_

ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

than one year from the balance sheet date, excluding those investments that the Company has the intent and ability to realize within twelve months from the balance sheet date without incurring losses, which are classified as short-term. The Company’s long-term investments consist of debt securities with maturities greater than one year from the balance sheet date. The Company classifies all securities as available-for-sale and all securities are reported at fair value with any related unrealized gains and losses, net of tax, recorded in stockholders’ equity under the caption “Accumulated other comprehensive income (loss).” The cost and fair value of investments are based on the specific identification method. The Company periodically reviews its investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. All realized gains and losses and declines in fair value that are other-than-temporary are recorded in earnings in the period of occurrence.

Trade Receivables and Allowance for Doubtful Accounts

Trade receivables consist of amounts billed to customers for products sold and are carried at their estimated collectible amounts. Accounts receivable are generally due within 60 days. The Company establishes an allowance for doubtful accounts based on collection experience and other factors. However, if circumstances change, the Company’s estimate of the recoverability of accounts receivable could be different. Circumstances that could affect the Company’s estimates include, but are not limited to, customer credit issues and general economic conditions. Accounts are written off once deemed to be uncollectible. Any subsequent cash collections relating to accounts that have been previously written off are typically recorded as a reduction to bad debt expense in the period of payment.

Fair Value of Other Financial Instruments

The Company evaluates the estimated fair value of financial instruments using available market information and valuation methodologies. The use of different market assumptions and/or estimation methodologies could have a negative effect on the estimated fair value amounts. The fair value of the Company’s cash, cash equivalents, accounts receivable, accounts payable, notes payable and other current liabilities approximates the carrying amount due to the relatively short maturity of these items.

Inventories

Inventories consist of finished goods held for sale and distribution, raw materials and work in process. Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). The Company writes down inventories to net realizable value based on forecasted demand and market conditions, which may differ from actual results. For the years ended December 31, 2010 and December 31, 2009, cost of product revenue includes a charge of approximately $1.5 million and $5.0 million, respectively, related to write downs of inventory which the Company does not expect to sell. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory.

Shipping and Handling Costs

Shipping and handling costs incurred prior to the product being shipped to customers are recorded as a component of Cost of product revenue in the Consolidated Statement of Operations. Shipping and handling costs incurred to ship the products to customers is included in Selling, general and administrative expenses. Included in Selling, general, and administrative expenses was $183,872 and $106,900 related to shipping and handling costs for the years ended December 31, 2010 and 2009, respectively.

Property, Plant and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. The Company recorded $4,983,371 and $4,875,383 of depreciation expense in the Company’s Consolidated Statement of Operations for the years ended December 31, 2010 and 2009, respectively. These amounts included depreciation expense from Anchen Taiwan of $312,210 from January 1 to March 30, 2010 for the year ended December 31, 2010 and $1,185,551 for the year ended December 31, 2009. As discussed in Note 3, the Company completed the spin-off of Anchen Taiwan on March 30, 2010.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides the range of estimated useful lives used for each asset type:


	Useful Lives
	(Years)
Land	-
Building	40
Machinery and equipment	5 - 7
Furniture and fixtures	3 - 7
Automobile	5
Leasehold improvements	10 - 25
Construction in progress	-

Maintenance and repairs are charged as expense in the statement of operations as incurred, and betterments that extend the useful life are capitalized. Upon retirement or sale, the cost and accumulated depreciation are eliminated from the respective accounts and the related gain or loss, if any, is reflected in other income (expense) in the statement of operations.

The Company periodically reviews its property, plant, and equipment to determine if facts and circumstances exist which indicate that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. The Company assesses the recoverability of its assets held for use by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

Intangible Assets

The Company amortizes the costs of intangibles over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset's estimated economic life. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value on either discounted cash flows or appraised value.

Fair Value Measurement

For financial assets and liabilities fair valued on a recurring basis, the fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

Accumulated Other Comprehensive Income (Loss)

The Company reports items required to be recognized under accounting standards as components of comprehensive income (loss), including unrealized gains and losses on available-for-sale securities and currency translation adjustments in stockholders’ equity in its consolidated financial statements. As discussed in Note 3, the Company determined that it was not required to consolidate Anchen Taiwan in its consolidated financial statements as of and for the year ended December 31, 2010 as a result of spinning off Anchen Taiwan on March 30, 2010. Accordingly, the Company charged the currency translation adjustments balance in accumulated other comprehensive loss as of the spin-off date to retained earnings.

Foreign Currency

The functional currency of Anchen Taiwan, is its local currency. Accordingly, all assets and liabilities of its foreign operations are translated to U.S. dollars

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

at the rate in effect at the balance sheet date, and revenues and expenses are translated to U.S. dollars at the average rate in effect during the period. The gains and losses from the translation of the subsidiary’s financial statements into U.S. dollars are recorded directly into a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss).” Currency transaction gains and losses are included in the Company’s results of operations. As discussed in Note 3, the Company determined that it was not required to consolidate Anchen Taiwan in its consolidated financial statements as of and for the year ended December 31, 2010 as a result of spinning off Anchen Taiwan on March 30, 2010. Accordingly, the Company charged the currency translation adjustments balance in accumulated other comprehensive loss as of the spin-off date to retained earnings.

Revenue Recognition

Product sales are generally recognized upon delivery to the customer when title and the risks and rewards of ownership passes, persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured.

Gross product sales are subject to various deductions to arrive at net product sales. When revenue is recognized from product sales, estimates for stock adjustments, price adjustments, chargebacks, rebates, including Medicaid rebates, prompt payment discounts, product returns and other sales adjustments are recorded. These estimates are based on a variety of factors including historical payment experience, historical relationship to revenue, estimated customer inventory levels and current contract sales terms with direct and indirect customers.

Alliance revenue includes profit splits from a third party distributor of one of the Company’s products. Pursuant to an agreement with Teva Pharmaceutical Industries, Ltd. (“Teva”), the Company receives payments based on a percentage of the profits associated with the sale of such product. Teva calculates the Company’s profit split by first deducting from gross sales earned by Teva i) provisions for product returns, cash discounts, rebates, and other sales allowances based on a pre-defined formula, ii) estimates for price adjustments, shelf-stock adjustments, promotional payments, and chargebacks, and iii) royalty paid to a third party in connection with marketing the product, to arrive at net sales, next reducing net sales by manufacturing and packaging costs based on pre-defined formulas, to arrive at the profit, and then applying the Company’s gross profit percentage to the profit. Teva’s estimates for price adjustments, shelf-stock adjustments, promotional payments, and chargebacks are subject to annual true-up by Teva based on a comparison of actual cash payments and credits issued to customers versus estimates previously reported. Based on an analysis of the profit split reports and other information received from Teva and its own internal information, the Company makes adjustments, if deemed necessary, to recognize alliance revenue to be consistent with its other revenue recognition policies.

The Company was first to file the Abbreviated New Drug Application (“ANDA”) for its 12.5mg strength zolpidem tartrate extended release tablet product (“ZPD”) with the Food and Drug Administration (“FDA”). In December 2010, the FDA granted final approval for the Company to market its 12.5mg strength of ZPD, and as a result, the Company was granted 180 days of first-to-file marketing exclusivity for the product. The launch and shipment of the 12.5mg ZPD product began in December 2010 and resulted in product revenue of approximately $23.4 million for the year ended December 31, 2010.

Research and Development

Research and development activities are expensed as incurred.

Income Taxes

The Company uses the asset and liability approach in accounting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. Such deferred income tax assets and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

Effective for years beginning after December 15, 2005, ASC 718 Stock–Compensation requires the use of a fair value method of accounting and disclosing for stock-based compensation awards. Accordingly, stock-based compensation cost is measured on the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period.

Financial Instruments with Off-Balance Sheet Risk and Concentration of Credit Risk

The Company uses financial instruments that potentially subject it to concentrations of credit risk. Such instruments consist principally of cash equivalents, short-term investments and trade accounts receivable. The Company invests excess cash not required for use in operations primarily in short-term investments that the Company believes bear minimal risk of loss. The Company has not experienced any losses due to institutional failure or bankruptcy.

Although cash balances are held at various financial institutions, such balances may, at times, exceed insurable amounts. The Company believes it mitigates its risks by investing in or through major financial institutions. Recovery is dependent upon performance of the institution. At December 31, 2010, the Company had approximately $17 million in deposits in excess of the FDIC insured amount.

Credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company’s customer base. However, as of December 31, 2010, two customers individually accounted for approximately 22 percent and 16 percent of accounts receivable. The Company’s major customers are large pharmaceutical wholesalers whose credit is closely monitored. Additionally, the Company regularly performs credit evaluations of its customers and assesses their financial strength.

Recent Accounting Pronouncements

In May 2009, the FASB issued authoritative guidance for subsequent events which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued. The guidance is effective for financial statements issued for interim or fiscal years ending after June 15, 2009. Effective December 31, 2009, the Company adopted the new accounting and disclosure requirements, the adoption of which did not have a significant impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The amendment eliminates the quantitative approach previously required for determining the primary beneficiary of a VIE and requires an enterprise to perform a qualitative analysis when determining whether or not to consolidate a VIE. The amendment requires an enterprise to continuously reassess whether it must consolidate a VIE and also requires enhanced disclosures about an enterprise’s involvement with a VIE and any significant change in risk exposure due to that involvement, as well as how its involvement with a VIE impacts the enterprise’s financial statements. This amendment is effective for fiscal years beginning after November 15, 2009. Effective December 31, 2010, the Company adopted the new accounting and disclosure requirements as discussed in Note 3.

