA.  Mylan alleges that our FENTORA Orange Book Patents are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of the product described in its ANDA.

While we intend to vigorously defend the NUVIGIL, AMRIX and FENTORA intellectual property rights, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

U.S. Attorney’s Office and Related Matters

In September 2008, we entered into a settlement agreement (the “Settlement Agreement”) with the DOJ, the USAO, the OIG, TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the “United States Government”) and the relators identified in the Settlement Agreement to settle the outstanding False Claims Act claims alleging off-label promotion of ACTIQ and PROVIGIL from January 1, 2001 through December 31, 2006 and GABITRIL from January 2, 2001 through February 18, 2005 (the “Claims”). As part of the Settlement Agreement we paid a total of $375 million (the “Payment”) plus interest of $11.3 million. Pursuant to the Settlement Agreement, the United States Government and the relators released us from all Claims and the United States Government agreed to refrain from seeking our exclusion from Medicare/Medicaid, the TRICARE Program or other federal health care programs. In connection with the Settlement Agreement, we pled guilty to one misdemeanor violation of the U.S. Food, Drug and Cosmetic Act and agreed to pay $50 million (in addition to the Payment). All of the payments described above were made in the fourth quarter of 2008.

As part of the Settlement Agreement, we entered into a five-year Corporate Integrity Agreement (the “CIA”) with the OIG. The CIA provides criteria for establishing and maintaining compliance. We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed. We also agreed to enter into a State Settlement and Release Agreement (the “State Settlement Agreement”) with each of the 50 states and the District of Columbia. Upon entering into the State Settlement Agreement, a state received its portion of the Payment allocated for the compensatory state Medicaid payments and related interest amounts. Each state also agrees to refrain from seeking our exclusion from its Medicaid program.

In September 2008, we entered into an Assurance of Voluntary Compliance (the “Connecticut Assurance”) with the Attorney General of the State of Connecticut and the Commissioner of Consumer Protection of the State of Connecticut (collectively, “Connecticut”) to settle Connecticut’s investigation of our promotion of ACTIQ, GABITRIL and PROVIGIL. Pursuant to the Connecticut Assurance, (i) we paid a total of $6.15 million to Connecticut and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject of Connecticut’s investigation. We also entered into an Assurance of Discontinuance (the “Massachusetts Settlement Agreement”) with the Attorney General of the

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Commonwealth of Massachusetts (“Massachusetts”) to settle Massachusetts’ investigation of our promotional practices with respect to fentanyl-based products. Pursuant to the Massachusetts Settlement Agreement, (i) we paid a total of $0.7 million to Massachusetts and (ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts’ investigation.

In late 2007, we were served with a series of putative class action complaints filed in the EDPA on behalf of entities that claim to have reimbursed for prescriptions of ACTIQ for uses outside of the product’s approved label in non-cancer patients. The complaints allege violations of various state consumer protection laws, as well as the violation of the common law of unjust enrichment, and seek an unspecified amount of money in actual, punitive and/or treble damages, with interest, and/or disgorgement of profits. In May 2008, the plaintiffs filed a consolidated and amended complaint that also alleges violations of RICO and conspiracy to violate RICO. The RICO allegations were dismissed with prejudice in May 2009. In February 2009, we were served with an additional putative class action complaint filed on behalf of two health and welfare trust funds that claim to have reimbursed for prescriptions of GABITRIL and PROVIGIL for uses outside the approved labels for each product. The complaint alleges violations of RICO and the common law of unjust enrichment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. We believe the allegations in the complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future. These efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In January 2011, we received a subpoena duces tecum (for documents) from the U.S. Postal Service Office of Inspector General (“Postal Service”) in connection with an investigation relating to Postal Service employees’ workers’ compensation claims.  The subpoena requests that we provide to the Postal Service documents pertaining to FENTORA.  We understand that this investigation is being conducted by the Postal Service in conjunction with the Civil Division of the United States Attorney’s Office in Philadelphia.  We are in the process of responding to the subpoena and intend to cooperate fully.

DURASOLV

In the third quarter of 2007, the U.S. Patent and Trademark Office (“PTO”) notified us that, in response to re-examination petitions filed by a third party, the Examiner rejected the claims in the two U.S. patents for our DURASOLV ODT technology. We disagree with the Examiner’s position, and we filed notices of appeal to the Board of Patent Appeals of the PTO’s decisions in the fourth quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. In September 2009, the Board affirmed the Examiner’s position with respect to the first of the DURASOLV patents. We requested reconsideration of that decision, and in March 2011, the Board reversed the Examiner’s rejections on both DURASOLV patents.  The Board entered new grounds of rejection and afforded us the opportunity to reopen prosecution with the Examiner.  We expect to file a response to the new rejections in June 2011.  Due to the nature of the re-examination process, there can be no assurance that these efforts will be successful. Invalidity of the DURASOLV patents could reduce our ability to enter into new contracts with regard to our drug delivery business.

Other Matters

We are a party to certain other litigation in the ordinary course of our business, including, among others, European patent oppositions, patent infringement litigation and matters alleging employment discrimination, product liability and breach of commercial contract. We do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

Three putative class actions have been filed in the Delaware Court of Chancery against our Board and/or us, alleging breach of duties in connection with Valeant’s non-binding acquisition proposal and seeking injunctive relief. We expect additional complaints to be filed relating to our proposed acquisition by Teva. We intend to vigorously defend these actions.

Other Commitments

We have committed to make potential future “milestone” payments to third parties as part of our in-licensing and development programs primarily in the area of research and development agreements.  Payments generally become due and payable only upon the achievement of certain developmental, regulatory and/or commercial milestones.  Because the achievement of these milestones is neither probable nor reasonably estimable, we have not recorded a liability on our consolidated balance sheet for any such contingencies, with the exception of the contingent consideration recorded upon an

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acquisition when appropriate. As of March 31, 2011, the potential milestone, option exercise payments and other contingency payments due under current contractual agreements are $3.3 billion, excluding amounts recognized as liabilities on our consolidated balance sheet of $208.2 million.

13.  STOCK-BASED COMPENSATION

Total stock-based compensation expense recognized in the consolidated statement of operations is as follows:

	Three months ended
	March 31,
	2011		2010
Stock option expense	$	2,830	$	4,470
Restricted stock unit expense	3,040		4,360
Total stock-based compensation expense*	$	5,870	$	8,830
Total stock-based compensation expense after-tax	$	3,980	$	5,801

*For the three months ended March 31, 2011 and 2010 total stock-based compensation is allocated 4% to cost of sales, 38% to research and development and 58% to selling, general and administrative expenses based on the employees’ compensation allocation between these line items.

14.  PENSION AND OTHER POSTRETIREMENT BENEFITS

We have defined benefit pension plans covering eligible employees in certain of our international subsidiaries. Net periodic pension benefit cost is based on periodic actuarial valuations which use the projected unit credit method of calculation and is charged to expense on a systematic basis over the average remaining service lives of the current participants.  Our defined benefit plans are all attributable to our European segment.

The net cost for pension benefit plans consisted of the following components:

	Three months ended March 31,
	2011			2010
Service cost	$	1,364		$	214
Interest cost	799			117
Expected return on plan assets	(728		)	—
Amortization of prior service credit	(6		)	(5		)
Amortization of net (gain) loss	(31		)	(30		)
Net periodic benefit cost	$	1,398		$	296

Through March 31, 2011, contributions of $0.7 million have been made to all international pension plans and we anticipate additional contributions during the remainder of 2011 to total approximately $3.4 million.

15.  INCOME TAXES

For the three months ended March 31, 2011, we recognized $102.7 million of income tax expense on income before income taxes of $314.3 million, resulting in an overall effective tax rate of 32.7 percent.  For the three months ended March 31, 2010, we recognized $48.3 million of income tax expense on income before income taxes of $148.6 million, resulting in an overall effective tax rate of 32.5 percent. During the first quarter of 2011, we recognized $22.1 million of deferred tax assets related to a 2010 acquisition of non-controlling interest.

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The Internal Revenue Service (“IRS”) concluded their  examination of  Cephalon, Inc.’s 2006 and 2007 U.S. federal income tax returns during Q4 2010.  We remain open for examination by the IRS for 2008 to 2010.  In other significant foreign jurisdictions, the tax years that remains open for potential examination range from 2001 to 2010.  We do not believe at this time that the results of these examinations will have a material impact on our financial statements.

In the regular course of business, various state and local tax authorities also conduct examinations of our state and local income tax returns.  Depending on the state, state income tax returns are generally subject to examination for a period of three to five years after filing.  The state impact of any federal changes that  resulted from the 2006 and 2007 IRS examination remain subject to examination by various states for a period of up to one year after formal notification to the states. We currently have several state income tax returns in the process of examination.

In 2010, we received $16.0 million in federal tax refunds of previously paid federal taxes.  This refund was due to the carryback of unused federal tax credits from the tax year ending December 31, 2008.

16.  EARNINGS PER SHARE (“EPS”)

Basic income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted income per common share is computed based on the weighted average number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period.  Common stock equivalents are measured under the treasury stock method.

We have entered into convertible note hedge and warrant agreements that, in combination, have the economic effect of reducing the dilutive impact of the 2.0% Notes, 2.5% Notes and the 2010 Zero Coupon Notes. However, we are required to analyze separately the impact of the convertible note hedge and warrant agreements on diluted EPS. As a result, the purchases of the convertible note hedges are excluded because their impact will be anti-dilutive.  The impact of the warrants is computed using the treasury stock method.

The number of shares included in the diluted EPS calculation for the convertible subordinated notes and warrants is as follows:

	Three months ended
	March 31,
	2011		2010
Average market price per share of Cephalon stock	$	58.94	$	67.43
Shares included in diluted EPS calculation (in thousands):
2.0% Notes	3,646		5,398
2.5% Notes	—		—
2010 Notes	—		572
Warrants related to 2.0% Notes	—		—
Warrants related to 2.5% Notes	—		—
Warrants related to New Zero Coupon Notes	—		—
Other	—		1
Total	3,646		5,971

The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted income per common share:

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	Three months ended
	March 31,
	2011		2010
Basic income per common share computation:
Numerator:
Net income used for basic income per common share	$	211,088	$	110,565
Denominator (in thousands):
Weighted average shares used for basic income per common share	75,743		74,990
Basic income per common share	$	2.79	$	1.47

	Three months ended
	March 31,
	2011		2010
Diluted income per common share computation:
Numerator:
Net income used for basic income per common share	$	211,088	$	110,565
Denominator (in thousands):
Weighted average shares used for diluted income per common share	75,743		74,990
Effect of dilutive securities:
Convertible subordinated notes and warrants	3,646		5,971
Employee stock options and restricted stock units	447		850
Weighted average shares used for diluted income per common share	79,836		81,811
Diluted income per common share	$	2.64	$	1.35

The following reconciliation shows the shares excluded from the calculation of diluted income per common share as the inclusion of such shares would be anti-dilutive:

	Three months ended
	March 31,
	2011	2010
Weighted average shares excluded (in thousands):
Convertible subordinated notes and warrants	24,805	28,337
Employee stock options and purchase plan	5,866	4,804
	30,671	33,141

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17. SEGMENT AND SUBSIDIARY INFORMATION

Revenues for the three months ended March 31:

	Three Months Ended
	March 31,
	2011									2010^
	United States			Europe			Total			United States			Europe		Total
Sales:
CNS
Proprietary CNS
PROVIGIL*	$	243,343		$	15,053		$	258,396		$	244,601		$	17,850	$	262,451
NUVIGIL	52,032			—			52,032			34,922			—		34,922
GABITRIL	11,038			1,089			12,127			8,299			1,462		9,761
Other Proprietary CNS	—			2,353			2,353			—			3,006		3,006
Generic CNS	—			9,775			9,775			—			2,311		2,311
CNS	306,413			28,270			334,683			287,822			24,629		312,451
Pain
Proprietary Pain
FENTORA**	39,043			7,358			46,401			38,480			3,729		42,209
AMRIX	23,032			—			23,032			25,135			—		25,135
Other Proprietary Pain	—			61			61			—			59		59
Generic Pain
ACTIQ	15,486			12,669			28,155			14,940			18,491		33,431
Generic OTFC	9,023			—			9,023			12,779			—		12,779
Other Generic Pain	—			23,866			23,866			—			2,142		2,142
Pain	86,584			43,954			130,538			91,334			24,421		115,755
Oncology
Proprietary Oncology
TREANDA	117,725			—			117,725			81,257			—		81,257
Other Proprietary Oncology	5,503			19,734			25,237			4,555			20,191		24,746
Generic Oncology	—			6,178			6,178			—			4,154		4,154
Oncology	123,228			25,912			149,140			85,812			24,345		110,157
Other
Other Proprietary	6,005			2,214			8,219			5,364			—		5,364
Other Generic	7,151			106,271			113,422			4,096			28,858		32,954
Other	13,156			108,485			121,641			9,460			28,858		38,318
Total Net Sales	529,381			206,621			736,002			474,428			102,253		576,681
Other Revenue	7,683			1,428			9,111			15,784			4,120		19,904
Total External Revenues	537,064			208,049			745,113			490,212			106,373		596,585
Inter-Segment Revenues	5,262			88			5,350			8,919			—		8,919
Elimination of Inter-Segment Revenues	(5,262		)	(88		)	(5,350		)	(8,919		)	—		(8,919		)
Total Revenues	$	537,064		$	208,049		$	745,113		$	490,212		$	106,373	$	596,585

^ Certain reclassifications of prior year amounts have been made to conform to current year presentation.

Europe consists primarily of Europe, the Middle East and Africa.   Proprietary products are products which are sold under patent coverage.  Generic products are products sold without patent coverage in the primary sales territory. Patent coverage may exist in other territories.

* Marketed under the name MODIODAL® (modafinil) in France and under the name VIGIL® (modafinil) in Germany.
** Marketed under the name EFFENTORA® (fentanyl buccal tablet) in Europe.

Income (loss) before income taxes for the period ended March 31:

	Three months ended
	March 31,
	2011			2010
United States	$	317,895		$	141,842
Europe	(3,554		)	6,806
Total	$	314,341		$	148,648

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Total assets:

	March 31,		December 31,
	2011		2010
United States	$	3,684,541	$	3,297,595
Europe	1,676,135		1,594,238
Total	$	5,360,676	$	4,891,833

Revenues and income (loss) before income taxes are attributed to geographic areas based on customer location. Income (loss) before income taxes exclude inter-segment transactions.

18.  SUBSEQUENT EVENTS

Gemin X Pharmaceuticals

In April 2011, we acquired all of the outstanding capital stock of Gemin X Pharmaceuticals, Inc., a privately-held biopharmaceutical company developing first-in-class cancer therapeutics, for $225 million cash on a cash-free, debt-free basis. Gemin X stockholders could also receive up to $300 million in cash payments upon the achievement of certain regulatory and sales milestones. There are no royalty obligations to Gemin X stockholders. The initial accounting for the acquisition is incomplete as of the date of this filing.

Teva Pharmaceuticals Merger Agreement

In early May 2011, we announced together with Teva Pharmaceutical Industries Ltd. (“Teva”) that our companies’ respective Boards of Directors have unanimously approved an Agreement and a Plan of Merger (the “Merger Agreement”) under which Teva will acquire all of the outstanding shares of Cephalon for $81.50 per share in cash.  The transaction, which is not conditioned on financing, is subject to the satisfaction of customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and clearance by the European Commission under the EC Merger Regulation, as well as the approval of Cephalon stockholders.  The transaction is expected to be completed in the third quarter of 2011.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2010.

EXECUTIVE SUMMARY

Cephalon is a global biopharmaceutical company dedicated to discovering, developing and bringing to market medications to improve the quality of life of individuals around the world. Since its inception in 1987, Cephalon’s strategy is to bring first-in-class and best-in-class medicines to patients in several therapeutic areas, with a particular focus on central nervous system (“CNS”) disorders, pain, oncology, inflammatory disease and regenerative medicine.  In addition to conducting an active research and development program, we market numerous branded and generic products around the world.  In total, Cephalon sells more than 180 products in more than 100 countries.  Consistent with our core therapeutic areas, we have aligned our approximately 745 person U.S. field sales and sales management teams by area.  We have a sales and marketing organization numbering approximately 640 persons that supports our presence throughout Europe, the Middle East and Africa.  For the quarter ended March 31, 2011, our total revenues and net income attributable to Cephalon, Inc. were $745.1 million and $211.1 million, respectively.  Our revenues from U.S. and European operations are detailed in Note 17 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In early May 2011, we announced together with Teva Pharmaceutical Industries Ltd. (“Teva”) that our companies’ respective Boards of Directors have unanimously approved an Agreement and Plan of Merger (the “Merger Agreement”) under which Teva will acquire all of the outstanding shares of Cephalon for $81.50 per share in cash.  The transaction, which is not conditioned on financing, is subject to the satisfaction of customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and clearance by the European Commission under the EC Merger Regulation, as well as the approval of Cephalon stockholders.  The transaction is expected to be completed in the third quarter of 2011.

Each of Cephalon and Teva has made representations and warranties in the Merger Agreement. We have also agreed to various covenants and agreements, including, subject to certain exceptions, (i) not to solicit alternative transactions or enter into discussions concerning, or provide non-public information to third parties in connection with, any alternative transaction and (ii) to call and hold a stockholder meeting and recommend that our stockholders adopt the Merger Agreement.  The parties have also agreed to use their reasonable best efforts to cause the transaction to be consummated.

The Merger Agreement contains specified termination rights for the parties, including the right of Cephalon in certain circumstances to terminate the Merger Agreement and accept a Superior Proposal (as defined in the Merger Agreement).  The Merger Agreement also provides that, in certain circumstances, we would be required to pay Teva a termination fee of $275 million.  For additional details regarding the Merger Agreement, please see our Current Report on Form 8-K filed on May 2, 2011.

Our announcement with Teva follows an unsolicited proposal we received from Valeant Pharmaceuticals International, Inc. (“Valeant”) in March 2011 to acquire all of the outstanding shares of our common stock for $73 per share.  In early April 2011, our Board announced that, after carefully reviewing the proposal and after consultation with our financial and legal advisors, it unanimously concluded that the proposal is inadequate and not in the best interests of our shareholders. Thereafter, in late April 2011, Valeant initiated a consent solicitation process by nominating 8 candidates to remove and replace our current Board.  On May 2, 2011, Valeant announced it was ending its consent solicitation process due to the signing of the Merger Agreement by Cephalon and Teva.

During 2011, we completed certain transactions intended to build a portfolio of marketed and potential products, including:

·purchase of additional equity interest in Mesoblast, an Australian public company, related to our strategic alliance to develop and commercialize novel adult MPC therapeutics for degenerative conditions of the cardiovascular and central nervous systems and for augmenting hematopoietic stem cell transplantation in cancer patients;

·conversion of our convertible note subscription agreement and exercise of our option agreements with ChemGenex, an Australian-based oncology focused biopharmaceutical company to fund clinical activities to complete a planned New Drug Application submission to the U.S. Food and Drug Administration for omacetaxine for the treatment of CML patients who have failed two or more TKIs and the filing of our takeover offer for the remaining 72.4% of ChemGenex;

·entry into a Stock Investment Agreement with SymBio, with whom we hold an exclusive sublicense to bendamustine hydrochloride in China and Hong Kong, purchasing additional common shares;

·entry into agreements with Alba Therapeutics Corporation (“Alba”), a privately held biopharmaceutical company, providing us an option to purchase all of Alba’s assets relating to larazotide acetate, a tight junction modulator, progressing toward a Phase IIb clinical trial for the treatment of celiac disease; and

·acquisition of Gemin X Pharmaceuticals, Inc., a privately-held biopharmaceutical company developing first-in-class cancer therapeutics, in April 2011.

For more information regarding these transactions, please see Notes 2 and 18 to our Consolidated Financial Statements included in Part I, Item 1 of the Quarterly Report on Form 10-Q.

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We have significant discovery research programs focused on developing oncology and inflammatory disease therapeutics.  Our oncology technology principally focuses on an understanding of kinases and proteases and the role they play in cellular integrity survival and proliferation.  We have coupled this knowledge with a library of novel, small, orally-active synthetic molecules that inhibit the activities of specific kinases.  We also have reinforced our commitment to the treatment of inflammatory diseases through the use of biologics.  Our entry into the biologics space combined with our efforts with our small molecule products creates opportunities to address unmet medical needs.  We also work with our collaborative partners to provide a more diverse therapeutic breadth and depth to our research efforts.

As a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging, product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract.  In particular, our future success is highly dependent on obtaining and maintaining patent protection or regulatory exclusivity for our products and technology.  In that regard, we are currently engaged in lawsuits with respect to generic company challenges to the validity and/or enforceability of our patents covering AMRIX, FENTORA, PROVIGIL and NUVIGIL.  We intend to vigorously defend the validity, and prevent infringement, of our patents.  The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or expiration, could materially impact our results of operations.  We are also engaged in litigation with the FTC and various private plaintiffs, including proposed class actions, regarding our PROVIGIL patent settlement agreements with certain generic pharmaceutical companies.  We believe the FTC and private complaints are without merit.  While we intend to vigorously defend ourselves in our patent and FTC litigations, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.  For more information regarding the legal proceedings described in this Overview and others, please see Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

For additional information regarding our product revenues, other revenues and geographic areas in which we operate, see  Note 17 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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RESULTS OF OPERATIONS

(In thousands)

Three months ended March 31, 2011 compared to three months ended March 31, 2010:

	Three Months Ended												%
	March 31,												Increase
	2011						2010^						(Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
CNS
Proprietary CNS
PROVIGIL*	$	243,343	$	15,053	$	258,396	$	244,601	$	17,850	$	262,451	(1	)%	(16	)%	(2	)%
NUVIGIL	52,032		—		52,032		34,922		—		34,922		49		—		49
GABITRIL	11,038		1,089		12,127		8,299		1,462		9,761		33		(26	)	24
Other Proprietary CNS	—		2,353		2,353		—		3,006		3,006		—		(22	)	(22	)
Generic CNS	—		9,775		9,775		—		2,311		2,311		—		323		323
CNS	306,413		28,270		334,683		287,822		24,629		312,451		6		15		7
Pain
Proprietary Pain
FENTORA**	39,043		7,358		46,401		38,480		3,729		42,209		1		97		10
AMRIX	23,032		—		23,032		25,135		—		25,135		(8	)	—		(8	)
Other Proprietary Pain	—		61		61		—		59		59		—		3		3
Generic Pain
ACTIQ	15,486		12,669		28,155		14,940		18,491		33,431		4		(31	)	(16	)
Generic OTFC	9,023		—		9,023		12,779		—		12,779		(29	)	—		(29	)
Other Generic Pain	—		23,866		23,866		—		2,142		2,142		—		1014		1014
Pain	86,584		43,954		130,538		91,334		24,421		115,755		(5	)	80		13
Oncology
Proprietary Oncology
TREANDA	117,725		—		117,725		81,257		—		81,257		45		—		45
Other Proprietary Oncology	5,503		19,734		25,237		4,555		20,191		24,746		21		(2	)	2
Generic Oncology	—		6,178		6,178		—		4,154		4,154		—		49		49
Oncology	123,228		25,912		149,140		85,812		24,345		110,157		44		6		35
Other
Other Proprietary	6,005		2,214		8,219		5,364		—		5,364		12		100		53
Other Generic	7,151		106,271		113,422		4,096		28,858		32,954		75		268		244
Other	13,156		108,485		121,641		9,460		28,858		38,318		39		276		217
Total Net Sales	529,381		206,621		736,002		474,428		102,253		576,681		12		102		28
Other Revenue	7,683		1,428		9,111		15,784		4,120		19,904		(51	)	(65	)	(54	)
Total Revenues	$	537,064	$	208,049	$	745,113	$	490,212	$	106,373	$	596,585	10	%	96	%	25	%

^ Certain reclassification of prior year amounts have been made to conform to current year presentation.

Europe consists primarily of Europe, the Middle East and Africa.   Proprietary products are products which are sold under patent coverage.  Generic products are products sold without patent coverage in the primary sales territory. Patent coverage may exist in other territories.

* Marketed under the name MODIODAL® (modafinil) in France and under the name VIGIL® (modafinil) in Germany.

** Marketed under the name EFFENTORA® (fentanyl buccal tablet) in Europe.

Total net sales:

	Three months ended March 31,				% Increase		% Increase (Decrease) due to		% Increase (Decrease) due to Mergers &		% Increase (Decrease) due
	2011		2010		(Decrease)		Currency		Acquisitions		to Operations
United States	$	529,381	$	474,428	12	%	—	%	—	%	12	%
Europe	206,621		102,253		102	%	(4	)%	105	%	1	%
	$	736,002	$	576,681	28	%	—	%	18	%	10	%

Net sales- In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 67% of our total consolidated gross sales for the three months ended March 31, 2011.  Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the amount of product they purchase from us) can

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materially affect the level of our sales in any particular period and thus may not necessarily correlate to the number of prescriptions written for our products as reported by IMS Health Incorporated.

We have distribution service agreements with each of our wholesaler customers. These agreements obligate the wholesalers to provide us with periodic outbound sales information and current inventory levels for our products held at their warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified days on hand limits. Various factors can impact the decisions made by wholesalers and retailers regarding the levels of inventory they hold, including, among other factors, their assessment of anticipated demand for products, timing of sales made by them, their review of historical product usage trends, and their purchasing patterns.

As of March 31, 2011, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products. Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products at our current sales levels.  As of our most recent retail inventory survey in June 2010, our generic OTFC inventory held at wholesalers and retailers is approximately three months. We do not expect that potential future fluctuations in inventory levels of generic OTFC held by retailers will have a significant impact on our financial position and results of operations.

For the three months ended March 31, 2011, in addition to the factors addressed below, net sales were also impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers.  Changes in foreign exchange rates versus the U.S. dollar caused a decrease of approximately $3.4 million in European net sales as compared to the three months ended March 31, 2010. The other key factors that contributed to the increase in sales, period to period, are summarized by therapeutic area as follows:

·In CNS, net sales increased 7 percent. U.S. results for our CNS products reflect pricing increases in May 2010 and a Provigil price increase in January 2011.  NUVIGIL was launched in June 2009 and the 49% increase in net sales is due to promotional efforts and the increased acceptance of NUVIGIL.  For both PROVIGIL and GABITRIL, which are non-promoted products, price increases were offset by declines in unit sales.  The PROVIGIL decline in unit sales is further due to the introduction of NUVIGIL and the transition of our marketing support from PROVIGIL to NUVIGIL.  For the three months ended March 31, 2011 NUVIGIL represented 41% of the combined NUVIGIL/PROVIGIL prescriptions in the U.S.  Europe net sales of PROVIGIL decreased 16% due to lower prices and the unfavorable effect of exchange rates.   Generic CNS sales increased as a result of the inclusion of Mepha products.

·In Pain, net sales increased 13 percent.  Net sales increased primarily due to the inclusion of Mepha products, the introduction of FENTORA into several European territories and US pricing increases period over period. Net sales of our pain products have been negatively impacted by a 15% decline in the rapid onset opioid market.  Sales of FENTORA and AMRIX benefited from pricing increases in the U.S. in May 2010, and AMRIX further benefited from a January 2011 price increase. ACTIQ sales benefited from pricing increases in May and October 2010.   Net sales increases due to pricing for AMRIX and ACTIQ in the U.S. were offset by declining unit sales specifically resulting, in the case of ACTIQ, from market share loss to generic competition.  In Europe, ACTIQ sales declined as a result of declining sales volumes and price reductions

·In Oncology, net sales increased 35 percent. This increase was attributable to increased acceptance of TREANDA, which also benefited from price increases in February 2011.  Generic oncology sales increased as a result of the inclusion of Mepha products.

·Other generic net sales increased 244% due to the inclusion of Mepha product net sales of $74.6 million.

Other Revenues—The decrease of  54% from period to period is primarily due to a decline in license royalties earned by Cephalon Australia, offset by revenues earned from VOGALENE/VOGALIB.

Analysis of gross sales to net sales—The following table presents the product sales allowances deducted from gross sales to arrive at a net sales figure:

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	Three Months Ended
	March 31,
	2011			2010			Change			% Change
Gross sales	$	836,854		$	657,050		$	179,804		27	%
Product sales allowances:
Prompt payment discounts	12,384			11,154			1,230			11
Wholesaler discounts	11,319			3,826			7,493			196
Returns	(3,419		)	11,673			(15,092		)	(129	)
Coupons	13,350			7,659			5,691			74
Medicaid discounts	20,807			13,590			7,217			53
Managed care and governmental contracts	46,411			32,467			13,944			43
	100,852			80,369			20,483			25
Net sales	$	736,002		$	576,681		$	159,321		28	%
Product sales allowances as a percentage of gross sales	12		%	12		%

Prompt payment discounts increased for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 due to the increase in U.S. net sales. Wholesaler discounts increased as price increases produced fewer wholesaler credits to offset wholesaler discounts in 2011 than in 2010.  Coupons increased period over period as a result of increased utilization for the NUVIGIL and AMRIX coupon programs.

In January 2011, we discontinued the 100 count bottles of PROVIGIL and the 60 count bottles of NUVIGIL and replaced them with new 30 count bottles.  We expect that this change reduces inventory levels in both the wholesale and retail supply chain and therefore reduces our exposure to returns.  In addition, historical actual returns experience for these products have been trending more favorably than our reserve estimates.  Combined, these factors resulted in a reduction of our returns reserve and returns accrual rate for these products in the first quarter of 2011.

Medicaid discounts increased for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 due to higher rebate rates for certain of our products resulting from product price increases in January and February 2011 and May 2010. Managed care and governmental contracts increased for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 due to increases in Federal Chargebacks from increases in sales of PROVIGIL and TREANDA and an increase in our DOD Tricare expense. In the future, we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of price increases on Medicaid discounts and the effect of the recently-enacted U.S. health care reform law.

	Three Months Ended
	March 31,
	2011		2010		Change		% Change
Cost of sales	$	157,983	$	105,043	$	52,940	50	%
Research and development	122,313		105,377		16,936		16
Selling, general and administrative	250,686		204,641		46,045		23
Change in fair value of contingent consideration	1,801		—		1,801		100
Restructuring charges	858		744		114		15
Acquired in-process research and development	30,000		—		30,000		100
Impairment and (gain) loss on sale of assets	5,648		—		5,648		100
	$	569,289	$	415,805	$	153,484	37	%

Cost of Sales—The cost of sales was 21% of net sales for the three months ended March 31, 2011 and 18% of net sales for the three months ended March 31, 2010.  The increase in cost of sales for the three months ended March 31, 2011 is primarily due to the inclusion of Mepha. Changes in foreign exchange rates versus the U.S. dollar caused a decrease of approximately 2% or $1.1 million in European expenses as compared to the three months ended March 31, 2010. For the three months ended March 31, 2011 and 2010, we recognized $29.1 million and $25.8 million of amortization expense included in cost of sales, respectively. Amortization expense increased $8.2 million due to the increase in amortization recognized in connection with the acquisition of Mepha, offset by a decrease of $4.5 million due to the expiration of

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Cephalon Australia royalty agreements. We recorded accelerated depreciation charges of $5.2 million in cost of sales in the first quarter of 2010.

Research and Development Expenses—Research and development expenses increased $16.9 million, or 16%, for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010. We experienced increased R&D expenditures from the inclusion of Mepha, as well as an increase in clinical trial activity.  For the three months ended March 31, 2011 and 2010, we recognized $5.8 million and $6.2 million of depreciation expense included in research and development expenses, respectively.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $46.0 million, or 23% for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, primarily due the inclusion of Mepha, increased legal expenditures, and $2.6 million for the recognition of the first quarter portion of the 2011 annual pharmaceutical fee mandated by the Health Care and Education Reconciliation Act.  Changes in foreign exchange rates versus the U.S. dollar caused a decrease of approximately 3% or $1.5 million in European expenses as compared to the three months ended March 31, 2010.  For the three months ended March 31, 2011 and 2010, we recognized $7.3 million and $6.6 million of depreciation expense included in selling, general and administrative expenses, respectively.

Change in fair value of contingent consideration— For the three months ended March 31, 2011, we recorded a $1.8 million charge for the change in fair value on Ception and BDC contingent consideration. Changes in fair value during the first quarter reflect changes in our risk adjusted discount rate and accretion related to the passage of time as development work towards the achievement of the milestones progresses.

Restructuring charges—For the three months ended March 31, 2011 and 2010, we recorded $0.9 million and $0.7 million, respectively, related to our restructuring plan to consolidate certain manufacturing and research and development activities primarily within our U.S. locations.  These charges primarily consist of costs associated with the transfer of technology, severance for employees who have or are expected to be terminated as a result of this restructuring plan.  For additional information, see Note 3 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

Acquired in-process research and development— For the three months ended March 31, 2011, we incurred expense of $30.0 million associated with the acquisition of exclusive world-wide rights to commercialize specific products based on Mesoblast’s proprietary adult stem cell technology platform..

Impairment and (gain) loss on sale of assets— In March 2011, we recorded an impairment of $6.1 million related to the planned divestiture of our facility in Mitry Mory, France, offset by a gain of $0.4 million related to the sale of our facility in Savigny le Temple, France.

	Three months ended
	March 31,
	2011			2010			Change			% Change
Interest income	$	1,017		$	1,930		$	(913	)	-47	%
Interest expense	(24,207		)	(26,791		)	2,584			(10	)
Change in fair value of investments	164,735			—			164,735			100
Other income (expense), net	(3,028		)	(7,271		)	4,243			(58	)
	$	138,517		$	(32,132	)	$	170,649		-531	%

Other Income (Expense)—Other income (expense) increased $170.6 million, or 531%, for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010. The change was attributable to the following factors:

·a $0.9 million decrease in interest income due to lower average investment balances;

·a $2.6 million decrease in interest expense due to the redemption of the Zero Coupon Notes in June 2010;

·a $164.7 million change in the fair value of our investments due to:

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·a $159.6 million change in fair value of our Mesoblast investment for which we have elected the fair value option and the investees stock price has increased since the date of our investment; and

·a $5.1 million increase in the fair value of our ChemGenex investments as compared to the value of the Chem Genex convertible notes and purchase option which we converted into shares in March; and

·a $4.2 million increase in other income (expense), net due to losses of $0.5 million and $6.2 million on foreign exchange derivative instruments in 2011 and 2010, respectively, and other net foreign exchange losses as a result of fluctuations in European currencies during those reporting periods, including the settlement of foreign currency transactions recorded by our Swiss subsidiaries.

	Three Months Ended
	March 31,
	2011		2010		Change		% Change
Income tax expense	$	102,731	$	48,311	$	54,420	113	%

Income Taxes— For the three months ended March 31, 2011, we recognized $102.7 million of income tax expense on income before income taxes of $314.3 million, resulting in an overall effective tax rate of 32.7 percent. This compared to income tax expense for the three months ended March 31, 2010 of $48.3 million on income before income taxes of $148.6 million, resulting in an effective tax rate of 32.5 percent.

	Three Months Ended
	March 31,
	2011			2010		Change			% Change
Net (income) loss attributable to noncontrolling interest	$	(522	)	$	10,228	$	(10,750	)	105	%

Noncontrolling Interest- For the three months ended March 31, 2011, we recorded income attributable to noncontrolling interest of $0.5 million related to our investment in Alba and Mepha Pharma AG. For the three months ended March 31, 2010, we recorded a loss attributable to noncontrolling interest of $10.2 million, related to our investment in BDC and Ception.  BDC and Ception became wholly owned subsidiaries in November and April 2010, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

(In thousands)

	As of			As of
	March 31, 2011			December 31, 2010
Financial assets:
Cash and cash equivalents	$	1,160,657		$	1,160,239
Debt and Redeemable Equity:
Current portion of long-term debt- convertible notes	$	820,000		$	820,000
Current portion of long-term debt discount- convertible notes	(161,969		)	(170,183		)
Current portion of long-term debt- other debt	5,653			2,180
Long-term debt- convertible notes	500,000			500,000
Long-term debt discount- convertible notes	(104,277		)	(111,357		)
Long-term debt- other debt	2,752			2,773
Redeemable equity	161,969			170,183
Total debt and redeemable equity	$	1,224,128		$	1,213,596
Select measures of liquidity and capital resources:
Working capital surplus	$	910,978		$	934,960
Total cash, cash equivalents and short-term investments as a percentage of total assets	22		%	24		%

	Three months ended
	March 31,
	2011			2010
Change in cash and cash equivalents
Net cash provided by operating activities	$	147,758		$	233,555
Net cash used for investing activities	(169,928		)	(15,768		)
Net cash provided by financing activities	12,884			11,217
Effect of exchange rate changes on cash and cash equivalents	9,704			(2,186		)
Net increase in cash and cash equivalents	$	418		$	226,818

Our working capital surplus is calculated as current assets less current liabilities. Our convertible notes contain conversion terms that will impact whether these notes are classified as current or long-term liabilities and consequently affect our working capital position.

Net Cash Provided by Operating Activities

Cash provided by operating activities is primarily driven by income from sales of our products offset by the timing of receipts and payments in the ordinary course of business.

Net income was $211.6 million in 2011 compared to $100.3 million in 2010 primarily due to increased sales of our products and changes in fair value of our investments.

Included within cash used for operating activities in the first quarter of 2011 is a payment of $30.0 million, recorded as in process research and development, for worldwide license to Mesoblast’s proprietary technology platform.

The change in receivables between periods is primarily due to an increase in trade receivables in 2011 resulting from our increased product sales.  Changes in accounts payable and accrued expenses are primarily due to increases in accrued taxes.

Net Cash Used for Investing Activities

Cash used in investing activities primarily relates to acquisitions of business, technologies, products and product rights and funds used for capital expenditures in property and equipment.