In October 2009, the FASB issued an amendment to its accounting guidance on revenue arrangements with multiple deliverables, which addresses the unit of accounting for arrangements involving multiple deliverables and how consideration should be allocated to separate units of accounting, when applicable. 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. The amendment is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact of the adoption of this amendment on the Company’s consolidated financial statements.

In January 2010, the FASB issued guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Level 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 (“Phase 1 Disclosure Requirements”), except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010 (“Phase 2 Disclosure Requirements”). Effective December 31, 2010, the Company adopted the new Phase 1 Disclosure Requirements, the adoption of which did not have a significant impact on the Company’s consolidated financial statements. The Company does not expect the adoption of the Phase 2 Disclosure Requirements to have a significant impact on the Company’s consolidated financial statements.

Note 3 — Corporate Reorganization

Anchen Taiwan Spin-off

On March 30, 2010, the Company completed the spin-off of Anchen Taiwan, a wholly-owned subsidiary, in order to separate the Company’s United States and Taiwan businesses into two independent companies. Prior to the separation, the Company invested $12.1 million in Anchen Taiwan in exchange for newly issued shares of common stock of Anchen Taiwan. Pursuant to the Contribution Agreement, the Company then transferred all of its Anchen Taiwan shares to TWI Pharmaceuticals Holding, Inc. or “TWI Holding” (formerly Anchen Laboratories International, Inc.), the Company’s wholly-owned subsidiary in the Cayman Islands. In exchange, the Company received 198,000 shares of TWI Holding preferred stock and 25,576,195 shares of TWI Holding ordinary stock.

The business separation was achieved by a pro rata distribution of TWI Holding ordinary stock and a cash dividend to all of the Company’s stockholders of record. The total cash dividend of $895,686 was intended to fund U.S. taxes applicable to the stock and cash dividends. Immediately following the separation, each stockholder owned an equal number of shares of both the Company and TWI Holding. The Company’s ownership comprised of the original 500,000 shares that it held in TWI Holding prior to the Contribution Agreement plus 1,643,118 shares retained to satisfy the total potential future obligation of its stock option holders. The Company adjusted the terms of all outstanding stock options in order to reflect the separation and preserve the value of the outstanding options. All outstanding option awards and the related option plans were amended to provide that upon exercise, each option will be entitled to receive one share of the Company’s stock and one ordinary share of TWI Holding.

As was contemplated under the reorganization plan, in May 2010 subsequent to the business separation, the Company invested $7.0 million in TWI Holding in exchange for 70,000 additional shares of TWI Holding preferred stock. TWI Holding’s capitalization immediately following the separation and the $7.0 million cash investment represented 268,000 shares of TWI Holding 8.25 percent cumulative preferred stock having a stated value of $100 per share and an aggregate value of $26.8 million and 26,076,195 TWI Holding ordinary shares with an attributable per share value of $0.087 and an aggregate value of $2.3 million. The Company’s stockholders held 92% of TWI Holding’s ordinary stock, and the Company held the remaining 8%. The Company held 100% of TWI Holding’s preferred stock. The Company’s ownership in TWI Holding’s preferred stock and ordinary stock represented 93% of the aggregate value of TWI Holding. The Company’s stockholders’ ownership represented the remaining 7% of the aggregate value of TWI Holding.

Immediately following the business separation, Anchen Taiwan was renamed TWI Pharmaceuticals, Inc. (“TWI Pharma”). The Company’s U.S. business continues to focus on the U.S. generic pharmaceuticals market. TWI Pharma continues to develop generic products for the U.S. market in collaboration with the Company and is expanding its focus to develop markets for existing and new products in Asia. Post reorganization, TWI Pharma operates as a related party of the Company (see Note 14).

Variable Interest Entity

At the time of the spin-off the Company evaluated the applicability of ASC 810, the accounting guidance that addresses Variable Interest Entities (“VIEs”). An entity is deemed a VIE to be consolidated if it is one in which, by design, equity investors do not have sufficient equity at risk to enable the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack i) the power through voting or similar rights to direct the activities of an entity that most significantly impact its economic performance, ii) the obligation to absorb the entity's expected losses, or iii) the right to receive the entity's expected residual returns. A VIE is consolidated by the variable interest holder that is determined to have the controlling financial

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company assesses whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and continuously thereafter.

Valuation and Financial Statement Impact

The Company’s Investment in Affiliate (TWI Holding) as of December 31, 2010 is stated on a cost basis at approximately $26.8 million, which approximates fair value. The fair value was determined on the basis of discounting expected future cash inflows to their present value at rates commensurate with the risk of realizing such cash inflows as well as through review of comparable transactions and companies. The preferred shares have a par value of $0.01 per share and a stated value of $100 per share. Dividends on the preferred stock are cumulative and accrue at an annual rate of 8.25% of the stated value and accrue whether or not declared. As of December 31, 2010, cumulative dividends on the preferred shares were approximately $1.6 million, which had not been declared and accordingly has not been recognized in the consolidated financial statements.

As a result of the Company’s evaluation of TWI Holding as a VIE and the spin-off of Anchen Taiwan, the Company did not include in its consolidated financial statements the balance sheet of Anchen Taiwan as of December 31, 2010 and Anchen Taiwan’s related statement of operations, stockholders’ equity and comprehensive income, and cash flows for the period subsequent to March 30, 2010, the spin-off date, through December 31, 2010. Following the spin-off of Anchen Taiwan, the Company recorded a reduction to retained earnings of $0.5 million after accounting for the elimination of Anchen Taiwan’s assets and liabilities and accounting for the investment in TWI Holding. As the Company determined that it was not required to consolidate Anchen Taiwan in its financial statements as of and for the year ended December 31, 2010 as a result of spinning off Anchen Taiwan on March 30, 2010, the Company charged the currency translation adjustments balance of $37,967 in accumulated other comprehensive loss as of the spin-off date to retained earnings.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the assets and liabilities of Anchen Taiwan as of March 30, 2010, the spin-off date, and as of December 31, 2009:


	March 30, 2010	December 31, 2009

Current assets:
Cash and cash equivalents	$ 10,818,970	$ 768,541
Restricted cash	-	469,505
Accounts receivable, net	239,753	512,876
Notes receivable	456,752	453,607
Inventories	1,137,254	1,167,683
Prepaid expenses and other current assets	258,232	147,245
Total current assets	12,910,961	3,519,457
Property, plant and equipment, net	12,473,826	12,687,627
Other assets	119,503	81,046
Total assets	$ 25,504,290	$ 16,288,130

Current liabilities:
Credit facility	$ 630,318	$ 625,978
Current portion of notes payable	1,076,128	1,068,718
Trade accounts payable	1,306,819	1,407,322
Other current liabilities	183,231	440,866
Total current liabilities	3,196,496	3,542,884
Notes payable	2,494,595	2,744,598
Total liabilities	$ 5,691,091	$ 6,287,482

The Company determined that the spin-off of Anchen Taiwan did not meet the criteria required for discontinued operations treatment in the Company’s consolidated financial statements since the Company continues to have significant cash outflows in connection with contract research and manufacturing activities performed by TWI Pharma (formerly Anchen Taiwan) on behalf of the Company.

The Company’s consolidated statement of operations for the year ended December 31, 2010 includes loss from operations of $1,469,736 and net loss of $1,501,256 from Anchen Taiwan through March 30, 2010, the spin-off date, and income from operations of $114,189 and net income of $2,809 for the year ended December 31, 2009.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — Investments

The amortized cost and estimated fair value of securities available-for-sale, by type, are as follows:


	2010			2009
	Amortized Cost	Gross Unrealized Gains	Estimated Fair Value	Amortized Cost	Gross Unrealized Gains	Estimated Fair Value
Debt Securities
U.S. corporate	$36,884,011	$ 32,404	$ 36,916,415	$13,098,740	$ 8,718	$13,107,458
State and municipal	12,870,000	13	12,870,013	8,785,000	(447)	8,784,553
Certificates of deposit	-	-	-	250,000	113	250,113
Total available-for-sale securities	$49,754,011	$ 32,417	$ 49,786,428	$22,133,740	\| $ 8,384	$22,142,124

Amounts included in:
Short-term investments	$49,027,382	$ 24,767	$49,052,149	$22,133,740	$ 8,384	$22,142,124
Investments	726,629	7,650	734,279	-	-	-
Total available-for-sale securities	$49,754,011	$ 32,417	$ 49,786,428	$22,133,740	$ 8,384	$22,142,124

Note 5 — Notes Receivable

As of December 31, 2009, the Company had a current note receivable of $453,607 in connection with the Company’s sale of its interest in Pharmosa Pharmaceutical Co. Ltd. to Bioneer in December 2007. The note accrued interest at 3.5 percent per annum. As a result of the spin-off of Anchen Taiwan as discussed in Note 3, the Company no longer carries the note receivable balance in its consolidated balance sheet as of December 31, 2010.

Note 6 — Credit Facility and Notes Payable

Credit Facility

U.S. Credit Facility. The Company maintained a $20 million revolving credit facility through its expiration in October 2010. As of December 31, 2009 and since inception of the credit facility, the Company had no borrowings outstanding against the facility. The Company did not renew the credit facility in 2010.