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Net cash used for investing activities was $169.9 million in 2011 as compared to $15.8 million in 2010. The increase between periods is primarily attributable to the following activity in 2011:

·$109.1 million paid in conjunction with our additional 7.8% equity interest in Mesoblast;

·$40.6 million paid to exercise our options to acquire ChemGenex equity securities;

·$17.0 million paid as consideration for an option to purchase Alba;

·$9.3 million paid for an additional equity interest in Symbio; and

·the initial variable interest entity consolidation of Alba’s cash and cash equivalent balances of $15.5 million.

Net Cash Provided by (Used for) Financing Activities

Net cash provided by financing activities was $12.9 million in 2011 as compared to $11.2 million in 2010.

Both periods presented reflect proceeds received from the exercise of stock options which will vary from period to period primarily due to the number of options exercised and fluctuations in the market value of our stock relative to the exercise price of such options.

Noncontrolling Interest

Although our VIE’s are included in our consolidated financial statements, our interest in our VIE’s assets are limited to those accorded to us in the agreements with our VIE’s as described in Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.  The creditors of our VIE’s have no recourse to the general credit of Cephalon.

Outlook

We expect to use our cash, cash equivalents, credit facility and investments for working capital and general corporate purposes, the acquisition of businesses, products, product rights, technologies, property, plant and equipment, the payment of contractual obligations, including scheduled interest payments on our convertible notes and regulatory or sales milestones that may become due, and/or the purchase, redemption or retirement of our convertible notes. We expect that net sales of our currently marketed products should allow us to continue to generate positive operating cash flow in 2011. While we anticipate generic competition to PROVIGIL in 2012, which will negatively impact net earnings and cash flow from operations, we expect to generate positive operating cash flow in 2012 as well, absent significant cash requirements for acquisitions or otherwise.  However, there is uncertainty regarding the effect of certain developments on our anticipated rate of sales in 2012 and beyond, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates and new indications for existing products.

Based on our current level of operations, projected sales of our existing products, and estimated sales from our product candidates, if approved, combined with other revenues and interest income, we also believe that we will be able to service our existing debt and meet our capital expenditure and working capital requirements in the near term. We do not expect any material changes in our capital expenditure spending during 2011. However, we cannot be sure that our anticipated revenue growth in 2011 will be realized or that we will continue to generate significant positive cash flow from operations. We may need to obtain additional funding for future significant strategic transactions, to repay our outstanding indebtedness, particularly if such indebtedness is presented for conversion by holders (see “—Indebtedness” below), or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs or closure costs.

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Marketed Products and Product Candidates

Sales levels of our wakefulness products depends, in part, on the continued effectiveness of the various settlement agreements we entered into in late 2005 and early 2006, as well as our maintenance of protection in the United States and abroad of the modafinil particle-size patent through its expiration beginning in 2014 and our NUVIGIL polymorph patent through its expiration beginning in 2023. See Note 12 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.  Growth of NUVIGIL sales in the future may depend in part on our success in promoting NUVIGIL in the U.S., on our ability to secure additional indications for NUVIGIL, and on the strength of the patents covering NUVIGIL, particularly in light of the ANDAs filed by several generic manufacturers.

Our future growth depends in large part on our ability to achieve sales growth with AMRIX and TREANDA, which we launched in October 2007 and April 2008, respectively. Growth of AMRIX sales will depend in part on the strength of the patent covering the product, particularly in light of the ANDAs filed by Barr, Mylan and Anchen, and a positive decision from the October 2010 trial related to the Barr, Mylan and Anchen ANDAs, which decision is expected by or in the second quarter of 2011, and a possible second trial related to recently issued additional pharmaceutical formulation patents covering AMRIX.

Our future growth also depends, in part, on our ability to successfully market FENTORA within its current indication and to secure FDA approval of a new broader label indication for the product outside of breakthrough cancer pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In early April 2009, we submitted a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA regarding the FENTORA REMS Program in the first half of 2011. Growth of FENTORA sales will also depend in part on the strength of the patents covering the product, particularly in light of the ANDAs filed by Watson, Barr and Sandoz.

Clinical Studies

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and to explore the utility of our existing products in treating disorders beyond those currently approved in their respective labels. In 2011, we expect to continue to incur significant levels of research and development expenditures. We also expect to continue or begin a number of significant clinical programs including: clinical studies evaluating  TREANDA as a treatment for frontline indolent NHL; clinical studies evaluating LUPUZOR for the treatment of systemic lupus erythematosus; clinical studies evaluating CINQUIL for the treatment of eosonophilic asthma; clinical studies of tamper-resistant hydrocodone for the treatment of chronic pain; clinical programs with respect to certain oncology and inflammatory diseases; clinical program with NUVIGIL focused on adjunctive treatment for bipolar depression; through funding provided to Alba Therapeutics, clinical studies evaluating larazotide acetate for the treatment of celiac disease; and clinical studies evaluating obataclax for the treatment of extensive stage small cell lung cancer.  As part of our strategic alliance with Mesoblast Ltd., we will also begin work on our clinical programs for mesynchymal precursor cells to treat congestive heart failure and acute myocardial infarction and our clinical program for cord blood expansion.

Manufacturing, Selling and Marketing Efforts

In 2011, we expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. In 2011, we expect to complete a capital expenditure project related to the transfer of manufacturing activities from our facility in Eden Prairie, Minnesota to our facility in Salt Lake City, Utah. In the third quarter 2010, we sold the Eden Prarie facility and certain associated equipment for proceeds of $4.7 million.  Pursuant to the sale agreement, we are leasing the Eden Prarie facility from the buyer until December 2011.

Over the past few years, we have developed a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil.  As a result of using this new process coupled with the launch of NUVIGIL, we reassess, as needed, the potential impact of these items on certain of our existing agreements to purchase modafinil and reserve for purchase commitments in excess of current expected need.  For more information regarding modafinil purchase commitments, please see Note 8 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. As of March 31, 2011, our aggregate future purchase commitments remaining totaled $7.7 million and are fully reserved.

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In March 2011 we finalized our plan to divest our manufacturing facility in Mitry Mory, France.  As part of the transaction, the acquirer has agreed to continue the operation of the facility and the employment of all current personnel so that no restructuring charges will be required. We also intend to enter into an agreement with the acquirer to purchase an annual minimum amount of raw material used in the production of SPASFON.  As a result, we intend to transfer the facility for a nominal amount and have recognized an impairment of $6.1 million in the first quarter of 2011.  We signed the Transfer Agreement with the acquirer for the transfer of the facility in April 2011 and we expect the facility to be transferred before the end of 2011.  As of March 31, 2011, the remaining value of the facility included on our balance sheet was insignificant.

Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our convertible subordinated notes outstanding as of March 31, 2011:

Security	Outstanding		Conversion Price			Redemption Rights and Obligations
	(in millions)
2.5% Convertible Senior Subordinated Notes due May  2014 (the “2.5% Notes”)	$	500.0	$	69.00	*	Generally not redeemable by the holder prior to November 2013.
2.0% Convertible Senior Subordinated Notes due June 2015 (the “2.0% Notes”)	$	820.0	$	46.70	**	Generally not redeemable by the holder prior to December 2014.

*Stated conversion price as per the terms of the notes; subject to adjustment (equivalent to a conversion rate of approximately 14.4928 shares per $1,000 principal amount of Notes.)  However, each convertible note contains certain terms restricting a holder’s ability to convert the notes, including that a holder may only convert if any of the following conditions is satisfied: (1) during any calendar quarter commencing after September 30, 2009, the closing sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price per share ($89.70 based on the initial conversion price) of the notes in effect on that last trading day; (2) during the 10 consecutive trading-day period that follows any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then current conversion rate; or (3) if we make certain significant distributions to holders of our common stock, we enter into specified corporate transactions or our common stock is not listed on a U.S. national securities exchange.

**Stated conversion prices as per the terms of the notes. However, each convertible note contains certain terms restricting a holder’s ability to convert the notes, including that a holder may only convert if the closing price of our stock on the day prior to conversion is higher than $56.04. For a more complete description of these notes, including the associated convertible note hedge, see Note 13 to our Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2009.

As of March 31, 2011, our closing stock price was $76.08, and therefore the 2.0% Notes were convertible as of that date. Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this Quarterly Report on Form 10-Q, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, other than the restrictive covenants contained in our credit agreement, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay any principal balance of notes presented for conversion, we will be required to raise additional funds. Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the market price for our securities.

As of March 31, 2011, our 2.0% Notes have been classified as current liabilities on our consolidated balance sheet.  We believe that the share price of our common stock would have to significantly increase over the market price as of the filing date of this report before the fair value of the convertible notes would be less than the value of the common stock shares underlying the notes and, as such, we believe it is highly unlikely that holders of the 2.0% Notes will present significant amounts of such notes for conversion under the current terms. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal amounts due through a combination of utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

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The annual interest payments on our 2.0% Notes as of March 31, 2011 are $16.4 million, payable semi-annually on June 1 and December 1. The annual interest payments on our 2.5% Notes as of March 31, 2011 are $12.5 million, payable semi-annually on May 1 and November 1. In the future, we may agree to exchanges of the notes for shares of our common stock or debt, or may determine to use a portion of our existing cash on hand to purchase or retire all or a portion of the outstanding convertible notes.

Our 2.0% Notes, 2.5% Notes and 2010 Zero Coupon Notes each are included in the dilutive earnings per share calculation using the treasury stock method. Under the treasury stock method, we must calculate the number of shares issuable under the terms of these notes based on the average market price of our common stock during the period, and include that number in the total diluted shares figure for the period. At the time we sold our 2.0% Notes, 2.5% Notes and 2010 Zero Coupon Notes we entered into convertible note hedge and warrant agreements that together are intended to have the economic effect of reducing the net number of shares that will be issued upon conversion of the notes by increasing the effective conversion price for these notes, from our perspective, to $67.92, $100.00 and $72.08, respectively. However, from an accounting principles generally accepted in the United States of America perspective, since the impact of the convertible note hedge agreements is always anti-dilutive we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.

Under the treasury stock method, changes in the share price of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation. The following table provides examples of how changes in our stock price will require the inclusion of additional shares in the denominator of the fully diluted earnings per share calculation (“Total Treasury Stock Method Incremental Shares”). The table also reflects the impact on the number of shares we could expect to issue upon concurrent settlement of the convertible notes, the warrant and the convertible note hedge (“Incremental Shares Issued by Cephalon upon Conversion”):

Share Price		Convertible Notes Shares	Warrant Shares	Total Treasury Stock Method Incremental Shares(1)	Shares Due to Cephalon under Note Hedge		Incremental Shares Issued by Cephalon upon Conversion(2)
$	55.00	2,650	—	2,650	(2,650	)	—
$	65.00	4,944	—	4,944	(4,944	)	—
$	75.00	7,206	1,658	8,864	(7,206	)	1,658
$	85.00	9,276	3,528	12,804	(9,276	)	3,528
$	95.00	10,910	5,005	15,915	(10,910	)	5,005
$	105.00	12,233	6,546	18,779	(12,233	)	6,546

(1)Represents the number of incremental shares that must be included in the calculation of fully diluted shares under U.S. GAAP.

(2)Represents the number of incremental shares to be issued by us upon conversion of the convertible notes, assuming concurrent settlement of the convertible note hedges and warrants.

On August 15, 2008, we established a $200 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders.  The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries.  The credit agreement contains customary borrowing conditions and covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the credit agreement), senior debt to Consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates.  As of the date of this filing, we have not drawn any amounts under the credit facility.

Acquisition Strategy

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or acquired in-process research and development charges.

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Other

We may experience significant fluctuations in quarterly results based primarily on the level and timing of:

·cost of product sales;

·achievement and timing of research and development milestones;

·collaboration revenues;

·cost and timing of clinical trials, regulatory approvals and product launches;

·marketing and other expenses;

·manufacturing or supply disruptions;

·unanticipated conversions of our convertible notes; and

·costs associated with the operations of recently-acquired businesses and technologies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

(In thousands)

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. In preparing these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010 in the “Critical Accounting Policies and Estimates” section and the “Recent Accounting Pronouncements” section.

Product Sales Allowances—We record product sales net of the following significant categories of product sales allowances, each of which is described in more detail included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010: prompt payment discounts, wholesaler discounts, returns, coupons, Medicaid discounts, Medicare Part D discounts and managed care and governmental contracts. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources. In certain of the product sales allowance categories, we have calculated the impact of changes in our estimates, which we believe represent reasonably likely changes to these estimates based on historical data adjusted for certain unusual items such as changes in government contract rules.

The following table summarizes activity in each of the above categories for the three months ended March, 2011:

	Prompt Payment Discounts			Wholesaler Discounts			Returns*			Coupons			Medicaid Discounts			Managed Care & Governmental Contracts			Total
Balance at January 1, 2011	$	(4,935	)	$	(9,549	)	$	(81,885	)	$	(10,128	)	$	(41,767	)	$	(65,596	)	$	(213,860	)
Provision:
Current period	(12,384		)	(11,370		)	(8,072		)	(13,607		)	(21,350		)	(47,991		)	(114,774		)
Prior periods	—			51			11,491			257			543			1,580			13,922
Total	(12,384		)	(11,319		)	3,419			(13,350		)	(20,807		)	(46,411		)	(100,852		)
Actual:
Current period	6,781			5,604			—			612			—			22,484			35,481
Prior periods	4,935			9,498			4,207			7,181			17,756			27,961			71,538
Total	11,716			15,102			4,207			7,793			17,756			50,445			107,019
Balance at March 31, 2011	$	(5,603	)	$	(5,766	)	$	(74,259	)	$	(15,685	)	$	(44,818	)	$	(61,562	)	$	(207,693	)

*Given our return goods policy, we assume that all returns in a current year relate to prior period sales.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in European and Australian subsidiaries that have transactions, assets and liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes, as well as transactions, assets and liabilities of our domestic operations that are denominated in foreign currencies.

We could enter into foreign exchange agreements to hedge foreign exchange risk associated with significant acquisitions denominated in foreign currencies.  In December 2010, Cephalon entered into a foreign exchange forward contract related to our Mesoblast transaction.  This contract protected against fluctuations between the Australian Dollar and (“A$”) the U.S. Dollar, up to a value of A$106.0 million, and changes in the value of this contract were recognized within net income.  This contract settled in February 2011.  For the quarter ended March 31, 2011, we recognized a loss of $0.5 million from the decrease in fair value of this foreign exchange contract.

In April, 2011, we entered into forward exchange and option contracts related to our takeover bid for ChemGenex.  These contracts will protect against fluctuations between the A$ and the U.S. Dollar, up to a value of A$162.0 million.  Changes in the value of these contracts will be recognized within net income, and the contracts will settle in June 2011.

At December 31, 2010, we held an investment in ChemGenex convertible notes which we elected to account for under the fair value method.  Our investment in ChemGenex convertible notes and assets we previously recorded for the options to purchase additional shares of ChemGenex were both subject to assumptions impacted by the stock price of ChemGenex at December 31, 2010.  In March 2011 we provided notice to convert our convertible notes and exercise our options to acquire equity securities in ChemGenex.  At March 31, 2011 we have a 27.6% investment in ChemGenex.  Additionally, in 2010 and 2011, we have purchased a combined 20.0% interest in our affiliate Mesoblast. While our investments in Mesoblast and ChemGenex equity securities are equity method investments, we have chosen to account for our interests under the fair value option.  Fair value is measured based on the company’s publicly traded market prices.

Therefore, the fair value of these investments are subject to fluctuations due to the volatility of the stock market, changes in general economic conditions and changes in the financial condition of the company.  An assumed 25% adverse change in market prices of ChemGenex and Mesoblast would result in a corresponding decline in total fair value of $117.9 million, which would be included as Change in fair value of investments within Other income (expense) in our statement of operations.   The ChemGenex and Mesoblast investments are also Australian Dollar investments and subject to foreign currency exchange rate risk.  A 10% weakening of the Australian Dollar to the U.S Dollar, assuming no other changes in stock price or other assumptions in the fair value models, would result in a corresponding decline in fair value of $47.1 million which would be included as Change in fair value of investments within Other income (expense) in our statement of operations.

ITEM 4.  CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b)  Change in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The information required by this Item is incorporated by reference to Note 12 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

ITEM 1A.  RISK FACTORS

You should carefully consider the risks described below, in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

Our proposed acquisition by Teva may be disruptive to our business and could create uncertainty that may adversely affect our operations and results.

In early May 2011, we announced together with Teva Pharmaceutical Industries Ltd. (“Teva”) that our companies’ respective Boards of Directors have unanimously approved a definitive agreement under which Teva will acquire all of the outstanding shares of Cephalon for $81.50 per share in cash.

The consummation of the Teva transaction, which is not conditioned on financing, is subject to the satisfaction of customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and clearance by the European Commission under the EC Merger Regulation, as well as the approval of Cephalon stockholders.  We cannot predict whether these closing conditions for the proposed transaction with Teva will be satisfied.  As a result, we cannot assure you that such transaction will be completed. In addition, if the proposed transaction does not occur, we will remain liable for considerable related expenses that we have incurred.

Our announcement with Teva follows an unsolicited proposal we received in March 2011 from Valeant Pharmaceuticals International, Inc. (“Valeant”) to acquire all of the outstanding shares of our common stock for $73 per share.  In early April 2011, our Board announced that, after carefully reviewing the proposal and after consultation with our financial and legal advisors, it unanimously concluded that the proposal is inadequate and not in the best interests of our shareholders. Thereafter, in late April 2011, Valeant initiated a consent solicitation process by nominating 8 candidates to remove and replace our current Board.  On May 2, 2011, Valeant announced it was ending its consent solicitation process due to the signing of the definitive agreement by Cephalon and Teva.

Our proposed acquisition by Teva may create uncertainty for our employees, which may adversely affect our ability to retain key employees and to hire new talent. These actions may also create uncertainty for current and potential business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us.  The Valeant and Teva processes have been, and may continue to be, a significant distraction for our management and employees and, with respect to the Teva process, may continue to require, the expenditure of significant time and resources by us.  Additionally, we and members of our Board have been named in three purported stockholder class action complaints relating to the Valeant proposal as more fully described in Note 12 of the Consolidated Financial Statements in Part I, Item 1 of this Report and we expect additional complaints to be filed relating to our proposed acquisition by Teva. These lawsuits or any future lawsuits may become time consuming and expensive. These consequences, alone or in combination, may harm our business.

Our largest revenue product, PROVIGIL, will be subject to generic competition beginning in April 2012.

For the quarter ended March 31, 2011, approximately 35% of our total consolidated net sales were derived from sales of PROVIGIL in the United States.  In late 2005 and early 2006, we entered into PROVIGIL patent settlement agreements with certain generic pharmaceutical companies.  As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations.  Outside the United States, we agreed with Teva to generally allow for entry in October 2012.  We expect that PROVIGIL sales will erode beginning in April 2012 and beyond, and it is possible that NUVIGIL sales will also be affected by PROVIGIL generic competition.

Our near term profitability will depend on the growth of NUVIGIL and TREANDA and the continued acceptance of AMRIX and FENTORA.

For the quarter ended March 31, 2011, approximately 7%, 16%, 6% and 3% of our total consolidated net sales were derived from sales of NUVIGIL, TREANDA, FENTORA and AMRIX, respectively.  With respect to NUVIGIL, we cannot be sure that our sales and marketing efforts will be successful or that it will be accepted in the market.  With respect to TREANDA, we cannot be certain that it will continue to be accepted in its market or that we will be able to achieve projected levels of sales growth.  We will also need AMRIX and FENTORA to continue to be accepted in the market.

Specifically, the following factors, among others, could affect the level of market acceptance of these products:

·a change in the perception of the healthcare community of the safety and efficacy of the products, both in an absolute sense and relative to that of competing products;

·the level and effectiveness of our sales and marketing efforts;

·the extent to which the products are studied in clinical trials in the future and the results of any such studies;

·any unfavorable publicity regarding these or similar products;

·the price of the products relative to the benefits they convey and to other competing drugs or treatments, including the impact of the availability of generic versions of our products on the market acceptance of those products;

·any changes in government and other third-party payer reimbursement policies and practices; and

·regulatory developments affecting the manufacture, marketing or use of these products.

Any adverse developments with respect to the sale or use of these products could significantly reduce our product revenues and have a material adverse effect on our ability to generate net income and positive net cash flow from operations.

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We may be unsuccessful in our efforts to obtain regulatory approval for new products or for new formulations or expanded indications of our existing products, which would significantly hamper future sales and earnings growth.

Our long-term prospects, particularly with respect to the growth of our future sales and earnings, depend to a large extent on our ability to obtain FDA approvals of new product candidates (including any product candidates for which we may have an option-to-acquire) or of expanded indications of our existing products such as TREANDA, FENTORA and NUVIGIL.

We are currently conducting a Phase III clinical trial of TREANDA in combination with RITUXAN as a frontline treatment for indolent NHL.  While not a currently approved indication by the FDA, TREANDA was recently listed in the 2010 NCCN clinical practice guidelines and the Clinical Pharmacology compendia as a frontline treatment for indolent NHL.  Separately, the results of an independent Phase III clinical study conducted by the German Study for Indolent Lymphomas Group (“StiL Group”) in Giessen, Germany were announced in December 2009.  The study for the first-line treatment of patients with advanced follicular, indolent, and mantle cell lymphomas, indicated better tolerability and more than a 20-month improvement in median progression free survival when treated with TREANDA in combination with rituximab compared to CHOP in combination with rituximab.  The study covered indications that are not currently FDA-approved indications for TREANDA.  We plan to submit the StiL Group’s study results to support an sNDA for TREANDA for the treatment of frontline indolent NHL in 2011.

We have focused our clinical strategy for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic pain and back pain.  In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions.  In December 2008, we received a supplement request letter from the FDA requesting that we submit a REMS Program with respect to FENTORA.  We have been engaged in ongoing discussions with the agency regarding our REMS program for FENTORA and ACTIQ, and we expect to receive a response from the FDA in the first half of 2011.  We believe that, by working with the FDA, we can design and implement a REMS Program to meet

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the FDA’s requests and possibly to provide a potential avenue for approval of the sNDA.  While we plan to initiate the REMS Program upon receipt of approval from the FDA, we may be unsuccessful, ultimately, in expanding the indications beyond the management of breakthrough cancer pain.

In March 2009, we announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for treating major depressive episode in adults with bipolar I disorder.  We have initiated three Phase III clinical trials, two of which we expect to complete in late 2011 or early 2012 and the third of which we expect to complete in late 2012 or early 2013.  In June 2010, we announced that the primary endpoint was not met for a Phase II study of NUVIGIL as an adjunctive therapy for the treatment of the negative symptoms of schizophrenia.  In 2010, we also decided to discontinue our clinical studies regarding NUVIGIL as a treatment of traumatic brain injury due to slow patient enrollment.  In December 2010, we announced that we will not pursue further a jet lag indication for NUVIGIL.

There can be no assurance that our applications to market for these new indications or for product candidates will be submitted or reviewed in a timely manner or that the FDA will approve the new indications or product candidates on the basis of the data contained in the applications.  Even if approval is granted to market a new indication or a product candidate, there can be no assurance that we will be able to successfully commercialize the product in the marketplace or achieve a profitable level of sales.

We may not be able to maintain adequate protection for our intellectual property or market exclusivity for our key products and, therefore, competitors may develop competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully and limit our commercial success.

We place considerable importance on obtaining patent protection for new technologies, products and processes.  To that end, we file applications for patents covering the compositions or uses of our drug candidates or our proprietary processes.  The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions.  Accordingly, the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology.  Patent disputes in our industry are frequent and can preclude commercialization of products.  If we ultimately engage in and lose any such disputes, we could be subject to competition or significant liabilities, we could be required to enter into third party licenses or we could be required to cease using the technology or product in dispute.  In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.

Competition from generic manufacturers is a particularly significant risk to our business.  Upon the expiration of, or successful challenge to, our patents covering a product, generic competitors may introduce a generic version of that product at a lower price.  Some generic manufacturers have also demonstrated a willingness to launch generic versions of branded products before the final resolution of related patent litigation (known as an “at-risk launch”).  A launch of a generic version of one of our products could have a material adverse effect on our business and we could suffer a significant loss of sales and market share in a short period of time.  As described above, we expect generic competition to PROVIGIL to begin in April 2012.

We also rely on trade secrets, know-how and continuing technological advancements to support our competitive position.  Although we have entered into confidentiality and invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to our unpatented trade secrets and know-how.  Moreover, others could independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.  In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in areas similar to those that we now pursue.  As a result, we could be subject to allegations of trade secret violations and other claims.

We are currently engaged in lawsuits with respect to generic company challenges to the validity and/or enforceability of our patents covering AMRIX, FENTORA, PROVIGIL and NUVIGIL.  While we intend to vigorously defend the validity, and prevent infringement, of our patents, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.  The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or expiration, could materially impact our results of operations.  For more information regarding the

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legal proceedings described in this Overview and others, please see Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

In late 2005 and early 2006, we entered into PROVIGIL patent settlement agreements with certain generic pharmaceutical companies.  As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations.  Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date.  Various factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due to an adverse judicial decision in a patent infringement lawsuit; (ii) all parties with first-to file ANDAs relinquish their right to the 180-day period of marketing exclusivity, which could allow a subsequent ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable counterparty breaches a PROVIGIL settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania described below.  We filed each of the settlements with both the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”).  The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us challenging the validity of the settlements and related agreements.  The complaint alleges a violation of Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future.  Various private plaintiffs, some of whom seek to represent various classes of plaintiffs, have also filed complaints challenging the PROVIGIL settlements.  We believe the FTC and private complaints are without merit.  While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.  For more information regarding our PROVIGIL settlements and related litigation, please see Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply.

We currently have a number of products that have been approved for sale in the United States, foreign countries or both.  All of our approved products are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion.  The failure to comply with any rules and regulations of the FDA or any foreign medical authority, or the post-approval discovery of previously unknown problems relating to our products, could result in, among other things:

·fines, recalls or seizures of products;

·total or partial suspension of manufacturing or commercial activities;

·non-approval of product license applications;

·restrictions on our ability to enter into strategic relationships; and

·criminal prosecution.

Over the past few years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities, including the DOJ and various U.S. Attorney’s Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the FTC and various state Attorney General offices.  These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with off-label promotion of products, pricing and Medicare and/or Medicaid reimbursement.

Because of the broad scope and complexity of these laws and regulations, the high degree of prosecutorial resources and attention being devoted to the sales practices of pharmaceutical companies by law enforcement authorities, and the risk of potential exclusion from federal government reimbursement programs, numerous companies have determined that it is

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highly advisable that they enter into settlement agreements in these matters, particularly those brought by federal authorities.  Companies that have chosen to settle these alleged violations have typically paid multi-million dollar fines to the government and agreed to abide by corporate integrity agreements.  In some instances, such fines have exceeded $1 billion.

In September 2008, as part of our settlement with the U.S. government regarding their investigation of our promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, we entered into a five-year Corporate Integrity Agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services.  The CIA provides criteria for establishing and maintaining compliance with federal laws governing the marketing and promotion of our products.  We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed.  For more information regarding our settlement with the U.S. government and the CIA, please see Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Although we have resolved the previously outstanding federal and state government investigations into our sales and promotional practices, there can be no assurance that there will not be regulatory or other actions brought by governmental entities who are not party to the settlement agreements we have entered.  We may also become subject to claims by private parties with respect to the alleged conduct which was the subject of our settlements with the federal and state governmental entities.  In addition, while we intend to comply fully with the terms of the settlement agreements, the settlement agreements provide for sanctions and penalties for violations of specific provisions therein.  We cannot predict when or if any such actions may occur or reasonably estimate the amount of any fines, penalties, or other payments or the possible effect of any non-monetary restrictions that might result from either settlement of, or an adverse outcome from, any such actions.  Further, while we have initiated, and will initiate, compliance programs to prevent conduct similar to the alleged conduct subject to these agreements, we cannot provide complete assurance that conduct similar to the alleged conduct will not occur in the future, subjecting us to future claims and actions.  Failure to comply with the terms of the CIA could result in, among other things, substantial civil penalties and/or our exclusion from government health care programs, which could materially reduce our sales and adversely affect our financial condition and results of operations.

It is both costly and time-consuming for us to comply with these inquiries and with the extensive regulations to which we are subject.  Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

With respect to our product candidates, we conduct research, preclinical testing and clinical trials, each of which requires us to comply with extensive government regulations.  We cannot market these product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority.  The approval process is highly uncertain and requires substantial time, effort and financial resources.  Ultimately, we may never obtain approval in a timely manner, or at all.  Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected.

In addition, because PROVIGIL, NUVIGIL, FENTORA, EFFENTORA, ACTIQ and generic OTFC contain active ingredients that are controlled substances, we are subject to regulation by the U.S. Drug Enforcement Agency (“DEA”) and analogous foreign organizations relating to the manufacture, shipment, sale and use of the applicable products.  These regulations also are imposed on prescribing physicians and other third parties, making the storage, transport and use of such products relatively complicated and expensive.  With the increased concern for safety by the FDA and the DEA with respect to products containing controlled substances and the heightened level of media attention given to this issue, it is possible that these regulatory agencies could impose additional restrictions on marketing or even withdraw regulatory approval for such products.  In addition, adverse publicity may bring about a rejection of the product by the medical community.  If the DEA, FDA or analogous foreign authorities withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our ability to promote our products and product sales could be substantially affected.

Manufacturing, supply and distribution problems may create supply disruptions that could result in a reduction of product sales revenue and an increase in costs of sales, and damage commercial prospects for our products.

The manufacture, supply and distribution of pharmaceutical products, both inside and outside the United States, is highly regulated and complex.  We, and the third parties we rely upon for the manufacturing and distribution of our products, must comply with all applicable regulatory requirements of the FDA and foreign authorities, including current Good Manufacturing Practice regulations.

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We also must comply with all applicable regulatory requirements of the DEA and analogous foreign authorities for certain of our products that contain controlled substances.  The DEA also has authority to grant or deny requests for quota of controlled substances such as the fentanyl that is the active ingredient in FENTORA and EFFENTORA or the fentanyl citrate that is the active ingredient in ACTIQ and generic OTFC.

The facilities used to manufacture, store and distribute our products also are subject to inspection by regulatory authorities at any time to determine compliance with regulations.  These regulations are complex, and any failure to comply with them could lead to remedial action, civil and criminal penalties and delays in production or distribution of material.  With respect to our transition of manufacturing activities from our Eden Prairie, Minnesota facilty to our Salt Lake City, Utah facility, it is possible that we may not complete the transition on a timely basis or to the satisfaction of our third party partners or relevant regulatory agencies.

We rely on third parties for the timely supply of specified raw materials, equipment, contract manufacturing, formulation or packaging services, product distribution services, customer service activities and product returns processing.  Although we actively manage these third party relationships to ensure continuity and quality, some events beyond our control could result in the complete or partial failure of these goods and services.  Any such failure could have a material adverse effect on our financial condition and result of operations.

For certain of our products in the United States and abroad, we depend upon single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies.  The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or analogous foreign medical authority approval and is very time-consuming.  If we are unable to manage this process effectively or if an unforeseen event occurs at any facility, we could face supply disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, damage commercial prospects for our products and adversely affect operating results.

As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls, changes to product labeling, adverse publicity and reduced sales of our products.

During research and development, the use of pharmaceutical products, such as ours, is limited principally to clinical trial patients under controlled conditions and under the care of expert physicians.  The widespread commercial use of our products could identify undesirable or unintended side effects that have not been evident in our clinical trials or the commercial use as of the filing date of this report.  For example, in 2009, we updated the prescribing information for TREANDA to note the increased risk of severe skin toxicity (including Stevens Johnson Syndrome/toxic epidermal necrolysis) when TREANDA and allopurinol are administered concomitantly.  As described above, we are also in process of developing REMS Programs for certain of our products to mitigate serious risks associated with the use of certain of our products.  In October 2010, the FDA approved our REMS Programs for PROVIGIL and NUVIGIL.  In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict.  Additionally, incidents of product misuse, product diversion or theft may occur, particularly with respect to products such as FENTORA, EFFENTORA, ACTIQ, generic OTFC, NUVIGIL and PROVIGIL, which contain controlled substances.

In November 2010, the Committee for Medicinal Products for Human Use (“CHMP”), the scientific committee of the European Medicines Agency (“EMEA”), issued a final recommendation to restrict the use of modafinil in the European Union only to the treatment for excessive sleepiness associated with narcolepsy.  Based on broad scientific evidence, clinical experience and patient use, we do not agree with the CHMP recommendation.  On January 27, 2011, the European Commission (EC) adopted the CHMP opinion.  There can be no assurance that the FDA or other regulatory agencies will, in the future, review the risk/benefit profile for our modafinil-based products, PROVIGIL and NUVIGIL, or, for that matter, any of our products.

These events, among others, could result in adverse publicity that harms the commercial prospects of our products or lead to additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market.  In particular, FENTORA and ACTIQ have been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use.  Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market.

We face significant product liability risks, which may have a negative effect on our financial performance.

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The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at fault for causing an injury.  Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time.  As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase.  Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance.  The cost of product liability insurance has increased in recent years, and the availability of coverage has decreased.  Nevertheless, we maintain product liability insurance and significant self-insurance retentions held by our wholly-owned Bermuda-based insurance captive in amounts we believe to be commercially reasonable but which would be unlikely to cover the potential liability associated with a significant unforeseen safety issue.  Product liability coverage maintained by our captive is reserved for, based on Cephalon’s historical claims as well as historical claims within the industry.  Reserves held by the captive are fully funded.  Any claims could easily exceed our current coverage limits.  Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.

Our product sales and related financial results will fluctuate, and these fluctuations may cause our stock price to fall, especially if investors do not anticipate them.

A number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and expenses, and have established earnings expectations based upon those models.  These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly.  Forecasting future revenues is difficult, especially when the level of market acceptance of our products is changing rapidly.  As a result, it is reasonably likely that our product sales will fluctuate to an extent that may not meet with market expectations and that also may adversely affect our stock price.  There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including:

·cost of product sales;

·achievement and timing of research and development milestones;

·collaboration revenues;

·cost and timing of clinical trials, regulatory approvals and product launches;

·“at-risk” generic launches;

·marketing and other expenses;

·manufacturing or supply disruptions;

·unanticipated conversion of our convertible notes; and

·costs associated with the operations of recently-acquired businesses and technologies.

We may be unable to repay our substantial indebtedness and other obligations.

All of our convertible notes outstanding contain restricted conversion prices.  As of March 31, 2011, our 2.0% Notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes.  As a result, our 2.0% Notes have been classified as current liabilities on our consolidated balance sheet as of March 31, 2011.  Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion.  As of the filing date of this report, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented.  In addition, other than the restrictive covenants contained in our credit agreement, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time.  If we do not have sufficient funds available to repay the principal balance of notes presented for conversion, we will be required to raise additional funds.  Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the market price for our securities.

The restrictive covenants contained in our credit agreement may limit our activities.

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With respect to our $200 million, three-year revolving credit facility, the credit agreement contains restrictive covenants which affect, and in many respects could limit or prohibit, among other things, our ability to:

·incur indebtedness;

·create liens;

·make investments or loans;

·engage in transactions with affiliates;

·pay dividends or make other distributions on, or redeem or repurchase, our capital stock;

·enter into various types of swap contracts or hedging agreements;

·make capital contributions;

·sell assets; or

·pursue mergers or acquisitions.

Failure to comply with the restrictive covenants in our credit agreement could preclude our ability to borrow or accelerate the repayment of any debt outstanding under the credit agreement.  Additionally, as a result of these restrictive covenants, we may be at a disadvantage compared to our competitors that have greater operating and financing flexibility than we do.

Our research and development, manufacturing and marketing efforts are often dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to develop and market potential products

To maximize our growth opportunities, we have entered into a number of collaboration agreements with third parties.  In certain countries outside the United States, we have entered into agreements with a number of partners with respect to the development, manufacturing and marketing of our products.  In some cases, our collaboration agreements call for our partners to control:

·the supply of bulk or formulated drugs for use in clinical trials or for commercial use;

·the design and execution of clinical studies;

·the process of obtaining regulatory approval to market the product; and/or

·marketing and selling of an approved product.

In each of these areas, our partners may not support fully our research and commercial interests because our program may compete for time, attention and resources with the internal programs of our corporate collaborators.  As such, our program may not move forward as effectively, or advance as rapidly, as it might if we had retained complete control of all research, development, regulatory and commercialization decisions.  We also rely on some of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical products.  Additionally, we may find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we ultimately might not be successful in establishing any such new or additional relationships.

The efforts of government entities and third party payers to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products.

In certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control, including the control over the amount of reimbursements provided to the patient who is prescribed specific pharmaceutical products.

In the United States, there have been, and we expect there will continue to be, various proposals to implement similar controls.  Certain members of Congress have introduced legislation to restrict or significantly limit branded pharmaceutical companies’ ability to enter into patent litigation settlement agreements with generic companies.  For example, the U.S. health care reform law will have certain estimable negative effects and possible, non-estimable effects on our

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business.  Congress is also considering legislation to provide for FDA approval of generic versions of branded biologic products.  The commercial success of our products could be limited if federal or state governments adopt any such proposals.  In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans.  These third party payers are increasingly utilizing their significant purchasing power to challenge the prices charged for pharmaceutical products and seek to limit reimbursement levels offered to consumers for such products.  Moreover, many governments and private insurance plans have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals.  In the United States in particular, generic substitution statutes have been enacted in virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug.  These third party payers are focusing their cost control efforts on our products, especially with respect to prices of and reimbursement levels for products prescribed outside their labeled indications.  In these cases, their efforts may negatively impact our product sales and profitability.

We experience intense competition in our fields of interest, which may adversely affect our business.