Foreign Credit Facility. Anchen Taiwan maintains a bank credit facility in Taiwan. The credit facility was approximately $2.2 million at December 31, 2009, based upon the exchange rate at December 31, 2009. Outstanding borrowings against the facility as of December 31, 2009 were $625,978, at an annual interest rate of 1.60 to 3.33 percent. As a result of the spin-off of Anchen Taiwan in 2010 as discussed in Note 3, the Company no longer carries on its consolidated balance sheet as of December 31, 2010 outstanding borrowings against the credit facility.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes Payable

Anchen Taiwan also entered into certain promissory notes with banks in order to fund facilities and capital expansion of the Company’s Taiwan operations. As a result of the spin-off of Anchen Taiwan in 2010 as discussed in Note 3, the Company no longer carries on its consolidated balance sheet as of December 31, 2010 outstanding borrowings against these notes. As of December 31, 2009, borrowings outstanding against these notes were as follows:


Note	Security	Annual Interest Rate	Expiration	2009
1	Real property	1.47% - 3.07%	April, 2017	$ 1,138,498
2	Real property	1.88% - 3.70%	June, 2012	1,017,215
3	Machinery	1.93% - 3.53%	March, 2013	1,238,843
4	Real property	1.98% - 3.58%	March, 2013	418,760
Total notes payable				3,813,316
Less: current portion				1,068,718
Notes payable, long-term				$ 2,744,598

Note 7 — Other Balance Sheet Components


	December 31,
	2010	2009
Inventories:
Raw materials	$ 3,672,767	$ 7,883,829
Work-in-process	566,111	294,256
Finished goods	8,513,223	7,486,566
Total	$12,752,101	$15,664,651


	December 31,
	2010	2009
Accounts receivable, net:
Gross accounts receivable	$36,216,531	$ 9,210,851
Less: allowance for bad debts	94,889	99,062
Less: allowance for stock adjustments, chargebacks, and other sales adjustments	3,840,297	1,379,374
Total	$32,281,345	$7,732,415


	December 31,
	2010	2009
Property, land and equipment, net:
Land	$ -	$ 4,099.376
Building	-	3,775,609
Machinery and equipment	21,428,429	23,705,106
Furniture and fixtures	3,229,451	3,226,707
Automotive	93,235	117,648
Leasehold improvements	17,770,793	13,074,642
Construction in progress	2,893,271	9,383,979
	45,415,179	57,383,067
Less: accumulated depreciation and amortization	14,932,464	13,463,488
Total	$30,482,715	$43,919,579

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	December 31,
	2010	2009
Other current liabilities:
Payable to distributor	$ 1,797,481	$1,769,432
Payable to licensor	4,344,498	147,415
Payable to collaboration partner	1,855,738	3,498,519
Other accrued expenses	3,801,346	4,322,559
Total	$ 11,799,063	$9,737,925

Note 8 — Income Taxes

The components of income (loss) before income taxes are as follows:


	Years Ended December 31,
	2010	2009

Domestic	$ (573,382)	$4,246,529
Foreign	(1,503,808)	110,960
Income (loss) before income taxes	$(2,077,190)	$4,357,489

The provision for income taxes consists of the following:


	Years Ended December 31,
	2010	2009
Current:

Federal	$ 1,562,688	$ -
State	571,222	1,088,511
Foreign	-	10,489
Total current	2,133,910	1,099,000

Deferred:


Federal	$(2,747,133)	$ 560,014
State	(1,044,464)	(581,282)
Foreign	(2,552)	97,664
Total deferred	(3,794,149)	76,396
Income tax provision (benefit)	$(1,660,239)	$1,175,396

The following is a reconciliation between income taxes computed at the U.S. Federal statutory rate and the actual effective income tax provision:


	Years Ended December 31,
	2010	2009

Tax at U.S. statutory tax rate	$ (706,245)	$1,525,121
State taxes, net of federal tax benefit	(281,897)	330,266
Tax on foreign income at a rate different than the U.S.
statutory rate	508,743	69,317
U.S. IRC section 199 domestic production deduction	(5,948)	-
U.S. tax research and development credit	(852,916)	(828,871)
Other, net	(321,976)	79,563
Income tax provision (benefit)	$(1,660,239)	$1,175,396

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities consist of the following at December 31:


	Years Ended December 31,
	2010	2009
Deferred tax assets – current:
Bad debt and sales reserve	494,565	$ 306,956
Inventory reserve	-	16,215
Inventory – Section 263A costs	445,784	77,744
State income taxes	544	33,124
Other current liabilities	1,479,170	679,639
Transfer pricing costs	247,356	-
Deferred rent and vacation	111,946	184,383
Long-term incentive plan	18,547	19,344
California tax research and development credit carryover	722,249	-
Other – foreign	-	95,406
Deferred tax assets – current	3,520,161	1,412,811
Valuation allowance	-	95,406
Net deferred tax assets - current	$ 3,520,161	$ 1,317,405


Deferred tax assets – noncurrent:
Intangible assets	$ 3,191,749	$ 338,523
Long-term incentive plan	9,274	9,672
Stock option expenses	393,199	272,157
Deferred rent	113,816	-
U.S. tax operating losses carryover	-	788,596
U.S. tax research and development credit carryover	-	1,250,596
Foreign tax operating losses carryover	-	93,985
Foreign tax research and development credit carryover	-	633,037
Deferred tax assets – noncurrent	3,708,038	3,386,566
Valuation allowance	-	595,898
Net deferred tax assets - noncurrent	$ 3,708,038	$2,790,668


Deferred tax liabilities – noncurrent:
Depreciation and amortization	$ 2,380,937	$1,449,158
Restricted stock deduction	91,974	170,534
Deferred tax liabilities – noncurrent	$ 2,472,911	$1,619,692

The net deferred assets and liabilities consist of the following at December 31:


Net deferred tax assets - current	$ 3,520,161	$1,317,405

Deferred tax assets – noncurrent	3,708,038	2,790,668
Deferred tax liabilities - noncurrent	2,472,911	1,619,692
Net deferred tax assets – noncurrent	1,235,127	1,170,976
Net deferred tax assets	$ 4,755,288	$2,488,381

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in the future. The Company evaluates the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent the Company does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

The Company’s businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws,

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

regulations and policies. Changes to these laws or regulations may affect the Company’s tax liability, return on investments and business operations.

On January 1, 2009, the Company adopted ASC 740, Income Taxes, which among other things, clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. In 2010, the Internal Revenue Service, the State of California and the State of Ohio initiated audits of the Company’s consolidated income tax returns for 2007 and 2008. Additionally, in March 2011, the Internal Revenue Service initiated an audit of the Company’s 2009 consolidated income tax return. The Company considered the impact of these audits in evaluating its reserves for income tax uncertainties. The adoption of ASC 740 resulted in an increase in income taxes payable of $1,953,376, an increase in current deferred tax assets of $679,639, and a reduction in retained earnings of $1,273,737.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the years ended December 31, 2010 and 2009:


	Years Ended December 31,
	2010	2009

Unrecognized tax benefits, beginning of year	$2,163,901	$1,953,376
Gross increases related to tax positions taken in prior years	-	-
Gross decreases related to tax positions taken in prior years	-	-
Gross increases related to tax positions taken in the current year	218,570	210,525
Gross decreases related to tax positions taken in the current year	-	-

Unrecognized tax benefits, end of year	$2,382,471	$2,163,901

Unrecognized tax benefits of $2,382,471 reflected in the Company’s consolidated balance sheet as of December 31, 2010 includes penalties and interest of $185,365. Income tax benefit of $1,660,239 reflected in the Company’s consolidated statement of operations for the year ended December 31, 2010 includes penalties and interest of $13,340.

Unrecognized tax benefits of $2,382,471 as of December 31, 2010 include items totaling $679,639, which do not have an impact on the effective tax rate. The remaining balance of unrecognized tax benefits of $1,702,832 as of December 31, 2010 has an impact on the effective tax rate.

The Company believes it is reasonably possible that unrecognized tax benefits may decrease by approximately $1.5 million exclusive of penalties and interest, in the upcoming year as a result of ongoing federal and state tax examinations that are expected to be settled, as well as voluntary disclosure agreements entered into with state tax authorities. In addition, it is reasonably possible that the unrecognized tax benefits may increase as a result of tax positions that the Company may take in the upcoming year.

The Company files income tax returns in the U.S. federal jurisdiction and various states. At December 31, 2010 the Company had research and development tax credit carryforwards with expiration years as follows:


Amount	Year Generated	Year of Expiration
$1,074,785 (State)	2009 and 2010	None

The Company files income tax returns in the U.S. federal jurisdiction, in multiple state jurisdictions, and in one foreign jurisdiction. The federal tax return for 2007 and subsequent years are open for examination. In addition, the state income tax returns generally have statute of limitations ranging from three to four years.

Note 9 — Stock Compensation Plans and Other Employee Benefits

Effective January 1, 2006, the Company adopted ASC 718 Stock-Compensation which establishes the accounting and reporting standard for stock-based compensation plans. ASC 718 requires that the Company account for all stock-based compensation transactions using a fair-value method and recognize the fair value of each award as an expense over the requisite service period.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concurrent with the spin-off of Anchen Taiwan as described in Note 3, the Company amended all outstanding options as of the record date of March 12, 2010 through issuance and approval of a supplement to all outstanding option plans and option agreements such that upon exercise of an option, the optionee received one share of common stock of the Company and one ordinary share of TWI Holding. This adjustment was intended to reflect the reorganization and preserve the value of all outstanding options. The Company performed an evaluation of the modification, noting that such modification did not result in a change in the fair value of outstanding options and no incremental compensation was recorded.

For the years ended December 31, 2010 and 2009, stock-based compensation expense related to employee stock options and restricted stock under ASC 718 was allocated as follows:


	Years Ended December 31,
	2010	2009

Stock-based compensation expense: :
Cost of product revenue	$ 96,033	$ 89,349
Research and development	144,345	181,129
Selling, general and administrative	255,320	259,829
Total stock-based compensation expense before income taxes	$495,698	$530,307
Income tax benefit	134,834	128,147
Total stock-based compensation expense after income taxes	$360,864	$402,160



Stock-based compensation expense by type of award: :
Stock options	$360,864	$402,160
Restricted stock awards	192,844	192,861
Total stock-based compensation expense after income taxes	$553,708	$595,021

Valuation and Other Assumptions

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model using a multiple options approach, consistent with the provisions of ASC 718 Stock-Compensation and ASC 820 Fair Value Measurements. All options are amortized over the requisite service period of the awards, which is generally the vesting period. The Black-Scholes-Merton valuation model requires the input of the following assumptions:

Expected Volatility. As the Company’s common stock is not publicly traded and the Company has no publicly traded options, actual or implied volatility could not be calculated. Accordingly, the Company estimated expected volatilities based on historical volatilities of guideline companies. The Company’s projected volatility applicable to the expected terms of the options range from 35.0% to 50.0%.

Expected Term. As the Company's stock or stock options are not publicly traded and post vesting employee turnover and exercise behavior is subject to significant uncertainty, the Company employed the "Simplified Formula" in accordance with ASC 820 to estimate the expected term of the unvested options. Based on the Simplified Formula and Company data, the expected terms for the options were estimated to range from 5.0 to 6.5 years.

Risk-Free Interest Rate. The risk-free rate is based on the return of the U.S. Treasury Note at the time of grant with remaining terms equivalent to the expected term of the option grants.

Expected Dividends. The Company does not expect to declare or pay future dividends on its common stock. Accordingly a zero dividend yield was used in the valuation.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Forfeitures. The expected forfeiture of unvested options was based on historical forfeitures of options. The forfeiture rate was estimated at 15.0% and was only applied to options in 2009 and 2010. Since the options were unvested as of their respective grant dates, the 15.0% forfeiture rate and weighted average vesting period were used to estimate the total number of stock options expected to vest.

In order to determine the fair value of each option grant in the years ended December 31, 2010 and 2009, the Company employed the following weighted-average valuation assumptions:


	2010	2009
Stock option plan:
Expected stock price volatility	40%	40%
Risk free interest rate	1.7%	2.8%
Expected term of options	6.2 years	6.4 years

ASC 718 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.

Stock Compensation Plans

The Company has adopted various equity incentive plans, which are intended to attract and retain qualified management, key employees and certain non-employee consultants and aligns stockholder and employee interests. Under these plans, stock options vest over a one to five-year period, expire no later than ten years from the date of grant, and are granted at prices not less than the fair market value of the Company’s common stock at the grant date.

Following approval by the Company’s Board of Directors, the Company increased the shares reserved for issuance upon exercise of options granted or to be granted under all plans for other types of stock-based awards from 2,857,143 as of December 31, 2009 to 3,892,279 as of December 31, 2010. The shares were increased in order to allow for additional awards under the equity incentive plans for the purposes of attracting and retaining key individuals. As of December 31, 2010, 1,637,910 shares were reserved for future awards under all plans, 1,576,322 options were outstanding, and 1,095,316 options were exercisable.

The following table summarizes the stock options activity under all plans:


	Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term
Outstanding at December 31, 2008	1,446,488	$4.26
Granted	337,000	4.96
Exercised	(35,988)	3.24
Forfeited or expired	(103,764)	5.94
Outstanding at December 31, 2009	1,643,736	$4.32
Granted	37,500	7.66
Exercised	(1,225)	3.38
Forfeited or expired	(103,689)	5.13
Outstanding at December 31, 2010	1,576,322	$4.34	6.6 years
Vested and expected to vest at December 31, 2010	1,498,071	$4.29	6.5 years

Options exercisable at December 31, 2008	552,333	$3.37
Options exercisable at December 31, 2009	787,456	$3.82
Options exercisable at December 31, 2010	1,095,316	$4.02	6.2 years

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred compensation in connection with the Company’s options outstanding as of December 31, 2010 was $634,557 which is expected to be recognized over a weighted average period of approximately 2.14 years.

Restricted Stock Awards

The Company granted restricted stock awards to certain key employees during the fourth quarter of 2008. The following table summarizes the restricted stock award activity for the years ended December 31, 2009 and 2010:


	Restricted Shares	Weighted-Average Grant Date Fair Value

Nonvested restricted stock awards at December 31, 2008	115,000	$ 5.51
Granted	-	-
Vested	(35,002)	5.51
Forfeited	-	-
Nonvested restricted stock awards at December 31, 2009	79,998	$ 5.51
Granted	-	-
Vested	(34,999)	5.51
Forfeited	-	-
Nonvested restricted stock awards at December 31, 2010	44,999	$ 5.51

These restricted stock awards, which were granted pursuant to the 2008 Equity Incentive Plan, vest annually over three to four years and are granted at prices not less than the fair market value of the Company’s common stock at the grant date. The Company recognizes compensation expense at the time the restricted stock awards vest signifying the employee’s completion of each year of continuous service. Deferred compensation in connection with the Company’s grant of these restricted stock awards as of December 31, 2010 and 2009 was $247,945 and $440,789, respectively.

Post-Retirement Benefit Plan

Anchen Taiwan has a non-domestic pension plan, which is funded in accordance with applicable local laws and regulations. Pension costs from January 1 to March 31, 2010, the Anchen Taiwan spin-off date, were approximately $33,000. Pension costs for the year ended December 31, 2009 were approximately $134,000. Subsequent to the spin-off of Anchen Taiwan as discussed in Note 3, the Company ceased incurring costs associated with the non-domestic pension plan from the spin-off date through December 31, 2010.

Note 10 – Marketing and Distribution Arrangements

Marketing Exclusivity

The Company was first to file the Abbreviated New Drug Application (“ANDA”) for its 300 mg and 150 mg strength of bupropion hydrochloride extended release tablet products (“BPP”) with the FDA. Pursuant to the terms of the Master 300 mg Agreement (“300mg Agreement”) with Teva entered into in January 2006 and amended in February 2007, the Company granted Teva exclusive control over all rights under the 180 days of first-to-file marketing exclusivity (“180-day market exclusivity”) of its 300mg BPP. In compliance with the terms of the 300mg agreement, in December 2006, the Company commenced the commercial marketing of its 300mg BPP, which triggered the Company’s rights to the 180-day marketing exclusivity. Immediately thereafter, the Company filed a request with the FDA to selectively waive its rights to the 180-day market exclusivity of its 300mg BPP to Impax Laboratories, Inc. (“Impax”), who had filed its own 300mg BPP under a separate ANDA with the FDA. Consequently, in partnership with Impax, Teva immediately commenced marketing the 300mg BPP and continued to market this product exclusively throughout the 180-day period. In June 2007, after the 180-day marketing exclusivity expired, the Company re-commenced its commercial marketing of the 300mg BPP under its own label. Under the terms of the 300mg Agreement, the Company was entitled to receive certain advance payments, a product launch payment and post-launch date payments aggregating $138 million provided certain agreement terms and contractual obligations are met and assuming certain adverse market events do not occur.

During 2009, the Company received the final payments totaling $12 million. Under the 300mg Agreement, the payments received in 2006 were subject to partial

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

repayment if certain adverse events occurred or the Company elected to sell its own 300mg BPP after the 180-day exclusivity period which would result in certain reduction of contract payments. The repayment was based upon a pro-rata formula over the 180-day exclusivity period. In February 2007, the Company entered into a settlement agreement with the brand company along with Teva and other related parties. As a result of the settlement, all of the contingencies to the receipt of payments and restrictions to sell the Company’s own 300mg BPP were eliminated and removed under the Settlement Agreement.

Distribution Partner

Pursuant to a Distribution and Supply Agreement (“150mg Agreement”) with Teva entered into in December 2006 and amended in February 2007, the Company provided Teva with exclusive rights to market and distribute the Company’s 150mg BPP for the first 180 days subsequent to the commercial launch of the product. Under the 150mg Agreement, Teva is to continue marketing and distributing the Company’s 150mg BPP under a non-exclusive arrangement for two and a half years subsequent to the commercial launch of the product, unless earlier terminated, as defined in the agreement.

Pursuant to the agreement, the Company is to supply fully finished and packaged products, which includes tablets packaged in bottles, prior to the commercial launch date and tablets in bulk form only, subsequent to the launch date. Teva is to reimburse the Company for manufacturing and packaging costs for pre-launch quantities delivered to Teva and for manufacturing costs only for post-launch quantities based on pre-defined terms in the agreement.