Large and small companies, academic institutions, governmental agencies and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development in competition with us.  Products developed by any of these entities may compete directly with those we develop or sell.

The conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with many drugs, several of which have been available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL and  NUVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy in the United States, including methylphenidate products, and in our other territories, many of which have been available for a number of years and are available in inexpensive generic forms. For GABITRIL, the market for the treatment of partial seizures in epileptic patients is well served with a number of available therapeutics, including gabapentin.  With respect to AMRIX, we face significant competition from SKELAXIN®, FLEXERIL® and other inexpensive generic forms of muscle relaxants.  With respect to FENTORA, we face competition from numerous short-and long-acting opioid products, including three products—Johnson & Johnson’s DURAGESIC® and Purdue Pharmaceutical’s OXYCONTIN® and MS-CONTIN®—that dominate the market.  In addition, we are aware of numerous other companies developing other technologies for rapidly delivering opioids to treat breakthrough pain that will compete against FENTORA in the market for breakthrough cancer pain in opioid-tolerant patients.  ONSOLIS® and ABSTRAL® are approved for this indication.  It also is possible that the existence of generic OTFC could negatively impact the growth of FENTORA.  With respect to ACTIQ, generic competition from Barr has meaningfully eroded branded ACTIQ sales and impacted sales of our own generic OTFC through Watson.  Our generic sales also could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time.  In October 2009, we understand that the FDA approved ANDAs by Barr and Covidien to market and sell generic OTFC and that Covidien launched its generic OTFC in the United States in March 2010.  With respect to TREANDA, we face competition from LEUKERAN®, CAMPATH® and the combination therapy of fludarabine, cyclophosphamide and rituximab.

For all of our products, we need to demonstrate to physicians, patients and third party payers that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient.

Many of our competitors have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products.  These entities represent significant competition for us.  In addition, competitors who are developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive.  Competition and innovation from these or other sources, including advances in current treatment methods, could potentially affect sales of our products negatively or make our products obsolete.  Furthermore, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary products than we can.  Any failure to maintain our competitive position could adversely affect our business and results of operations.

We plan to consider and, as appropriate, make acquisitions of technologies, products and businesses, which may subject us to a number of risks and/or result in us experiencing significant charges to earnings that may adversely affect our stock price, operating results and financial condition.

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As part of our efforts to acquire businesses or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction.  Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realize the intended advantages of the acquisition.  If we fail to realize the expected benefits from acquisitions we have consummated or may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected.  In connection with an acquisition, we must estimate the value of the transaction by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved products and the market potential for marketed products and/or product candidates.  Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of a transaction.  As part of our efforts to hedge risks associated with the uncertainty of acquisitions generally and pharmaceutical development specifically, we have structured certain transactions as options-to-acquire.  Pursuant to this structure, we typically make an upfront payment to secure the option, set forth the appropriate “trigger” for the option in an option agreement and, should we exercise the option, make a subsequent payment to finalize the product or company acquisition.  Our option transaction with BioAssets Development Corp. was an example of this option structure.  While we believe that this structure helps us to manage risk appropriately, it is possible that we will not “trigger” an option-to-acquire, and therefore receive nothing of tangible value in return for our upfront payment to secure the option-to-acquire.

In addition, we have experienced, and will likely continue to experience, significant charges to earnings related to our efforts to consummate acquisitions.  For transactions that ultimately are not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts.  Even if our efforts are successful, we may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process research and development charges.  In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

We may be unable to successfully consolidate and integrate the operations of businesses we acquire, which may adversely affect our stock price, operating results and financial condition.

We must consolidate and integrate the operations of acquired businesses with our business.  Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and financial resources and could prove to be more difficult and expensive than we predicted.  The diversion of our management’s attention and any delays or difficulties encountered in connection with these recent acquisitions, and any future acquisitions we may consummate, could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings.

The results and timing of our research and development activities, including future clinical trials, are difficult to predict, subject to potential future setbacks and, ultimately, may not result in viable pharmaceutical products, which may adversely affect our business.

In order to sustain our business, we focus substantial resources on the search for new pharmaceutical products.  These activities include engaging in discovery research and process development, conducting preclinical and clinical studies and the development of new indications for our existing products and seeking regulatory approval in the United States and abroad.  In all of these areas, we have relatively limited resources and compete against larger, multinational pharmaceutical companies.  Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of compounds discovered do not enter clinical studies and the majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization.

In the pharmaceutical business, the research and development process generally takes 12 years or longer, from discovery to commercial product launch.  During each stage of this process, there is a substantial risk of failure.  Preclinical testing and clinical trials must demonstrate that a product candidate is safe and efficacious.  The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and these clinical trials may not demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates.  A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.  For ethical reasons, certain clinical trials are conducted with patients having the most advanced stages of disease and who have failed treatment with alternative therapies.  During the

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course of treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested.  Such events can have a negative impact on the statistical analysis of clinical trial results.

The completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients.  Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product candidates to be completed in a timely manner or at all.  In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for one or more of our product candidates.  Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals.  Any significant delays in, or termination of, clinical trials of our product candidates could impact our ability to generate product sales from these product candidates in the future.

The price of our common stock has been and may continue to be highly volatile, which may make it difficult for stockholders to sell our common stock when desired or at attractive prices.

The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future.  For example, from January 1, 2010 through April 28, 2011 our common stock traded at a high price of $77.59 and a low price of $54.15.  Negative announcements, including, among others:

·adverse regulatory decisions;

·disappointing clinical trial results;

·legal challenges, disputes and/or other adverse developments impacting our patents or other proprietary products; or

·sales or operating results that fall below the market’s expectations

could trigger significant declines in the price of our common stock.  In addition, external events, such as news concerning economic conditions, our competitors or our customers, changes in government regulations impacting the biotechnology or pharmaceutical industries or the movement of capital into or out of our industry, also are likely to affect the price of our common stock, regardless of our operating performance.

We further believe that, as a result of the announcement our proposed acquisition by Teva, the future trading price of our common stock may be volatile and could be subject to wide price fluctuations. We cannot predict whether the closing conditions for the proposed transaction with Teva will be satisfied, and as a result, we cannot assure you that such transaction will be completed. If a transaction does not occur, or the market perceives a transaction as unlikely to happen, our stock price may decline.

Our internal controls over financial reporting may not be considered effective, which could result in possible regulatory sanctions and a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to furnish annually a report on our internal controls over financial reporting and to maintain effective disclosure controls and procedures and internal controls over financial reporting.  In order for management to evaluate our internal controls, we must regularly review and document our internal control processes and procedures and test such controls.  Ultimately, we or our independent auditors could conclude that our internal control over financial reporting may not be effective if, among others things:

·any material weakness in our internal controls over financial reporting exist; or

·we fail to remediate assessed deficiencies.

We have implemented a number of information technology systems, including SAP®, to assist us to meet our internal controls for financial reporting.  While we believe our systems are effective for that purpose, we cannot be certain that they will continue to be effective in the future or adaptable for future needs.  Due to the number of controls to be examined, the complexity of our processes, the subjectivity involved in determining the effectiveness of controls, and, more generally, the laws and regulations to which we are subject as a global company, we cannot be certain that, in the future, all of our controls will continue to be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment.

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If, in the future, we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal control over financial reporting, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our securities.

A portion of our revenues and expenses is subject to exchange rate fluctuations in the normal course of business, which could adversely affect our reported results of operations.

Historically, a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the U.S. dollar.  For the quarter ended March 31, 2011, 28% of our revenues were denominated in currencies other than the U.S. dollar.  With our acquisition of Mepha, the percentage of revenues denominated in foreign currencies has increased, thereby increasing our exposure to foreign currency exchange risk.  We translate revenues earned and expenses incurred into U.S. dollars at the average exchange rate applicable during the relevant period.  A weakening of the U.S. dollar would, therefore, increase both our revenues and expenses.  Fluctuations in the rate of exchange between the U.S. dollar and the euro and other currencies may affect period-to-period comparisons of our operating results.  Historically, we have not hedged our exposure to these fluctuations in exchange rates.

Our customer base is highly concentrated.

Our principal customers are wholesale drug distributors.  These customers comprise a significant part of the distribution network for pharmaceutical products in the United States.  Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network.  These three wholesaler customers, in the aggregate, accounted for 67% of our total consolidated gross sales for the quarter ended March 31, 2011.  Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decisions or other factors outside of our control, could significantly affect the level of our net sales on a period to period basis.  Because of this, the amounts purchased by these customers during any quarterly or annual period may not correlate to the level of underlying demand evidenced by the number of prescriptions written for such products, as reported by IMS Health Incorporated.

We are involved, or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition.

As a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination, product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract.  In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact results of operations and financial condition.  We currently are vigorously defending ourselves against those matters specifically described in Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as numerous other litigation matters.  While we currently do not believe that the settlement or adverse adjudication of these other litigation matters would materially impact our results of operations or financial condition, the final resolution of these matters and the impact, if any, on our results of operations, financial condition or cash flows is unknown but could be material.

Unfavorable general economic conditions could adversely affect our business.

Our business, financial condition and results of operations may be affected by various general economic factors and conditions.  Periods of economic slowdown or recession in any of the countries in which we operate could lead to a decline in the use of our products and therefore could have an adverse effect on our business.  In addition, if we are unable to access the capital markets due to general economic conditions, we may not have the cash available or be able to obtain funding to permit us to meet our business requirements and objectives, thus adversely affecting our business and the market price for our securities.

Our dependence on key executives and scientists could impact the management and development of our business.

We are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel.  There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain the qualified personnel necessary for the development and

49

management of our business.  Although we do not believe the loss of one individual would materially harm our business, our business might be harmed by the loss of the services of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner.  Much of the know-how we have developed resides in our scientific and technical personnel and is not readily transferable to other personnel.  While we have employment agreements with our key executives, we do not ordinarily enter into employment agreements with our other key scientific, technical and managerial employees.  We do not maintain “key man” life insurance on any of our employees.

We may be required to incur significant costs to comply with environmental laws and regulations, and our related compliance may limit any future profitability.

Our research, development and manufacturing activities involve the controlled use of hazardous, infectious and radioactive materials that could be hazardous to human health and safety or the environment.  We store these materials, and various wastes resulting from their use, at our facilities pending ultimate use and disposal.  We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with related existing and future environmental laws and regulations.

While we believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials.  In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial costs.  These damages could require payment by us of significant amounts over a number of years, which could adversely affect our results of operations and financial condition.

Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders’ ability to profit from such a transaction.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock, $0.01 par value, of which 1,000,000 have been reserved for issuance in connection with our stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders.  Our stockholder rights plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner.  The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon.  Section 203, the rights plan, and certain provisions of our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of our management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

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ITEM 2.  ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares of Common Stock Purchased(1)	Average Price Paid Per Share		Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Common Stock that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2011	—	$	—	—	—
February 1-28, 2011	—	—		—	—
March 1-31, 2011	61	65.51		—	—
Total	61	$	65.51	—	—

(1)This column reflects the surrender to Cephalon of common stock during the first quarter of 2011 to satisfy tax  withholding obligations in connection with the vesting of restricted stock units issued to employees.

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ITEM 5.  OTHER INFORMATION

Computation of Ratios of Earnings to Fixed Charges

	Year ended December 31,											Three months ended March 31,
	2006		2007			2008		2009		2010		2011
Determination of Earnings
Income (Loss) Before Income Taxes and Non-Controlling Interest	$	192,166	$	(123,276	)	$	134,070	$	289,407	$	618,799	$	314,341
Add:
Amortization of interest capitalized in current or prior periods	52		98			250		265		265		66
Fixed charges:	97,054		79,993			84,762		99,453		109,460		26,594
Total Earnings	$	289,272	$	(43,185	)	$	219,082	$	389,125	$	728,524	$	341,001
Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	87,805		70,866			75,233		90,336		100,324		24,207
Appropriate portion of rentals	9,249		9,127			9,529		9,117		9,136		2,387
Preferred stock dividend requirements of consolidated subsidiaries	—		—			—		—		—		—
Fixed charges	97,054		79,993			84,762		99,453		109,460		26,594
Capitalized interest	1,766		768			77		—		—		—
Total Fixed Charges	$	98,820	$	80,761		$	84,839	$	99,453	$	109,460	$	26,594
Ratio of earnings to fixed charges (1)	2.93					2.58		3.91		6.66		12.82
Deficiency of earnings to fixed charges			$	123,946

(1)For the year ended December 31 2007, no ratios are provided because earnings were insufficient to cover fixed charges.

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ITEM 6.  EXHIBITS

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of May 1, 2011, by and among Cephalon, Inc., Teva Pharmaceutical Industries Ltd. and Copper Acquisition Corp., filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 2, 2011.
3.1	Fourth Amended and Restated Bylaws, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 16, 2011.
4.3	Amendment No. 2 to the Second Amended and Restated Rights Agreement, as amended by the Agreement of Appointment and Joinder and Amendment No. 1 to the Second Amended and Restated Rights Agreement, by and between Cephalon, Inc. and American Stock Transfer & Trust Company, LLC dated as of May 1, 2011, filed as Exhibit 4.3 to the Company’s Registration Statement on Form 8-A (Amendment No. 3) filed on May 2, 2011.
*10.1	Agreement and Plan of Merger by and among the Company, C2011Merger Sub, Inc., a wholly-owned subsidiary of the Company, Gemin X Pharmaceuticals, Inc. and Shareholder Representative Services LLC, dated as of, March 20, 2011. (1)
†10.2	Cephalon, Inc. 2011 Management Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2011.
10.3	Seventh Amendment dated as of February 9, 2011 to the Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche Bank Securities Inc. and Bank of America N.A., as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of America Securities LLC, as joint bookrunners and joint lead arrangers, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 29, 2011.
10.4	Consulting Agreement effective March 1, 2011 by and between Peter E. Grebow and the Company, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 16, 2011.
†10.5	Form of Indemnification Agreement dated March 10, 2011 by and between Cephalon, Inc. and the directors and executive officers listed therein of Cephalon, Inc., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 16, 2011.
†10.6	Executive Severance Agreement dated March 10, 2011 by and between Cephalon, Inc. and J. Kevin Buchi, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 16, 2011.
†10.7	Form of Executive Severance Agreement dated March 10, 2011 by and between Cephalon, Inc. and the executive officers listed therein, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 16, 2011.
†10.8	Amendment to Employment Contract dated March 10, 2011 by and between Cephalon, Inc. and Alain Aragues, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 16, 2011.
31.1*	Certification of J. Kevin Buchi, Chief Executive Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Wilco Groenhuysen, Executive Vice President and Chief Financial Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1#	Certification of J. Kevin Buchi, Chief Executive Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2#	Certification of Wilco Groenhuysen, Executive Vice President and Chief Financial Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial statements, formatted in XBRL: (i) Consolidated Statements of Operations- three months ended March 31, 2011 and 2010, (ii) Consolidated Balance Sheets- March 31, 2011 and December 31, 2010, (iii) Consolidated Statements of Changes in Equity- three months ended March 31, 2011 and 2010, (iv) Consolidated Statements of Cash Flows- three months ended March 31, 2011 and 2010, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

*Filed herewith.

†Compensation plans and arrangements for executive officers and others.

#This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference in any document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

(1)Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment to the Securities and Exchange Commission.

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SIGNATURES

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

	CEPHALON, INC.
	(Registrant)
May 4, 2011	By	/s/ J. KEVIN BUCHI
		J. Kevin Buchi
		Chief Executive Officer
		(Principal executive officer)
	By	/s/ WILCO GROENHUYSEN
		Wilco Groenhuysen
		Executive Vice President and Chief Financial Officer
		(Principal financial and accounting officer)

54

EX-10.1

Exhibit 10.1

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

AGREEMENT AND PLAN OF MERGER

among:
CEPHALON, INC.,
a Delaware corporation;

C2011MERGER SUB, INC.,
a Delaware corporation;

GEMIN X PHARMACEUTICALS, INC.,
a Delaware corporation;

and

SHAREHOLDER REPRESENTATIVE SERVICES LLC
as the Stockholders’ Representative

Dated as of March 20, 2011

TABLE OF CONTENTS

		Page
SECTION 1.	DESCRIPTION OF TRANSACTION	1
1.1	Merger of Merger Sub into the Company	1
1.2	Closing; Effective Time	2
1.3	Consideration	2
1.4	Treatment of Company Options and Company Warrants	8
1.5	Withholding	9
1.6	Appraisal Rights	10
1.7	Surrender of Certificates; Payment	10
1.8	Further Action	12
1.9	Milestone Payments	13
SECTION 2.	REPRESENTATIONS AND WARRANTIES OF THE COMPANY	19
2.1	Due Organization; Organizational Documents	19
2.2	Capitalization; Stockholder Information	19
2.3	Financial Statements	21
2.4	Absence of Changes	21
2.5	Tangible Personal Property	23
2.6	Real Property; Lease Agreements	23
2.7	Intellectual Property	23
2.8	Contracts	29
2.9	Suppliers; Contractors	30
2.10	Compliance with Laws	30
2.11	Permits	30
2.12	Tax Matters	30
2.13	Employees and Consultants	32
2.14	Employee and Labor Matters; Benefit Plans	33
2.15	Environmental Matters	36
2.16	Insurance	37
2.17	Indebtedness with Affiliates	37
2.18	Legal Proceedings	38
2.19	Regulatory Compliance	38
2.20	Authority; Binding Nature of Agreement; Non-Contravention	39
2.21	Stockholder Approval; Voting Agreements	39
2.22	Board Approval; Other Approvals	40
2.23	No Undisclosed Liabilities	40
2.24	Takeover Laws	40
2.25	Foreign Corrupt Practices Act	40
2.26	Financial Advisor	41
2.27	Disclosure	41
SECTION 3.	REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB	41
3.1	Due Organization	41

i

3.2	Authority; Binding Nature of Agreement	41
3.3	Merger Sub	41
3.4	No Authorizations	41
3.5	Litigation	42
3.6	Adequacy of Funds	42
3.7	No Brokers	42
SECTION 4.	COVENANTS AND AGREEMENTS	42
4.1	Conduct of Business of the Company	42
4.2	Access to Information	45
4.3	Public Disclosure	45
4.4	Consents; Regulatory Approval; Further Assurances	45
4.5	Indemnification of Officers and Directors of the Company	46
4.6	Employee Benefits Arrangements	48
4.7	No Solicitation	49
4.8	Company Stockholder Consents	50
4.9	Escrow Agreement	51
4.10	Payoff Letters	51
4.11	Termination of the Investor Rights Agreement and the Shareholder Agreement	51
4.12	Bonus Plan	51
4.13	Delivery of Monthly Financial Statements	52
4.14	Confidentiality	52
4.15	Transaction Costs; Allocation Schedule	52
4.16	Data Room	52
4.17	Allocation of Certain Items for Purposes of Consolidated Return Rules	52
4.18	Redomestication of Canadian Subsidiary	52
SECTION 5.	CONDITIONS TO THE MERGER	53
5.1	Conditions to Each Party’s Obligation to Effect the Merger	53
5.2	Conditions to Obligations of Parent and Merger Sub	53
5.3	Conditions to Obligation of the Company	55
5.4	Frustration of Closing Conditions	56
SECTION 6.	TERMINATION	56
6.1	Termination	56
6.2	Effect of Termination	57
SECTION 7.	INDEMNIFICATION, ETC.	57
7.1	Expiration of Representations, Etc.	57
7.2	Indemnification	58
7.3	Limitations on Liability	59
7.4	Defense of Third Party Claims	60
7.5	Subrogation; Mitigation	61
7.6	Indemnification Claims	62
7.7	Release of Escrow Funds	63
7.8	Exercise of Remedies Other Than by Parent	64

ii

SECTION 8.	MISCELLANEOUS PROVISIONS	64
8.1	Stockholders’ Representative	64
8.2	Expenses	67
8.3	Exclusive Representations and Warranties	67
8.4	Waiver; Amendment	67
8.5	Entire Agreement; Counterparts; Exchanges by Facsimile	68
8.6	Applicable Law; Dispute Resolution	68
8.7	Assignability; Third Party Rights	68
8.8	Disclosure Schedule	69
8.9	Notices	69
8.10	Severability	71
8.11	Construction	71
8.12	Additional Agreement	71

EXHIBITS

Exhibit A	-	Certain Definitions
Exhibit B		Obatoclax Compound

SCHEDULES

Schedule A - Allocation Schedule

iii

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of March 20, 2011, by and among: CEPHALON, INC., a Delaware corporation (“Parent”); C2011MERGER SUB, INC., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”); GEMIN X PHARMACEUTICALS, INC., a Delaware corporation (the “Company”); and, solely in its capacity as the representative of the Escrow Participants with respect to Sections 1, 7 and 8, SHAREHOLDER REPRESENTATIVE SERVICES LLC, a Colorado limited liability company, solely in its capacity as the Stockholders’ Representative.  Certain capitalized terms used in this Agreement are defined in Exhibit A.

Recitals

A.            Parent has offered to acquire all of the capital stock of the Company and, further to such offer, Parent, Merger Sub and the Company intend to effect a merger of Merger Sub into the Company in accordance with this Agreement and the DGCL (the “Merger”).  Upon the consummation of the Merger, Merger Sub will cease to exist, and the Company will become a wholly-owned Subsidiary of Parent.

B.            The respective boards of directors of Parent, Merger Sub and the Company have approved this Agreement and the Merger and the other transactions contemplated by this Agreement.

Agreement

The parties to this Agreement, intending to be legally bound, agree as follows:

SECTION 1.         DESCRIPTION OF TRANSACTION.

1.1          Merger of Merger Sub into the Company.

(a)           Upon the terms and subject to the provisions set forth in this Agreement, at the Effective Time (as defined in Section 1.2(b)), Merger Sub shall be merged with and into the Company.  By virtue of the Merger, at the Effective Time, the separate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation in the Merger (the “Surviving Corporation”).

(b)           The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the DGCL. The certificate of incorporation of the Surviving Corporation shall be amended and restated as of the Effective Time to conform to the certificate of incorporation of Merger Sub and the bylaws of the Surviving Corporation shall be amended and restated as of the Effective Time to conform to the bylaws of Merger Sub as in effect immediately prior to the Effective Time. The directors and officers of the Surviving Corporation immediately after the Effective Time shall be the respective individuals who were directors and officers of Merger Sub immediately prior to the Effective Time.

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

1.2          Closing; Effective Time.

(a)           The consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place as soon as practicable, but no later than two (2) business days after the satisfaction or waiver of the last of the conditions set forth in Section 5 (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions), unless another time or date, or both, are agreed to in writing by the parties hereto.  The date on which the Closing is held is herein referred to as the “Closing Date.” The Closing will be held at the offices of Cooley LLP, 3175 Hanover Street, Palo Alto, California 94304, unless another place is agreed to in writing by the parties hereto.

(b)           Subject to the terms of this Agreement, on the Closing Date, a certificate of merger satisfying the applicable requirements of the DGCL shall be filed with the Secretary of State of the State of Delaware.  The Merger shall become effective at the time of the filing of such certificate of merger with the Secretary of State of the State of Delaware (the time as of which the Merger becomes effective being referred to as the “Effective Time”).

1.3          Consideration.

(a)           The following definitions are used in this Section 1.3 and elsewhere in this Agreement:

(i)            Merger Consideration.  “Merger Consideration” is equal to the aggregate of (a) all Class A Common Merger Consideration, Class B Common Merger Consideration, Class B-1 Common Merger Consideration, Series A Preferred Merger Consideration, Series B Preferred Merger Consideration, Series C Preferred Merger Consideration, Series D Preferred Merger Consideration and Series E Preferred Merger Consideration to be paid pursuant to this Section 1.3, and the Option Consideration and Warrant Consideration to be paid pursuant to Section 1.4 and (b) the Bonus Plan Amounts.

(ii)           Merger Price Per Share.  “Merger Price Per Share” is equal to the result of (A) the Closing Date Residual Consideration divided by (B) the aggregate number of Effective Time Shares.

(iii)         Class A Common Merger Consideration.  “Class A Common Merger Consideration” for each share of the Company’s Class A Common Stock is equal to (A) an amount in cash equal to the Merger Price Per Share; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (D) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and when such payments are required to be made pursuant to Section 1.9.

(iv)          Class B Common Merger Consideration.  “Class B Common Merger Consideration” for each share of the Company’s Class B Common Stock is equal to (A)

2

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

an amount in cash equal to CA$2.24; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to (1) the Merger Price Per Share multiplied by (2) 5.187097; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share multiplied by 5.187097, as and when such payments are required to be made pursuant to Section 1.9.

(v)            Class B-1 Common Merger Consideration.  “Class B-1 Common Merger Consideration” for each share of the Company’s Class B-1 Common Stock is equal to (A) an amount in cash equal to CA$2.24; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to the Merger Price Per Share; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and when such payments are required to be made pursuant to Section 1.9.

(vi)          Series A Preferred Merger Consideration.  “Series A Preferred Merger Consideration” for each share of the Company’s Series A Preferred Stock is equal to (A) an amount in cash equal to $15.075; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to (1) the Merger Price Per Share multiplied by (2) 5.187097; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share multiplied by 5.187097, as and when such payments are required to be made pursuant to Section 1.9.

(vii)         Series B Preferred Merger Consideration.  “Series B Preferred Merger Consideration” for each share of the Company’s Series B Preferred Stock is equal to (A) an amount in cash equal to $35.175; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to (1) the Merger Price Per Share multiplied by (2) 5.187097; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share multiplied by 5.187097, as and when such payments are required to be made pursuant to Section 1.9.

(viii)        Series C Preferred Merger Consideration.  “Series C Preferred Merger Consideration” for each share of the Company’s Series C Preferred Stock is equal to (A) an amount in cash equal to $70.35; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to (1) the Merger Price Per Share multiplied by (2)

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33.5; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share multiplied by 33.5, as and when such payments are required to be made pursuant to Section 1.9.

(ix)          Series D Preferred Merger Consideration.  “Series D Preferred Merger Consideration” for each share of the Company’s Series D Preferred Stock is equal to (A) an amount in cash equal to $4.80; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to the Merger Price Per Share; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and when such payments are required to be made pursuant to Section 1.9.

(x)           Series E Preferred Merger Consideration.  “Series E Preferred Merger Consideration” for each share of the Company’s Series E Preferred Stock is equal to (A) an amount in cash equal to $2.40; plus (B) declared or accumulated but unpaid dividends on such share; plus (C) an amount in cash equal to the Merger Price Per Share; plus (D) any amounts to be distributed pursuant to the Net Cash adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such share to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (E) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and when such payments are required to be made pursuant to Section 1.9.

(b)           At the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any stockholder of the Company:

(i)            except as provided in clauses “(ix)” and “(x)” below, each share of the Company’s Class A Common Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Class A Common Merger Consideration;

(ii)           to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Series A Preferred Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Series A Preferred Merger Consideration;

(iii)         to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Series B Preferred Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Series B Preferred Merger Consideration;

(iv)          to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Series C Preferred Stock

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outstanding immediately prior to the Effective Time shall be converted into the right to receive the Series C Preferred Merger Consideration;

(v)            to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Series D Preferred Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Series D Preferred Merger Consideration;

(vi)          to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Series E Preferred Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Series E Preferred Merger Consideration;

(vii)         to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Class B Common Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Class B Common Merger Consideration;

(viii)        to the extent not converted into the Company’s Class A Common Stock prior to the Effective Time, each share of the Company’s Class B-1 Common Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive the Class B-1 Common Merger Consideration;

(ix)          each share of the common stock, no par value, of Merger Sub outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation; and

(x)           each share of Company Capital Stock that is owned by the Company as treasury stock, and each share of Company Capital Stock owned by Parent or Merger Sub or any other wholly owned Subsidiary of Parent, shall be automatically canceled and shall cease to exist and no consideration shall be delivered in exchange therefor.

(c)           At the Closing, Parent will deliver a sum of Thirty Million United States Dollars (US$30,000,000) (such amount, the “Escrow Amount”) to the Escrow Fund (as defined in Section 1.7(a)) to be held in accordance with the terms and conditions of this Agreement and the Escrow Agreement (as defined in Section 1.7(a)).  Of the Escrow Amount, (i) for each Effective Time Share outstanding as of immediately prior to the Effective Time, an amount equal to the Residual Escrow Amount divided by aggregate number of Effective Time Shares shall be deemed to be a contribution to the Escrow Fund with respect to each such Effective Time Share, and (ii) for each Bonus Plan Participant, an amount equal to such Bonus Plan Participant’s allocable portion of the Bonus Plan Escrow Amount shall be deemed to be a contribution to the Escrow Fund, in each case as provided in the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m).

(d)           Notwithstanding anything in this Agreement to the contrary, in no event shall the aggregate merger consideration payable at Closing by Parent, Merger Sub or the

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Surviving Corporation to the holders of Company Capital Stock, Company Options and Company Warrants (“Company Holders”) and Bonus Plan Participants in connection with the Merger, including the Escrow Amount and the Administrative Expense Amount, exceed the Closing Date Merger Consideration.  If any Company Warrant or IQ Option outstanding as of the date of this Agreement is validly exercised prior to the Effective Time and the holder of such Company Warrant or IQ Option is entitled to receive Merger Consideration pursuant to Section 1.3 for the shares of Company Capital Stock issued upon such exercise, then the payment of such Merger Consideration with respect to such shares may be made net of the applicable exercise price for such Company Warrant or IQ Option if the holder had not provided payment of the exercise price to the Company as of immediately prior to the Effective Time.

(e)           Net Cash Adjustment.

(i)            The Closing Date Merger Consideration shall be adjusted by the amount of Estimated Closing Date Net Cash (it being understood that if such amount is a positive number, such amount shall be added and if such amount is a negative number, such amount shall be subtracted) (the amount of such increase or decrease, the “Net Cash Adjustment”).  Estimated Closing Date Net Cash and Closing Date Net Cash shall be determined as follows:

(1)           Within ten (10) business days prior to the estimated Closing Date, such date to be mutually agreed upon by the parties (the “Estimated Closing Date”), the Company shall deliver to Parent a statement (the “Estimated Closing Date Net Cash Statement”) that sets forth the Company’s estimate of Net Cash as of the Estimated Closing Date (the “Estimated Closing Date Net Cash”).  The Estimated Closing Date Net Cash Statement shall be accompanied by (1) relevant backup materials and schedules, in detail reasonably acceptable to the Parent and (2) copies of all accounting workpapers relevant to the preparation of the Estimated Closing Date Net Cash Statement.  In the event that Parent contests the Estimated Closing Date Net Cash Statement, then the parties shall use good faith efforts to resolve the dispute and if such dispute is not resolved within three (3) days of Parent giving the Company notice of such dispute, the such dispute shall be settled by Senior Executives at each of Parent and the Company.

(2)           As soon as practicable, but in no event later than sixty (60) calendar days after the Closing Date, Parent shall cause the Surviving Corporation to prepare and deliver to the Stockholders’ Representative a statement (the “Parent’s Closing Date Net Cash Statement”) that sets forth Parent’s calculation of the Net Cash as of the Closing Date (“Parent’s Closing Date Net Cash”).

(3)           For a period of thirty (30) days after the Surviving Corporation delivers the Parent’s Closing Date Net Cash Statement to the Stockholders’ Representative, (i) the Stockholders’ Representative and its advisors or agents shall be given reasonable access (including electronic access, to the extent available) to the books, records and other data of the Surviving Corporation necessary for the purpose of reviewing the Parent’s Closing Date Net Cash Statement and reasonable access to the personnel of Parent and the

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Surviving Corporation to consult as to the procedures and determinations made by the Surviving Corporation in the Parent’s Closing Date Net Cash Statement and (ii) the Stockholders’ Representative shall have the right to contest the Parent’s Closing Date Net Cash Statement by written notice to Parent setting forth in reasonable detail the Stockholders’ Representative’s objections to the Parent’s Closing Date Net Cash Statement and such written notice shall be accompanied by a statement (the “Stockholders’ Representative’s Closing Date Net Cash Statement”) that sets forth the Stockholders’ Representative’s calculation of the Net Cash as of the Closing Date (the “Stockholders’ Representative’s Closing Date Net Cash”).  In the event that the Stockholders’ Representative does not contest the Parent’s Closing Date Net Cash Statement within thirty (30) days of receiving the Parent’s Closing Date Net Cash Statement, the Parent’s Closing Date Net Cash Statement shall be final and binding on Parent, the Surviving Corporation and the Stockholders’ Representative and Closing Date Net Cash shall be the number set forth in Parent’s Closing Date Net Cash Statement.  In the event that the Stockholders’ Representative contests the Parent’s Closing Date Net Cash Statement, then the parties shall use good faith efforts to resolve the dispute within fifteen (15) days of the Stockholders’ Representative’s notice of contest, but failing such resolution, (i) the Surviving Corporation and the Stockholders’ Representative shall engage the New York, New York office of a nationally-recognized financial accounting firm to be selected by mutual agreement of Parent and the Stockholders’ Representative and with whom none of Parent, Surviving Corporation, Company or any of their respective Affiliates has had any material personal or professional relationship during the three year period prior to such selection (the “Price Adjustment Accountant”), and (ii) the Price Adjustment Accountant shall review the Parent’s Closing Date Net Cash Statement and the Stockholders’ Representative’s Closing Date Net Cash Statement, and shall make its own determination of the Net Cash as of the Closing Date (the “Price Adjustment Accountant’s Closing Date Net Cash”), which determination shall be final and binding on Parent, the Surviving Corporation and the Stockholders’ Representative.  The Price Adjustment Accountant shall be instructed to provide the Price Adjustment Accountant’s Closing Date Net Cash by delivering to Parent and the Stockholders’ Representative, within thirty (30) days of the date the Price Adjustment Accountant was engaged, a statement (the “Price Adjustment Accountant’s Closing Date Net Cash Statement”) that sets forth the Price Adjustment Accountant’s Closing Date Net Cash.  For purposes of this Agreement, the term “Closing Date Net Cash” shall mean either (i) the Net Cash as set forth on Parent’s Closing Date Net Cash Statement if not contested by the Stockholders’ Representative or (ii) if Parent’s Closing Date Net Cash Statement is contested by the Stockholders’ Representative, the Net Cash as set forth on the Price Adjustment Accountant’s Closing Date Net Cash Statement.

(ii)           If the Closing Date Net Cash is less than the Estimated Closing Date Net Cash (a “Net Cash Shortfall”), then Parent shall be entitled to receive an amount equal to the Net Cash Shortfall from the Escrow Fund (and, to the extent the Escrow Fund is insufficient, shall be offset against Milestone Payments as provided in Section 1.9(e)).

(iii)         If the Closing Date Net Cash is greater than the Estimated Closing Date Net Cash, (a “Net Cash Surplus”), then Parent shall (A) cause to be paid to the Bonus Plan Participants, in accordance with the terms of the Bonus Plan and in a manner consistent with the methodology set forth in the final Allocation Schedule delivered by the Company pursuant to

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Section 5.2(m), the portion of the Net Cash Surplus that would have been paid under the Bonus Plan had the Estimated Closing Date Net Cash been equal to the Closing Date Net Cash, and (B) pay, or cause to be paid, for distribution as additional consideration to the holders of Effective Time Shares the remaining amount of the Net Cash Surplus, and the Paying Agent or an Acquired Corporation or the Parent, through its payroll, as the case may be, shall deliver or cause to be delivered to each such holder, for each Effective Time Share held by such holder immediately prior to the Effective Time, a check or wire transfer in an amount equal to such remaining amount of the Net Cash Surplus divided by the aggregate number of Effective Time Shares.  Amounts payable pursuant to clause “(B)” of the preceding sentence shall be paid (1) through an Acquired Corporation or the Parent’s payroll with respect to Effective Time Shares subject to Company Options held by employees of the Acquired Corporations and (2) by the Paying Agent with respect to all other Effective Time Shares.

1.4          Treatment of Company Options and Company Warrants.

(a)           Subject to Section 1.5, at the Effective Time, each Company Option that is outstanding and unexercised immediately prior to the Effective Time shall hereby be canceled at the Effective Time and converted into the right to receive, with respect to each vested share of Company Common Stock subject to such Company Option (including any share that becomes vested as of immediately prior to the Effective Time as a result of the transactions contemplated by this Agreement): (i) an amount in cash equal to (1) the Merger Price Per Share, minus (2) the exercise price per share of Company Common Stock subject to such Company Option, payable as provided in Section 1.7; plus (ii) any amounts to be distributed pursuant to the Net Cash Adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such shares to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (iii) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and if such payments are required to be made pursuant to Section 1.9 (it being understood that, if the per share exercise price payable in respect of such Company Option equals or exceeds the sum of (i) through (iii), the amount payable hereunder shall be zero for such Company Option) (collectively, the “Option Consideration”).  At the Effective Time, each Company Option or portion thereof that is outstanding and unexercised immediately prior to the Effective Time and that is unvested or that has a per share exercise price equal to or greater than the sum of clauses (i) through (iii) of the prior sentence shall be cancelled at the Effective Time and the holder thereof shall be entitled to receive no consideration therefor.  The installment payments received by a holder of a Company Option under this Section 1.4(a) are intended to be separate “payments” for purposes of Section 409A of the Code and the guidance and regulations thereunder (“Section 409A”).  Prior to the Effective Time, the Company shall take all actions that may be reasonably necessary (under the Company Stock Plan or otherwise) to effectuate the provisions of this Section 1.4(a) and to ensure that, from and after the Effective Time, each holder of a Company Option that was outstanding immediately prior to the Effective Time and that was cancelled as provided in this Section 1.4(a) shall cease to have any rights with respect thereto, except the right to receive the consideration specified in this Section 1.4(a) without interest.  In addition, following the date of this Agreement, the Company shall prepare and deliver to each holder of a Company Option a notice as contemplated by Section 11.2 of the Company Stock Plan.