Furthermore, the Company is entitled to receive a share of the profits earned by Teva associated with the sale of its 150mg BPP. Profits are determined first based on gross sales earned by Teva less i) a deduction for product returns, cash discounts, rebates, and other sales allowances, ii) an estimate for pricing adjustments, shelf-stock adjustments and promotional payments, iii) reasonable estimates for chargebacks, and iv) a royalty paid to a third party in connection with marketing the product, to arrive at net sales. Next, net sales are reduced by manufacturing and packaging costs based on pre-defined formulas, to arrive at the profit. The Company’s profit split is then determined by applying the Company’s gross profit percentage to the profit. Teva’s estimates for price adjustments, shelf-stock adjustments, promotional payments, and chargebacks are subject to annual true-up by Teva based on a comparison of actual cash payments and credits issued to customers versus estimates previously reported.

Based on an analysis of the profit split reports and other information received from Teva and its own internal information, the Company makes adjustments, if deemed necessary, to recognize alliance revenue to be consistent with its other revenue recognition policies. The Company launched its 150mg BPP in May 2008 through its partnership with Teva and recorded approximately $3 million and $19 million of alliance revenue for the years ended December 31, 2010 and 2009, respectively.

In November 2008, after 180 days from the launch date, the Company commenced marketing and distributing its 150mg BPP directly to its customers. Revenue associated with these sales is recorded under product revenue.

Note 11 – Collaborative Arrangements

The Company has entered into various product licensing and development agreements. In some of these arrangements, the Company provides funding for the development of the product or to obtain rights to the use of the patent, through milestone payments, in exchange for marketing and distribution rights to the product. Milestones represent the completion of specific contractual events, and it is uncertain if and when these milestones will be achieved. Hence, the Company has not attempted to predict the period in which such milestones would possibly be incurred. In the event that all projects are successful, milestone and development payments of approximately $9.2 million would be paid subsequent to December 31, 2010.

Additionally, the Company has entered into product development agreements under which it has agreed to share in the development costs as they are incurred by its partners. As the timing of cash expenditures is dependent upon a number of factors, many of which are outside of the Company’s control, it is difficult to forecast the amount of payments to be made over the next few years, which could be significant.

Research and development expenses incurred under collaborative agreements were approximately $14.0 million and $4.4 million for the years ended December 31, 2010 and 2009, respectively. Included in these amounts were approximately $7.5 million and $0.9 million in nonrefundable milestone payments required under the

-23-

ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

agreements for the years ended December 31, 2010 and 2009, respectively. Additionally, the Company made a $3.0 milestone payment in 2009 which is refundable at the option of the Company if the product under the agreement is not approved by the FDA by December 31, 2011. The Company capitalized the milestone payment as an intangible asset on its consolidated balance sheet based on the future benefit associated with the payment. The Company will begin amortizing the intangible asset as research and development expenses in its statement of operations upon approval of the related product by the FDA.

Note 12 — Commitments and Contingencies

Legal Matters

The Company is involved in various litigation matters that arise from time to time in the ordinary course of business. The Company’s regular practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when losses are probable and reasonably estimable.

Cyclobezaprine Hydrochloride Litigation. In July 2009, the Company was named as defendants in a lawsuit in the United States District Court for the District of Delaware by Eurand, Inc. The litigation alleges that the Company proposed cyclobenzaprine hydrochloride extended-release drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. The trial was held in September 2010 and the Company is currently awaiting judgment. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Duloxetine Litigation. In August 2009, the Company was named as defendants in a lawsuit in the United States District Court for the Southern District of Indiana by Eli Lilly and Company. The litigation alleges that the Company’s proposed duloxetine extended-release drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. The case is pending and no trial date has been set. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Quetiapine Fumarate Litigation. In April 2010, the Company was named as defendants in a lawsuit by AstraZencca Pharmaceutical LP. The litigation alleges that the Company’s proposed quetiapine fumarate drug product, if marketed in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patent. The case is pending and a trial date is expected for October 2011. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Choline Fenofibrate Litigation. In June 2010, the Company was named as defendants in a lawsuit in the United States District Court for the District of New Jersey by Abbott Laboratories. The litigation alleges that the Company’s proposed choline fenofibrate delayed-release drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patent. The case is pending and no trial date has been set. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Doxercalciferol Litigation. In June 2010, the Company was named as defendants in a lawsuit in the United States District Court for the District of Delaware by Genzyme Corporation. The litigation alleges that the Company’s proposed doxercalciferol drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patent. The case is pending and no trial date has been set. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

-24-

ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Guanfacine Hydrochloride Litigation. In June 2010, the Company was named as defendants in a lawsuit by Shire LLC. The litigation alleges that the Company’s proposed guanfacine hydrochloride extended-release drug product in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. The case is pending and no trial date has been set. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Paricalcitol Litigation. In October 2010, the Company was named as defendants in a lawsuit in the United States District Court for the District of Delaware by the Wisconsin Alumni Research Foundation (“WARF”) and Abbott Laboratories (“Abbott”). The litigation alleges that the Company’s proposed paricalcitol drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on WARF’s patent (which is licensed exclusively to “Abbott”). The case is pending and no trial date has been set. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Other. The Company is a defendant in various other suits, claims and investigations that arise in the normal course of business. In the opinion of management the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Operating Leases

The Company leases its U.S. facilities and certain office equipment under agreements accounted for as operating leases. The Company’s manufacturing and administrative facility lease expires in March 2016, the research and development facility lease expires in August 2018, and the facility lease with warehouse and additional manufacturing capability expires in December 2017. Rent expense due under facility leases was $1,281,948 and $1,342,639 for the years ended December 31, 2010 and 2009, respectively. These amounts included rent expense from Anchen Taiwan of $28,827 from January 1 to March 30, 2010 for the year ended December 31, 2010 and $93,052 for the year ended December 31, 2009. As discussed in Note 3, the Company completed the spin-off of Anchen Taiwan on March 30, 2010.

Future minimum lease payments under non-cancelable operating leases at December 31, 2010 were as follows:


2011		$ 1,268,000
2012		1,291,000
2013		1,315,000
2014		1,321,000
2015		1,328,000
Thereafter		1,904,000
Total		$ 8,427,000

Note 13 — Investments and Fair Value

In 2009, the Company adopted the provisions of ASC 820 Fair Value Measurement with respect to only financial assets and liabilities. ASC 820 defines fair value, establishes the framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs. The standard describes a fair value hierarchy based on these levels of input, of which the first two are considered observable and the last is considered unobservable, that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

-25-

ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for the Company’s financial assets and liabilities measured at fair value:


	Level 1	Level 2	Level 3	Total
December 31, 2010
Cash	$ 7,609,463	$ -	$ -	$ 7,609,463
Cash equivalents	9,976,145	-	-	9,976,145
U.S. corporate debt securities	-	36,916,415	-	36,916,415
State and municipal obligations	-	12,870,013	-	12,870,013
Total cash and investments	$17,585,608	$49,786,428	$ -	$67,372,036


December 31, 2009
Cash	$69,749,494	$ -	$ -	$ 69,749,494
Cash equivalents	16,652,011	-	-	16,652,011
Certificates of deposit	-	250,113	-	250,113
U.S. corporate debt securities	-	13,107,458	-	13,107,458
State and municipal obligations	-	8,784,553	-	8,784,553
Total cash and investments	$86,401,505	$22,142,124	$ -	$108,543,629

Note 14 — Related Party Transactions

The Company contracts TWI Pharma to perform research and development related to generic drugs. As discussed in Note 3, the Company completed the spin-off of Anchen Taiwan on March 30, 2010. Contract research and development expenses of $697,092 charged to the Company by Anchen Taiwan from January 1 to March 30, 2010 were eliminated in consolidation. Subsequent to the spin-off date, contract research and development expenses charged to the Company by TWI Pharma were reflected in the Company’s consolidated financial statements. As the Company did not consolidate TWI Holding and its subsidiaries subsequent to spin-off, contract work performed by TWI Pharma were accounted for as related party transactions. Contract research and development expenses charged to the Company by TWI Pharma and reflected in the Company’s consolidated statement of operations under research and development expenses were $2,862,765 for the year ended December 31, 2010. Related expenses of $4,402,061 for the year ended December 31, 2009 were eliminated in consolidation.

The Company also purchases a portion of its raw materials from TWI Pharma under a contract manufacturing arrangement. Contract manufacturing expenses of $1,587,387 charged to the Company by Anchen Taiwan from January 1 to March 30, 2010 were eliminated in consolidation. Contract manufacturing expenses charged to the Company by TWI Pharma and reflected in the Company’s consolidated statement of operations were $7,543,949 for the year ended December 31, 2010. Related expenses of $5,349,444 for the year ended December 31, 2009 were eliminated in consolidation.

During 2010, the Company entered into an Asset Purchase Agreement with TWI Biotechnology, Inc. (“TWI Biotech”), a wholly-owned subsidiary of TWI Holding established subsequent to the spin-off of Anchen Taiwan. TWI Biotech was formed to develop branded products for the worldwide market. Pursuant to the agreement, TWI Biotech purchased certain intellectual property in connection with products which were under development by the Company. TWI Biotech acquired these assets at a purchase price of $2.4 million based on a valuation performed by an independent appraiser. The Company reflected the gain on the sale, net of associated expenses in other income (expense), net in its consolidated statement of operations for the year ended December 31, 2010.