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(b)           At the Effective Time, each Company Warrant to purchase shares of the Company’s Class A Common Stock shall hereby be canceled and shall entitle the holder thereof to receive, with respect to each share of the Company’s Class A Common Stock subject to such Company Warrant: (i) an amount in cash equal to (1) the Merger Price Per Share minus (2) the exercise price per share of the Company’s Class A Common Stock subject to such Company Warrant, payable as provided in Section 1.7; plus (ii) any amounts to be distributed pursuant to the Net Cash Adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such shares to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (iii) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and if such payments are required to be made pursuant to Section 1.9 (it being understood that, if the exercise price payable in respect of such Company Warrant equals or exceeds the sum of (i) through (iii), the amount payable hereunder shall be zero for such Company Warrant) (collectively, the “Common Warrant Consideration”).  At the Effective Time, each Company Warrant to purchase shares of the Company’s Series E Preferred Stock shall hereby be canceled and shall entitle the holder thereof to receive, with respect to each share of the Company’s Series E Preferred Stock subject to such Company Warrant: (i) an amount in cash equal to (1) $2.40 plus (2) declared or accumulated but unpaid dividends on such share plus (3) the Merger Price Per Share minus (4) the exercise price per share of the Company’s Series E Preferred Stock subject to such Company Warrant, payable as provided in Section 1.7; plus (ii) any amounts to be distributed pursuant to the Net Cash Adjustment set forth in Section 1.3(e) and from the Escrow Fund and the Administrative Expense Account with respect to such shares to the former holder thereof in accordance with the terms of Section 7.7 and Section 8.1(b) and the Escrow Agreement; plus (iii) an amount in cash equal to the Contingent Equity Consideration Price Per Share, as and if such payments are required to be made pursuant to Section 1.9 (it being understood that, if the exercise price payable in respect of such Company Warrant equals or exceeds the sum of (i) through (iii), the amount payable hereunder shall be zero for such Company Warrant) (the “Preferred Warrant Consideration” and collectively with the Common Warrant Consideration, the “Warrant Consideration”).  The amount payable pursuant to this Section 1.4(b) shall be paid promptly after the Effective Time.

1.5          Withholding.  Each of Parent, the Surviving Corporation, the Paying Agent and the Escrow Agent, without duplication, shall be entitled to withhold from any cash consideration payable pursuant to this Agreement to any holder or former holder of Company Capital Stock, Company Warrants,  Company Options and Bonus Plan Participant such amounts as Parent or the Surviving Corporation are required to withhold from such consideration under the Code or any provision of foreign, state or local tax Law (including, for purposes of illustration and not of limitation, any provision of the federal and provincial laws of Canada).  At least five (5) days before the Closing Date, the Company shall provide to Parent all information reasonably requested by Parent which is reasonably necessary to permit Parent to determine the amounts, if any, required to be withheld with respect to withholding of employee Taxes.  Parent shall take all action that may be necessary to ensure that any such amounts are timely withheld and promptly and properly remitted to the appropriate Governmental Authority.  The Company will be solely responsible for paying the employer’s share of employment taxes arising in connection with the exercise of Company Options or cash payments in respect of Company Options and the Bonus

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Plan, it being understood that the amount of such taxes shall not be deemed to be or included in the calculation of Third Party Debt or otherwise result in any reduction of the Merger Consideration.

1.6          Appraisal Rights.

(a)           Notwithstanding anything to the contrary contained in this Agreement, any shares of Company Capital Stock that, as of immediately prior to the Effective Time, are held by holders who have as of such time preserved appraisal rights under Section 262 of the DGCL (“Dissenting Shares”) with respect to such shares shall not be converted into or represent the right to receive the consideration specified in Section 1.3, and the holder or holders of such shares shall be entitled only to such rights as may be granted to such holder or holders pursuant to Section 262 of the DGCL and Parent shall pay any consideration required to be paid to such holders of Dissenting Shares; provided, however, that if such appraisal rights shall not be perfected or the holders of such shares shall otherwise lose their appraisal rights with respect to such shares, then, as of the later of the Effective Time or the time of the failure to perfect such status or the loss of such rights, such shares shall automatically be converted into and shall represent only the right to receive (upon the surrender of such holder’s stock certificate(s) that immediately prior to the Effective Time represented shares of Company Capital Stock (each such certificate, a “Certificate”) in accordance with Section 1.7) the consideration specified in Section 1.3.

(b)           The Company shall give Parent: (i) prompt notice of any written demand received by the Company prior to the Effective Time to require the Company to purchase shares of Company Capital Stock pursuant to the DGCL, any withdrawal of any such demand and any other demand, notice or instrument delivered to the Company prior to the Effective Time pursuant to the DGCL; and (ii) the opportunity to participate in all negotiations and proceedings with respect to any such demand, notice or instrument.  The Company shall not make any payment or settlement offer with respect to any such demand, notice or instrument, without the prior written consent of Parent.

1.7          Surrender of Certificates; Payment.

(a)           Paying Agent; Escrow Agent.  Prior to the Effective Time, Parent shall designate a bank or trust company reasonably acceptable to the Company to act as agent (the “Paying Agent”) for payment of the applicable Merger Consideration upon surrender of the Certificates, delivery of letters of transmittal, or delivery or a release of claims in the case of the Bonus Plan Participants, as applicable.  Prior to the Effective Time, Parent shall deposit, or cause to be deposited, with the Paying Agent cash sufficient to pay the Closing Date Merger Consideration, minus the Escrow Amount, the Administrative Expense Amount and the Bonus Plan Amounts payable at Closing, payable pursuant to Section 1.3 and Section 1.4 upon surrender of Certificates and cancellation of Company Options and Company Warrants and delivery of letters of transmittal or releases of claims, as applicable.  Such funds provided to the Paying Agent are referred to herein as the “Payment Fund.”  Prior to the Effective Time, Parent shall deposit with Deutsche Bank Trust Company Americas (or such other institution jointly

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designated by Parent and the Stockholders’ Representative) as escrow agent (the “Escrow Agent”) the Escrow Amount to be held by the Escrow Agent (such fund, including earnings thereon, the “Escrow Fund”) pursuant to an escrow agreement in a form to be agreed by Company, Parent, the Stockholders’ Representative and the Escrow Agent and consistent with this Agreement (the “Escrow Agreement”) and the Administrative Expense Amount.  The Escrow Fund and the Administrative Expense Account: (A) shall be held by the Escrow Agent in accordance with the terms of this Agreement and the terms of the Escrow Agreement; (B) shall be held as a trust fund and shall not be subject to any lien, attachment, trustee process or other judicial process of any creditor of any Person; and (C) shall be held and disbursed solely for the purposes and in accordance with the terms of this Agreement and the Escrow Agreement.

(b)           Payment Procedures.  Prior to the Closing, Parent and the Company shall agree on the form of: (A) letter of transmittal; and (B) instructions for use in effecting the surrender of the Certificates with respect to each share of Company Capital Stock and each Company Warrant evidenced by such Certificate, in exchange for the right to receive the applicable Merger Consideration.  Promptly (and in any event within one business day) after the Effective Time, the Paying Agent shall mail to each holder of record of a Certificate such letter of transmittal and  instructions for use in effecting the surrender of the Certificates.  Separately, the Company shall provide such notices as required under the Company Stock Plan and other relevant materials to holders of Company Options, and may also provide letter of transmittal, instructions and other relevant materials to holders of record of the Certificates directly.  Upon surrender of a Certificate for cancellation to the Paying Agent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions (and such other customary documents as may reasonably be required by the Paying Agent), the holder of such Certificate shall be entitled to receive in exchange therefor the applicable Merger Consideration with respect to each share of Company Capital Stock and each Company Warrant evidenced by such Certificate, and any Certificate so surrendered shall forthwith be canceled.  In the event of a transfer of ownership of shares of Company Capital Stock or Company Warrant that is not registered in the transfer records of the Company, the proper amount of cash may be paid in exchange therefor to a Person other than the Person in whose name the Certificate so surrendered is registered if such Certificate shall be properly endorsed or shall otherwise be in proper form for transfer and the Person requesting such payment shall pay any transfer and other Taxes required by reason of the payment to a Person other than the registered holder of such Certificate or establish to the reasonable satisfaction of the Surviving Corporation that such Tax either has been paid or is not applicable.  Until surrendered as contemplated by this Section 1.7(b), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the applicable Merger Consideration with respect to each share of Company Capital Stock or Company Warrant evidenced by such Certificate.  If a Certificate is properly surrendered to the Paying Agent not later than two (2) business days prior to the Closing Date, then Parent shall cause the applicable Merger Consideration to be paid by the Paying Agent in immediately available funds payable to the holder of such Certificate at the Closing.  If a Certificate is properly surrendered to the Paying Agent following the Closing, then Parent shall cause the applicable Merger Consideration to be paid by the Paying Agent in immediately available funds within two (2) business days after such surrender.  A holder of a Company Option that was outstanding immediately prior to the Closing and canceled as

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provided in Section 1.4(a) hereof, as applicable, shall be entitled to receive in exchange therefor the applicable Option Consideration payable in respect thereof.  Parent shall cause to be paid through an Acquired Corporation’s payroll agent within two (2) business days following the Closing the portion of the Option Consideration which becomes payable at Closing.

(c)           Transfer Books; No Further Ownership Rights in Company Stock.  At the Effective Time: (i) all shares of Company Capital Stock outstanding immediately prior to the Effective Time shall automatically be canceled and retired and shall cease to exist, and all holders of Certificates representing shares of Company Capital Stock that were outstanding immediately prior to the Effective Time shall cease to have any rights as stockholders of the Company, except the right to receive the applicable Merger Consideration with respect to each share of Company Capital Stock evidenced by such Certificate upon surrender thereof in accordance with Section 1.7(a); and (ii) the stock transfer books of the Company shall be closed and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Capital Stock that were outstanding immediately prior to the Effective Time.

(d)           Lost, Stolen or Destroyed Certificates.  If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such Person of a bond, in such reasonable amount as Parent may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent will pay the applicable Merger Consideration to such Person in exchange for each share of Company Capital Stock evidenced by such lost, stolen or destroyed Certificate.

(e)           Termination of Payment Fund.  Any portion of the Payment Fund (including the proceeds of any investments thereof) that remains undistributed to the former holders of the Certificates one year after the Effective Time shall be delivered by the Paying Agent to the Surviving Corporation upon demand.  Any former holders of Certificates who have not theretofore complied with this Section 1.7 shall thereafter look only to the Surviving Corporation for payment of the Merger Consideration payable with respect thereto.

(f)            No Liability.  Notwithstanding any provision of this Agreement to the contrary, none of Parent, the Surviving Corporation or the Paying Agent shall be liable to any Person for any amount delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.

1.8          Further Action.  If, at any time after the Effective Time, any further action is determined by Parent or the Surviving Corporation to be reasonably necessary or desirable to vest the Surviving Corporation with full right, title and possession of and to all rights, privileges, powers, franchises, assets and property of Merger Sub and the Acquired Corporations, or otherwise carry out the purposes of this Agreement, the officers and directors of the Surviving Corporation and Parent shall be fully authorized (in the name of Merger Sub, in the name of the Acquired Corporations and otherwise) to take such action.

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1.9          Milestone Payments.

(a)           Certain Definitions.  For purposes of this Section 1.9 and this Agreement:

(i)            “Combination Product” shall mean any pharmaceutical composition which comprises the Compound and at least one other active ingredient (whether combined in a single formulation or package, as applicable, or formulated or packaged separately but sold together for a single price).

(ii)           “Compound” shall mean obatoclax (chemically defined as 2-(2-((3,5-dimethyl-1H-pyrrol-2-yl)methylene)-3-methoxy-2H-pyrrol-5-yl)-1H-indole, also known as, 1H-Indole, 2-[2-[(3, 5-dimethyl-1H-pyrrol-2-yl)methylene]-3-methoxy-2H-pyrrol-5-yl]), and its salts, and their hydrates, hemihydrates, metabolites, pro-drugs, esters, conformers, rotamers, derivatives and analogues and, if applicable, any isomers or racemates thereof, including, but not limited to the compound shown in Exhibit B.

(iii)         “EMA” shall mean the European Medicines Agency.

(iv)          “FDA” shall mean the U.S. Food and Drug Administration.

(v)            “Initiate” (including any variations thereof, such as “Initiates” and “Initiated”) shall mean, with respect to a clinical trial, the first dosing of a subject in such clinical trial in accordance with the protocol therefor.

(vi)          “MAA” shall mean a marketing authorization application filed with the EMA.

(vii)         “Milestone Target Date” shall mean (1) in the case of the Milestone Events set forth in subsections (i) and (ii) of Section 1.9(b) below, **** and (2) in the case of the Milestone Events set forth in subsections (iii), (iv) and (v) of Section 1.9(b) below, ****.

(viii)        “NDA” shall mean a New Drug Application filed with the FDA.

(ix)          “Net Sales” for any given calendar year period shall mean the gross aggregate amount invoiced on account of sales of all Products, including as part of a Combination Product, anywhere in the world, by Parent and its Affiliates, licensees and distributors to a third party, less the following reductions directly relating to such sales of the Product:

(1)           trade and quantity discounts or rebates, price reductions, coupons, vouchers and co-pay assistance reimbursements given in the ordinary course of business which are not already reflected in the amount invoiced, and provided, further, that the level of discount allowed hereunder shall be limited only to such level given on the Product

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when sold on a stand-alone basis and not on a bundled basis with other products of the Parent or its Affiliates;

(2)           any adjustments or allowances on account of price adjustments, billing errors, rejected goods, damaged goods and returns;

(3)           credits, volume rebates, charge-back and prime vendor rebates, fees, reimbursements or similar payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, pharmacy benefit management companies, health maintenance organizations or other institutions or health care organizations, which are not already reflected in the amount invoiced;

(4)           any Tax associated with the sales of goods, including but not limited to VAT, sales Tax, tariff, customs duty, excise or other duty or other governmental charge (other than a Tax on income) levied on the sale, transportation or delivery of the Product and borne by the seller thereof, itemized on the applicable invoice and remitted to the applicable taxing authority;

(5)           payments or rebates paid in connection with sales of the Product to any governmental or regulatory authority in respect of any state or federal Medicare, Medicaid or similar programs, or other managed care programs, which are not already reflected in the amount invoiced; and

(6)           any invoiced charge for freight, postage, handling, shipping, insurance or other transportation costs charged to the customer whether invoiced separately or included within the selling price;

provided that, in any event deductions may only be made under (1) through (6) to the extent they are truly, fairly and equitably allocated to the Net Sales of the Product so that such sales do not bear a disproportionate portion of such deductions. For purposes of this definition, Product shall be considered “sold” and “reductions” allowed when recorded as invoiced in Parent’s or its Affiliates’, licensee’s or distributor’s financial statements prepared in accordance with GAAP.  Sales between Parent, its Affiliates or its licensees and distributors shall be disregarded for the purposes of calculating Net Sales as long as the Product is resold to an unrelated third party, in which case the final sale to such unrelated Third Party shall be included in Net Sales.

In the event a Combination Product is sold by Parent, its Affiliates or its licensees or distributors, the Net Sales from the Combination Product, for the purposes of determining the Milestone Payments, shall be determined by multiplying the Net Sales (as defined above) of the Combination Product, during the applicable reporting period, by the fraction, A/A+B, where A is the weighted (by sales volume) average sale price of the Product when sold separately in finished form and B is the weighted (by sales volume) average sale price of the other product(s) included in the Combination Product when sold separately in finished form, in each case during the applicable reporting period or, if sales of both the Product and the other product(s) did not occur in such period, then in the most recent reporting period in which sales of both occurred.  If, on a country-by-country basis, such other active ingredient(s) in the Combination Product are not sold

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separately in such country, but the Product component of the Combination Product is sold separately in such country, Net Sales for the Combination Product will be calculated by multiplying actual Net Sales of such Combination Product by the fraction A/C, where A is the invoice price of the Product component if sold separately, and C is the total weighted (by sales volume) average invoice price of the Combination Product.  If, on a country-by-country basis, the Product component is not sold separately in such country, Net Sales for the Combination Product will be D/(D+E), where D is the fair market value (as determined by Parent in good faith) of the portion of the Combination Products that contains the Product, and E is the fair market value (as determined by Parent in good faith) of the portion of the Combination Product containing the other active ingredient(s), included in such Combination Product.

(x)           “Product” shall mean a pharmaceutical product containing as an active agent the Compound, either alone or in combination with one or more other active agents, in any formulation or mode of administration.

(xi)          “Technical Failure” shall mean Parent’s reasonable determination that the Product presents unacceptable levels of safety risks such that Parent terminates in its entirety development or commercial sale of the Product.

(b)           Milestone Events and Milestone Payments.  In addition to the Closing Date Merger Consideration, upon the attainment of each of the milestones set forth below (each, a “Milestone Event”) and provided that each of the Milestone Events set forth below occurs prior to the applicable Milestone Target Date, Parent shall, or shall cause the Surviving Corporation to, within (x) thirty (30) calendar days after the first occurrence of the Milestone Event set forth in Section 1.9(b)(i) and (ii) and (y) within fifteen (15) business days after Parent’s first filing with the SEC of a quarterly report on Form 10-Q or an annual report on Form 10-K (or any applicable comparable report) for the period in which a Milestone Event in Section 1.9(b)(iii), (iv) or (v) is achieved, or in the event that Parent no longer files such reports, sixty (60) days after the end of the calendar quarter in which the Milestone Event in Section 1.9(iii), (iv) or (iv) is achieved (each, a “Milestone Payment Date”), pay the respective amounts set forth below to the Escrow Participants pursuant to Section 1.9(f) (each, a “Milestone Payment” and collectively, the “Milestone Payments”), subject to the provisions of this Section 1.9:

(i)            (x) A one-time payment of **** United States Dollars (US$****) upon approval by the FDA of the NDA for the Product for the treatment of small-cell lung cancer or (y)(1) a one-time payment of **** United States Dollars (US$****) (the “Alternative Indication FDA Milestone Payment”) upon approval by the FDA of the NDA for the Product for the treatment of an indication other than small-cell lung cancer if the FDA’s first approval of the NDA for the Product is for an indication other than small-cell lung cancer and either (A) Parent does not Initiate the Phase 3 Clinical Trial on or prior to the Phase 3 Clinical Trial Commencement Target Date or (B) Parent is using active and concerted efforts to pursue FDA approval for the Product for the treatment of small-cell lung cancer at the time of such initial approval of the NDA for the Product and (2) a one-time payment of an additional ****  United States Dollars (US$****) upon subsequent approval by the FDA of the NDA for the Product for the treatment of small-cell lung cancer.  For clarity, under no circumstance will the total cash

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milestone payment provided by this Section 1.9(b)(i) exceed **** United States Dollars (US$****);

(ii)           (x) A one-time payment of **** United States Dollars (US$****) on approval by the EMA of the MAA for the Product for the treatment of small-cell lung cancer or (y)(1) a one-time payment of **** United States Dollars (US$****) (the “Alternative Indication EMA Milestone Payment”) upon approval by the EMA of the MAA for the Product for the treatment of an indication other than small-cell lung cancer if the EMA’s first approval of the MAA for the Product is for an indication other than small cell lung cancer and either (A) Parent does not Initiate the Phase 3 Clinical Trial on or prior to the Phase 3 Clinical Trial Commencement Target Date or (B) Parent is using active and concerted efforts to pursue EMA approval for the Product for the treatment of small-cell lung cancer at the time of such initial approval of the MAA for the Product and (2) a one-time payment of an additional ****  United States Dollars (US$****) upon subsequent approval by the EMA of the MAA for the Product for the treatment of small-cell lung cancer.  For the avoidance of doubt, under no circumstance will the total cash milestone payment provided by this Section 1.9(b)(ii) exceed **** United States Dollars (US$****);

(iii)         a one-time payment of **** United States Dollars (US$****) upon initial achievement of Two Hundred and Fifty Million United States Dollars (US$****) of worldwide aggregate Net Sales in any ****;

(iv)          a one-time payment of **** United States Dollars (US$****) upon initial achievement of **** United States Dollars (US$****) of worldwide aggregate Net Sales in any ****; and

(v)            a one-time payment of **** United States Dollars (US$****) on initial achievement of **** United States Dollars (US$****) of worldwide aggregate Net Sales in any ****.

(vi)          It is understood and agreed that if in any calendar year, Net Sales of the Products achieve more than one of the foregoing Milestone Events set forth in clauses (iii) — (v) above (i.e., Net Sales grow from **** United States Dollars (US$****) to **** United States Dollars (US$****) in a single calendar year), then each of the applicable Milestone Payments shall be nonetheless due and owing following the end of such ****.

(c)           Diligence.  From and after the Effective Time, unless and until a Technical Failure has occurred, Parent and/or its Affiliates shall use commercially reasonable efforts to implement and conduct all development, manufacturing, regulatory and commercial activities for the Product (including through third parties) that are components of or directly related to or required for the achievement of each of the Milestone Events by the applicable Milestone Target Dates. By no later than the first anniversary of the Closing Date (the “Phase 3 Clinical Trial Commencement Target Date”), Parent shall Initiate a Phase 3 clinical trial of the Product for a small-cell lung cancer indication under a protocol that is reasonably consistent with the results of the end of Phase 2 meeting with the FDA and any subsequent discussions or correspondence with the FDA with respect to the Product, as evidenced by the minutes of such

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meeting (the “Phase 3 Clinical Trial”) or discussions and any such correspondence.  For the avoidance of doubt, if Parent does not Initiate the Phase 3 Clinical Trial on or prior to the Phase 3 Clinical Trial Commencement Target Date, the sole and exclusive remedy of the Stockholders’ Representative and any Company Holder with respect to Parent’s obligation pursuant to the second sentence of this Section 1.9(c) shall be that the provisions set forth in Section 1.9(b)(i) and Section 1.9(b)(ii) shall be applicable for payment of the Alternative Indication FDA Milestone Payment and the Alternative Indication EMA Milestone Payment, provided, that such payments shall be due only to the extent such Milestone Events set forth therein are achieved.

(d)           Information Obligations.  Within (x) five (5) business days of the occurrence of a Milestone Event set forth in Section 1.9(b)(i) and (ii) and (y) within fifteen (15) calendar days after Parent’s first filing with the SEC of a quarterly report on Form 10-Q or an annual report on Form 10-K (or any applicable comparable report) for the period in which a Milestone Event in Section 1.9(iii), (iv) and (v) is achieved, or in the event that Parent no longer files such reports, sixty (60) days after the end of the calendar quarter in which the Milestone Event in Section 1.9(iii), (iv) or (iv) is achieved, Parent shall notify the Stockholders’ Representative that the applicable Milestone Event has occurred.  So long as one or more of the Milestone Payments may reasonably become payable, Parent shall notify the Stockholders’ Representative promptly after the Phase 3 Clinical Trial has Initiated.  In the event the Phase 3 Clinical Trial has not Initiated by the Phase 3 Clinical Trial Commencement Target Date, Parent shall promptly notify the Stockholders’ Representative if Parent Initiates any Phase 2 or Phase 3 clinical trial, in any other indication for the Product.  From and after the Effective Time and until the first commercial sale of the Product, upon reasonable request, in writing, to Parent by the Stockholders’ Representative, Parent shall meet with the Stockholders’ Representative at Parent’s offices to discuss the development status of the Product, provided that Parent shall not be obligated to meet with the Stockholders’ Representative more than **** (****)**** in **** ****.  After the first commercial sale of the Product, in the event Parent does not report to the public on a quarterly basis its sales of the Product, upon request Parent shall provide to the Stockholders’ Representative quarterly reports indicating Net Sales for such quarterly period, provided, that Stockholders’ Representative agrees in writing to keep such information confidential, which writing shall provide that the Stockholders’ Representative may share such information with the Escrow Participants and its advisors and attorneys, in each case so long as such parties are subject to a confidentiality obligation with respect to such information.  If a Technical Failure has occurred, then Parent shall send written notice thereof to the Stockholders’ Representative within sixty (60) calendar days of the date on which Parent and/or its affiliates first cease engaging in the commercially reasonable efforts otherwise required under Section 1.9(c) due to such Technical Failure.

(e)           Set-Off Right.  In the event that (i) any Parent Indemnified Party is entitled to indemnification pursuant to, and in accordance with, the provisions of Section 7 with respect to any Damages or (ii) Parent is entitled to receive the Net Cash Shortfall pursuant to Section 1.3(e)(ii), and in either case such Parent Indemnified Party or Parent has not been able to recover such Damages or Net Cash Shortfall, respectively, from the Escrow Fund for any reason (other than by reason of Parent’s actions or inaction) or from any prior Milestone Payment, then Parent shall have the right to reduce and setoff, without duplication, the amount of any Milestone

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Payment that Parent would otherwise be required to pay pursuant to this Section 1.9 by an amount equal to such Damages or Net Cash Shortfall, as applicable; provided, however, that in no event shall an amount **** than **** percent (**** %) of each Milestone Payment be subject to reduction and setoff pursuant to this Section 1.9(c) to satisfy such Damages or Net Cash Shortfall.

(f)Distribution of Milestone Payments.  Subject to Section 1.5 and the Stockholders’ Representative’s rights under Section 8.1(a), promptly following each Milestone Payment Date (but in no event later than ten (10) days immediately following such Milestone Payment Date), Parent shall (i) cause to be paid to the Bonus Plan Participants a portion of the Milestone Payment made on such Milestone Payment Date, calculated in accordance with the terms of the Bonus Plan and in a manner consistent with the methodology set forth in the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m), and (ii) pay, or cause to be paid, for distribution as additional consideration to the holders of Effective Time Shares the remaining amount of the Milestone Payment, and the Paying Agent or an Acquired Corporation or the Parent through its payroll, as the case may be, shall deliver or cause to be delivered to each such holder, subject to the provisions of Section 1.9, for each Effective Time Share held by such holder immediately prior to the Effective Time, a check or wire transfer in an amount equal to such remaining amount of the Milestone Payment made on such Milestone Payment Date divided by the aggregate number of Effective Time Shares. Amounts payable pursuant to clause “(ii)” of the preceding sentence shall be paid (1) by an Acquired Corporation or the Parent’s payroll with respect to Effective Time Shares subject to Company Options held by employees of the Acquired Corporations and (2) by the Paying Agent with respect to all other Effective Time Shares. If any Escrow Participant designates another Person to receive such check, then, among other things, it shall be a condition of the making of such payment that the Person requesting such payment shall pay to the Paying Agent the transfer Taxes required by reason of the delivery of such payment to a Person other than the Escrow Participant, or shall establish to the reasonable satisfaction of Parent that such Tax has been paid or is not applicable.

(g)Transferability of Milestone Payments. The right of any Person to receive any portion of any Milestone Payment shall not be assignable or transferable except, subject to compliance with applicable securities laws, (i) by operation of law, will or intestate succession, (ii) if such Person is an individual, to (A) trusts all of the beneficiaries of which are such individual and/or such individual’s spouse, descendants and siblings and descendants of such individual’s siblings or (B) family limited partnerships or family limited liability companies all of the equity interests of which are and in the future shall be owned by such individual and/or such individual’s spouse, descendants and siblings and descendant’s of such individual’s siblings or (iii) if such Person is an entity, to (A) an Affiliate of such Person or (B) to a non-Affiliate of such Person in connection with the sale of all or substantially all of the portfolio assets of such Person or a distribution to partners or other equity holders of such Person.  The Company hereby acknowledges and agrees, and the Company Holders by virtue of the approval of the Merger by the Stockholders and pursuant to the terms of the Letter of Transmittal shall acknowledge and agree, that:  (1) the right to receive the Milestone Payments, if any, is an integral part of the consideration for the transactions contemplated hereby; (2) the Milestone Payments do not represent any ownership or equity interest in the Company, Merger Sub, the Surviving

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Corporation or Parent and do not entitle any Person to voting rights or rights to dividend payments; and (3) the Milestone Payments are solely represented by this Agreement and are not represented by any certificate, instrument or other delivery.

SECTION 2.REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

As an inducement to Parent and Merger Sub to enter into this Agreement and to consummate the transactions contemplated hereby, the Company represents and warrants to Parent and Merger Sub as of the date of this Agreement and immediately prior to the Effective Time that, subject to Section 8.8, except as disclosed in the Disclosure Schedule:

2.1Due Organization; Organizational Documents.  Each of the Acquired Corporations is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction where it was incorporated or organized and has all necessary corporate power and authority to conduct its business in the manner in which its business is currently being conducted as of the date of this Agreement (the “Current Company Business”).  Each of the Acquired Corporations is qualified to do business as a foreign corporation under the Laws of all jurisdictions where the nature of its business requires such qualification.  The Company has delivered, or made available to Parent or Parent’s legal or financial advisor copies of the certificate of incorporation (the “Restated Certificate of Incorporation”) and bylaws of the Company (the “Bylaws”) and organizational documents of each other Acquired Corporation, in each case including all amendments thereto, as in effect as of the date of this Agreement.  Other than the Subsidiaries identified on Part 2.1 of the Disclosure Schedule, the Company has no Subsidiaries, and the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity.

2.2Capitalization; Stockholder Information.

(a)The authorized capital stock of the Company consists of:  (i) 40,529,405 shares of Company Common Stock, 40,000,000 of which are designated Class A Common Stock, of which 244,724 are outstanding; 492,022 of which are designated Class B-1 Common Stock, of which no shares are outstanding; and 37,383 of which are designated Class B Common Stock, of which no shares are outstanding as of the date hereof; and (ii) 12,996,308 shares of Company Preferred Stock, 298,141 of which are designated Series A Preferred Stock, of which 298,141 are outstanding as of the date hereof; 155,800 of which are designated Series B Preferred Stock, of which 155,800 are outstanding as of the date hereof; 342,367 of which are designated Series C Preferred Stock, of which 342,356 are outstanding as of the date hereof; 8,600,000 of which are designated Series D Preferred Stock, 6,767,355 of which are outstanding as of the date hereof; and 3,600,000 of which are designated Series E Preferred Stock, 3,375,716 of which are outstanding as of the date hereof.  Part 2.2(a) of the Disclosure Schedule sets forth the following information with respect to each outstanding share of Company Capital Stock: (i) the name of the holder of the Company Common Stock or Company Preferred Stock, as applicable; (ii) the number of shares of Company Common Stock or Company Preferred Stock, as applicable, held by each holder of Company Common Stock or Company Preferred Stock and

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(iii) the class or series, as applicable, of such Company Common Stock or Company Preferred Stock.  All outstanding shares of Company Common Stock and Company Preferred Stock (i) are duly authorized, validly issued, fully paid and non-assessable, (ii) are free of any liens or encumbrances created by the Company, and, to the Knowledge of the Company, free of any liens or encumbrances created by or imposed upon the holders thereof, and (iii) were not issued in violation of applicable law, any preemptive rights or rights of first refusal created by statute, the Restated Certificate of Incorporation or Bylaws or any agreement to which the Company is a party or by which it is bound.  As of the date of this Agreement, there are 5,803,862 shares of Company Class A Common Stock reserved for issuance under the Company Stock Plan, of which 4,350,507 shares of Company Class A Common Stock are subject to outstanding options and 1,453,355 shares of Company Class A Common Stock are reserved for future option grants.  The Company has delivered or made available to Parent or its legal or financial advisors true and complete copies of each form of agreement and the Company Stock Plan evidencing each Company Option.  As of the date of this Agreement, there were 492,022 shares of Company Class B-1 Common Stock, of which 343,357 are vested as of the date of this Agreement, and 37,383 shares of Company Class B Common Stock, all of which are vested as of the date of this Agreement, subject to options (collectively, the “IQ Options”) granted to Investissement Quebec (“IQ”) pursuant to a Amended and Restated Loan Offer between the Company and IQ dated May 21, 2004, as amended (the “IQ Loan Agreement”), a copy of which has been made available to Parent or its legal or financial advisors.  As of the date of this Agreement, there were 2,878,670 shares of Company Class A Common Stock subject to outstanding Company Warrants.  The Company has delivered or made available to Parent or its legal or financial advisors true and complete copies of each agreement and form of instrument associated with or evidencing such Company Warrants.

(b)Part 2.2(b) of the Disclosure Schedule sets forth the following information with respect to each outstanding Company Option and Company Warrant: (i) the name of the holder of the Company Option or Company Warrant, as applicable; (ii) the number of shares of Company Common Stock subject to such Company Option or Company Warrant, as applicable, (iii) the date of grant, (iv) the exercise price, (v) the number of shares vested as of the date hereof, (vi) the type of Company Option and (vii) the Company Stock Plan or other plan under which such Company Options were granted, as applicable.  The Company has made available to Parent or Parent’s legal or financial advisor copies of each form of stock option agreement evidencing outstanding Company Options.

(c)Except for the rights created pursuant to this Agreement, the Note Purchase Agreement dated as of May 29, 2009 among the Company, Gemin X Pharmaceuticals Canada Inc. and certain of the Company’s investors, as amended, (the “Series D Agreement”) and the Series E Preferred Stock Purchase Agreement dated as of May 7, 2010 among the Company and certain of the Company’s investors (the “Series E Agreement”), and as set forth in Part 2.2 of the Disclosure Schedule, there is no: (i) outstanding option, warrant or right to acquire from the Company any shares of the capital stock or other equity securities of the Company; or (ii) outstanding security of the Company that is convertible into any shares of the capital stock or other equity securities of the Company.  Except as set forth in Part 2.2 of the Disclosure Schedule, the Company does not have outstanding any bonds, debentures, notes or other

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obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders on any matter.  As of the date hereof, there are no accrued dividends or declared and unpaid dividends on any share of Company Capital Stock.  The Company has no voting agreements that restrict or direct the voting of any of the Company Capital Stock.

(d)Each outstanding share of capital stock or other equity security of each Subsidiary of the Company is owned by the Company.  There is no: (i) outstanding option, warrant or right to acquire from any Subsidiary of the Company or the Company any shares of the capital stock or other equity securities of such Subsidiary; or (ii) outstanding security of any Subsidiary of the Company that is convertible into any shares of the capital stock or other equity securities of the Company or any Subsidiary of the Company.  No Subsidiary of the Company has any outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of any Subsidiary of the Company on any matter.  As of the date hereof, there are no accrued dividends or declared and unpaid dividends on any share of capital stock of any Subsidiary of the Company.

2.3Financial Statements.  The Company has delivered or made available to Parent or Parent’s legal or financial advisor (i) the audited consolidated balance sheet of the Company as of and for the fiscal years ended December 31, 2008 and December 31, 2009 and the consolidated statements of operations and statement of cash flows for 2008 and 2009; and (ii) the unaudited consolidated balance sheet of the Company as of December 31, 2010 (the “Company Balance Sheet”) and the unaudited consolidated statement of operations and statement of cash flows for the twelve-month period ended December 31, 2010 (collectively, the “Company Financial Statements”).  The Company Financial Statements are set forth in Part 2.3 of the Disclosure Schedule.  The Company Financial Statements fairly present, in all material respects and in accordance with GAAP consistently applied, the consolidated financial condition of the Company as of the dates indicated therein and the consolidated results of operations and cash flows of the Company for the periods indicated therein, except that the financial statements pursuant to (ii) are subject to year-end audit adjustments and additional disclosures.

2.4Absence of Changes.

(a)Between December 31, 2009 and the date of this Agreement, there has been (i) no Company Material Adverse Effect and (ii) no damage, destruction, loss or claim, whether or not covered by insurance, or condemnation or other taking materially adversely affecting any material assets or business of the Acquired Corporations.

(b)Between December 31, 2009 and the date of this Agreement, the Acquired Corporations have conducted their business only in the ordinary course of business.  Without limiting the generality of the foregoing, between December 31, 2009 and the date of this Agreement, the Acquired Corporations have not:

(i)accrued declared or paid, or agreed to accrue, declare or pay, any dividend in respect of any shares of Company Capital Stock;

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(ii)incurred any liability of the type required to be reflected in the liabilities section of a balance sheet prepared in accordance with GAAP, except for liabilities incurred in connection with this Agreement and the transactions contemplated by this Agreement;

(iii)acquired or sold any assets, except in the ordinary course of business;

(iv)incurred any lien on any Material Company IP Right or any tangible asset other than Permitted Encumbrances;

(v)issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any Company Capital Stock or other equity interest or any security convertible into Company Capital Stock or other equity interest;

(vi)issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities, incurred any debt or borrowed or agreed to borrow any funds;

(vii)paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the Company Financial Statements and other than as contemplated by this Agreement;

(viii)made any material amendment or modification of, or terminated any Company Significant Contract;

(ix)undertaken or committed to undertake capital expenditures exceeding $100,000 or acquired any real property;

(x)entered into any capital lease (as defined in Statement of Financial Accounting Standards No. 13);

(xi)(A) instituted any material increase in any compensation payable to any director, officer, consultant or employee or (B) materially increased the benefits under any profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to their directors, officers, consultants or employees, in each case other than in the ordinary course of business consistent with past practice;

(xii)paid any amount or incurred any liability to or in respect of, or sold any properties or assets to, or entered into any transaction, agreement or arrangement with any corporation or business in which any officer or director of the Acquired Corporations has any direct or indirect ownership interest, except for any such amount, liability, properties, assets, transaction, agreement or arrangement that is not material to the Company or its business;

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(xiii)entered into any collective bargaining agreements or employment agreements;

(xiv)made any change in the accounting principles and practices used by it from those applied in the preparation of the Company Financial Statements and the related statements of income and cash flow for the period then ended, except for any such change that is not material to the Acquired Corporations or their business; or

(xv)prepared or filed any Company Returns inconsistent with past practice or, on any such Company Returns, taken any position, made any election, or adopted any method that is inconsistent with the positions taken, elections made or methods used in preparing or filing similar Company Returns in prior periods, except where necessitated as a result of a change in circumstances of the Acquired Corporations from a prior period.

2.5Tangible Personal Property.  Each of the Acquired Corporations has good and valid title to all of the items of tangible personal property reflected on the Company Balance Sheet as owned by the Acquired Corporations, except for assets disposed of since December 31, 2009 in the ordinary course of business, and all tangible personal property owned by the Acquired Corporations is owned free and clear of all mortgages, liens, pledges or other encumbrances, except for the following (which are referred to as the “Permitted Encumbrances”): (a) liens identified in Part 2.5 of the Disclosure Schedule; (b)  liens for current Taxes not yet due and payable or that are being contested in good faith by appropriate proceedings; (c) statutory or common Law liens to secure obligations to landlords, lessors or renters under leases or rental agreements; (d) deposits or pledges made in connection with, or to secure payment of, workers’ compensation, unemployment insurance or similar programs mandated by applicable Law; and (e) statutory or common Law liens in favor of carriers, warehousemen, mechanics and materialmen, to secure claims for labor, materials or supplies, and other like liens.

2.6Real Property; Lease Agreements.  None of the Acquired Corporations owns any real property.  Part 2.6 of the Disclosure Schedule contains a list of all lease agreements pursuant to which any real property is currently leased to any of the Acquired Corporations (the “Real Property Lease Agreements”).The Acquired Corporations have the right to quiet enjoyment of all the property covered by the Real Property Lease Agreements (the “Leased Real Property”) for the full term of the Real Property Lease Agreements, and the leasehold or other interest of the Acquired Corporations in the Leased Real Property is not subject or subordinate to any material encumbrance, other than Permitted Encumbrances.

2.7Intellectual Property.

(a)For purposes of this Agreement, the following terms shall be defined as follows:

(i)“IP Rights” means all intellectual property rights, in any country, including, but not limited to: (A) Copyrights, Patent Rights, Trademark Rights, Software Rights,  and all registrations and applications for any of the foregoing; (B) the right (whether at Law, in

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equity, by contract or otherwise) to make, use, sell, reproduce, or otherwise exploit any of the foregoing in any country; and (C) the specific right to bring suit for infringement, misappropriation, or other encroachment of any of the foregoing by third parties prior to the date of this Agreement.

(ii)“Know-How” means proprietary information (including know-how, inventions (whether patentable or not), customer lists, technical documentation, technical information, data, technology, research records, plans, drawings, schematics, compilations, devices, formulae, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, supplier lists, customer lists, marketing information, sales and promotional materials, business plans, whether tangible or intangible, and other confidential information, any of which may also be a trade secret (as defined by applicable law “Trade Secrets”)).

(iii)“Copyrights” means all registered and unregistered copyrights in both published and unpublished works, including all rights of authorship, use, publication, reproduction, distribution, performance, transformation, moral rights and rights of ownership of such registered and unregistered copyrightable works and all registrations and rights to register and obtain renewals and extensions of registrations, together with all other interests accruing by reason of international copyrights existing in such works.

(iv)“Material Company IP Rights” means all Company IP Rights other than those which, individually or in the aggregate, are not material to the conduct of the Current Company Business.

(v)“Patent Rights” means all issued patents, and pending patent applications (which for purposes of this Agreement shall include utility models, design patents, certificates of invention and applications for certificates of invention and priority rights) in any country, including all provisional applications, substitutions, continuations, continuations-in-part, divisions, renewals, reissues, re-examinations and extensions thereof.

(vi)“Company IP Rights” means all IP Rights owned solely by any of the Acquired Corporations or jointly by any of the Acquired Corporations and one or more third parties, or in which any of the Acquired Corporations has any right, title or interest.

(vii)“Trademark Rights” means all trademarks, registered trademarks, applications for registration of trademarks, service marks, registered service marks, applications for registration of service marks, trade names, registered trade names and applications for registration of trade names and internet domain name registrations.

(viii)“Software Rights” means all computer software, except generally available commercial software (in both source code and object code), including (A) any and all software implementations of algorithms, models and methodologies, whether in source code or object code, (B) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (C) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, (D) the technology supporting any Internet site(s), (E) all Worldwide Web addresses, URLs, and sites, and (F) all

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documentation, including system documentation, user manuals and training materials, pertaining to any of the foregoing.

(b)Part 1 of Part 2.7(b) of the Disclosure Schedule lists all of the Patent Rights and Trademark Rights owned solely by any of the Acquired Corporations as of the date of this Agreement, setting forth in each case the jurisdictions in which patents have been issued, patent applications have been filed, trademarks have been registered and trademark applications have been filed, along with the respective application, registration or filing number.  Part 2 of Part 2.7(b) of the Disclosure Schedule lists, as of the date hereof, all of the Patent Rights and all Trademark Rights in which any of the Acquired Corporations has any joint ownership interest, other than those owned solely by any of the Acquired Corporations, setting forth in each case the jurisdictions in which patents have been issued, patent applications have been filed, trademarks have been registered and trademark applications have been filed, along with the respective application, registration or filing number.  Part 3 of Part 2.7(b) of the Disclosure Schedule lists, to the Knowledge of Company as of the date hereof, all of the Patent Rights and all registered Trademark Rights (or Trademark Rights for which applications for registration have been filed) which are material to the Current Company Business and in which any of the Acquired Corporations has any express right, title or interest, other than those owned solely or jointly by any of the Acquired Corporations, and other than those owned solely or co-owned by any of the Acquired Corporations, and other than rights arising under “shrink wrap” or “click through” license agreements accompanying widely available computer software that has not been modified or customized for any of the Acquired Corporations.

(c)Except as provided in the Disclosure Schedule Part 2.7(c), each of the Acquired Corporations exclusively or co-exclusively, as applicable, owns all right, title and interest to and under all Company IP Rights that are referenced in Part 1 of 2.7(b) of the Disclosure Schedule, free and clear of all mortgages, liens, pledges or other encumbrances.  Without limiting the generality of the foregoing:

(i)For each item of such Company IP Rights that is filed by the Acquired Corporations and/or registered or issued under the authority of any Governmental Authority whose duty is to register or issue patents, trademarks, copyrights or other forms of intellectual property protection, all applicable registration fees, maintenance fees, renewal fees, annuity fees and taxes which are due in connection with such Company IP Rights have been paid and all other documents in connection with such Company IP Rights have been filed, as instructed by Acquired Corporations’ reputable legal counsels, in the relevant patent, trademark, copyright offices or other Governmental Authority in the United States or applicable foreign jurisdictions, as the case may be, for the purpose of maintaining such Company IP Rights.

(ii)No interference, opposition, reissue, reexamination or other proceeding or challenge is pending, or to the Knowledge of the Acquired Corporations, threatened in which the scope, validity, or enforceability of any Company IP Rights is being or has been contested or challenged in any court of competent jurisdiction or the U.S. Patent and Trademark Office.  To the Knowledge of the Acquired Corporations, there is no threatened action alleging that any claim of an issued patent within any Company IP Rights that is material

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to the Acquired Corporation or its business is invalid or unenforceable, or that a claim of a pending patent application within such Company IP Rights would be invalid or unenforceable as a patent claim.

(iii)To the Knowledge of the Acquired Corporations, the patent and patent applications within the Company IP Rights, disclose and/or claim inventions that are patentable as provided under the U.S. patent laws or other relevant jurisdictions.  Each of the Acquired Corporations is (with respect to Company IP Rights licensed by the Acquired Corporations, and to the extent the Acquired Corporations are obligated or have the right to do so (and are exercising such prosecution rights)) pursuant to any agreement pertaining to Company IP Rights) diligently prosecuting claims to the extent it is commercially reasonable to do so, in the pending patent applications within Company IP Rights claiming existing products and products currently under development. To the Knowledge of the Acquired Corporations, each other party to any such agreement pertaining to such Company IP Rights that is obligated to prosecute such claims is diligently prosecuting such claims to the extent it is commercially reasonable to do so.  To the Knowledge of each of the Acquired Corporations, each of these pending patent applications included in such Company IP Rights was properly filed and is being diligently prosecuted to the extent it is commercially reasonable to do so.  To the Knowledge of each of the Acquired Corporations, there are no issued patents or pending applications that would, if issued as patents, dominate or interfere with any pending application included in such Company IP Rights claiming any of the Acquired Corporations’ existing products or processes.

(d)The Acquired Corporations own, individually or collectively, all Company IP Rights referenced in Parts 1 and 2 of 2.7(b) of the Disclosure Schedule, and to the Knowledge of the Acquired Corporations, the issued Company IP Rights are valid, subsisting and enforceable (in the case of patent applications, would be valid, subsisting and enforceable if issued as patents).  Without limiting the generality of the foregoing:

(i)All documents and instruments necessary to perfect the rights of each of the Acquired Corporations in the Company IP Rights referenced in Parts 1 and 2 of the Disclosure Schedules that are material to the Acquired Corporations and its business have been validly executed, delivered and filed in a timely manner as instructed by Acquired Corporations’ reputable legal counsels with the appropriate Governmental Authority.  Each of the Acquired Corporations and its respective licensors, as appropriate, are identified or are in the process of being identified, in the records of the U.S. Patent and Trademark Office and corresponding foreign Governmental Authorities as the holders of record of patents and patent applications within the Material Company IP Rights.

(ii)Each of the Acquired Corporations has taken reasonable steps in accordance with normal industry practice to maintain the confidentiality of and otherwise protect and enforce its rights in all  Know-How used in the development and manufacturing of the Acquired Corporations’ existing products and processes or products and processes in development.  To the Knowledge of the Acquired Corporations, the Acquired Corporations have the right (but not necessarily exclusive) to use such Know-How.  To the Knowledge of the Acquired Corporations, such Know-How is not part of the public knowledge or literature and, to

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the Knowledge of the Acquired Corporations, has not been used, divulged or appropriated by any of the Acquired Corporations either for the benefit of any Person or to the detriment of the Acquired Corporations, other than pursuant to confidentiality agreements entered into in the ordinary course of business or pursuant to confidentiality agreements entered into in connection with the development and/or manufacturing of the Acquired Corporations’ existing products and processes or products and processes in development.  To the Knowledge of the Acquired Corporations, no such Know-How is subject to any adverse claim or has been challenged or threatened in any way or infringes any IP Right or misappropriates any Know-How of any other Person.

(e)Part 2.7(e) of the Disclosure Schedule lists all written contracts, agreements and licenses in effect as of the date of this Agreement, under which any third party has licensed, granted or conveyed to any of the Acquired Corporations any right, title or interest in or to any Company IP Rights which are not owned solely or jointly by any of the Acquired Corporations, other than rights arising under “shrink wrap” or “click through” license agreements accompanying widely available computer software that has not been modified or customized for any of the Acquired Corporations, or any implied use rights granted under material transfer agreements, consulting agreements, or agreements engaging third party services providers entered into by any of the Acquired Corporations.

(f)Part 2.7(f) of the Disclosure Schedule lists all written contracts, agreement and licenses terminated as of the date of this Agreement under which any third party previously licensed, granted or conveyed to any of the Acquired Corporations any right, title or interest in or to any IP Rights which were not owned solely or jointly by any of the Acquired Corporations, other than rights arising under “shrink wrap” or “click through” license agreements accompanying widely available computer software that has not been modified or customized for any of the Acquired Corporations, or any implied use rights granted under material transfer agreements, consulting agreements, or agreements engaging third party services providers entered into by any of the Acquired Corporations.

(g)Part 2.7(g) of the Disclosure Schedule lists all written contracts, agreements and licenses under which any of the Acquired Corporations has licensed, granted or conveyed to any third party any right, title or interest in or to any Company IP Rights, other than any implied use rights granted under material transfer agreements, consulting agreements, or agreements engaging third party services providers entered into by any of the Acquired Corporations.

(h)The Acquired Corporations have complied materially with all obligations due to any third parties under all written contracts, agreements, licenses and other arrangements referenced in Part 2.7(e), (f), and (g) of the Disclosure Schedule.  The Acquired Corporations owe no obligations under any written contract, agreement, license or other arrangement referenced in Parts 2.7(e), (f), and (g) of the Disclosure Schedule that would result in the grant or transfer of any right to develop and commercialize the Acquiring Corporations’ existing products or products under development under the Material Company IP Rights referenced in Parts 1-3 of the Disclosure Schedule. The Acquired Corporations owe no future payment obligations,

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including milestones and royalties, under any written contract, agreement, license or other arrangement referenced in Parts 2.7(f) and 2.7(g) of the Disclosure Schedule.

(i)To the Knowledge of the Acquired Corporations, no party is challenging the right, title or interest of any of the Acquired Corporations in, to or under the Material Company IP Rights, or the validity, enforceability or claim construction of any Patent Rights owned (solely or jointly) or exclusively licensed to any of the Acquired Corporations.  None of the Acquired Corporations have received a written challenge to the right, title or interest of any of the Acquired Corporations in, to or under the Material Company IP Rights, or the validity, enforceability or claim construction of any Patent Rights owned (solely or jointly) or exclusively licensed to any of the Acquired Corporations.

(j)All current and former officers and employees of, and consultants and independent contractors to, any of the Acquired Corporations who have contributed in a material manner to the creation or development of any Material Company IP Right have executed and delivered to the Acquired Corporations an agreement regarding the protection of proprietary information and the assignment or license to the Acquired Corporations, or by equivalent arrangement, of any IP Rights arising from services performed for the Acquired Corporations by such persons, the current forms of which agreements have been made available in the Data Room for review by Parent or its advisors.  To the Knowledge of the Acquired Corporations, no current or former officers and employees of, or consultants or independent contractors to, any of the Acquired Corporations have breached any term of any such agreements.

(k)To the Knowledge of the Acquired Corporations, the Acquired Corporations have not infringed (whether direct, contributory or induced), misappropriated or otherwise violated any valid IP Rights or Know-How of any other Person.  Without limiting the generality of the foregoing:

(i)To the Knowledge of the Acquired Corporations, no product or service that (A) has been, or is being, developed, (B) is the subject of an investigational new drug or human clinical trial or (C) is being currently, or is contemplated to be, sold by the Acquired Corporations, infringes, misappropriates or otherwise violates the IP Rights of any other Person.

(ii)No infringement, misappropriation, or similar claim, suit, action, proceeding or investigation pertaining to the Company IP Rights is pending or, to the Knowledge of the Acquired Corporations, threatened against the Acquired Corporations or against any other Person who may be entitled to be indemnified, defended, held harmless or reimbursed by the Acquired Corporations with respect to such claim, suit, action, proceeding or investigation; and except as provided in Part 2.7(k) of the Disclosure Schedule the Acquired Corporations have not received any written notice or to the Knowledge of the Acquired Corporations, oral communication alleging any actual, alleged or suspected infringement, misappropriation or violation of any IP Rights of another Person by any of the Acquired Corporations.

(iii)Each of the Acquired Corporations is not bound by any contract to indemnify, defend, hold harmless or reimburse any other Person with respect to any intellectual property infringement, misappropriation, or similar claim.  Each of the Acquired Corporations

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has not assumed, or agreed to discharge or otherwise take responsibility for, any existing or potential liability of another Person for infringement, misappropriation or violation of any IP Right.

(l)Except as provided in Part 2.7(l) of the Disclosure Schedule, to the Knowledge of the Acquired Corporations, as of the date of this Agreement, no Material Company IP Rights are being infringed, misappropriated, or otherwise being violated by any third party.

(m)Neither the execution, delivery, or performance of this Agreement nor the consummation of any of the transactions contemplated by this Agreement will, with or without notice or lapse of time, result in, or give any other Person the right or option to cause or declare, (i) a loss of, or encumbrance on, any Company IP Rights that are material to the Acquired Corporations or its business, (ii) the release, disclosure or delivery of any Company IP Rights by or to any Escrow Agent or other Person or (iii) the grant, assignment, or transfer to any other Person of any license or other right or interest under, to, or in any of the Company IP Rights.

(n)Neither the execution, delivery nor performance of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement will contravene, conflict with or result in any limitation on the Company’s right, title or interest in or to any of the Material Company IP Rights.

2.8Contracts.

(a)Part 2.8 of the Disclosure Schedule identifies each Company Significant Contract (as defined below) that is in effect as of the date of this Agreement.  For purposes of this Agreement, “Company Significant Contract” shall mean a legally binding contract to which any of the Acquired Corporations is a party: (i) under which future expenditures required, or reasonably expected, to be made by any of the Acquired Corporations exceed $100,000 (excluding any amounts paid or advanced on behalf of and to be reimbursed by a third party); (ii) pursuant to which any of the Acquired Corporations has licensed from any Person any Material Company IP Rights; (iii) pursuant to which any of the Acquired Corporations has granted rights to any third party to any Company IP Rights (other than material transfer agreements substantially in the form of the templates thereof delivered or made available to Parent or Parent’s legal or financial advisor); (iv) evidencing indebtedness for, or a guarantee by any of the Acquired Corporations of indebtedness for, borrowed money of $100,000 or more; (v) creating any partnership or joint venture between any of the Acquired Corporations and any third party or providing for any sharing of profits or losses by any of the Acquired Corporations with any third party; (vi) containing covenants limiting the freedom of any of the Acquired Corporations or their affiliates to compete in any line of business or with any third party; (vii) that constitutes a Real Property Lease Agreement; (viii) that was entered into outside the ordinary course of business, (ix) that provides rights to investors or shareholders; or (x) providing for royalty payments by any of the Acquired Corporations. The Company has delivered or made available to Parent or Parent’s legal or financial advisor a copy of each Company Significant Contract.

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(b)Each Company Significant Contract is valid and in full force and effect, no Acquired Corporation is in breach of or default under, and no event has occurred or circumstance exists which with the passage of time would result in a breach of or default by the Company under, any Company Significant Contract and, to the Knowledge of the Company, no other party is in breach or in default under any Company Significant Contract.  No Acquired Corporation has received notice at any time since January 1, 2008 from any party regarding an alleged or actual breach of any Company Significant Contract to which it is a party.

(c)Except as set forth in Part 2.8(c) of the Disclosure Schedule, the execution and delivery of this Agreement, the consummation of the transactions contemplated under this Agreement and the consummation of the Merger (i) will not cause any of the Company Significant Contracts to cease to be in full force and effect, (ii) will not result in any breach of the terms of any Company Significant Contracts or in the forfeiture or impairment of any material rights thereunder or (iii) will not require under the terms of any of the Company Significant Contracts the consent, approval or act of, or the making of any filing with, any other party.

(d)None of the Acquired Corporations are currently renegotiating any of the Company Significant Contracts or paying liquidated damages in lieu of performance thereunder.  The Company has delivered or made available complete and accurate copies to Parent of each Company Significant Contract, including all exhibits, schedules and amendments thereto.

2.9Suppliers; Contractors.  No current supplier or contractor, including any clinical research organization, manufacturer or subcontractor of any of the Acquired Corporations has canceled or otherwise terminated, or made any written threat to any of the Acquired Corporations to cancel or otherwise terminate, its relationship with any of the Acquired Corporations or has at any time on or after June 30, 2010, materially decreased its services or supplies to any of the Acquired Corporations.  No such supplier has indicated in a writing delivered to any of the Acquired Corporations that such supplier intends to cancel or otherwise terminate its relationship with any of the Acquired Corporations or to decrease materially its delivery of services or supplies to any of the Acquired Corporations.

2.10Compliance with Laws.  Each of the Acquired Corporations is in compliance with all Laws applicable to the operation of the Current Company Business.

2.11Permits.  Each of the Acquired Corporations has obtained all permits, approvals, licenses and registrations from U.S. federal, state and local as well as foreign Governmental Authorities that are necessary for the conduct of the Current Company Business.  All such permits, approvals, licenses and registrations are valid and in full force and effect.

2.12Tax Matters.

(a)Each of the Tax Returns required to be filed by each of the Acquired Corporations with any Governmental Authority with respect to any taxable period ending on or before the date of this Agreement (the “Company Returns”): (i) has been filed on or before the applicable due date (including any extensions of such due date); (ii)  has been prepared in

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compliance with applicable Law; and (iii) is correct and complete in all material respects.  All amounts shown on the Company Returns to be due on or before the Closing Date have been paid, except to the extent such amounts are being contested in good faith by the Acquired Corporations or are properly reserved for on the books or records of the Acquired Corporations. All Taxes that the Acquired Corporations have been required to collect or withhold on or before the Closing Date have been duly collected or withheld and, to the extent required when due, have been duly paid to the proper Governmental Authority.

(b)No audit of any such Company Return is in progress, and none of the Acquired Corporations has been notified in writing by any Governmental Authority that any such audit is contemplated or pending.  No extension of time with respect to any date on which a Company Return was required to be filed by any of the Acquired Corporations is in force, and no waiver or agreement by or with respect to the Acquired Corporations is in force for the extension of time for the payment of any Taxes.  No written claim has been made by any Governmental Authority in a jurisdiction where any of the Acquired Corporations does not file Tax Returns that any of the Acquired Corporations is subject to taxation by that jurisdiction that has not been resolved.

(c)None of the Acquired Corporations has agreed to or is required to make any adjustment for any period after the date of this Agreement pursuant to Section 481(a) of the Code by reason of any change in any accounting method. There is no application pending with any Governmental Authority requesting permission for any such change in any accounting method of the Company, and the IRS has not issued in writing any pending proposal regarding any such adjustment or change in accounting method.

(d)None of the Acquired Corporations is a party to any agreement with any third party relating to allocating or sharing the payment of, or liability for, Taxes.  None of the Acquired Corporations has any liability for the Taxes of any third party under Treasury Regulation § 1.1502-6 as a transferee or successor.  None of the Acquired Corporations has been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code.

(e)There is no Company Employee Plan to which the Company or its Subsidiaries is a party, including the provisions of this Agreement, covering any employee or former employee of the Company or its Subsidiaries, which, individually or collectively, will, or is reasonably likely to give rise to the payment of any amount that would not be deductible pursuant to Section 280G of the Code due to the consummation of the transactions contemplated hereby, including the Merger. There is no agreement, plan, arrangement or other contract by which the Company is bound to compensate any employee for excise Taxes paid pursuant to Section 4999 of the Code.

(f)None of the Acquired Corporations is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; and none of the holders of Company Capital Stock, Company Warrants and Company Options is subject to withholding under Section 1445 of the Code with respect to the sale of the Shares to the Buyer.

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(g)The Company owns all of the Canadian Shares. The “adjusted cost base” (within the meaning of Section 54 of the ITA) to the Company of the Canadian Shares is US$104,737,524.  The “paid-up capital “ (within the meaning of Section 89(1)(c) of the ITA) of the Canadian Shares is C$143,152,671 (Canadian).

2.13Employees and Consultants.

(a)The Company has made available to Parent or Parent’s legal or financial advisors copies of all written contracts with Company Employees and Company Consultants (other than Company Employee Plans, as contemplated by Section 2.12) as well as a complete and accurate summary of the terms and conditions of any contracts with Company Employees and Company Consultants that are not in written form.

(b)Part 2.13(b) of the Disclosure Schedule sets forth, as of the date of this Agreement, the names of all Company Employees, their current respective salaries or wages, their current respective levels of target annual incentive compensation, their respective dates of hire and age, the amount of severance to which such employees may be entitled in the event of a termination, their current titles and the current location of their employment.

(c)Part 2.13(c) of the Disclosure Schedule sets forth, as of the date of this Agreement, the names of all Company Consultants, their current fee and other compensation, the term of their consulting contract, the notice period or legal terms providing for the termination of such consulting contract and the status of such relationship.

(d)Part 2.13(d) of the Disclosure Schedule sets forth, as of the date of this Agreement, a list of all former Company Employees to whom the Company has or may reasonably be expected to have any obligations indicating the nature and value of such obligations or potential obligations.

(e)To the Knowledge of the Company as of the date of this Agreement, no Company Employee intends to resign, retire or terminate his or her employment with the Company as a result of the execution and delivery of this Agreement nor as a result of the consumption of the transactions contemplated hereby.

(f)To the Knowledge of the Company as of the date of this Agreement, no Company Consultant intends to terminate his, her or its consulting contract with the Company as a result of the execution and delivery of this Agreement nor as a result of the consumption of the transactions contemplated hereby.

(g)No Company Employee has been improperly classified as an independent contractor under applicable tax laws.  The Company has properly remitted all applicable payroll and employment Taxes for all Company Employees subject to such Taxes and does not have any liability under the Code or any applicable Tax laws arising out of the classification of any individual as an independent contractor rather than as an employee.

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2.14Employee and Labor Matters; Benefit Plans.

(a)The Company has made available to Parent or Parent’s legal or financial advisor copies of all employee manuals and handbooks and material policy statements in effect as of the date of this Agreement relating to the employment of the Company Employees.

(b)There are no current actions, suits, claims, complaints, labor disputes or grievances pending or, to the Knowledge of the Company, threatened relating to any employment, labor, safety or discrimination matters involving any Company Employee.

(c)Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract.

(d)No trade union, council of trade unions, association of employees, employee bargaining agency or affiliated bargaining agent holds bargaining rights with respect to any Company Employees by way of certification, voluntary recognition, designation or successor rights or has applied to have the Company or any of its Subsidiaries declared a related or successor employer pursuant to applicable Laws.  To the Knowledge of the Company, there is no outstanding labor tribunal proceedings of any kind or other event of any nature whatsoever which could result in certification of a trade union as bargaining agent for any Company Employees.  To the Knowledge of the Company, there are no union organizing activities involving Company Employees.

(e)The Company and its Subsidiaries have not engaged in any unfair labor practices and there is no current, and to the Knowledge of the Company, there is no threatened, strike, lock-out, slowdown, work stoppage, picketing, labor dispute, or any similar activity or dispute, affecting the Company or any of its Subsidiaries.

(f)The Company has not engaged in any plant closing of lay-off activities within the past three (3) years that would violate or in any way subject the Company to the group termination or lay-off requirements of the applicable employment/labor standards laws or other applicable Laws.

(g)The Company and its Subsidiaries are not in arrears in the payment of wages, overtime pay, public holiday pay, salary, commissions, bonuses, incentives, vacation pay, expense reimbursement or any other compensation in any form or of any other amounts owing to current or former Company Employees.

(h)The Company and its Subsidiaries are operating in compliance with all occupational health and safety laws in connection with their business.  To the Knowledge of the Company, there are no pending or threatened charges, fines, penalties or assessments against the Company or any of its Subsidiaries under occupational health and safety Laws.  There have been no fatal or critical accidents which have occurred in the course of the operation of the business of the Company or any of its Subsidiaries since 2007 which could reasonably lead to claims, litigation, charges, fines, penalties or assessments under applicable laws.  The Company and each of its Subsidiaries have complied in all material respects with any orders, directives,

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judgments, decrees, injunctions, decisions, rulings, awards or writs of any Governmental Authority issued under occupational health and safety Laws.

(i)The Company and its Subsidiaries are in material compliance with all written and oral employment contracts and with all applicable Laws respecting employment/labor standards, human rights/discrimination, employment equity, pay equity and other Laws relating to employment of current or former Company Employees.  The Company has no Knowledge that any current or former Company Employee intends to file any claim against the Company with respect to any past non-compliance with any such employment contracts or applicable Laws.

(j)All Company Employee Plans are listed in Part 2.14(j) of the Disclosure Schedule.  With respect to each Company Employee Plan, the Company has made available to Parent or Parent’s legal or financial advisor (i)  copies of each Company Employee Plan, including all amendments and a summary of each unwritten Company Employee Plan; (ii) the three most recent annual reports (on Form Series 5500 and all schedules and financial statements attached thereto), if applicable; (iii) the most recent summary plan description together with the summaries of material modifications thereto, if applicable; (iv) all material written service provider agreements relating to each Company Employee Plan, including administrative service agreements, group insurance contracts, trust agreements and other funding documents; (v) all material correspondence, if any, from the last six years to or from any governmental agency relating to any Company Employee Plan; (vi) the most recent IRS determination or opinion letter issued with respect to each Company Employee Plan intended to be qualified under Section 401(a) of the Code.

(k)All Company Employee data necessary to administer each company Employee Plan is in the possession of the Company, its Subsidiaries or agents and is in a form which is sufficient for the proper administration of the Company Employee Plans in accordance with the terms thereof and all applicable Laws and such data is complete and accurate.

(l)Except as set forth in Part 2.14(l) of the Disclosure Schedule:

(i)each Company Employee Plan has been established and maintained in all material respects in accordance with its terms and in material compliance with applicable Law, including ERISA and the Code;

(ii)no Company Employee Plan, and no trustee or administrator thereof, engaged in any non-exempt “prohibited transaction” (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) within the meaning of Section 406 of ERISA or Section 4975 of the Code;

(iii)each Company Employee Plan intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS (or has time remaining to obtain such letter) or is entitled to rely upon a favorable opinion issued by the IRS, and, to the Company’s knowledge, there are no existing circumstances or events that have

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occurred that could reasonably be expected to adversely affect the qualified status of any such plan;

(iv)neither the Company nor any of its Subsidiaries or ERISA Affiliates has ever maintained, established, sponsored, participated in, contributed to or had any obligation to contribute to any: (A) “employee pension benefit plan” (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA, or Code Section 412 or 430; (B) “multiemployer plan” within the meaning of Section (3)(37)(A) of ERISA; or (C) “multiple employer plan” within the meaning of Section 4063 or 4064 of ERISA;

(v)all current obligations of the Company and its Subsidiaries regarding the Company Employee Plans have been satisfied in all material respects.  All required payments, contributions, premiums or taxes with respect to any Company Employee Plan have been paid or made or properly accrued on the Company’s financial statements.  As of the date hereof, no current outstanding notice of non-compliance, failure to be in good standing or otherwise has been received by the Company or its Subsidiaries from any applicable Governmental Authority in respect of any Company Employee Plan; and

(vi)no Company Employee Plan provides (except at no cost to any of the Acquired Corporations) any retiree or post-employment medical, dental or life insurance benefits with respect to Company Employees of the Company (other than coverage mandated by Law).

(m)Except as set forth in Part 2.14(m) of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including any severance, unemployment compensation, change in control payment or golden parachute payment) becoming due from the Company under any of the Company Employee Plans or any other program, agreement or arrangement, (ii) increase any benefits otherwise payable under any of the Company Employee Plans or any other program, agreement or arrangement, or (iii) result in the acceleration of the time of payment or vesting of any benefits under any of the Company Employee Plans or any other program, agreement or arrangement.

(n)With respect to each Company Employee Plan other than the Bonus Plan, other than restrictions under the Code and ERISA, and restrictions under the terms of the Company Employee Plan that restrict amendments which would adversely affect benefits already accrued, credited or granted at the time of the amendment, there are no restrictions on the ability of the plan sponsor to amend or terminate such Company Employee Plan, and the plan sponsor has expressly reserved in itself the right to amend, modify or terminate any such Company Employee Plan, or any portion of it, and has made no material representations which would conflict with or contradict such reservation or right.  There are no pending actions, claims or lawsuits that have been instituted against any of the Company Employee Plans, the assets of any of the trusts under such Company Employee Plans, or the Company in connection with any of the Company Employee Plans (other than routine benefit claims) and, to the Knowledge of the Company, no such actions, claims or lawsuits are threatened.  There are no investigations or

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audits by any Governmental Authority of any of the Company Employee Plans, any trusts under such Company Employee Plans, or the Company or any Subsidiary in connection with any of the Company Employee Plans that have been instituted and, to the Knowledge of the Company, no such investigations or audits are threatened.  No event has occurred and no condition exists that would subject the Company or any of its Subsidiaries to any tax, fine, penalty or other liability imposed by ERISA, the Code or other applicable law in relation with a Company Employee Plan.  Except for the former employees, consultants and directors of the Acquired Corporations and the number of shares of Class A Common Stock subject to such Company Options held by each such former employee, consultant and director set forth on Part 2.14(n) of the Disclosure Schedule, no Company Options are held by any former employees, directors, officers, consultants or members of the scientific advisory board of the Company or any of its Subsidiaries.

(o)The Company has no formal plan and has made no promise or commitment, whether legally binding or not, to create any additional Company Employee Plan to improve or materially increase the benefits provided under the Company Employee Plans.

(p)No Company Employee Plan which is an employee welfare benefit plan under Section 3(1) of ERISA is funded by a trust or is subject to Section 419 or 419A of the Code.

(q)With respect to each Company Employee Plan that is a “nonqualified deferred compensation plan” (as defined for purposes of Section 409A(d)(1) of the Code) (each, a “Section 409A Plan”), each such Company Employee Plan (i) was operated in good faith compliance with Section 409A of the Code and all applicable IRS guidance promulgated thereunder (“Section 409A”) between January 1, 2005 and December 31, 2008 and (ii) has complied in form and operation with the requirements of Section 409A since January 1, 2009.  No amount under any Section 409A Plan is or has been subject to interest or additional Tax under Section 409(a)(1)(B) of the Code and the Company has no obligation to gross up any person for any such Tax.

(r)Each International Plan has been maintained in material compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations (including any special provisions relating to qualified plans where such Company Employee Plan was intended so to qualify) and has been maintained in good standing with applicable regulatory authorities.

2.15Environmental Matters.

(a)The following terms shall be defined as follows:

(i)“Environmental Laws” shall mean any applicable, federal, provincial. state or local governmental Laws (including common Law), permits, licenses, certificates, approvals, judgments, decrees, orders, directives, or requirements that regulate the protection of the environment, protection of public health and safety, or protection of worker health and safety, or that regulate the handling, use, manufacturing, processing, storage,

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treatment, transportation, discharge, release, emission, disposal, re-use, or recycling of Hazardous Materials, including the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., as amended (“CERCLA”), and the federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., as amended (“RCRA”).

(ii)“Hazardous Materials” shall mean any material, chemical, compound, substance, mixture or by-product that is identified, defined, designated, listed, restricted or otherwise regulated under Environmental Laws as a “hazardous constituent,” “hazardous substance,” “hazardous material,” “acutely hazardous material,” “extremely hazardous material,” “hazardous waste,” “hazardous waste constituent,” “acutely hazardous waste,” “extremely hazardous waste,” “infectious waste,” “medical waste,” “biomedical waste,” “pollutant,” “toxic pollutant,”  or “contaminant.”  The term “Hazardous Materials” shall include any “hazardous substances” as defined, listed, designated or regulated under CERCLA, any “hazardous wastes” or “solid wastes” as defined, listed, designated or regulated under RCRA, any asbestos or asbestos containing materials any polychlorinated biphenyls or materials containing polychlorinated biphenyls, and any petroleum or hydrocarbonic substance, fraction, distillate or by-product.

(iii)Each of the Acquired Corporations is in substantial compliance with all Environmental Laws relating to the properties or facilities used, leased or occupied by the Acquired Corporations and the activities thereon (collectively, “Company’s Facilities”).  None of the Acquired Corporations has and, to the Company’s knowledge, no third party has discharged, emitted, released, leaked or spilled Hazardous Materials at, from, or onto any of Company’s Facilities such that the discharge, emission, release, leak or spill is reasonably likely to give rise to liability of any of the Acquired Corporations under Environmental Laws.  As of the date hereof, no civil, criminal or administrative action, proceeding or, to the Company’s knowledge, investigation is pending against any of the Acquired Corporations, or, to the Company’s knowledge, is being threatened against any of the Acquired Corporations, with respect to Hazardous Materials or Environmental Laws.

2.16Insurance.  Part 2.16 of the Disclosure Schedule is a list of all policies of insurance or fidelity bonds maintained by any of the Acquired Corporations.  Such policies are in full force and effect and none of the Acquired Corporations is in default with respect to its obligations under any such policies. As of the date of this Agreement, there is no claim pending under any of such policies or fidelity bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds.  The Company has no Knowledge as of the date of this Agreement of any threatened termination of, or premium increase with respect to, any of such policies or bonds.

2.17Indebtedness with Affiliates.  None of the Acquired Corporations is indebted to any director, officer or employee of the Acquired Corporations (except for amounts due as salaries and bonuses under employment agreements or employee benefit plans and amounts payable in reimbursement of expenses), and no such director, officer or employee is indebted to any of the Acquired Corporations.

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2.18Legal Proceedings.  There is no private or governmental action, lawsuit or other legal proceeding pending (or, to the Company’s knowledge, being threatened) against any of the Acquired Corporations or any of its respective officers or directors (in their capacities as such).  To the Company’s knowledge, there is no governmental investigation pending or being threatened against any of the Acquired Corporations or any of its respective officers or directors (in their capacities as such).

2.19Regulatory Compliance.

(a)As to each product candidate subject to the Federal Food Drug and Cosmetic Act (“FDCA”) and the regulations of the FDA promulgated thereunder or similar Laws in any foreign jurisdiction that is or has been developed, manufactured and/or tested by or on behalf of any of the Acquired Corporations (each such product candidate, a “Drug”), each such Drug is being or has been developed, manufactured and/or tested in compliance with all applicable requirements under the FDCA and the regulations of the FDA promulgated thereunder and similar foreign Laws, including those relating to investigational use, good manufacturing practices, good clinical practices, good laboratory practices, labeling, record keeping and filing of required reports.  None of the Acquired Corporations has received any notice or other communication from the FDA or any other Governmental Authority (i) withdrawing the investigational new drug application (“IND”) of any Drug of the Acquired Corporations, (ii) placing any IND of the Acquired Corporations on “clinical hold”, or (iii) otherwise alleging any violation by the Acquired Corporations of any Laws applicable to any Drug.  Complete and correct copies of each submission of the Acquired Corporations to the FDA or any analogous foreign Governmental Authority with respect to each Drug of the Acquired Corporations, and all amendments and supplements thereto, including all related pre-clinical and clinical data, have heretofore been identified, delivered or made available to Parent by the Acquired Corporations.  Complete and correct copies of all written correspondence (including minutes of meetings and substantive telephone calls) received by the Acquired Corporations from the FDA or any analogous foreign Governmental Authority with respect to each Drug of the Acquired Corporations and the responses thereto have heretofore been delivered or made available to Parent by the Acquired Corporations.  Complete and correct copies of all clinical trial agreements and other clinical trial documentation have been delivered or made available to Parent by the Acquired Corporations.