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ANCHEN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2010, receivable from and payable to TWI Pharma were $720,379 and $1,549,071, respectively. As of December 31, 2009, receivable from and payable to TWI Pharma of $1,040,464 and $2,292,520, respectively, were eliminated in consolidation.

Exhibit 99.2

ANCHEN INCORPORATED

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

ANCHEN INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



			September 30, 2011	December 31, 2010

ASSETS
Current assets:
	Cash and cash equivalents		$ 72,859,440	$ 17,585,608
	Short-term investments		28,546,555	49,052,149
	Accounts receivable, net		16,524,195	32,281,345
	Receivable from affiliate		45,276	720,379
	Notes receivable		29,960,147	-
	Income tax receivable		-	5,892,591
	Inventories, net		12,745,389	12,752,101
	Deferred tax assets		8,480,666	3,520,161
	Prepaid expenses and other current assets		2,326,386	1,752,938
		Total current assets	171,488,054	123,557,272
Property, plant and equipment, net			27,995,742	30,482,715
Investment in affiliate			179,309	26,794,353
Investments			-	734,279
Intangible assets			3,000,000	3,000,000
Deferred tax assets			3,232,803	3,708,038
Other assets			183,883	204,012
		Total assets	$ 206,079,791	$ 188,480,669

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Trade accounts payable		$ 2,405,327	$ 2,200,278
	Payable to affiliate		365,709	1,549,071
	Customer deposits		-	2,081,570
	Income taxes payable		5,644,939	2,634,172
	Other current liabilities		21,340,197	11,799,063
		Total current liabilities	29,756,172	20,264,154
Notes payable			-	-
Other long-term liabilities			346,491	406,824
Deferred tax liabilities			-	2,472,911
		Total liabilities	30,102,663	23,143,889
Stockholders' equity:
	Common stock — par value $0.0001 per share
		Shares authorized: 30,000,000 as of September 30, 2011 and December 31, 2010;
		Shares issued: 24,166,142 and 26,166,058 as of September 30, 2011 and December 31, 2010, respectively	2,417	2,417
	Additional paid-in capital		26,541,875	24,577,563
	Treasury stock at cost: 236,181 and 231,756 shares as of September 30, 2011
		and December 31, 2010, respectively	(1,488,158)	(1,471,504)
	Retained earnings		150,960,658	142,195,607
	Accumulated other comprehensive income (loss)		(39,664)	32,697
		Total stockholders’ equity	175,977,128	165,336,780
		Total liabilities and stockholders' equity	$ 206,079,791	$ 188,480,669

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

- 2 -

ANCHEN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


			Nine Months Ended September 30,
			2011	2010
Revenue:
	Product revenue		$ 95,902,456	$ 41,079,361
	Alliance revenue		7,944,386	3,052,978
		Total revenue	103,846,842	44,132,339
Cost and expenses:
	Cost of product revenue		39,755,747	21,363,992
	Research and development		35,444,716	26,339,668
	Selling, general and administrative		16,986,092	9,200,128
		Total cost and expenses	92,186,555	56,903,788
Operating income (loss)			11,660,287	(12,771,449)
Interest income, net			858,713	732,990
Gain on sale of assets			3,203,430	2,355,809
Other expense			(485,866)	(560,525)
Income (loss) before income taxes			15,236,564	(10,243,175)
Income tax provision (benefit)			6,471,513	(3,053,849)
Net income (loss)			$ 8,765,051	$ (7,189,326)

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

- 3 -

ANCHEN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


					Nine Months Ended September 30,
					2011	2010
Cash flows from operating activities:
	Net income (loss)				$ 8,765,051	$ (7,189,326)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization			3,972,515	3,706,161

		Amortization of discount or premium on investments			431,337	500,774
		Stock-based compensation			11,036,064	522,492
		Deferred income taxes			(6,958,181)	(3,429,392)
		Loss on impairment of property and equipment			79,643	-
		Gain on sale of assets			(3,232,246)	(2,335,560)
		Inventory provision			2,015,223	545,461
		Changes in operating assets and liabilities:
			Accounts receivable		15,757,150	(1,855,389)
			Inventories		(2,008,511)	(965,021)
			Notes receivable		(142,817)	(3,145)
			Trade accounts payable		205,049	(427,221)
			Customer deposit		(2,081,570)	-
			Income taxes		8,903,358	1,902,412
			Payable to affiliate, net		(508,259)	796,278
			Other operating assets and liabilities, net		(55,580)	(5,643,885)
				Net cash provided by (used in) operating activities	36,178,226	(13,875,361)
Cash flows from investing activities:
	Capital expenditures				(1,654,185)	(3,406,599)
	Purchase of intangibles
	Purchase of investments
	Change in investments, net				20,766,135	(31,385,250)
	Proceeds from sale of assets
	Proceeds from sale of assets				-	2,355,809
	Notes receivable in connection with sale of long-term investment
	Investment in affiliate				-	(7,000,000)
	Net cash impact of spin-off				-	(10,818,967)
		Net cash provided by (used in) investing activities			19,111,950	(50,255,007)
Cash flows from financing activities:
	Change in short-term borrowing, net				-	(238,253)
	Restricted cash in connection with notes payable				-	469,505
	Issuance of common stock under employee stock plans				310	4,138
	Excess tax benefit (expense) from stock-based compensation				-	(14,647)
	Cash dividends paid				-	(895,677)
	Repurchase of common stock				(16,654)	(12,889)
		Net cash used in financing activities			(16,344)	(687,823)
Effect on cash and cash equivalents of changes in exchange rates					-	53,391
Net increase (decrease) in cash and cash equivalents					55,273,832	(64,764,800)
Cash and cash equivalents — beginning of period					17,585,608	85,932,000
Cash and cash equivalents — end of period					$ 72,859,440	$ 21,167,200

Supplemental disclosure of non-cash activity:
	Sale of investment in affiliate in exchange for note receivable (see Note 5)				29,817,330	-

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

- 4 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Description of Business

Anchen Incorporated was formed in December 2004. Anchen Incorporated and its subsidiaries (“the Company”), headquartered in Irvine, California, develops, manufactures and markets for sale and distribution specialty pharmaceutical products. The Company is focused on the development and commercialization of niche generic products. The Company utilizes its expertise in drug delivery and clinical affairs to develop high quality products, which are currently used by patients primarily in the United States of America (“U.S.”).

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2010, as certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying December 31, 2010 balance sheet was derived from the audited financial statements as of and for the year ended December 31, 2010. The accompanying condensed consolidated financial statements are unaudited, but reflect all adjustments of a normal recurring nature necessary to fairly present the Company’s consolidated financial position and the related results of operations and cash flows for the periods presented. The related results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations and cash flows that the Company may achieve in future periods or in full fiscal years. The condensed consolidated financial statements include the accounts of wholly-owned subsidiaries, after elimination of intercompany accounts and transactions.

Subsequent Events

The Company has evaluated subsequent events through January 24, 2012, the date the financial statements were issued.

Use of Estimates

Management is required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with generally accepted accounting principles. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Company’s most significant estimates relate to the determination of sales returns and allowances for accounts receivable and accrued liabilities, valuation of inventory balances, valuation allowance on deferred tax assets and other long-lived assets for impairment. The estimation process required to prepare the Company’s condensed consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. The Company’s actual results could differ materially from those estimates.

Fair Value of Other Financial Instruments

Inventories

Inventories consist of finished goods held for sale and distribution, raw materials and work in process. Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). The Company writes down inventories to net realizable value based on forecasted demand and market conditions, which may differ from actual results. For the nine months ended September 30, 2011 and 2010, cost of product revenue includes a charge of approximately $2.0 million and $0.5 million, respectively, related to write downs of inventory which the Company

- 5 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

does not expect to sell. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory.

Property, Plant and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. The Company recorded $3,972,515 and $3,706,161 of depreciation expense in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2011 and 2010, respectively. These amounts included depreciation expense from Anchen Taiwan of $312,210 from January 1 to March 30, 2010 for the nine months ended September 30, 2010. As discussed in Note 3, the Company completed the spin-off of Anchen Taiwan on March 30, 2010.

Revenue Recognition

Alliance revenue includes profit splits from a third party distributor of one of the Company’s products. Pursuant to an agreement with Teva Pharmaceutical Industries, Ltd. (“Teva”), the Company receives payments based on a percentage of the profits associated with the sale of such product. Teva calculates the Company’s profit split by first deducting from gross sales earned by Teva i) estimates of provisions for product returns, cash discounts, rebates, and other sales allowances based on a pre-defined formula, ii) estimates for price adjustments, shelf-stock adjustments, promotional payments, and chargebacks, and iii) royalties paid to a third party in connection with marketing the product, to arrive at net sales, next reducing net sales by manufacturing and packaging costs based on pre-defined formulas, to arrive at the profit, and then applying the Company’s gross profit percentage to the profit. Teva’s estimates for price adjustments, shelf-stock adjustments, promotional payments, and chargebacks are subject to annual true-up by Teva based on a comparison of actual cash payments and credits issued to customers versus estimates previously reported. Based on an analysis of the profit split reports and other information received from Teva and its own internal information, the Company makes adjustments, if deemed necessary, to recognize alliance revenue to be consistent with its other revenue recognition policies.