(b)All human clinical trials conducted by or, to the Company’s knowledge, on behalf of any of the Acquired Corporations have been, and are being, conducted in compliance with the applicable requirements of Good Clinical Practice, Informed Consent, and all applicable requirements relating to protection of human subjects contained in 21 CFR Parts 50, 54 and 56 and all comparable state Laws and regulations.

(c)To the Company’s knowledge, all manufacturing operations conducted for the benefit of any of the Acquired Corporations with respect to any Drug being used in human clinical trials have been and are being conducted in accordance with the FDA’s current Good Manufacturing Practice regulations and guidelines for drug products.

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(d)None of the Acquired Corporations’ officers or employees nor, to the Knowledge of the Company, any of the Acquired Corporations’ agents or clinical investigators acting for the Acquired Corporations, has committed any act, made any statement or failed to make any statement that would reasonably be expected to provide a basis for the FDA or any other Governmental Authority to invoke its policy with respect to “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” set forth in 56 Fed. Reg. 46191 (September 10, 1991) and any amendments thereto.  Additionally, none of the Acquired Corporations, nor to the Knowledge of the Company, any officer, employee or agent of the Acquired Corporations has been convicted of any crime or engaged in any conduct that would reasonably be expected to result, or has resulted, in (i) debarment under 21 U.S.C. Section 335a or any similar state Law, or (ii) exclusion under 42 U.S.C. Section 1320a-7 or any similar state Law.

(e)To the Knowledge of the Company, there are no investigations, suits, claims, actions or proceedings against or affecting the Acquired Corporations relating to or arising under (i) the FDCA or the regulations of the FDA promulgated thereunder or similar Laws or (ii) applicable Laws relating to government health care programs, private health care plans, or the privacy and confidentiality of patient health information.

2.20Authority; Binding Nature of Agreement; Non-Contravention.  The Company has the requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated by this Agreement.  The execution and delivery of this Agreement have been duly authorized by all necessary corporate action on the part of the Company.  This Agreement, assuming it constitutes the valid and binding obligation of the other parties hereto,  constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to: (a) Laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (b) rules of Law governing specific performance, injunctive relief and other equitable remedies.  Except as set forth in Part 2.20 of the Disclosure Schedule, neither (i) the execution and delivery of this Agreement by the Company, nor (ii) the performance of the Company of its obligations hereunder or the consummation by the Company of the Merger, will result in a termination, or a violation by the Company of (A) any provision of the Restated Certificate of Incorporation or Bylaws, (B) any provision of any Company Significant Contract or (C) any Law applicable to the Company, and will not require any registration, declaration or filing with, or any permit, order, authorization, consent or approval of, any Governmental Authority, except for compliance with the applicable requirements of HSR and applicable foreign antitrust or trade regulation Laws.

2.21Stockholder Approval; Voting Agreements.  The affirmative vote or consent of the holders of (a) at least 66 2/3% of the shares of Company Preferred Stock, voting together as a single class on an as-converted to Class A Common Stock basis; and (b) a majority of the shares of Company Capital Stock, voting together as a single class on an as-converted basis, in each case outstanding on the record date chosen for purposes of determining the stockholders of the Company entitled to vote on the adoption of this Agreement, is the only vote of the holders of any Company Capital Stock necessary under the DGCL and the Restated Certificate of Incorporation to adopt this Agreement (the “Required Stockholder Vote”).  The Company has delivered to Parent executed irrevocable voting agreements in the form attached as Schedule 2.21

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(each a “Voting Agreement” and together, the “Voting Agreements”) from Company Holders evidencing the Required Stockholder Vote.

2.22Board Approval; Other Approvals.  The board of directors of the Company has (a) approved this Agreement and its execution and delivery and the consummation of the Merger, and the other transactions contemplated by this Agreement, and (b) determined that the Merger is in the best interests of the Company and the stockholders of the Company.  No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, whether inside or outside the United States (each, a “Governmental Authority”), is required to be obtained or made by the Company at or prior to the Effective Time in order for the Company to execute and deliver this Agreement or to consummate the Merger, except for: (x) the filing of the certificate of merger as provided in Section 1.2(b); (y) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required to be obtained or made by the Company under applicable state securities Laws and the securities Laws of any foreign country; and (z) such filings as may be required under Antitrust Laws (as defined in Section 4.4(b)).

2.23No Undisclosed Liabilities.  The Acquired Corporations are not subject, as of the date of this Agreement, to any liability, whether absolute, contingent, accrued or otherwise, which is not shown or reflected in the Company Balance Sheet (including the notes thereto) or which is in excess of amounts shown, disclosed or reserved for in the Company Balance Sheet (including the notes thereto), other than (i) any liability incurred in the ordinary course of business after the date of the Company Balance Sheet, (ii) any liability incurred for legal, accounting and other expenses in connection with the transactions contemplated by this Agreement, (iii) any liability that the Company is expressly permitted to incur pursuant to the terms of this Agreement and (iv) performance obligations incurred in the ordinary course of business under the Company Significant Contracts identified in Part 2.23 of the Disclosure Schedule and Company Employee Plans identified in Part 2.14(c) of the Disclosure Schedule.

2.24Takeover Laws.  No state or foreign takeover statute or similar Law applies or purports to apply to the Merger, this Agreement or any of the transactions contemplated hereby.

2.25Foreign Corrupt Practices Act.  The Acquired Corporations and, to the Knowledge of the Company, their officers, directors, employees and agents, are in compliance in all material respects with and have not violated in any material respect the Foreign Corrupt Practices Act of 1977 or any similar Laws of any foreign jurisdiction.  No governmental or political official in any country is or has been employed by, acted as a consultant to or, to the Knowledge of the Company, held any beneficial ownership in the Company.  The Acquired Corporations and, to the Knowledge of the Company, their officers, directors, employees and agents, are in compliance in all material respects with and have not violated in any material respect any U.S. anti-money laundering Laws, the U.S. Bank Secrecy Act, the USA PATRIOT Act or the anti-money laundering Laws of any foreign jurisdiction.

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2.26Financial Advisor.  Except for Citigroup Global Markets Inc., no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the Merger based upon arrangements made by or on behalf of the Company.

2.27Disclosure.  To the Knowledge of the Company, this Agreement and the Disclosure Schedules (including the representations and warranties set forth herein and therein), when viewed collectively, do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances in which they were made.

SECTION 3.REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

As an inducement to Company to enter into this Agreement and to consummate the transactions contemplated hereby, the Parent and Merger Sub represent and warrant to Company as of the date of this Agreement and immediately prior to the Effective Time that:

3.1Due Organization.  Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation.

3.2Authority; Binding Nature of Agreement.  Each of Parent and Merger Sub has the requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated by this Agreement.  The execution and delivery by Parent and Merger Sub of this Agreement have been duly authorized by all necessary corporate action on the part of Parent and Merger Sub.  This Agreement, assuming it constitutes the valid and binding obligation of the Company, constitutes the valid and binding obligation of Parent and Merger Sub, enforceable against them in accordance with its terms, subject to: (a) Laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (b) rules of Law governing specific performance, injunctive relief and other equitable remedies. Neither (i) the execution and delivery of this Agreement by Parent or Merger Sub, nor (ii) the consummation of the Merger, will: (A) result in a violation by Parent or Merger Sub of (I) any provision of the certificate of incorporation or bylaws or other equivalent organizational documents of Parent or Merger Sub, (II) any provision of any contract by which Parent or Merger Sub is bound, or (III) any Law applicable to Parent or Merger Sub; or (B) render Parent insolvent or unable to pay its debts as they become due.

3.3Merger Sub.  Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, and has engaged in no other business activities.

3.4No Authorizations.  Neither the execution and delivery by Parent and Merger Sub of this Agreement, nor the consummation by Parent or Merger Sub of any of the transactions contemplated hereby, will require on the part of Parent or Merger Sub any registration, declaration or filing with, or any permit, order, authorization, consent or approval of, any Governmental Authority, except for (a) compliance with the applicable requirements of HSR and applicable foreign antitrust or trade regulation Laws, (b) the filing by Parent of such reports and

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information with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as may be required in connection with this Agreement, the Merger and the other transactions contemplated by this Agreement and (c) the filing of a notification after the Closing Date pursuant to the Investment Canada Act.

3.5Litigation.  There is no private or governmental action, suit, proceeding, claim, arbitration or, to the Knowledge of Parent, investigation, pending before any Governmental Authority or, to the Knowledge of Parent, threatened in a communication with Parent, against Parent or its Subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Merger, Parent’s ability to pay the Merger Consideration or otherwise consummate the Merger or any other transactions contemplated by this Agreement.

3.6Adequacy of Funds.  Parent has adequate financial resources to satisfy its monetary and other obligations under this Agreement.

3.7No Brokers.  Except for Deutsche Bank Securities Inc., no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the Merger or any of the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Merger Sub.

SECTION 4.COVENANTS AND AGREEMENTS

4.1Conduct of Business of the Company.  Except as permitted or contemplated by, or as necessary to comply with this Agreement and the Escrow Agreement, as set forth in Part 4.1 of the Disclosure Schedule or as required by applicable Law, during the period from the date of this Agreement until the Effective Time, without Parent’s prior written consent (which consent shall not be unreasonably withheld, or conditioned or delayed), the Company shall, and shall cause each of the other Acquired Corporations to: (x) conduct its business in the ordinary course consistent with past practice; (y) use commercially reasonable efforts to comply in all material respects with all applicable Laws and the requirements of all Company Significant Contracts; and (z) use commercially reasonable efforts to: (i) maintain and preserve intact its present business organization; (ii) retain the services of its present officers and key employees; and (iii) preserve its relationships with suppliers, licensors, licensees, lessors, clinical trial investigators, managers of its clinical trials, consultants, business associates and others to whom any of the Acquired Corporations has material contractual obligations.  Without limiting the generality of the foregoing, except as permitted or contemplated by or as necessary to comply with, this Agreement and the Escrow Agreement, as set forth in Part 4.1 of the Disclosure Schedule or as required by applicable Law, during the period from the date of this Agreement until the Effective Time, the Company shall not, without Parent’s prior written consent (which consent shall not be unreasonably withheld or delayed):

(a)issue, sell or deliver any shares of Company Capital Stock or securities convertible into, or rights, warrants or options to acquire any shares of Company Capital Stock;

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provided, however, that the Company may issue shares of Company Capital Stock upon (i) the valid exercise of Company Options, the Company Warrants and the IQ Options outstanding as of the date of this Agreement, (ii) the valid conversion of Company Preferred Stock outstanding as of the date of this Agreement, or (iii) the issuance of authorized (as of the date of this Agreement), but unissued shares of the Company’s Series D Preferred Stock pursuant to the Series D Agreement;

(b)redeem, purchase or otherwise acquire any outstanding shares of Company Capital Stock, or any rights, warrants or options to acquire any shares of Company Capital Stock other than (i) the repurchase of any unvested shares of Company Capital Stock that have failed to vest upon termination of employment in accordance with the terms of agreements governing Company Options as of the date of this Agreement and (ii) those certain rights of redemption granted to IQ pursuant to the IQ Loan Agreement;

(c)split, combine, subdivide or reclassify any shares of Company Capital Stock;

(d)incur any accounts payable, accrued expenses or any other current liability outside the ordinary course of business or fail to satisfy accounts payable, accrued expenses and other current liabilities in the ordinary course of business and in conformity with past practice;

(e)incur any indebtedness for borrowed money or guarantee any indebtedness, other than borrowings under any of the Acquired Corporations’ existing credit facilities, in any case in the ordinary course of business consistent with past practice or the Company’s 2011 monthly financial forecast as set forth in Part 4.1 of the Disclosure Schedule, or issue any debt securities or warrants or other rights to acquire debt securities of the Acquired Corporations;

(f)sell, transfer, lease, license, mortgage or encumber any Material Company IP Right or any tangible assets that are material to the Current Company Business, except for the incurrence of Permitted Encumbrances;

(g)make any capital expenditures, except in the ordinary course of business consistent with past practice or the Company’s 2011 monthly financial forecast as set forth in Part 4.1 of the Disclosure Schedule, in an amount not in excess of $250,000 in the aggregate for the Acquired Corporations during any three-consecutive month period;

(h)make any acquisition (by purchase of securities or assets, merger, consolidation or otherwise) of any other Person, business or division, or merge or consolidate with any other Person;

(i)make any investment in, or loan or advance (other than advances to its employees in the ordinary course of business consistent with past practice) to, any Person other than in the ordinary course of business consistent with past practice;

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(j)increase in any material manner the compensation of any of Company Employee or enter into, establish, materially amend or terminate any employment, consulting, collective bargaining, bonus or other incentive compensation, health or other welfare, pension, retirement, severance, deferred compensation or other compensation or benefit plan with, for or in respect of any Company Employee, other than: (i) as required pursuant to applicable Law or the terms of agreements in effect as of the date of this Agreement; (ii) increases in salaries, wages and benefits of employees made in the ordinary course of business consistent with past practice, (iii) entry into, in the ordinary course of business consistent with past practice, offer letters with new employees below the level of Vice President, or (iv) as reasonably necessary to comply with clauses (z)(i) and (ii) of Section 4.1;

(k)make or change any material election concerning Taxes or Tax Returns (other than elections made in the ordinary course of business);

(l)make any material changes in financial or Tax accounting methods, principles or practices or change an annual accounting period, except insofar as may be required by a change in GAAP or applicable Law;

(m)amend the Restated Certificate of Incorporation or Bylaws;

(n)enter into any contract or agreement that would be a Company Significant Contract if it had been in existence on the date of this Agreement, or prematurely terminate or amend any Company Significant Contract, except in the ordinary course of business consistent with past practice;

(o)settle or compromise any claims or litigation or adverse proceeding, or waive, release or assign any rights or claims under any Company Significant Contract, including granting any covenant not to sue except (i) in the ordinary course of business consistent with past practice, or (ii) as required by applicable Law or any judgment by a Governmental Authority;

(p)adopt a plan or agreement of complete or partial liquidation, dissolution, restructuring, recapitalization, merger, consolidation or other reorganization;

(q)enter into any (1) contract for the purchase or lease of real property or (2) extend or enter into an option to extend any Real Property Lease Agreement for a period longer than one year from the scheduled initial expiration date of the term of such lease; or

(r)declare, set aside for payment, pay or agree to declare, set aside for payment or pay, any dividend on, or make any other distribution in respect of, any shares of Company Capital Stock or otherwise make any payments to its shareholders in their capacity as such;

(s)agree, in writing or otherwise, to take any of the actions described in clauses “(a)” through “(r)” of this sentence.

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4.2Access to Information.  During the period from the date of this Agreement until the Effective Time, the Company shall afford Parent and its personnel, accountants, counsel and other representatives, subject to applicable Law, reasonable access during normal business hours and on reasonable advance notice to the Company’s properties, books and records and all other existing information concerning the business, properties and personnel of the Company as Parent may reasonably request; provided, however, that in exercising access rights under this Section 4.2, Parent shall not be permitted to interfere unreasonably with the conduct of the business of the Company.  Parent shall hold information received pursuant to this Section 4.2 in confidence in accordance with the terms of that certain Confidentiality Agreement, dated January 26, 2009, between the Company (acting through Gemin X Pharmaceuticals US, Inc.) and Parent (the “Confidentiality Agreement”).

4.3Public Disclosure.  Neither Company nor Parent shall, without the prior written approval of the other party, make any press release, public statement or any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated by this Agreement, except as and to the extent that any party shall be so obligated by Law or the rules of any stock exchange; provided, however, that the Company and Parent shall be permitted to make public statements and disclosures consistent with the content of the press release announcing the transaction contemplated by this Agreement from and after the issuance of such press release.  In the event of a disclosure required by Law or the rules of any stock exchange, the disclosing party shall advise the other party, submit a draft of such disclosure to the other party and consider any reasonable comments timely received from such other party; provided that in the event the disclosing party does not receive comments from such other party within one (1) business day of submission of draft disclosure to such other party, the disclosing party may make such required disclosure.

4.4Consents; Regulatory Approval; Further Assurances.

(a)Parent and the Company shall use commercially reasonable efforts to satisfy the conditions to the Merger, effectuate the Merger and make effective the other transactions contemplated by this Agreement.  Without limiting the generality of the foregoing, each party to this Agreement shall: (i) make any filings and give any notices required to be made or given by such party in connection with the Merger and the other transactions contemplated by this Agreement; (ii) use commercially reasonable efforts to obtain any consent required to be obtained (pursuant to any applicable Law, contract or otherwise) by such party in connection with the Merger or any of the other transactions contemplated by this Agreement; and (iii) use commercially reasonable efforts to lift any restraint, injunction or other legal bar to the Merger.  Each of Parent and the Company shall promptly deliver to the other (or, based on reasonable confidentiality concerns, its outside counsel) a copy of each such filing made, each such notice given and each such consent obtained during the period from the date of this Agreement until the Effective Time.

(b)Each party shall use commercially reasonable efforts in filing, as promptly as practicable after the date of this Agreement, all notices, reports and other documents that the parties deem to be necessary or advisable to be filed with any Governmental Authority with

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respect to the Merger and the other transactions contemplated by this Agreement, and to submit promptly any additional information requested by any such Governmental Authority.  Without limiting the generality of the foregoing, promptly after the date of this Agreement, but in no event later than ten (10) business days after the date of this Agreement, Parent and the Company shall cause to be prepared and filed the notifications that the parties deem necessary or advisable under HSR or any other statute, regulation, order, or decree, whether foreign or based on United States Law, that is designed to prohibit, restrict, or regulate actions having the potential purpose or effect of monopolization, restraint of trade, or lessening of competition (collectively, “Antitrust Laws”) in connection with the Merger.  Parent and the Company shall respond as promptly as practicable to (i) any inquiries or requests received from the Federal Trade Commission or the Department of Justice for additional information or documentation and (ii) any inquiries or requests received from any state attorney general or any other Governmental Authority in connection with Antitrust Laws.  Each of the Company (to the extent it has Knowledge of such facts) and Parent shall: (A) give the other party prompt notice of any investigation or other legal proceeding by or before any Governmental Authority with respect to the Merger or any of the other transactions contemplated by this Agreement; (B) keep the other party informed as to the status of any such legal proceeding; and (C) promptly inform the other party or its counsel of any communication to or from the Federal Trade Commission, the Department of Justice or any other Governmental Authority regarding the Merger.  The Company and Parent will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with any communication, analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted by either of them in connection with any legal proceeding under or relating to HSR or any other of the Antitrust Laws.  In addition, except as may be prohibited by any Governmental Authority or by any applicable Law, in connection with any proceeding with any Governmental Authority under or relating to HSR or any other of the Antitrust Laws relating to the Merger to which either the Company or Parent is a party, each of the Company and Parent will permit authorized representatives of the other party to be present at each meeting, conference or other communication relating to any such legal proceeding and to have access to and be consulted in connection with any document, opinion or proposal made or submitted to any Governmental Authority in connection with any such legal proceeding.  Moreover, without limiting the generality of the foregoing, each of Parent and the Company shall, if any administrative, regulatory, or judicial action or proceeding is instituted (or threatened to be instituted) challenging the Merger or any of the transactions contemplated by the Agreement as violative of any Antitrust Laws, use their commercially reasonable efforts to cooperate to vigorously contest and resist any such action or proceeding and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction, or other order, whether temporary, preliminary, or permanent, that is in effect and that prohibits, prevents, or restricts consummation of the Merger or any of the transactions contemplated by this Agreement.

4.5Indemnification of Officers and Directors of the Company.

(a)From and after the Effective Time, Parent shall cause the Surviving Corporation to fulfill and honor in all respects the obligations of the Company and the Acquired Corporations pursuant to the applicable provisions in any agreement with the Company  or the

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other Acquired Corporations identified in Part 4.5 of the Disclosure Schedule or in the Company’s Certificate of Incorporation or Bylaws or organization documents of each other Acquired Corporation providing for the indemnification of its respective officers or directors (the current and former officers and directors of the Company and the other Acquired Corporations, and all other persons entitled to be indemnified pursuant to such provisions being referred to each as an “Indemnified Party” and collectively as the “Indemnified Parties”).  Without limiting the foregoing, Parent agrees that all rights to indemnification (including any obligations to advance funds for expenses) and exculpation from liabilities for acts or omissions occurring at or prior to the Effective Time now existing in favor of the Indemnified Parties as provided in any agreement with the Company or the other Acquired Corporations identified in Part 4.5 of the Disclosure Schedule or in the Company’s Certificate of Incorporation or Bylaws or organizational documents of each other Acquired Corporation will, from and after the Effective Time, be assumed by the Surviving Corporation in the Merger without further action on the part of any Person and will survive the Merger and the transactions contemplated hereby and will continue in full force and effect in accordance with their respective terms and such rights will not be amended or modified in any manner that would adversely affect the rights of the Indemnified Parties.

(b)Without limiting the effect of Section 4.5(a), commencing at the Effective Time and ending on the sixth anniversary of the Effective Time, Parent shall indemnify and hold harmless each Indemnified Party against and from any costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, to the extent such claim, action, suit, proceeding or investigation arises out of or pertains to: (i) any action or omission or alleged action or omission on the part of a director, officer or employee of the Company or other Acquired Corporation (regardless of whether such action or omission, or alleged action or omission, occurred prior to, on or after the date of this Agreement); or (ii) any of the transactions contemplated by this Agreement.  Notwithstanding the foregoing, neither Parent nor the Surviving Corporation in the Merger shall be obligated to indemnify any Indemnified Parties under this Section 4.5 for (i) any acts that were not taken by such Indemnified Parties in good faith and in a manner that such Indemnified Parties reasonably believed to be in or not opposed to the best interests of the Company or which such Indemnified Parties had reasonable cause to believe was unlawful or (ii) for any settlement effected without Parent’s written consent (which consent shall not be unreasonably withheld).  Each Indemnified Party shall provide notice to Parent of any matters as to which such Indemnified Party intends to seek indemnification from Parent or the Surviving Corporation as contemplated by this Section 4.5.

(c)The Company shall obtain a prepaid tail policy prior to the Effective Time that provides the Indemnified Parties with directors’ and officers’ liability insurance for a period ending no earlier than the sixth anniversary of the Effective Time on substantially the same terms as provided to Parent prior to the date of this Agreement.

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(d)Parent and the Surviving Corporation jointly and severally agree to pay all expenses, including attorneys’ fees, that may be incurred by the Indemnified Parties in enforcing the indemnity and other obligations provided for in this Section 4.5.

(e)If Parent or the Surviving Corporation or any of the successors or assigns of Parent or the Surviving Corporation (i) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any other Person, then, and in each such case, proper provisions shall be made so that the successors and assigns of Parent or the Surviving Corporation (as the case may be) shall assume all of the obligations set forth in this Section 4.5.  This Section 4.5: (A) shall survive the consummation of the Merger and the Effective Time; (B) is intended for the benefit of, and will be enforceable by, each Indemnified Party and his or her heirs and representatives; (C) shall be binding on all successors and assigns of Parent and the Surviving Corporation; and (D) provides rights that are in addition to, and not in substitution for, any other rights to indemnification or contribution that any Indemnified Party, or any heir or representative of any Indemnified Party, may have by contract or otherwise.

4.6Employee Benefits Arrangements.

(a)The Company shall take all actions necessary to terminate the 401(k) Plan for the employees of Gemin X Pharmaceuticals US, Inc. effective as of a date not later than the day immediately prior to the Closing Date.

(b)At the Effective Time, Parent shall offer employment with the Surviving Corporation or another Acquired Corporation to all employees of the Company and its Subsidiaries who are listed on Part 4.6(b)(i) of the Disclosure Schedule.  The Company shall take all actions necessary to terminate the employment or services of all employees of and individual consultants to the Company and its Subsidiaries who are not listed on Part 4.6(b)(i) of the Disclosure Schedule such that the terminations of employment occurs prior to the Effective Time.  The Closing Date Merger Consideration shall be reduced (without duplication based on other reductions) by the amount of all costs associated with the employment or services and the termination of employment or services of the employees and consultant identified in Part 4.6(b)(ii) of the Disclosure Schedule that are unpaid as of the Closing Date, including, but not limited to, severance and change in control benefits payable to such individuals pursuant to any Company Employee Plan or otherwise (“Company Severance Payments”).  The Closing Date Merger Consideration shall not be reduced by the amount of the cost of severance benefits payable to all other employees and consultants whose employment or service is terminated pursuant to this Section 4.6(b) pursuant to any Company Employee Plans or other Company policy described on Part 2.13(b) of the Disclosure Schedule or by operation of law, it being understood that obligations with respect to the Contingent 2010 Bonuses and the Bonus Plan are addressed through other provisions of this Agreement.

(c)Parent shall take commercially reasonable steps, to: (i) enroll all employees of the Company or its Subsidiaries identified on Part 4.6(b)(i) of the Disclosure

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Schedule who are employed by the Surviving Corporation or another Acquired Corporation upon and after the Effective Time (“Continuing Employees”) in Parent’s plans, programs, policies, practices, contracts, agreements and other arrangements providing for employment, compensation, retirement, deferred compensation, loans, severance, separation, termination pay, performance awards, bonuses, incentive, stock option, stock purchase, stock bonuses, phantom stock, stock appreciation rights, supplemental retirement benefits, fringe benefits, cafeteria benefits or other benefits, whether written or unwritten, including each “employee benefit plan” within the meaning of Section 3(3) of ERISA (the “Parent Employee Plans”), to the extent applicable, which are provided to similarly situated employees of Parent; (ii) cause any pre-existing conditions or limitations, evidence of insurability, exclusions and waiting periods with respect to participation and coverage requirements under any Parent Employee Plans to be waived with respect to Continuing Employees and their eligible dependents; (iii) give each Continuing Employee credit for the plan year in which the Effective Time occurs towards applicable deductibles, co-payments and annual out-of-pocket limits for expenses incurred under a similar Company Employee Plan to the extent such deductibles, co-payments and annual out-of-pocket limits are applicable under the comparable Parent Plan; and (iv) give each Continuing Employee service credit for such Continuing Employee’s employment with the Acquired Corporations for purposes of eligibility to participate, vesting credit and entitlement to benefits (but excluding benefit accruals) under each applicable Parent Employee Plan, as if such service had been performed with Parent.

(d)The provisions of this Section 4.6 are for the sole benefit of the parties to the Agreement and nothing herein, expressed or implied, is intended or shall be construed to (i) constitute an amendment to any of the compensation and benefits plans maintained for or provided to Continuing Employees prior to or following the Effective Time or (ii) confer upon or give to any person (including for the avoidance of doubt any current or former employees, directors, or independent contractors of the Company or any of its Subsidiaries, or on or after the Effective Time, the Surviving Corporation or any of its subsidiaries), other than the parties hereto and their respective permitted successors and assigns, any legal or equitable or other rights or remedies (with respect to the matters provided for in this Section 4.6) under or by reason of any provision of this Agreement.

4.7No Solicitation.

(a)During the period from the date of this Agreement until the Effective Time, the Company agrees that it shall not, nor shall it authorize or permit any of the Acquired Corporations, or its or their employees, officers, directors or representatives to, directly or indirectly: (i) solicit, initiate, knowingly encourage, knowingly induce or knowingly facilitate the communication, making, submission or announcement of any inquiry, proposal or offer from any Person (other than Parent) relating to a possible Acquisition Transaction; (ii) provide any information to any Person relating to a possible Acquisition Transaction, (iii) participate in any discussions or negotiations or enter into any agreement with, or provide any non-public information to, any Person (other than Parent) relating to or in connection with a possible Acquisition Transaction; or (iv) review, consider, entertain or accept any proposal or offer from any Person (other than Parent) relating to a possible Acquisition Transaction.  The Company

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shall promptly notify Parent in writing of any communication, inquiry, proposal or offer relating to a possible Acquisition Transaction that is received by the Company, any other Acquired Corporation, or any employee, officer, director or representative of any Acquired Corporation during the period from the date of this Agreement until the Effective Time.

(b)The Company shall immediately cease and cause to be terminated any existing discussions with any Person that relate to any Acquisition Transaction.

(c)The Company shall promptly request each Person that has executed a confidentiality or similar agreement in connection with its consideration of a possible Acquisition Transaction (other than a transaction or series of transactions described in clause (b) of the definition of “Acquisition Transaction” intended principally for equity financing purposes) within the two (2) year period immediately prior to the date of this Agreement to return to the Company or destroy all confidential information heretofore furnished to such Person by or on behalf of the Company within the two (2) year period immediately prior to the date of this Agreement.

4.8Company Stockholder Consents.

(a)In accordance with and in satisfaction of the requirements of Section 262 of the DGCL, the Company covenants and agrees to cause a written notice to be delivered no later than ten (10) business days following the date hereof to each stockholder of the Company and to deliver any additional notice or other information to the stockholders of the Company as may be required by the DGCL.  The Company shall cause to be delivered to each holder of Company Preferred Stock all notices relating to this Agreement and the Merger required by the Certificate of Incorporation and other applicable organizational documents.

(b)The Company agrees to use its reasonable best efforts to obtain the affirmative vote or consent of the holders constituting the Required Stockholder Vote as promptly as possible following the date of this Agreement. The Company shall provide the stockholders of the Company with such disclosure materials as shall be required by applicable Laws.  The Company shall submit to Parent the form of any written notice and other disclosure materials to be transmitted to stockholders pursuant to this Section 4.8 as promptly as possible following the date of this Agreement and in any event prior to delivery thereof to the stockholders and shall not transmit to its stockholders any such notice or disclosure material to which Parent reasonably objects.  The board of directors of the Company shall recommend the adoption of this Agreement by the Company’s stockholders and shall not withdraw or modify in any manner, or publicly propose to withdraw or modify in any manner, such recommendation, except as may be required by applicable Laws.  If any “fair price,” “moratorium” or “control share acquisition” statute or other similar anti-takeover statute or regulation shall become applicable to the transactions contemplated by this Agreement, the Company and its board of directors shall use their reasonable best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated hereby and thereby and otherwise act to

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minimize the effects of any such statute or regulation on the transactions contemplated hereby and thereby.

(c)In the event that the Required Stockholder Vote has not been obtained within 30 days following the date of this Agreement, upon the written request of Parent, the Company shall duly call, give notice of, convene and hold a meeting of its stockholders (the “Stockholders’ Meeting”) for the purpose of approving the Merger and adopting this Agreement and, in connection therewith, shall deliver to its stockholders all disclosure materials required by applicable Laws.  The Company shall, through its board of directors, recommend to the stockholders adoption of this Agreement at the Stockholders’ Meeting and the Company shall solicit the approval and adoption of this Agreement by the requisite number of stockholders as required by the Certification of Incorporation and the DGCL.

(d)Prior to the Closing, the Company may submit for approval by its stockholders any payments of cash or stock contemplated by this Agreement to the extent such payments could constitute a “parachute payment” pursuant to Section 280G of the Code (each a “Parachute Payment”).

4.9Escrow Agreement.  At or before the Effective Time, Parent and the Stockholders’ Representative shall, and shall use commercially reasonable efforts to cause the Escrow Agent to, execute the Escrow Agreement.

4.10Payoff Letters.  On or prior to the Closing Date, the Company shall deliver to the Parent and Merger Sub one or more payoff letters signed by the financing sources with respect to all Third Party Debt (other than amounts described in clause “(vii)” and, as it relates to clause “(vii)”, clause “(viii)” of the definition of “Third Party Debt”) setting forth, in the aggregate, all amounts necessary to be paid in order to fully pay such Third Party Debt as of the Closing Date and providing that, upon such payment, such Third Party Debt will be extinguished and all liens relating thereto will be released (the “Payoff Letters”).

4.11Termination of the Investor Rights Agreement and the Shareholder Agreement.  Prior to the Effective Time, the Company shall take all actions necessary to terminate the Series D Agreement, the Investor Rights Agreement and the Shareholders Agreement effective as of the Effective Time in accordance with their respective terms.  In addition, the Company agrees that it shall not amend the Consent among Oxford Finance Corporation and the Acquired Corporations dated as of March 20, 2011 (the “Oxford Consent”) without the prior written consent of Parent.

4.12Bonus Plan.  At and following the Closing, Parent shall cause the Surviving Corporation (or, if applicable, another Acquired Corporation) to pay (a) the Bonus Plan Participants the cash payments required to be made pursuant to the terms of the Bonus Plan as provided by this Agreement, subject to delivery by a Bonus Plan Participant of an executed release of claims in the form provided in the Bonus Plan to Parent, (b) the Contingent 2010 Bonuses and (c) the Company Severance Payments.

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4.13Delivery of Monthly Financial Statements.  Within thirty (30) days after each month end between the date of this Agreement and the Closing Date, the Company shall deliver to Parent an unaudited balance sheet, statement of operations and statement of cash flows of the Company for each respective monthly period.

4.14Confidentiality.  Notwithstanding the Confidentiality Agreement, (A) the Company may disclose confidential information to its equity holders in connection with soliciting the Required Stockholder Vote and (B) the Company may, with the prior written consent of Parent, disclose a copy of this Agreement or the terms of this Agreement and the transactions contemplated under this Agreement to any third parties in connection with obtaining any consents to permit the consummation of the Merger or to otherwise comply with its obligations under this Agreement.

4.15Transaction Costs; Allocation Schedule.  The Company shall deliver to Parent within five (5) days prior to the Closing Date a written schedule that details all of the unpaid costs and expenses due to attorneys, accountants, bankers or any other advisor incurred by any of the Acquired Corporations in connection with the transactions contemplated by this Agreement (the “Transaction Costs”), including estimates of costs and expenses to be incurred for services to be performed from the date of such written schedule through the Closing Date.  The Company shall deliver to Parent on the Closing Date an updated version of such written schedule (the “Transaction Schedule”) that details all of the unpaid Transaction Costs as of the Closing Date.  For avoidance of doubt, “Transaction Costs” shall include any costs and expenses that are payable or may become payable by any of the Acquired Corporations for services that were performed on or prior to the Closing Date, even if the invoice for such fees is not issued until after the Closing Date.  On or prior to the Closing Date, the Company shall deliver a final copy of the Allocation Schedule detailing, for each Company Holder and Bonus Plan Participant as of the Effective Time, the amount of Merger Consideration due and the respective contributions to the Escrow Fund and Administrative Expense Account, which shall reflect the conversion of any Canadian dollar amounts into U.S. dollars.  At and following the Closing, Parent shall cause the Surviving Corporation (or, if applicable, another Acquired Corporation) to pay the Transaction Costs.

4.16Data Room.  The Company shall prepare one or more CD ROMS (or other digital media format) containing electronic copies of the Data Room as of the date of this Agreement and deliver such CD ROMS to Parent and the Stockholders’ Representative on or prior to the Closing Date.

4.17Allocation of Certain Items for Purposes of Consolidated Return Rules.  For purposes of Section 1.1502-76(b) of the Treasury Regulations, Parent and Company agree to consistently allocate tax items attributable to payments made on or after the Closing Date of (i) Bonus Plan Amounts, and (ii) in respect to Company Options, under the “next day rule” to the portion of the day following the Effective Time.

4.18Redomestication of Canadian Subsidiary.  The Acquired Corporations shall use reasonable efforts to take the actions requested by and at the expense of Parent related to the

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redomestication of Gemin X Pharmaceuticals Canada Inc. to the corporate laws of a different province in Canada effective as of immediately prior to the Effective Time.

SECTION 5.CONDITIONS TO THE MERGER

5.1Conditions to Each Party’s Obligation to Effect the Merger.  The respective obligations of each party hereto to effect the Merger shall be subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions:

(a)this Agreement shall have been adopted by the Required Stockholder Vote;

(b)any waiting period (and any extension of such period) under HSR applicable to the transaction contemplated by this Agreement shall have expired or shall have been terminated;

(c)(i) the time period during which holders of Company Capital Stock are entitled to deliver demands for appraisal of their Company Capital Stock to the Company pursuant to Section 262 of the DGCL shall have terminated and holders of more than ten percent (10%) of the outstanding Company Common Stock as of immediately prior to the Effective Time (assuming the conversion of all of the shares of Company Preferred Stock) shall not have delivered to the Company a demand for appraisal of their shares of Company Capital Stock pursuant to Section 262 of the DGCL or (ii) the affirmative vote or consent to adopt this Agreement in accordance with the DGCL shall have been obtained from the holders of at least 90% of the shares of Company Capital Stock outstanding on the record date chosen for purposes of determining the stockholders of the Company entitled to vote on the adoption of this Agreement, voting together as a single class on an as-converted basis; and

(d)no temporary restraining order or permanent injunction or other order issued by any U.S. federal or state Governmental Authority (collectively, “Restraints”) shall be in effect enjoining, restraining, preventing or prohibiting consummation of the Merger or making the consummation of the Merger illegal.

5.2Conditions to Obligations of Parent and Merger Sub.  The obligations of Parent and Merger Sub to effect the Merger are further subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions:

(a)Accuracy of Representations.

(i)the representations and warranties of the Company contained in Sections 2.1 (Due Organization; Organizational Documents), 2.2 (Capitalization; Stockholder Information), 2.3 (Financial Statements), 2.5 (Tangible Property), 2.7(c) and (d) (Intellectual Property), 2.20 (Authority; Binding Nature of Agreement; Non-Contravention), 2.21 (Stockholder Approval; Voting Agreements), 2.22 (Board Approval; Other Approvals), 2.24 (Takeover Laws), 2.25 (Foreign Corrupt Practices Act) and 2.26 (Financial Advisor) of this

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Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent such representations and warranties relate to an earlier date, in which case as of such earlier date); and

(ii)the other representations and warranties of the Company contained in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent such representations and warranties relate to an earlier date, in which case as of such earlier date), except as the failure to be so true and correct has not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect; provided, however, that for purposes of determining the accuracy of such representations and warranties, all materiality qualifications limiting the scope of such representations and warranties shall be disregarded;

(b)the Company shall have performed in all material respects and shall not have materially breached any obligations required to be performed by it under this Agreement on or prior to the Closing Date;

(c)Parent shall have received a certificate, signed on behalf of the Company by the chief executive officer or chief financial officer of the Company, certifying as to the matters set forth in Sections 5.1(a), 5.2(a), 5.2(b) and 5.2(e);

(d)there shall not be any legal, administrative, arbitral or other proceeding pending before any Governmental Authority in which a Governmental Authority is a party that would or would reasonably be expected to: (i) restrain, enjoin, prevent, prohibit or make illegal the consummation of the Merger or the other transactions contemplated by this Agreement; or (ii) impose material limitations on the ability of Parent effectively to exercise full rights of ownership of all shares of the Surviving Corporation;

(e)between the date of this Agreement and the Effective Time, there shall have been no Company Material Adverse Effect;

(f)the Company shall have received and delivered to Parent and Merger Sub consents, in form and substance reasonably satisfactory to Parent and Merger Sub, to the transactions contemplated hereby from the other parties to all contracts, leases, agreements and permits to which the Company is a party or by which the Company or any of its respective assets or properties is affected and which are specified in Part 5.2(f) of the Disclosure Schedule, and the representations and warranties of the Acquired Corporations set forth in the Oxford Consent shall be true and correct in all material respects on the Closing Date;

(g)the Company’s Series D Agreement, Investor Rights Agreement and the Shareholder Agreement shall have been duly terminated by the Company and the investors and stockholders, as applicable, party thereto in accordance with their respective terms and all rights to acquire the securities of the Company under such agreements or under the Series E Agreement shall have terminated;

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(h)Parent shall have received the Payoff Letters in accordance with Section 4.10;

(i)the Escrow Agent and Stockholders’ Representative shall have executed and delivered to Parent the Escrow Agreement;

(j)Parent shall have received a certificate, meeting the requirements of Section 1445(b)(3) of the Code and Section 1.1445-2(c)(3) of the Treasury Regulations, to the effect that none of the Company Capital Stock, Company Options or Company Warrants is a United States real property interest for purposes of Sections 897 and 1445 of the Code and applicable Treasury Regulations, together with proof reasonably satisfactory to Parent that the Company has provided notice of such certification to the Internal Revenue Service in accordance with the provisions of Treasury Regulations Section 1.897-2(h)(2); and (2) if applicable, any certificate, affidavit or other documentation required to establish that no withholding is required under similar provisions of United States state and local Tax laws and of the Tax laws of jurisdictions outside the United States;

(k)the IQ Options have been exercised or terminated and have no further rights other than the rights of Company Holders set forth herein;

(l)the Parent shall have received the Transaction Schedule in accordance with Section 4.15;

(m)the Parent shall have received from the Company (1) a final copy of the Allocation Schedule as of the Effective Time and (2) a written certificate from an executive officer of the Company dated as of the Closing Date certifying the accuracy of the Allocation Schedule and attaching such Allocation Schedule as an exhibit thereto; and

(n)Parent shall have received the audited consolidated balance sheet, statement of operations and statement of cash flows for the Company as of and for the fiscal year ended December 31, 2010.

5.3Conditions to Obligation of the Company.  The obligation of the Company to effect the Merger is further subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions:

(a)Accuracy of Representations.

(i)the representations and warranties of Parent and Merger Sub contained in Sections 3.1 (Due Organization), 3.2 (Authority; Binding Nature of Agreement), 3.3 (Merger Sub), 3.4 (No Authorizations) and 3.7 (No Brokers) of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent such representations and warranties relate to an earlier date, in which case as of such earlier date); and

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(ii)the other representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent such representations and warranties relate to an earlier date, in which case as of such earlier date), except as the failure to be so true and correct has not had, and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the ability of Parent and Merger Sub to consummate the Merger; provided, however, that for purposes of determining the accuracy of such representations and warranties, all materiality qualifications limiting the scope of such representations and warranties shall be disregarded;

(b)Parent and Merger Sub shall have performed in all material respects and shall not have materially breached any obligations required to be performed by them under this Agreement at or prior to the Closing Date;

(c)the Company shall have received a certificate, signed on behalf of Parent by an executive officer of Parent, certifying as to the matters set forth in Sections 5.3(a) and 5.3(b); and

(d)the Escrow Agent and Parent shall have executed and delivered to the Stockholders’ Representative the Escrow Agreement.

5.4Frustration of Closing Conditions.  None of the Company, Parent or Merger Sub may rely on the failure of any condition set forth in Section 5.1, 5.2 or 5.3, as the case may be, to be satisfied if such failure was caused by such party’s failure to perform any of its obligations under this Agreement.

SECTION 6.TERMINATION

6.1Termination.  This Agreement may be terminated and the transactions  contemplated by this Agreement abandoned at any time prior to the Effective Time:

(a)by the mutual written consent of the Company and Parent duly authorized by each of their respective Boards of Directors;

(b)by either of the Company or Parent if the Merger shall not have been consummated on or before June 30, 2011 (the “Outside Date”); provided, however, that the right to terminate this Agreement under this Section 6.1(b) shall not be available to a party if the failure of the Merger to have been consummated on or before the Outside Date was primarily due to the failure of such party to perform any of its obligations under this Agreement;

(c)by either of the Company or Parent if any Restraint having the effect set forth in Section 5.1(c) shall be in effect and shall have become final and nonappealable; provided, however, that the right to terminate this Agreement under this Section 6.1(c) shall not be available to a party if the imposition of such Restraint was primarily due to the failure of such party to perform any of its obligations under this Agreement;

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(d)by Parent if: (i) there is an inaccuracy in any of the representations or warranties of the Company in this Agreement such that the condition set forth in Section 5.2(a) would not be satisfied; or (ii) there has been a breach by the Company of any of its covenants in this Agreement such that the condition set forth in Section 5.2(b) would not be satisfied (the events described in clauses “(i)” and “(ii)” of this sentence being referred to as a “Terminating Company Breach”); provided, however, that if such Terminating Company Breach is curable and can reasonably be expected to be cured by the Company by the Outside Date through the exercise of reasonable efforts, Parent may not terminate this Agreement under this Section 6.1(d); for so long as the Company continues to exercise such reasonable efforts; or

(e)by the Company if: (i) there is an inaccuracy in any of the representations or warranties of Parent or Merger Sub in this Agreement such that the condition set forth in Section 5.3(a) would not be satisfied; or (ii) there has been a breach by Parent or Merger Sub of any of their respective covenants in this Agreement such that the condition set forth in Section 5.3(b) would not be satisfied (the events described in clauses “(i)” and “(ii)” of this sentence being referred to as a “Terminating Parent Breach”); provided, however, that if such Terminating Parent Breach is curable and can reasonably be expected to be cured by Parent or Merger Sub by the Outside Date through the exercise of reasonable efforts, the Company may not terminate this Agreement under this Section 6.1(e); for so long as Parent or Merger Sub continues to exercise such reasonable efforts.

6.2Effect of Termination.  In the event of the termination of this Agreement as provided in Section 6.1, written notice thereof shall be given to the other party or parties, specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void (other than the provisions of Section 8, which shall survive termination of this Agreement), and there shall be no liability on the part of Parent, Merger Sub or the Company or their respective directors, officers and Affiliates, except that nothing shall relieve any party hereto from liability for any breach of Section 4.7 (No Solicitation), Section 4.8 (Company Stockholder Consents) or Section 4.14 (Confidentiality) or any willful, material breach of this Agreement.

SECTION 7.INDEMNIFICATION, ETC.

7.1Expiration of Representations, Etc.  Subject to Section 7.3, the survival period for representations and warranties of the Company set forth in this Agreement shall terminate and expire and such representations and warranties shall cease to have any further force or effect (a) thirty (30) days after the expiration of the statute of limitations (giving effect to any tolling thereof) after the Effective Time with respect to the matters covered by Section 2.12 (Tax Matters) and Section 2.14 (Employee and Labor Matters; Benefit Plans), (b) five (5) years from the Effective Time with respect to the matters covered by Section 2.15 (Environmental Matters), (c) on the first anniversary of the date of the first commercial sale of the Product with respect to the matters covered by Sections 2.7(c) and (d) (Intellectual Property), and (d) subject to clauses (a), (b), and (c) of this Section 7.1 and the next sentence in this Section 7.1, eighteen (18) months after the Effective Time with respect to all other representation and warranties and covenants set forth in this Agreement (the date of each such expiration, a “Termination Date”); provided,

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however, that if at any time prior to the applicable Termination Date, Parent has duly delivered to the Stockholders’ Representative a valid Notice of Indemnification Claim (as defined in, and satisfying the requirements set forth in, Section 7.6(a)), then the specific indemnification claim asserted in such Notice of Indemnification Claim shall survive the Termination Date until such time as such claim is resolved.  The parties agree that the survival period shall be an indefinite period from the Effective Time with respect to the matters covered by Section 2.2 (Capitalization; Stockholder Information), and with respect to any willful breach of any representation or warranty in this Agreement.  It is the express intent of the parties that, if the applicable survival period for an item as contemplated by this Section 7.1 is shorter than the statute of limitations that would otherwise have been applicable to such item, then, by contract, the applicable statute of limitations with respect to such item shall be reduced to the shortened survival period contemplated hereby.  The parties further acknowledge that the time periods set forth in this Section 7.1 for the assertion of claims under this Agreement are the result of arms’-length negotiation among the parties and that they intend for the time periods to be enforced as agreed by the parties.  The period of time prescribed for the commencement of any action directly or indirectly based upon the representations and warranties of the Company set forth in this Agreement, regardless of the nature of the claims or causes of action alleged therein, and regardless of whether under this Agreement or otherwise, shall expire on the applicable Termination Date.

7.2Indemnification.  From and after the Effective Time (but subject to Section 6.2, Section 7.1 and the other provisions of this Section 7), the Parent Indemnified Parties shall be entitled to be indemnified and held harmless against any Damages (as defined below) incurred by Parent as a result of:

(a)any breach of the representations and warranties of the Company set forth in Section 2 of this Agreement or any breach of the covenants of the Company or the Acquired Corporations set forth in this Agreement, provided, that the Company shall not indemnify Parent Indemnified Parties for Damages incurred as a result of any actions properly and appropriately taken directly with respect to the operation of the Current Company Business that were previously approved in writing and executed by an executive officer of Parent.  For purposes of this Section 7, “Damages” shall mean losses, damages, costs, expenses (including reasonable attorneys fees), obligations, judgments, liabilities, settlement payments, awards, fines, penalties, Taxes or deficiencies or other charges, (i) net of any amount of any insurance proceeds, indemnification payments, contribution payments and other similar payments recoverable by Parent Indemnified Parties in connection with the facts or circumstances giving rise or otherwise relating to such losses or damages and (ii) excluding any exemplary or punitive damages;

(b)any action, claim, suit, proceeding instituted, on or at any time after the Effective Time, by any Company Holder against any officer or director of the Company on the basis that such officer or the board of directors of the Company breached his or its fiduciary duty on or prior to the Closing Date by authorizing and approving (i) this Agreement, (ii) the transactions contemplated hereby and thereby or (iii) any amendments or modifications to the terms of any of the Company Capital Stock in contemplation of the transactions contemplated

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under this Agreement or in order to obtain the support or approval of Company Holders for any of such transactions;

(c)any inaccuracy of the Company’s reporting and calculation of the Closing Date Merger Consideration due to each Company Holder and Bonus Plan Participant as set forth on the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m); and

(d)the matter set forth in Part 2.18 of the Company Disclosure Schedule; provided, however, that the Parent Indemnified Parties shall be entitled to be indemnified and held harmless against only $**** plus ****% of the Damages in excess of $**** incurred by Parent as a result of this matter.

7.3Limitations on Liability.

(a)From and after the Effective Time, the right of Parent Indemnified Parties to be indemnified pursuant to this Section 7 shall be the sole and exclusive remedy with respect to any breach of any representation or warranty of the Company set forth in, or any breach by the Company or the other Acquired Corporations of, this Agreement, provided that, notwithstanding any other provision in this Agreement, the limitations in Section 7.1 and this Section 7.3 shall not apply in the case of fraud, gross negligence or intentional misconduct by the Company, any of the Acquired Corporation or any of their officers, directors, employees or agents.  No current or former stockholder, director, officer, employee, affiliate or advisor of the Company shall have any personal or individual liability of any nature to any Parent Indemnified Party with respect to any breach of any representation or warranty set forth in, or any breach by the Company of this Agreement.  Should the Closing occur, recourse by Parent Indemnified Parties to the Escrow Fund and an offset against up to 10% of any unpaid Milestone Payments (pursuant to Section 1.9(c) of this Agreement) shall be Parent Indemnified Parties’ sole and exclusive remedy for any Damages resulting from the matters referred to in Section 7.2 or resulting from any breach of this Agreement by the Company.  Notwithstanding anything to the contrary set forth herein, in no event will any Parent Indemnified Party have any recourse to recover directly from any Escrow Participant any Damages resulting from the matters referred to in Section 7.2 or from any breach of this Agreement by the Company from any Merger Consideration that has been paid to such Escrow Participant, except in the event of fraud by such Escrow Participant.

(b)Without limiting the effect of any other limitation set forth in this Section 7, the indemnification provided for in Section 7.2(a) with respect to any breach of the representations and warranties of the Company shall not apply, and Parent Indemnified Parties shall not be entitled to exercise any indemnification rights under this Agreement for any such breach, except to the extent that the aggregate amount of all claims for Damages against which Parent Indemnified Parties would otherwise be entitled to be indemnified under Section 7.2 exceeds Two Million Two Hundred and Twenty-Five Thousand United States Dollars ($2,250,000) (the “Deductible”).  If the aggregate amount of all claims for Damages exceeds the Deductible, then Parent shall, subject to the other limitations set forth in this Agreement, be entitled to be indemnified only against the portion of such Damages in excess of the Deductible.

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(c)The amount of any Damages that are subject to indemnification under this Section 7 shall be calculated net of the amount of any insurance proceeds, indemnification payments, contribution payments or reimbursements received or receivable by Parent Indemnified Parties in connection with such Damages or any of the events or circumstances giving rise or otherwise related to such Damages.  The Parent Indemnified Parties shall seek, and shall cause each of their respective affiliates to seek, full recovery under all insurance policies covering any Damages to the same extent as they would if such Damages were not subject to indemnification hereunder.  In the event that an insurance recovery is made by Parent Indemnified Parties with respect to any Damages for which any Parent Indemnified Party has been indemnified hereunder, then a refund equal to the aggregate amount of the recovery shall be deposited promptly with the Paying Agent for distribution to the Escrow Participants.  The amount of any Damages that are subject to indemnification under this Section 7 shall be calculated net of any Tax benefit received or receivable by a Parent Indemnified Party in connection with such Damages or any of the events or circumstances giving rise or otherwise related to such Damages.

7.4Defense of Third Party Claims.  Promptly after Parent Indemnified Party, the Surviving Corporation or any affiliate of Parent or the Surviving Corporation receives notice or otherwise obtains Knowledge of any actual or possible claim, demand, suit, action, arbitration, investigation, inquiry or proceeding that has been or may be brought or asserted by a third party against a Parent Indemnified Party and that may give rise to an indemnification claim by Parent Indemnified Party under this Section 7 (any such actual or possible claim, demand, suit, action, arbitration, investigation, inquiry or proceeding by a third party being referred to as a “Third-Party Claim”), Parent, or the Parent Indemnified Party, shall deliver to the Stockholders’ Representative a written notice stating in reasonable detail the nature and basis of such Third-Party Claim and the dollar amount of such Third-Party Claim, to the extent known.  The timely delivery of such written notice by Parent, or the Parent Indemnified Party, to the Stockholders’ Representative shall not limit the Parent Indemnified Party’s right to be indemnified under this Section 7 with respect to such Third-Party Claim or any of the facts or circumstances giving rise to such Third-Party Claim, except to the extent the Stockholders’ Representative or the Escrow Participants are materially prejudiced by the failure of such timely delivery.  The Stockholders’ Representative shall have the right, at the Stockholders’ Representative’s option, at any time to assume the defense of any such Third-Party Claim for which the Parent Indemnified Party may be indemnified hereunder with its own counsel.  If the Stockholders’ Representative elects to assume the defense of any such Third-Party Claim, then:

(a)the attorneys’ fees of the Stockholders’ Representative’s counsel and other defense costs incurred by the Stockholders’ Representative shall be payable by the Escrow Participants without the requirement of any consent or approval by Parent or any other Person;

(b)notwithstanding anything to the contrary contained in this Agreement, a Parent Indemnified Party shall not be entitled to be indemnified for any costs or expenses incurred by the Parent Indemnified Party in connection with the defense of such Third-Party Claim following the Stockholders’ Representative’s election to assume the defense of such Third-Party Claim;

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(c)the Parent Indemnified Party shall be entitled to monitor (but not control) such defense at its own expense;

(d)the Parent shall make available (including by electronic means, to the extent available) to the Stockholders’ Representative all books, records and other documents and materials that are under the direct or indirect control of Parent or any of Parent’s Subsidiaries or other affiliates and that the Stockholders’ Representative considers reasonably necessary or desirable for the defense of such Third-Party Claim;

(e)the Parent Indemnified Party shall execute such documents and take such other actions as the Stockholders’ Representative may reasonably request for the purpose of facilitating the defense of, or any settlement, compromise or adjustment relating to, such Third-Party Claim;

(f)the Parent Indemnified Party shall otherwise cooperate as reasonably requested by the Stockholders’ Representative in the defense of such Third-Party Claim;

(g)the Parent Indemnified Party shall not admit any liability with respect to such Third-Party Claim; and

(h)the Stockholders’ Representative shall not enter into any settlement agreement providing for the settlement of such Third-Party Claim without the prior written consent of Parent (which consent shall not be unreasonably withheld, delayed or conditioned) if such settlement agreement imposes on any Parent Indemnified Party any obligation.

If the Stockholders’ Representative elects not to assume the defense of such Third-Party Claim, then Parent, or Parent Indemnified Party, shall proceed to defend such Third-Party Claim with the assistance of counsel satisfactory to the Stockholders’ Representative; provided, however, that neither Parent nor the Parent Indemnified Party shall settle, adjust or compromise such Third-Party Claim, or admit any liability with respect to such Third-Party Claim, without the prior written consent of the Stockholders’ Representative.  In such event, the Stockholders’ Representative shall be entitled to monitor (but not control) such defense at the expense of the Escrow Participants.

7.5Subrogation; Mitigation.

(a)To the extent that a Parent Indemnified Party is entitled to indemnification pursuant to this Section 7, the Stockholders’ Representative shall be entitled to exercise, and shall be subrogated to, any rights and remedies (including rights of indemnity, rights of contribution and other rights of recovery) that the Parent Indemnified Party may have against any other Person with respect to any Damages, circumstances or matter to which such indemnification is directly or indirectly related.  The Parent Indemnified Party shall permit the Stockholders’ Representative to use the name of the Parent Indemnified Party and its affiliates in any transaction or in any proceeding or other matter involving any of such rights or remedies, and the Parent Indemnified Party shall take such actions as the Stockholders’ Representative may

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reasonably request for the purpose of enabling the Stockholders’ Representative to perfect or exercise the right of subrogation of the Stockholders’ Representative under this Section 7.5(a).

(b)Promptly after Parent or the Surviving Corporation becomes aware of any event or circumstance that could reasonably be expected to constitute or give rise to any breach of any representation or warranty set forth in Section 2 or of any covenants of the Company set forth in Section 4.1 of this Agreement, Parent and the Surviving Corporation shall take all reasonable steps to mitigate and minimize all Damages that may result from such breach.

7.6Indemnification Claims.

(a)No Parent Indemnified Party shall be entitled to indemnification under this Section 7 unless he, she or it has duly delivered a written notice to the Stockholders’ Representative (any such notice being referred to as a “Notice of Indemnification Claim,” and the claim for indemnification described in such Notice of Indemnification Claim being referred to as an “Indemnification Claim”), setting forth: (i) the specific representation and warranty or covenant alleged to have been breached by the Company; (ii) a reasonable description of the facts and circumstances giving rise to the alleged breach of such representation and warranty or covenant; and (iii) an estimate of the aggregate dollar amount of the Damages that have been incurred or will be incurred by the Parent Indemnified Party as a result of the breach referred to in such notice (the aggregate amount of such estimate being referred to as the “Claimed Amount”).

(b)During the 60-day period commencing upon the receipt by the Stockholders’ Representative of a Notice of Indemnification Claim, the Stockholders’ Representative may deliver to Parent a written response (the “Response Notice”) in which the Stockholders’ Representative: (i) agrees that the full Claimed Amount is owed to Parent Indemnified Party; (ii) agrees that part (but not all) of the Claimed Amount (the “Agreed Amount”) is owed to Parent Indemnified Party; or (iii) asserts that no part of the Claimed Amount is owed to Parent Indemnified Party.  Any part of the Claimed Amount that is not agreed by the Stockholders’ Representative to be owed to the Parent Indemnified Party pursuant to the Response Notice (or the entire Claimed Amount, if the Stockholders’ Representative asserts in the Response Notice that no part of the Claimed Amount is owed to Parent Indemnified Party) shall be referred to as the “Contested Amount.”  If no Response Notice is delivered during such 60-day period, then, for purposes of this Agreement, the Stockholders’ Representative shall be deemed to have delivered to Parent a Response Notice on the last day of such 60-day period asserting that the full amount of the Claimed Amount is owed to Parent Indemnified Party.

(c)If the Stockholders’ Representative delivers a Response Notice to Parent agreeing that the full Claimed Amount is owed to Parent Indemnified Party, then, subject to Section 7.3, Parent Indemnified Party shall be entitled to receive the Claimed Amount from the Escrow Fund or by offset against a Milestone Payment in accordance with Sections 1.9 and 7.3.

(d)If the Stockholders’ Representative delivers a Response Notice to Parent agreeing that less than the full Claimed Amount is owed to Parent Indemnified Party, then, subject to Section 7.3, Parent Indemnified Party shall be entitled to receive the Agreed Amount

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from the Escrow Fund or by offset against a Milestone Payment in accordance with Sections 1.9 and 7.3 and the remainder of the Claimed Amount will continue to be a Contested Amount.

(e)If the Stockholders’ Representative delivers a Response Notice to Parent indicating that there is a Contested Amount, the Stockholders’ Representative and Parent shall attempt in good faith to resolve the dispute related to the Contested Amount.  If Parent and the Stockholders’ Representative resolve such dispute in writing, then a settlement agreement stipulating the amount owed to Parent (the “Stipulated Amount”) shall be signed by Parent and the Stockholders’ Representative and then, subject to Section 7.3, Parent shall be entitled to receive the Stipulated Amount from the Escrow Fund or by offset against a Milestone Payment in accordance with Sections 1.9 and 7.3.

(f)If the Stockholders’ Representative and Parent are unable to resolve the dispute relating to any Contested Amount during the 30-day period commencing upon the receipt of the Response Notice by Parent, then either Parent or the Stockholders’ Representative may proceed in accordance with Section 8.6. The final decision following resolution of the dispute in accordance with Section 8.6 shall include the dollar amount of the award to Parent, if any (the “Award Amount”), and shall be furnished to the Stockholders’ Representative and Parent in writing and then, subject to Section 7.3, Parent shall be entitled to receive the Award Amount from the Escrow Fund or by offset against a Milestone Payment in accordance with Sections 1.9 and 7.3.

(g)The parties agree that any amounts received from the Escrow Fund or by offset against the Milestone Payments pursuant to this Section 7 shall be treated as a reduction in the aggregate consideration paid in connection with the Merger for federal income Tax purposes.

(h)Subject to any applicable limitations set forth in this Agreement, for the avoidance of doubt, in the event the Parent Indemnified Parties are entitled to indemnification pursuant to this Section 7, the Parent Indemnified Parties shall recover first from the Escrow Fund, until such Escrow Fund has a zero balance, and thereafter shall have the right to setoff against the Milestone Payments in accordance with Sections 1.9(e) and 7.3.

7.7Release of Escrow Funds.

(a)On December 15, 2011 (the “Initial Escrow Release Date”), the Escrow Agent shall deliver to the Escrow Participants an aggregate amount equal to Fifteen Million United States Dollars (US$15,000,000) minus (i) any amount previously released from the Escrow Fund minus (ii) any amount that is necessary to satisfy all then unresolved, unsatisfied or disputed Indemnification Claims specified in a properly delivered Notice of Indemnification Claim delivered to the Stockholders’ Representative before the Initial Escrow Release Date.  If any Indemnification Claims are unresolved, unsatisfied or disputed as of the Initial Escrow Release Date, then the Escrow Agent shall retain possession and custody of that portion of the Escrow Amount that equals the total maximum amount of Damages being claimed by Parent in all such unresolved, unsatisfied or disputed Indemnification Claims (the “Pending Claim Amount”).  If any such Indemnification Claims are resolved between the Initial Escrow Release Date and the Remaining Escrow Release Date, then as soon as such Indemnification Claim has

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been resolved, the Escrow Agent shall deliver to the Escrow Participants from the Escrow Fund any portion of the Pending Claim Amount not delivered to the Parent Indemnified Parties and not required to satisfy any other pending Indemnification Claims; provided that the Escrow Agent shall not be required to deliver such amounts to the Escrow Participants prior to the Remaining Escrow Release Date (as defined below) until such time as the total amount to be delivered to the Escrow Participants in the aggregate exceeds $500,000.

(b)On the date that is eighteen (18) months immediately after the Effective Time (the “Remaining Escrow Release Date”), the Escrow Agent shall deliver to the Escrow Participants all of the remaining amounts in the Escrow Fund (if any) in excess of any amount that is necessary to satisfy all unresolved, unsatisfied or disputed Indemnification Claims specified in a properly delivered Notice of Indemnification Claim delivered to the Stockholders’ Representative before the Remaining Escrow Release Date.  If any Indemnification Claims are unresolved, unsatisfied or disputed as of the Remaining Escrow Release Date, then the Escrow Agent shall retain possession and custody of that portion of the Escrow Amount that equal the total maximum amount of Damages being claimed by Parent in all such unresolved, unsatisfied or disputed Indemnification Claims, and as soon as all such Indemnification Claims have been resolved, the Escrow Agent shall deliver to the Escrow Participants all of the remaining amounts in the Escrow Fund (if any) not required to satisfy such Indemnification Claims.

(c)All amounts delivered to the Escrow Participants from the Escrow Fund pursuant to Sections 7.7(a) and (b) shall be distributed to such Escrow Participants in accordance with the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m).

7.8Exercise of Remedies Other Than by Parent.  No Parent Indemnified Party (other than Parent or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless Parent (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy.

SECTION 8.MISCELLANEOUS PROVISIONS

8.1Stockholders’ Representative.

(a)By virtue of the adoption of this Agreement, the approval of the principal terms of the Merger, the consummation of the Merger or participating in the Merger and receiving the benefits thereof, including the right to receive the consideration payable in connection with the Merger, and/or the cancellation by an Escrow Participant of Company Options or Company Warrants in exchange for Merger Consideration pursuant to this Agreement and/or participation in the Bonus Plan, the Escrow Participants irrevocably nominate, constitute and appoint Shareholder Representative Services LLC as the agent and true and lawful attorney in fact of the Escrow Participants (the “Stockholders’ Representative”) to take any and all actions and make any and all decisions required or permitted to be taken or made by the Stockholders’ Representative under this Agreement or another agreement entered into prior to the Closing by the Stockholders’ Representative and certain Escrow Participants in connection with the transactions contemplated by this Agreement, including the exercise of the right to:

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(i) give and receive notices and communications under Sections 1 and 7; (ii) authorize payments from the Escrow Fund pursuant to the terms of the Escrow Agreement or offset against Milestone Payments in satisfaction of claims for indemnification made by Parent under Section 7; (iii) authorize payments from the Escrow Fund pursuant to the terms of the Escrow Agreement pursuant to a Net Cash Adjustment under Section 1.3(e); (iv) object to claims for indemnification made by Parent under Section 7 or to Parent’s calculation of Net Cash under Section 1.3(e); (v) agree to, negotiate, enter into settlements and compromises of and comply with any arbitration awards or court orders with respect to claims for indemnification made by Parent under Section 7 or otherwise in connection with this Agreement; (vi) administer the Bonus Plan as “Representative” (as defined in the Bonus Plan) thereunder and in accordance with the terms thereof; and (vii) take all actions necessary or appropriate in the good faith judgment of the Stockholders’ Representative for the accomplishment of the foregoing.  The identity of the Stockholders’ Representative may be changed, and a successor Stockholders’ Representative may be appointed, from time to time (including in the event of the resignation or the death, disability or other incapacity of the Stockholders’ Representative) by the Escrow Participants holding a majority of the Effective Time Shares, and any such successor shall succeed the Stockholders’ Representative as Stockholders’ Representative hereunder.  If for any reason there is no Stockholders’ Representative at any time, all references herein to the Stockholders’ Representative shall be deemed to refer to the Escrow Participants holding a majority of the Effective Time Shares.  No bond shall be required of the Stockholders’ Representative.  From and after the Effective Time, a decision, act, consent or instruction of the Stockholders’ Representative shall be final, binding and conclusive upon each Escrow Participant.  Each Escrow Participant hereby agrees to receive correspondence from the Stockholders’ Representative, including in electronic form.

The Stockholders’ Representative shall not be liable for any liability, loss, damage, penalty, fine, cost or expense incurred without gross negligence or willful misconduct by the Stockholders’ Representative while acting in good faith and arising out of or in connection with the acceptance or administration of its duties or the exercise of his rights hereunder (it being understood that any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith).  The Escrow Participants shall indemnify, defend and hold the Stockholders’ Representative harmless against any liability, loss, damage, penalty, fine, cost or expense (collectively, the “Representative Losses”) incurred or suffered by the Stockholders’ Representative and arising out of or in connection with the acceptance or administration of his duties under this Agreement, in each case as such Representative Loss is incurred or suffered; provided that in the event it is finally adjudicated that a Representative Loss or any portion thereof was primarily caused by the gross negligence or willful misconduct of the Stockholders’ Representative, the Stockholders’ Representative will reimburse the Escrow Participants the amount of such indemnified Representative Loss attributable to such gross negligence or willful misconduct.  If not paid directly to the Stockholders’ Representative by the Escrow Participants any such Representative Loss incurred or suffered without gross negligence or willful misconduct by the Stockholders’ Representative may be recovered by the Stockholders’ Representative from: (A) the funds in the Administrative Expense Amount; (B) the amounts in the Escrow Fund otherwise distributable to Escrow Participants pursuant to the terms hereof and the Escrow Agreement at the time of distribution in accordance with written instructions

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delivered by the Stockholders’ Representative to the Escrow Agent, and (C) by offset against any Milestone Payments actually payable to the Escrow Participants pursuant to written instructions delivered by the Stockholders’ Representative to Parent; provided that while this section allows the Stockholders’ Representative to be paid from the Administrative Expense Amount, the Escrow Fund and by offset against the Milestone Payments, this does not relieve the Escrow Participants from their obligation to promptly pay such Representative Losses as such Representative Losses are suffered or incurred, nor does it prevent the Stockholders’ Representative from seeking any remedies available to it at law or otherwise.  For the avoidance of doubt, the Escrow Participants shall not indemnify the Stockholders’ Representative for any Representative Losses arising out of the Stockholders’ Representative’s willful misconduct or gross negligence.  In furtherance of the payment of such losses and expenses incurred by or on behalf of the Stockholders’ Representative, at the Closing, Parent will deliver a sum of Five Hundred Thousand United States Dollars (US$500,000) (the “Administrative Expense Amount”) to an account of the Escrow Agent established in the name of the Stockholders’ Representative (the “Administrative Expense Account”).  Of the Administrative Expense Amount, (i) for each Effective Time Share outstanding as of immediately prior to the Effective Time, an amount equal to the Residual Administrative Expense Amount divided by aggregate number of Effective Time Shares shall be deemed to be a contribution to the Administrative Expense Account with respect to each such Effective Time Share, and (ii) for each Bonus Plan Participant, an amount equal to such Bonus Plan Participant’s allocable portion of the Bonus Plan Administrative Expense Amount shall be deemed to be a contribution to the Administrative Expense Account, as provided by the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m).  The Escrow Participants agree that, to the extent available, the Stockholders’ Representative shall be entitled to draw against the Administrative Expense Account at any time and from time to time as and when (i) the Stockholders’ Representative incurs any losses and expenses indemnified by the Escrow Participants as set forth in this Agreement, (ii) as and when any losses and expenses are otherwise due under this Agreement and (iii) necessary or appropriate to pay any costs and expenses reasonably incurred by the Stockholders’ Representative in the performance of his duties in accordance with this Agreement.  The Stockholders’ Representative shall be the administrator of the Administrative Expense Account and shall have sole and absolute authority over the Administrative Expense Account to pay all losses and expenses incurred in accordance with this Agreement.  Upon the earlier to occur of (i) the Stockholders’ Representative no longer having any duties to perform under this Agreement, or (ii) at the discretion of the Stockholders’ Representative, all amounts remaining in the Administrative Expense Account shall be distributed by the Paying Agent to the Escrow Participants in accordance with the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m).

(b)From and after the Effective Time, Parent shall cause the Surviving Corporation to provide the Stockholders’ Representative with reasonable access to information about the Surviving Corporation (including electronically) and the reasonable assistance of the officers and employees of Parent and the Surviving Corporation for purposes of performing its duties and exercising its rights under this Agreement, including Sections 1 and 7.

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(c)On or prior to the Closing Date, the Company or Parent shall provide the Stockholders’ Representative with copies of the following: (i) the form of the letter of transmittal described in Section 1.7(b); (ii) the paying agent agreement between Parent and the Paying Agent in connection with, among other things, the Paying Agent’s duties pursuant to Section 1.7; and (iii) the Estimated Closing Date Net Cash Statement.

8.2Expenses.  Except as otherwise provided herein, each party shall pay all of its own fees, costs and expenses (including fees, costs and expenses of legal counsel, investment bankers, brokers or other representatives and consultants and appraisal fees, costs and expenses) incurred in connection with the negotiation of this Agreement, the Escrow Agreement and the other agreements contemplated by this Agreement, the performance of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby.

8.3Exclusive Representations and Warranties.  Parent acknowledges that, except as expressly provided in Section 2, Parent is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied.  The representations and warranties of the Company set forth in Section 2, as modified by the Disclosure Schedule, constitute the sole and exclusive representations and warranties made to Parent in connection with the transactions contemplated by this Agreement, and Parent understands, acknowledges and agrees that all other representations and warranties of any kind or nature, express or implied, are specifically disclaimed by the Company.  Without limiting the generality of the foregoing, except as expressly provided in Section 2, neither the Company nor any stockholder is making or providing, and Parent hereby waives any right it may otherwise have with respect to, any representation or warranty, express or implied, as to the quality, merchantability, fitness for a particular purpose, conformity to samples or condition of the Company’s assets.

8.4Waiver; Amendment.

(a)Except as expressly set forth in this Agreement, no failure on the part of any party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.

(b)No party shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.

(c)This Agreement may not be amended except by an instrument in writing signed on behalf of Parent, the Company (or, following the Closing, the Surviving Corporation) and the Stockholders’ Representative.

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8.5Entire Agreement; Counterparts; Exchanges by Facsimile.  This Agreement and the other agreements referred to in this Agreement, including the Escrow Agreement, constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof.  This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. The exchange of a fully executed Agreement (in counterparts or otherwise) by facsimile or by electronic delivery in .pdf format shall be sufficient to bind the parties to the terms and provisions of this Agreement.

8.6Applicable Law; Dispute Resolution.

(a)This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of laws thereof.

(b)Any dispute or claim arising under this Agreement which cannot be readily resolved by the parties shall be referred for review and resolution (i) to the senior executive officers of each of the Company and Parent prior to the Effective Time or (ii) to the Stockholders’ Representative and senior executive officers of Parent following the Effective Time (collectively, the “Senior Executives”).  A copy of the terms of this Agreement, agreed upon facts (and areas of disagreement), and concise summary of the basis for the contentions of each Party will be provided to both the Senior Executives who shall review the same, confer and attempt to reach a mutual resolution of the issue.  If any dispute or claim arising under this Agreement has not been resolved by the Senior Executives within thirty (30) days of the relevant referral in accordance with this Section 8.6(b), or if the Senior Executives fail to meet within such thirty (30) day period, then each party hereby irrevocably and unconditionally consents to the exclusive jurisdiction of the courts of the State of Delaware, and the United States District Court for the District of Delaware for any action, suit or proceeding arising out of or relating to this Agreement, waived any objections to such jurisdiction and venue and agrees not to commence any action, suit or proceeding relating to this Agreement except in such courts.

8.7Assignability; Third Party Rights.

(a)Subject to Section 8.7(b), this Agreement shall be binding upon, and shall be enforceable by and inure solely to the benefit of, the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any of the rights or obligations of any party hereunder may be assigned or delegated by such party without the prior written consent of the other parties, and any attempted assignment or delegation of this Agreement or any of such rights or obligations by any party without the other parties’ prior written consent shall be void and of no effect.  Notwithstanding any other provision in this Agreement, Parent may assign, delegate or transfer this Agreement and its rights and obligations hereunder to an affiliate of Parent without the prior written consent of any other party, provided that no such assignment, delegation or transfer shall relieve Parent or Merger Sub of its

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obligations hereunder or enlarge, alter or change any obligation of any other party hereto to Parent or Merger Sub.