Income Taxes

The Company uses the asset and liability approach in accounting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. Such deferred income tax assets and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Share-Based Compensation

Effective for years beginning after December 15, 2005, Accounting Standards Codification (“ASC”) 718 Stock–Compensation, requires the use of the fair value method for stock-based compensation awards. Equity-settled stock-based compensation cost is measured on the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. In 2011, we granted stock appreciation rights (“SARs”) which, with certain exceptions, vest two-thirds immediately and one-third one year from grant date. The SAR awards are settled in cash and/or stock at the Company’s sole discretion and accordingly, are classified as liability

- 6 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

awards and reported within accrued expenses and other current liabilities on the condensed consolidated balance sheet. SARs entitle employees to receive a cash amount determined by the fair value of our common stock. The fair values of these awards are remeasured at each reporting period (marked to market) until the awards are paid. Fair value fluctuations are recognized as cumulative adjustments to share-based compensation expense and the related liabilities. Share-based compensation expense for unvested SAR awards are recognized ratably over the service period.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance designed to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles and requires additional disclosures about fair value measurements. This new guidance is effective for fiscal years beginning after December 15, 2011. The Company does not anticipate the adoption of this new guidance will have a material impact on the financial statements other than requiring additional disclosures.

In June 2011, the FASB issued new guidance which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, the Company will be required to present either a continuous statement of net income (loss) and other comprehensive income (loss) or present two separate but consecutive statements. This new guidance is effective for non-public entities for fiscal years ending after December 15, 2012 and interim and annual periods thereafter. The Company does not anticipate the adoption of this new guidance will have a material impact on the financial statements as it will only require revising the manner in which comprehensive income is presented in the financial statements..

Note 3 — Corporate Reorganization

Anchen Taiwan Spin-off

On March 30, 2010, the Company completed the spin-off of Anchen Taiwan, a wholly-owned subsidiary, in order to separate the Company’s United States and Taiwan businesses into two independent companies. Prior to the separation, the Company invested $12.1 million in Anchen Taiwan in exchange for newly issued shares of common stock of Anchen Taiwan. Pursuant to the Contribution Agreement, the Company then transferred all of its Anchen Taiwan shares to TWI Pharmaceuticals Holding, Inc. (“TWI Holding”, formerly Anchen Laboratories International, Inc.), the Company’s wholly-owned subsidiary in the Cayman Islands. In exchange, the Company received 198,000 shares of TWI Holding preferred stock and 25,576,195 shares of TWI Holding ordinary stock.

The business separation was achieved by a pro rata distribution of TWI Holding ordinary stock and a cash dividend to all of the Company’s stockholders of record. The total cash dividend of $895,686 was intended to fund U.S. tax applicable to the stock and cash dividends. Immediately following the separation, each stockholder owned an equal number of shares of both the Company and TWI Holding. The Company’s ownership comprised of the original 500,000 shares that it held in TWI Holding prior to the Contribution Agreement plus 1,643,118 shares retained to satisfy the total potential future obligation of its stock option holders. The Company adjusted the terms of all outstanding stock options in order to reflect the separation and preserve the value of the outstanding options. All outstanding option awards and the related option plans were amended to provide that upon exercise, each option will be entitled to receive one share of the Company’s stock and one ordinary share of TWI Holding.

As was contemplated under the reorganization plan, in May 2010 subsequent to the business separation, the Company invested $7.0 million in TWI Holding in exchange for 70,000 additional shares of TWI Holding preferred stock. TWI Holding’s capitalization immediately following the separation and the $7.0 million cash investment represented 268,000 shares of TWI Holding 8.25 % cumulative preferred stock having a stated value of $100 per share and an aggregate value of $26.8 million and 26,076,195 TWI Holding ordinary shares with an attributable per share value of $0.087 and an aggregate value of $2.3 million. The Company’s stockholders held 92% of TWI Holding’s ordinary stock, and the Company held the remaining 8%. The Company held 100% of TWI Holding’s preferred stock. The Company’s ownership in TWI Holding’s preferred stock and ordinary stock represented 93% of the aggregate value of TWI Holding. The Company’s stockholders’ ownership represented the remaining 7% of

- 7 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the aggregate value of TWI Holding.

Immediately following the business separation, Anchen Taiwan was renamed TWI Pharmaceuticals, Inc. (“TWI Pharma”). Post reorganization, TWI Pharma operates as a related party of the Company (see Note 14).

Variable Interest Entity

At the time of the spin-off, the Company evaluated the applicability of ASC 810, the accounting guidance that addresses Variable Interest Entities (“VIEs”). An entity is deemed a VIE if it is one in which, by design, equity investors do not have sufficient equity at risk to enable the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack i) the power through voting or similar rights to direct the activities of an entity that most significantly impact its economic performance, ii) the obligation to absorb the entity's expected losses, or iii) the right to receive the entity's expected residual returns. A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company assesses whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and continuously thereafter.

As a result of the evaluation, the Company concluded that TWI Holding is a VIE, and the Company’s investment in TWI Holding’s ordinary and preferred stock represent variable interests. However, the Company concluded that it is not the primary beneficiary, as i) there are variable interest holders of TWI Holding who are considered related parties for purposes of applying this accounting guidance and ii) the controlling financial interest in TWI Holding is held by the majority ordinary shareholder who is most closely associated with TWI Holding. Accordingly, the Company is not the primary beneficiary of TWI Holding and did not include TWI Holding and its subsidiaries in its condensed consolidated financial statements as of December 31, 2010 and for the period subsequent to March 30, 2010, the spin-off date through December 31, 2010. As described in Note 5, on August 24, 2011, the Company sold all of its shares of TWI Holding preferred stock. Upon evaluation of this reconsideration event, the Company concluded that TWI Holding consequently no longer met the criteria of a VIE. Accordingly, the Company continued its treatment of excluding TWI Holding and its subsidiaries in its condensed consolidated financial statements as of and for the nine months ended September 30, 2011.

Financial Statement Impact

The Company’s Investment in Affiliate (TWI Holding) as of December 31, 2010 is stated on a cost basis at approximately $26.8 million, which approximates fair value. The fair value was determined on the basis of discounting expected future cash inflows to their present value at rates commensurate with the risk of realizing such cash inflows as well as through review of comparable transactions and companies. The preferred shares have a par value of $0.01 per share and a stated value of $100 per share. Dividends on the preferred stock are cumulative and accrue at an annual rate of 8.25% of the stated value and accrue whether or not declared. As of December 31, 2010, cumulative dividends on the preferred shares were approximately $1.6 million, which had not been declared and accordingly was not recognized in the condensed consolidated financial statements for 2010.

As a result of the Company’s evaluation of TWI Holding as a VIE and the spin-off of Anchen Taiwan, the Company does not include in its consolidated financial statements the balance sheet of Anchen Taiwan and Anchen Taiwan’s related statement of operations, stockholders’ equity and comprehensive income, and cash flows for the period subsequent to March 30, 2010, the spin-off date. Following the spin-off of Anchen Taiwan, the Company recorded a reduction to retained earnings of $0.5 million after accounting for the elimination of Anchen Taiwan’s assets and liabilities and accounting for the investment in TWI Holding. As the Company determined that it was not required to consolidate Anchen Taiwan in its financial statements subsequent to March 30, 2010 as a result of the spin-off of Anchen Taiwan on March 30, 2010, the Company charged the currency translation adjustments balance of $37,967 in accumulated other comprehensive loss as of the spin-off date to retained earnings.

The following table presents the assets and liabilities of Anchen Taiwan as of March 30, 2010, the spin-off date:

- 8 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


			March 30, 2010

Current assets:
	Cash and cash equivalents		$ 10,818,970
	Restricted cash		-
	Accounts receivable, net		239,753
	Notes receivable		456,752
	Inventories		1,137,254
	Prepaid expenses and other current assets		258,232
		Total current assets	12,910,961
Property, plant and equipment, net			12,473,826
Other assets			119,503
		Total assets	$ 25,504,290

Current liabilities:
	Credit facility		$ 630,318
	Current portion of notes payable		1,076,128
	Trade accounts payable		1,306,819
	Other current liabilities		183,231
		Total current liabilities	3,196,496
Notes payable			2,494,595
		Total liabilities	$ 5,691,091

The Company determined that the spin-off of Anchen Taiwan did not meet the criteria required for discontinued operations treatment in the Company’s condensed consolidated financial statements since the Company continues to have significant cash outflows in connection with contract research and manufacturing activities performed by TWI Pharma (formerly Anchen Taiwan) on behalf of the Company.

The Company’s consolidated statement of operations for the year ended December 31, 2010 includes a loss from operations of $1,469,736 and a net loss of $1,501,256 from Anchen Taiwan through March 30, 2010, the spin-off date.