(b)Except as set forth in the final sentence of this Section 8.7, nothing in this Agreement is intended to or shall confer upon any Person (other than the parties hereto) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.  Notwithstanding anything to the contrary contained in this Agreement (but without limiting any of the rights of the Stockholders’ Representative under this Agreement), the Indemnified Parties shall be third party beneficiaries of the provisions set forth in Section 4.5.

8.8Disclosure Schedule.  The Disclosure Schedule has been arranged as separate Parts corresponding to the specified subsections of Section 2 and shall be deemed to qualify and limit the representation and warranty set forth in such subsection.  Information set forth in any Part of the Disclosure Schedule shall be deemed to be disclosed and incorporated by reference in other Parts of the Disclosure Schedule as though fully set forth in such other Parts only if a specific cross-reference is made or if it is readily apparent from the face of the disclosure that such disclosure would qualify the representation or warranty applicable to such other Part.  No reference to or disclosure of any item or other matter in this Disclosure Schedule shall be construed as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed in this Disclosure Schedule.  The information set forth in the Disclosure Schedule is disclosed solely for the purposes of this Agreement, and no information set forth therein shall be deemed to be an admission by any party hereto to any third party of any matter whatsoever, including of any violation of Law or breach of any agreement.

8.9Notices.  All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given or made as follows: (a) if sent by registered or certified mail in the United States or Canada return receipt requested, upon receipt; (b) if sent designated for overnight delivery by nationally recognized overnight air courier (such as DHL or Federal Express), two (2) business days after dispatch; (c) if sent by facsimile transmission before 5:00 p.m., when transmitted and receipt is confirmed; (d) if sent by facsimile transmission after 5:00 p.m. and receipt is confirmed, on the following business day; and (e) if otherwise actually personally delivered, when delivered, provided, that such notices, requests, demands and other communications are delivered to the address set forth below, or to such other address as any party shall provide by like notice to the other parties to this Agreement:

if to Parent, Merger Sub or the Surviving Corporation:

Cephalon, Inc.
41 Moores Road
Frazer, PA 19355
Attention:  General Counsel
Facsimile:  (610) 738-6258

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with a copy (which shall not constitute notice) to:

Ballard Spahr LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103-7599
Attention: Brian Doerner, Esq
Facsimile: (215) 864-8999

if to the Company:

Gemin X Pharmaceuticals, Inc.
Suite 4310
3576 Avenue du Parc
Montreal, Quebec
Canada H2X 2H7
Attention:  Chief Financial Officer
Facsimile:  (514) 281-8540

with a copy (which shall not constitute notice) to:

Cooley LLP
3175 Hanover Street
Palo Alto, CA 94304
Attention: Barbara A. Kosacz, Esq. and Suzanne Sawochka Hooper, Esq.
Facsimile: (650) 849-7400

and to:

Davies Ward Phillips & Vineberg S.E.N.C.R.L., s.r.l.
1501, avenue McGill College Suite 2600
Montréal, QC H3A 3N9
Canada
Attention: Justin Vineberg
Facsimile: (514) 841-6499

if to the Stockholders’ Representative:

Shareholder Representative Services LLC
601 Montgomery Street, Suite 2020
San Francisco, CA 94111
Attention: Managing Director
Email: deals@shareholderrep.com
Facsimile No.: (415) 962-4147
Telephone No.: (415) 367-9400

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CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

8.10Severability.  Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions of this Agreement or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.  If a final judgment of a court of competent jurisdiction or arbitrator declares that any term or provision of this Agreement is invalid or unenforceable, the parties hereto agree that the court or arbitrator making such determination shall have the power to limit such term or provision, to delete specific words or phrases or to replace such term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be valid and enforceable as so modified.  In the event such court or arbitrator does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term or provision.

8.11Construction.

(a)For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders.

(b)As used in this Agreement, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.”

(c)Except as otherwise indicated, all references in this Agreement to “Sections,” “Exhibits” and “Schedules” are intended to refer to Sections of this Agreement and Exhibits or Schedules to this Agreement.

(d)The bold-faced headings set forth in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.

8.12Additional Agreement.  Each of the parties hereto acknowledges and agrees, on its own behalf and on behalf of its directors, members, partners, officers, employees, and affiliates that the Company is the client of Cooley LLP (“Cooley”).  After the Closing, it is possible that Cooley will represent the Escrow Participants, the Stockholders’ Representative and their respective affiliates (individually and collectively, the “Seller Group”) in connection with matters related to this Agreement or the Escrow Agreement, including matters related to the Escrow Fund and any claims related thereto pursuant to this Agreement.  Parent and the Company hereby agree that Cooley (or any successor) may represent the Seller Group in the future in connection with matters related to this Agreement or the Escrow Agreement and any claims that may be made thereunder pursuant to this Agreement.  Cooley (or any successor) may serve as counsel to Seller Group or any director, member, partner, officer, employee, representative, or affiliate of the Seller Group, in connection with any litigation, claim or

71

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

obligation arising out of or relating to this Agreement or the Escrow Agreement or the transactions contemplated by this Agreement or the Escrow Agreement and each of the parties hereto hereby consents thereto and waives any conflict of interest arising therefrom and each of such parties shall cause any affiliate thereof to consent to waive any conflict of interest arising from such representation.  Each of the parties hereto acknowledges that such consent and waiver is voluntary, has been carefully considered and the parties have consulted with counsel or been advised they should do so in connection with this waiver and consent

[Remainder of page intentionally left blank]

72

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER.  OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.

Cephalon, Inc.
By:	/s/ J. Kevin Buchi
Name:	J. Kevin Buchi
Title:	CEO
C2011 Merger Sub, Inc.
By:	/s/ J. Kevin Buchi
Name:	J. Kevin Buchi
Title:	President
Gemin X Pharmaceuticals, Inc.
By:	/s/ Peter R. Dolan
Name:	Peter R. Dolan
Title:	Chairman & CEO
And with respect to Sections 1, 7 and 8 only:
Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative
By:	/s/ Mark B. Vogel
Name:	Mark B. Vogel
Title:	Managing Director

[MERGER AGREEMENT]

EXHIBIT A

CERTAIN DEFINITIONS

For purposes of the Agreement (including this Exhibit A):

Acquired Corporations.  “Acquired Corporations” shall mean (i) the Company, (ii) each Subsidiary of the Company, and (iii) each corporation or other entity that has been merged (prior to the date of the Agreement) into or that otherwise is a predecessor to any of the entities identified in clauses “(i)” and “(ii)” above.

Acquisition Transaction.  “Acquisition Transaction” shall mean any transaction involving: (a) the sale, license, disposition or acquisition of all or a substantial portion of the business or assets of any Acquired Corporation; (b) the issuance, disposition or acquisition of (i) any capital stock or other equity security of an Acquired Corporation (other than Company Common Stock issued to (1) employees of the Company upon exercise of Company Options in routine transactions in accordance with the Company’s past practices, (2) IQ upon exercise of the IQ Options, and (3) holders of Company Warrants upon exercise of Company Warrants), (ii) any option, call, warrant or right (whether or not immediately exercisable) to acquire any capital stock or other equity security of an Acquired Corporation, or (iii) any security, instrument or obligation that is or may become convertible into or exchangeable for any capital stock or other equity security of an Acquired Corporation; or (c) any merger, consolidation, share exchange, business combination, reorganization, recapitalization or similar transaction involving an Acquired Corporation.

Administrative Expense Account.  “Administrative Expense Account” shall have the meaning set forth in Section 8.1(a).

Administrative Expense Amount.  “Administrative Expense Amount” shall have the meaning as set forth in Section 8.1(a).

Aggregate Preference Amount.  “Aggregate Preference Amount” shall mean the aggregate amounts payable pursuant to clauses “(A)” and “(B)” of Sections 1.3(a)(iv), (v), (vi), (vii), (viii), (ix) and (x), clause “(B)” of Section 1.3(a)(iii) and clauses “(i)(1)” and “(i)(2)” of the second sentence of Section 1.4(b).

Agreed Amount.  “Agreed Amount” shall have the meaning as set forth in Section 7.6(b).

Agreement.  “Agreement” shall have the meaning as set forth in the Preamble.

Allocation Schedule.  “Allocation Schedule” shall mean the written schedule detailing the amount of Merger Consideration due to each Company Holder and Bonus Plan Participant pursuant to this Agreement in substantially the form attached as Schedule A.

Alternative Indication EMA Milestone Payment.  “Alternative Indication EMA Milestone Payment” shall have the meaning as set forth in Section 1.9(b)(ii).

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Alternative Indication FDA Milestone Payment.  “Alternative Indication FDA Milestone Payment” shall have the meaning as set forth in Section 1.9(b)(i).

Antitrust Laws.  “Antitrust Laws” shall have the meaning as set forth in Section 4.4(b).

Award Amount.  “Award Amount” shall have the meaning as set forth in Section 7.6(f).

Bankruptcy Proceeding.  “Bankruptcy Proceeding” shall have the meaning as set forth in Section 1.9(f)(v).

Bonus Plan.  “Bonus Plan” shall mean the Company’s Amended Incentive Bonus Plan originally adopted on August 4, 2010, as amended and restated on December 29, 2010 and March 20, 2011.

Bonus Plan Administrative Expense Amount.  “Bonus Plan Administrative Expense Amount” means the aggregate bonus amounts that, pursuant to the terms of the Bonus Plan, are earned by the Bonus Plan Participants in respect of the Administrative Expense Amount, as calculated in the manner set forth in the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m) of the Agreement.

Bonus Plan Amounts.  “Bonus Plan Amounts” shall mean the aggregate bonus amounts that may become earned, vested and payable under the Bonus Plan as a result of the consummation of the transactions contemplated by this Agreement.

Bonus Plan Participant.  “Bonus Plan Participant” shall mean a participant in the Bonus Plan.

Bonus Plan Escrow Amount.  “Bonus Plan Escrow Amount” means the aggregate bonus amounts that, pursuant to the terms of the Bonus Plan, are earned by the Bonus Plan Participants in respect of the Escrow Amount, as calculated in the manner set forth in the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m) of the Agreement.

Bonus Plan Milestone Amount.  “Bonus Plan Milestone Amount” means the aggregate bonus amounts that may become earned, vested and payable under the Bonus Plan as a result of achievement of one or more Milestones, which shall be calculated in accordance with the terms of the Bonus Plan and in a manner consistent with the methodology set forth in the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m) of the Agreement.

Bylaws.  “Bylaws” shall have the meaning as set forth in Section 2.1.

Canadian Company. “Canadian Company” shall mean Gemin X Pharmaceuticals Canada Inc., a company incorporated under the laws of Quebec.

Canadian Shares. “Canadian Shares” shall mean the issued and outstanding shares of the Canadian Company.

CERCLA.  “CERCLA” shall have the meaning as set forth in Section 2.15(a)(i).

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Certificates.  “Certificate” shall have the meaning as set forth in Section 1.6(a).

Change of Control.  “Change of Control” shall have the meaning as set forth in Section 1.9(a)(i).

Claimed Amount.  “Claimed Amount” shall have the meaning as set forth in Section 7.6(a)

Class A Common Merger Consideration.  “Class A Common Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(iii).

Class B Common Merger Consideration.  “Class B Common Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(iv).

Class B-1 Common Merger Consideration.  “Class B-1 Common Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(v).

Closing.  “Closing” shall have the meaning as set forth in Section 1.2(a).

Closing Date.  “Closing Date” shall have the meaning as set forth in Section 1.2(a).

Closing Date Bonus Plan Amount.  “Closing Date Bonus Plan Amount” means the aggregate amount that becomes earned and payable under the Bonus Plan at Closing, in accordance with the terms of the Bonus Plan and this Agreement, as may be adjusted pursuant to Section 1.3(e) in connection with a Net Cash Adjustment, which shall be calculated in a manner consistent with the methodology set forth in the final Allocation Schedule delivered by the Company pursuant to Section 5.2(m) of the Agreement.  For the avoidance of doubt, the Closing Date Bonus Plan Amount does not include any part of the Bonus Plan Escrow Amount or the Bonus Plan Milestone Amount.

Closing Date Merger Consideration.  “Closing Date Merger Consideration” means the amount equal to (i) Two Hundred Twenty-Five Million United States Dollars ($225,000,000), plus or minus (ii) the Net Cash Adjustment, minus (iii) the Transaction Costs as set forth in the Transaction Schedule delivered pursuant to Section 4.15, minus the Contingent 2010 Bonuses, minus the Company Severance Payments.

Closing Date Residual Consideration.  “Closing Date Residual Consideration” means an amount equal to (i) the Closing Date Merger Consideration, minus (ii) the Aggregate Preference Amount, minus (iii) the Closing Date Bonus Plan Amount, plus (iv) the aggregate dollar amount payable to the Company upon the exercise of all vested Company Options (including any Company Option or portion thereof that becomes vested and exercisable immediately prior to the Effective Time) and Company Warrants that are outstanding and unexercised immediately prior to the Effective Time, minus (v) the Escrow Amount, minus (vi) the Administrative Expense Amount.

Closing Date Net Cash.  “Closing Date Net Cash” shall have the meaning as set forth in Section 1.3(e)(i)(3).

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Code. “Code” shall mean the Internal Revenue Code of 1986, as amended.

Combination Product. “Combination Product” shall have the meaning as set forth in Section 1.9(a)(ii).

Commercially Reasonable Efforts. “Commercially Reasonable Efforts” shall have the meaning as set forth in Section 1.9(a)(iii).

Common Warrant Consideration.  “Common Warrant Consideration” shall have the meaning as set forth in Section 1.4(b).

Company.  “Company” shall have the meaning as set forth in the Preamble.

Company Balance Sheet.  “Company Balance Sheet” shall have the meaning as set forth in Section 2.3

Company Capital Stock.  “Company Capital Stock” shall mean the Company Common Stock and Company Preferred Stock.

Company Common Stock.  “Company Common Stock” shall mean the Company’s Class A Common Stock, $0.0001 par value, Class B Common Stock, $0.0001 par value, and Class B-1 Common Stock, $0.0001 par value.

Company Employee.  “Company Employee” shall mean each current employee, consultant or director of the Company or any of its Subsidiaries, excluding consultants who are not individuals.

Company Employee Plan. “Company Employee Plan” shall mean (i) each “employee benefit plan” (as defined in Section 3(3) of ERISA) and (ii) all other material employment, compensation, bonus, stock option, stock purchase or other equity-based, benefit, incentive compensation, profit sharing, savings, retirement, disability, insurance, vacation, deferred compensation, severance, termination pay, retention, change of control and other similar fringe, welfare or other employee benefit plans, programs, agreement, contracts, policies or binding arrangements (whether or not in writing) maintained or contributed to by the Company or any of its Subsidiaries, or to which the Company or any of its Subsidiaries has an obligation to contribute, for the benefit of any current or former employee or director of the Company, any of its Subsidiaries or any ERISA Affiliate.

Company Financial Statements.  “Company Financial Statements” shall have the meaning as set forth in Section 2.3.

Company Holders.  “Company Holders” shall have the meaning as set forth in Section 1.3(d).

Company IP Rights.  “Company IP Rights” shall have the meaning as set forth in Section 2.7(a)(v).

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Company Material Adverse Effect.  “Company Material Adverse Effect” shall mean any state of facts, change, development, event, effect, condition, occurrence, action or omission (each, an “Event”) that, individually or in the aggregate, (a) has had or would reasonably be expected to result in a material adverse effect on the business, condition, results of operations or prospects of the Acquired Corporations, taken as a whole, or (b) would prevent, materially impede or materially delay the consummation by the Company of the transactions contemplated by this Agreement; provided, however, that none of the following shall be deemed, either alone or in combination, to constitute, and none of the following shall be taken into account in determining whether there has been or will be, a Company Material Adverse Effect: (i) any Events generally affecting (A) the industry in which the Acquired Corporations primarily operate to the extent they do not materially disproportionately affect the Acquired Corporations in relation to other companies in the industry in which the Acquired Corporations primarily operate or (B) the economy, or financial or capital markets, in the United States or elsewhere in the world to the extent they do not disproportionately affect the Acquired Corporations in relation to other companies in the industry in which the Acquired Corporations primarily operate; (ii) any Events arising from or otherwise relating to any act of terrorism, war, national or international calamity or any other similar event to the extent they do not disproportionately affect the Acquired Corporations; (iii) any failure, in and of itself, by the Company to meet any internal or published projections or predictions (whether such projections or predictions were made by the Company or independent third parties) for any period ending on or after the date of this Agreement (it being understood that the facts or occurrences giving rise to or contributing to such failure may be deemed to constitute, or be taken into account in determining whether there has been or will be, a Company Material Adverse Effect); (iv) any Events resulting from or arising out of any change in GAAP or changes in applicable Law; (v) any Events (including any material loss of, or any material disruption in, supplier, licensor, licensee, partner or similar relationships) directly attributable to the announcement or pendency of the transactions contemplated by this Agreement; and (vi) any Events arising from or otherwise relating to any action taken by the Company with Parent’s consent or that is required by this Agreement.

Company Options.  “Company Options” shall mean options to purchase shares of Company Capital Stock granted by the Company pursuant to the Company Stock Plan or otherwise.

Company Preferred Stock.  “Company Preferred Stock” shall mean the Company’s Series A Preferred Stock, $0.0001 par value, Series B Preferred Stock, $0.0001 par value, Series C Preferred Stock, $0.0001 par value, Series D Preferred Stock, $0.001 par value, and Series E Preferred Stock, $0.001 par value.

Company Returns.  “Company Returns” shall have the meaning as set forth in Section 2.12(a).

Company Severance Payments.  “Company Severance Payments” shall have the meaning as set forth in Section 4.6(b).

Company Significant Contract.  “Company Significant Contract” shall have the meaning as set forth in Section 2.8(a).

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Company Stock Plan.  “Company Stock Plan” shall mean the 2007 Stock Option Plan for the Company.

Company Warrants.  “Company Warrants” shall mean warrants to purchase shares of Company Capital Stock issued by the Company.

Company’s Facilities.  “Company’s Facilities” shall have the meaning as set forth in Section 2.15(a)(iii).

Compound. “Compound” shall have the meaning as set forth in Section 1.9(a)(iv).

Confidentiality Agreement.  “Confidentiality Agreement” shall have the meaning as set forth in Section 4.2.

Contested Amount.  “Contested Amount” shall have the meaning as set forth in Section 7.6(b).

Contingent 2010 Bonuses.  “Contingent 2010 Bonuses” shall mean the contingent 2010 bonuses that were approved by the board of directors of the Company on December 29, 2010 (which approval was amended by the board of directors of the Company on March 20, 2011) for all employees below the level of Vice President, provided that the Closing Date occurs on or before the deadline for such closing approved by the board of directors in connection with such bonuses and to the extent payable to employees who satisfy the payment requirements for such bonuses.

Contingent Equity Consideration Price Per Share.  “Contingent Equity Consideration Price Per Share” is equal to (a) the result of (i) the sum of the Milestone Payments minus (ii) the Bonus Plan Milestone Amount; divided by (b) the aggregate number of Effective Time Shares.

Continuing Employees.  “Continuing Employees” shall have the meaning as set forth in Section 4.6(c).

Copyrights.  “Copyrights” shall have the meaning as set forth in Section 2.7(a)(ii).

Current Company Business.  “Current Company Business” shall have the meaning as set forth in Section 2.1.

Damages.  “Damages” shall have the meaning as set forth in Section 7.2(a).

Data Room.  “Data Room” shall mean the electronic data room established by the Company in connection with the transactions contemplated by the Agreement.

Deductible.  “Deductible” shall have the meaning set forth in Section 7.3(b).

DGCL.  “DGCL” shall mean the Delaware General Corporation Law.

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Disclosure Schedule.  “Disclosure Schedule” shall mean the Disclosure Schedule that has been prepared by the Company in accordance with Section 8.8 and that has been delivered by the Company to Parent on the date of the Agreement.

Dissenting Shares.  “Dissenting Shares” shall have the meaning as set forth in Section 1.6(a).

Drug.  “Drug” shall have the meaning as set forth in Section 2.19(a).

Effective Time.  “Effective Time” shall have the meaning as set forth in Section 1.2(b).

Effective Time Shares.  “Effective Time Shares” shall mean each share of the Company’s Class A Common Stock outstanding as of immediately prior to the Effective Time and each share of the Company’s Class A Common Stock which as of immediately prior to the Effective Time is issuable upon (1) the conversion of all Company Preferred Stock outstanding as of immediately prior to the Effective Time (it being understood that each share of the Company’s Series A Preferred Stock is convertible into 5.187097 shares of the Company’s Class A Common Stock, each share of the Company’s Series B Preferred Stock is convertible into 5.187097 shares of the Company’s Class A Common Stock, each share of the Company’s Series C Preferred Stock is convertible into 33.5 shares of the Company’s Class A Common Stock, each share of the Company’s Series D Preferred Stock is convertible into one share of the Company’s Class A Common Stock and each share of the Company’s Series E Preferred Stock is convertible into one share of the Company’s Class A Common Stock), (2) the exercise of the IQ Options outstanding as of immediately prior to the Effective Time for shares of the Company’s Class B Common Stock and the Company’s Class B-1 Common Stock and the conversion of such shares of the Company’s Class B Common Stock and the Company’s Class B-1 Common Stock (it being understood that each share of the Company’s Class B Common Stock is convertible into 5.187097 shares of the Company’s Class A Common Stock and each share of the Company’s Class B-1 Common Stock is convertible into one share of the Company’s Class A Common Stock), and (3) the exercise of all vested Company Options (including any Company Option or portion thereof that becomes vested and exercisable immediately prior to the Effective Time) and Company Warrants outstanding and unexercised as of immediately prior to the Effective Time.

EMA.  “EMA” shall have the meaning as set forth in Section 1.9(b)(v).

Environmental Laws.  “Environmental Laws” shall have the meaning as set forth in Section 2.15(a)(i).

ERISA.  “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

ERISA Affiliate.  “ERISA Affiliate” shall mean any other Person under common control with the Company or any of its Subsidiaries within the meaning of Section 414(b), (c), (m) or (o) of the Code, and the regulations issued thereunder.

Escrow Agent.  “Escrow Agent” shall have the meaning as set forth in Section 1.7(a).

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Escrow Agreement.  “Escrow Agreement” shall have the meaning as set forth in Section 1.7(a).

Escrow Amount.  “Escrow Amount” shall have the meaning as set forth in Section 1.3(c).

Escrow Fund.  “Escrow Fund” shall have the meaning as set forth in Section 1.7(a).

Escrow Participant.  “Escrow Participant” shall mean the Non-Dissenting Stockholders, the holders of Company Options and Company Warrants that are outstanding immediately prior to the Effective Time and the Bonus Plan Participants, other than “Pool D” participants in the Bonus Plan.

Estimated Closing Date.  “Estimated Closing Date” shall have the meaning as set forth in Section 1.3(e)(i)(1).

Estimated Closing Date Net Cash.  “Estimated Closing Date Net Cash” shall have the meaning as set forth in Section 1.3(e)(i)(1).

Estimated Closing Date Net Cash Statement.  “Estimated Closing Date Net Cash Statement” shall have the meaning as set forth in Section 1.3(e)(i)(1).

FDA.  “FDA” shall have the meaning as set forth in Section 1.9(b)(vi).

FDCA.  “FDCA” shall have the meaning as set forth in Section 2.19(a).

GAAP.  “GAAP” shall mean generally accepted accounting principles in the United States.

Governmental Authority.  “Governmental Authority” shall have the meaning as set forth in Section 2.22.

Hazardous Materials.  “Hazardous Materials” shall have the meaning as set forth in Section 2.15(a)(ii).

HSR.  “HSR” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

IND.  “IND” shall have the meaning as set forth in Section 2.19(a).

Initial Escrow Release Date.  “Initial Escrow Release Date “ shall have the meaning as set forth in Section 7.7(a).

Indemnified Parties.  “Indemnified Parties” shall have the meaning as set forth in Section 4.5(a).

Indemnification Claim.  “Indemnification Claim” shall have the meaning as set forth in Section 7.6(a).

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International Plan.  “International Plan” means any Company Employee Plan that (i) is entered into, maintained, administered or contributed to by the Company or any of its Subsidiaries and (ii) covers any employee or former employee of the Company or any of its Subsidiaries or ERISA Affiliates who is based outside the United States.

IP Rights.  “IP Rights” shall have the meaning as set forth in Section 2.7(a)(i).

IQ.  “IQ” shall have the meaning as set forth in Section 2.2(a).

IQ Loan Agreement.  “IQ Loan Agreement” shall have the meaning as set forth in Section 2.2(a).

IQ Options.  “IQ Options” shall have the meaning as set forth in Section 2.2(a).

IRS.  “IRS” shall mean the United States Internal Revenue Service.

ITA.  “ITA” shall mean the Income Tax Act, Revised Statutes of Canada 1985, c. 1 (5th Supplement), as amended.

Knowledge.  “Knowledge” of any particular matter shall mean: (a) with respect to the Company or the Acquired Corporations, the actual knowledge, after due inquiry, of Peter R. Dolan, the Company’s Chief Executive Officer, Gordon C. Shore, the Company’s Chief Scientific Officer, Michael Dixon, the Company’s Chief Financial Officer, Jean Viallet, the Company’s Executive Vice President and Chief Medical Officer and Arthur Fratamico, the Company’s former Chief Business Officer; and (b) with respect to Parent, Kevin Buchi, the Parent’s Chief Executive Officer, Wilco Groenhuysen, the Parent’s Executive Vice President and Chief Financial Officer and Gerald Pappert, the Parent’s Executive Vice President and General Counsel.

Law.  “Law” shall mean and federal, provincial, state or local, domestic or foreign, statute, law, code, ordinance, rule or regulation of any Governmental Authority.

Leased Real Property.  “Leased Real Property” shall have the meaning as set forth in Section 2.6.

MAA. “MAA” shall have the meaning as set forth in Section 1.9(a)(vii).

Major Markets. “Major Markets” shall have the meaning as set forth in Section 1.9(a)(viii).

Material Company IP Rights.  “Material Company IP Rights” shall have the meaning as set forth in Section 2.7(a)(iii).

Merger.  “Merger” shall have the meaning as set forth in the Recitals.

Merger Consideration.  “Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(i).

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Merger Price Per Share.  “Merger Price Per Share” shall have the meaning as set forth in Section 1.3(a)(ii).

Merger Sub.  “Merger Sub” shall have the meaning as set forth in the Preamble.

Milestone  Event.  “Milestone Event” shall have the meaning as set forth in Section 1.9(b).

Milestone Payment.  “Milestone Payment” shall have the meaning as set forth in Section 1.9(b).

Milestone Payment Date.  “Milestone Payment Date” shall have the meaning as set forth in Section 1.9(b).

Milestone Target Date. “Milestone Target Date” shall have the meaning as set forth in Section 1.9(a)(ix).

NDA. “NDA” shall have the meaning as set forth in Section 1.9(a)(x).

Net Cash.  “Net Cash” shall mean the positive or negative number obtained by subtracting (A) the aggregate amount of Third Party Debt (1) as reflected in the Payoff Letters delivered pursuant to Section 4.10 and (2) representing the excess amount of accounts payable as described in clause “(vii)” of the definition of “Third Party Debt”, from (B) the aggregate amount of unrestricted cash, cash equivalents, restricted cash and short term marketable securities of the Acquired Corporations on a consolidated basis as of the Closing Date, in each case as determined in accordance with GAAP and the historical practices of the Company except as otherwise provided by this Agreement.

Net Cash Adjustment.  “Net Cash Adjustment” shall have the meaning as set forth in Section 1.3(e)(i).

Net Cash Shortfall.  “Net Cash Shortfall” shall have the meaning as set forth in Section 1.3(e)(ii).

Net Sales.  “Net Sales” shall have the meaning as set forth in Section 1.9(a)(xi).

Non-Dissenting Stockholder.  “Non-Dissenting Stockholder” shall mean each stockholder of the Company that does not perfect such stockholder’s appraisal rights under the DGCL and is otherwise entitled to receive consideration pursuant to Section 1.3.

Notice of Indemnification Claim.  “Notice of Indemnification Claim” shall have the meaning as set forth in Section 7.6(a).

Option Consideration.  “Option Consideration” shall have the meaning as set forth in Section 1.4(a).

Outside Date.  “Outside Date” shall have the meaning as set forth in Section 6.1(b).

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Parachute Payment.  “Parachute Payment” shall have the meaning as set forth in Section 4.8(d).

Parent.  “Parent” shall have the meaning as set forth in the Preamble.

Parent Employee Plans.  “Parent Employee Plans” shall have the meaning as set forth in Section 4.6(c).

Parent Indemnified Parties.  “Parent Indemnified Parties” shall mean (i) Parent, Merger Sub, and any other Subsidiaries of Parent, (ii) the directors, officers and employees of each of Parent, Merger Sub and any Subsidiary thereof and (iii) the respective successors and assigns of each of the foregoing including, after the Effective Time, the Surviving Corporation. Individually, the Parent Indemnified Parties shall each be referred to herein as a “Parent Indemnified Party”.

Parent’s Closing Date Net Cash.  “Parent’s Closing Date Net Cash” shall have the meaning as set forth in Section 1.3(e)(i)(2).

Parent’s Closing Date Net Cash Statement.  “Parent’s Closing Date Net Cash Statement” shall have the meaning as set forth in Section 1.3(e)(i)(2).

Patent Rights.  “Patent Rights” shall have the meaning as set forth in Section 2.7(a)(iv).

Paying Agent.  “Paying Agent” shall have the meaning as set forth in Section 1.7(a).

Payment Fund.  “Payment Fund” shall have the meaning as set forth in Section 1.7(a).

Payoff Letters.  “Payoff Letters” shall have the meaning as set forth in Section 4.10.

Pending Claim Amount  “Pending Claim Amount” shall have the meaning as set forth in Section 7.7(a).

Permitted Encumbrances.  “Permitted Encumbrances” shall have the meaning as set forth in Section 2.5.

Person.  “Person” shall mean any individual, entity or Governmental Authority.

Phase 3 Clinical Trial.  “Phase 3 Clinical Trial” shall have the meaning as set forth in Section 1.9(c).

Phase 3 Clinical Trial Commencement Target Date.“Phase 3 Clinical Trial Commencement Target Date” shall have the meaning as set forth in Section 1.9(c).

Preferred Warrant Consideration.  “Preferred Warrant Consideration” shall have the meaning as set forth in Section 1.4(b).

Price Adjustment Accountant.  “Price Adjustment Accountant” shall have the meaning as set forth in Section 1.3(e)(i)(3).

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Price Adjustment Accountant’s Closing Date Net Cash.  “Price Adjustment Accountant’s Closing Date Net Cash” shall have the meaning as set forth in Section 1.3(e)(i)(3).

Price Adjustment Accountant’s Closing Date Net Cash Statement.  “Price Adjustment Accountant’s Closing Date Net Cash Statement” shall have the meaning as set forth in Section 1.3(e)(i)(3).

Product. “Product” shall have the meaning as set forth in Section 1.9(a)(xii).

RCRA.  “RCRA” shall have the meaning as set forth in Section 2.15(a)(i).

Real Property Lease Agreements.  “Real Property Lease Agreements” shall have the meaning as set forth in Section 2.6.

Remaining Escrow Release Date.  “Remaining Escrow Release Date” shall have the meaning as set forth in Section 7.7(b).

Representative Losses.  “Representative Losses” shall have the meaning as set forth in Section 8.1(a).

Residual Administrative Expense Amount.  “Residual Administrative Expense Amount” shall mean the Administrative Expense Amount less the Bonus Plan Administrative Expense Amount.

Residual Escrow Amount.  “Residual Escrow Amount” shall mean the Escrow Amount less the Bonus Plan Escrow Amount.

Response Notice.  “Response Notice” shall have the meaning as set forth in Section 7.6(b).

Restated Certificate of Incorporation.  “Restated Certificate of Incorporation” shall have the meaning as set forth in Section 2.1.

Restraints.  “Restraints” shall have the meaning as set forth in Section 5.1(d).

Required Stockholder Vote.  “Required Stockholder Vote” shall have the meaning as set forth in Section 2.21.

SEC.  “SEC” shall mean the United States Securities and Exchange Commission.

Section 409A.  “Section 409A” shall have the meaning as set forth in Section 1.4(a).

Senior Executives.  “Senior Executives” shall have the meaning as set forth in Section 8.6(b).

Series A Preferred Merger Consideration.  “Series A Preferred Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(vi).

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Series B Preferred Merger Consideration.  “Series B Preferred Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(vii).

Series C Preferred Merger Consideration.  “Series C Preferred Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(viii).

Series D Agreement.  “Series D Agreement” shall have the meaning as set forth in Section 2.2(c).

Series D Preferred Merger Consideration.  “Series D Preferred Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(ix).

Series E Agreement.  “Series E Agreement” shall have the meaning as set forth in Section 2.2(c).

Series E Preferred Merger Consideration.  “Series E Preferred Merger Consideration” shall have the meaning as set forth in Section 1.3(a)(x).

Stipulated Amount.  “Stipulated Amount” shall have the meaning as set forth in Section 7.6(e).

Software Rights.  “Software Rights” shall have the meaning as set forth in Section 2.7(a)(vii).

Stockholders’ Meeting.  “Stockholders’ Meeting” shall have the meaning as set forth in Section 4.8(c).

Stockholders’ Representative.  “Stockholders’ Representative” shall have the meaning as set forth in Section 8.1(a).

Stockholders’ Representatives’ Closing Date Net Cash.  “Stockholders’ Representatives’ Closing Date Net Cash” shall have the meaning as set forth in Section 1.3(e)(i)(3).

Stockholders’ Representatives’ Closing Date Net Cash Statement.  “Stockholders’ Representatives’ Closing Date Net Cash Statement” shall have the meaning as set forth in Section 1.3(e)(i)(3).

Subsidiaries.  “Subsidiaries”, when used with respect to any party hereto, shall mean any corporation, limited liability company, partnership, association, trust or other entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power (or, in the case of a partnership, more than 50% of the general partnership interests) are, as of such date, owned by such party.

Surviving Corporation.  “Surviving Corporation” shall have the meaning as set forth in Section 1.1(a).

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Tax or Taxes. “Tax” or “Taxes” means any United States federal, state or local, or non-U.S., provincial, net income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added, transfer, stamp, or environmental (including taxes under Code Section 59A) tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any Governmental Authority.

“Tax Return” means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.

Technical Failure. “Technical Failure” shall have the meaning as set forth in Section 1.9(a)(xiii).

Terminating Company Breach.  “Terminating Company Breach” shall have the meaning as set forth in Section 6.1(d).

Terminating Parent Breach.  “Terminating Parent Breach” shall have the meaning as set forth in Section 6.1(e).

Termination Date.  “Termination Date” shall have the meaning as set forth in Section 7.1.

Third-Party Claim.  “Third-Party Claim” shall have the meaning as set forth in Section 7.4.

Third Party Debt.  “Third Party Debt” shall mean with respect to the Acquired Corporations (i) all indebtedness for borrowed money, including any prepayment penalties for such indebtedness to the extent applicable, (ii) all outstanding obligations issued, undertaken or assumed as the deferred purchase price of property or services other than trade accounts or accrued expenses recorded as current liabilities (including commissions payable to sales representatives) arising in the ordinary course of business, (iii) all reimbursement obligations with respect to surety bonds, letters of credit (to the extent not collateralized with cash or cash equivalents), bankers’ acceptances and similar instruments (in each case, whether or not matured), (iv) all obligations evidenced by notes, including promissory notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by a Person, (vi) all indebtedness referred to in clauses (i) through (v) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any encumbrance upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, (vii) the excess, if any, of the amount of any accounts or trade payable of the Acquired Corporations over the budgeted accounts or trade payable amount set forth in the 2011 monthly financial forecast set forth in Part 4.1 of the Disclosure Schedule for the date closest to the Closing Date, provided that Transaction Costs set

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forth on the Transaction Schedule, the Contingent 2010 Bonuses and the Company Severance Payments shall not be considered accounts payable for purposes of the calculation in this clause, and  (viii) all agreements, undertakings or arrangements by which any Person guarantees, endorses or becomes or is contingently liable for any of the obligations described in foregoing clauses of another Person.

Trade Secrets.  “Trade Secrets” shall have the meaning as set forth in Section 2.7(a)(i).

Trademark Rights.  “Trademark Rights” shall have the meaning as set forth in Section 2.7(a)(vi).

Transaction Costs.  “Transaction Costs” shall have the meaning as set forth in Section 4.15.

Transaction Schedule.  “Transaction Costs Schedule” shall have the meaning as set forth in Section 4.15.

Treasury Regulations.  “Treasury Regulations” shall mean the regulations issued under the Code by the IRS with the approval of the United States Department of the Treasury.

Update Report.  “Update Report” shall have the meaning as set forth in Section 1.9(d).

Voting Agreement.  “Voting Agreement” shall have the meaning as set forth in Section 2.21.

Warrant Consideration.  “Warrant Consideration” shall have the meaning as set forth in Section 1.4(b).

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EXHIBIT B

B-1

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, J. Kevin Buchi, certify that:

1.I have reviewed this report on Form 10-Q of Cephalon, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 4, 2011
	/s/ J. Kevin Buchi
	J. Kevin Buchi
	Chief Executive Officer
	(Principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Wilco Groenhuysen certify that:

1.I have reviewed this report on Form 10-Q of Cephalon, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 4, 2011
	/s/ Wilco Groenhuysen
	Wilco Groenhuysen
	Executive Vice President and Chief Financial Officer
	(Principal financial officer)