- 9 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 — Investments

The amortized cost and estimated fair value of securities available-for-sale, by type, are as follows:


	September 30, 2011			December 31, 2010
	Amortized Cost	Gross Unrealized Gains	Estimated Fair Value	Amortized Cost	Gross Unrealized Gains	Estimated Fair Value
Debt Securities
U.S. corporate	$17,454,700	$(49,454)	$17,405,246	$36,884,011	$ 32,404	$36,916,415
State and municipal	10,381,518	9,283	10,390,801	12,870,000	13	12,870,013
Certificates of deposit	750,000	508	750,508	-	-	-
Total available-for-sale securities	$28,586,218	$(39,663)	$28,546,555	$49,754,011	$ 32,417	$49,786,428

Amounts included in:
Short-term investments	$28,586,218	$(39,663)	$28,546,555	$49,027,382	$ 24,767	$49,052,149
Investments	-	-	-	726,629	7,650	734,279
Total available-for-sale securities	$28,586,218	$(39,663)	$28,546,555	$49,754,011	$ 32,417	$49,786,428

Note 5 — Note Receivable

On August 24, 2011, the Company sold its 198,000 shares of TWI Holding preferred stock for $29,817,330 to an entity controlled by Chih-Ming Chen, Ph.D. (“Dr. Chen”), the Company’s principal shareholder, in exchange for a promissory note which accrues interest at 4.725 percent per annum. In August 2011, the Company recognized a gain of $3.2 million in connection with the sale. On the Company’s condensed consolidated balance sheet as of September 30, 2011, the amount of the promissory note was reflected as a current note receivable of $29,960,147 which included related interest receivable of $142,817.

- 10 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 — Other Balance Sheet Components


	September 30,	December 31,
	2011	2010
Inventories, net:
Raw materials	$4,201,230	$3,672,767
Work-in-process	653,212	566,111
Finished goods	7,890,947	8,513,223
Total	$12,745,389	$12,752,101


	September 30,	December 31,
	2011	2010
Accounts receivable, net:
Gross accounts receivable	$26,127,287	$36,216,531
Less: allowance for bad debts	100,000	94,889
Less: allowance for stock adjustments, chargebacks, and other sales adjustments	9,503,092	3,840,297
Total	$16,524,195	$32,281,345


	September 30,	December 31,
	2011	2010
Property, land and equipment, net:
Machinery and equipment	$23,381,008	$21,428,429
Furniture and fixtures	3,446,977	3,229,451
Automotive	93,235	93,235
Leasehold improvements	19,043,952	17,770,793
Construction in progress	897,969	2,893,271
	46,863,141	45,415,179
Less: accumulated depreciation and amortization	18,867,399	14,932,464
Total	$27,995,742	$30,482,715


	September 30,	December 31,
	2011	2010
Other current liabilities:
Share-based compensation obligation	$9,072,062	$ -
Payable to licensor	3,130,507	4,344,498
Payable to collaboration partner	631,352	1,855,738
Payable to distributor	-	1,797,481
Other accrued expenses	8,506,276	3,801,346
Total	$21,340,197	$11,799,063

- 11 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 — Income Taxes

The Company’s effective tax rate for the nine months ended September 30, 2011 was 42.5%. The effective tax rate for the nine months ended September 30, 2011 is higher than the statutory rate primarily due to the increase in the valuation allowance of $1.1 million during the nine months ended September 30, 2011. The valuation allowance increased due to tax law changes enacted for the 2011 tax year resulting in deferred tax assets not expected to be realized related to the Company’s California research and development tax credit.

On January 1, 2009, the Company adopted ASC 740, Income Taxes, which among other things, clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. In 2010, the Internal Revenue Service, and the States of California, Pennsylvania, and Ohio initiated audits of the Company’s consolidated income tax returns for 2007 and 2008. Additionally, in March 2011, the Internal Revenue Service initiated an audit of the Company’s 2009 consolidated income tax return. The Company considered the impact of these audits in evaluating its reserves for income tax uncertainties.

Unrecognized tax benefits of $2,382,471 reflected in the Company’s condensed consolidated balance sheet as of December 31, 2010 includes penalties and interest of $185,365. Unrecognized tax benefits of $2,382,471 as of December 31, 2010 include items totaling $679,639, which do not have an impact on the effective tax rate. The remaining balance of unrecognized tax benefits of $1,702,832 as of December 31, 2010 has an impact on the effective tax rate.

Unrecognized tax benefits of $1,966,928 reflected in the Company’s condensed consolidated balance sheet as of September 30, 2011 includes penalties and interest of $198,089. The provision for income tax of $6,471,513 reflected in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2011 includes penalties and interest of $12,724. Unrecognized tax benefits of $1,966,928 as of September 30, 2011 include items totaling $679,639, which do not have an impact on the effective tax rate. The remaining balance of unrecognized tax benefits of $1,287,289 as of September 30, 2011 has an impact on the effective tax rate.

The Company believes it is reasonably possible that unrecognized tax benefits may decrease by approximately $111,847 exclusive of penalties and interest, in the upcoming year as a result of ongoing federal and state tax examinations that are expected to be settled, as well as voluntary disclosure agreements entered into with state tax authorities. In addition, it is reasonably possible that the unrecognized tax benefits may increase as a result of tax positions that the Company may take in the upcoming year.

The Company files income tax returns in the U.S. federal jurisdiction and multiple state jurisdictions. The federal tax return for 2007 and subsequent years are open for examination. In addition, the state income tax returns generally have statute of limitations ranging from three to four years.

Note 8 — Stock Compensation Plans and Other Employee Benefits

Concurrent with the spin-off of Anchen Taiwan as described in Note 3, the Company amended all outstanding options as of the record date of March 12, 2010 through issuance and approval of a supplement to all outstanding option plans and option agreements such that upon exercise of an option, the optionee received one share of common stock of the Company and one ordinary share of TWI Holding. This adjustment was intended to reflect the reorganization and preserve the value of all outstanding options as required by each of the relevant plan documents. The Company performed an evaluation of the modification, noting that such modification did not result in a change in the fair value of outstanding options and no incremental compensation was recorded.

- 12 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock Compensation Plans

The Company has adopted various equity incentive plans which permit the granting of stock options, restricted stock awards, restricted stock units (“RSUs”) and SARs, which are intended to attract and retain qualified management, key employees and certain non-employee consultants and aligns stockholder and employee interests. The following is a discussion of some of the key features of each stock compensation plan including fair value assumptions, vesting periods, summary plan descriptions and activity under each plan for the year ended December 31, 2010 and nine months ended September 30, 2011.

Stock Option Plans

Under the Company’s stock option plans, stock option awards vest over a one to five-year period, expire no later than ten years from the date of grant, and are granted at prices not less than the fair market value of the Company’s common stock at the grant date.

Risk-Free Interest Rate. The risk-free rate is based on the return of the U.S. Treasury Note at the time of grant with remaining terms equivalent to the expected term of the option grants.

Expected Dividends. The Company does not expect to declare or pay future dividends on its common stock. Accordingly a zero dividend yield was used in the valuation.

Forfeitures. The expected forfeiture of unvested options was based on historical forfeitures of options. The forfeiture rate was estimated at 15.0%. Since the options were unvested as of their respective grant dates, the 15.0% forfeiture rate and weighted average vesting period were used to estimate the total number of stock options expected to vest.

In order to determine the fair value of each option grant in the nine months ended September 30, 2010 the Company employed the following weighted-average valuation assumptions:


	2010
Stock option plan:
Expected stock price volatility	40%
Risk free interest rate	1.7%
Expected term of options	6.2 years

No stock options were granted during the nine months ended September 30, 2011.

- 13 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.

The following table summarizes the stock option activity under all plans:


	Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term
Outstanding at December 31, 2009	1,643,736	$4.32
Granted	37,500	7.66
Exercised	(1,225)	3.38
Forfeited or expired	(103,689)	5.13
Outstanding at December 31, 2010	1,576,322	$4.34
Granted	-	-
Exercised	(84)	3.77
Forfeited or expired	(52,462)	4.97
Outstanding at September 30, 2011	1,523,776	$4.32	See below

Upon close of the merger on November 17, 2011, all outstanding options fully vested (refer to Note 15 – Subsequent Event).

Restricted Stock Awards


	Restricted Shares	Weighted-Average Grant Date Fair Value

Nonvested restricted stock awards at December 31, 2009	79,998	$5.51
Granted	-	-
Vested	(34,999)	5.51
Forfeited	-	-
Nonvested restricted stock awards at December 31, 2010	44,999	$5.51
Granted	-	-
Vested	-	-
Forfeited	-	-
Nonvested restricted stock awards at September 30, 2011	44,999	$5.51

These restricted stock awards, which were granted pursuant to the 2008 Equity Incentive Plan, vest annually over three to four years and are granted at prices not less than the fair market value of the Company’s common stock at the grant date. The Company recognizes compensation expense ratably over the vesting periods signifying the employee’s completion of continuous service. Deferred compensation in connection with the Company’s grant of these restricted stock awards as of September 30, 2011 was $103,312.

- 14 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RSUs

The Company granted RSUs to certain key employees during the second quarter of 2011. These RSUs, which were granted pursuant to the 2008 Equity Incentive Plan, vest at the earlier of 13 months from grant date or immediately prior to any change in control, as defined in the Restricted Share Unit Agreement. At September 30, 2011, 567,570 nonvested RSU’s were outstanding.

SARs

The Company granted SARs to certain employees during the first and second quarters of 2011. The following table summarizes SAR activity for the nine month period ended September 30, 2011:


	SARs	Weighted-Average Grant Date Fair Value	Aggregate Intrinsic Value

Granted	829,147	$7.57
Vested	(499,444)	7.57
Forfeited	(4,167)	7.57
Nonvested SARs at September 30, 2011	325,536	$7.57	$6,552,700


Vested unexercised SARs at September 30, 2011	499,444		$7.57		$4,271,000

The total grant-date fair value of SAR awards granted in 2011 was approximately $6,277,000. As of September 30, 2011, unrecognized compensation costs related to non-vested SARs was approximately $1,800,000.

Post-Retirement Benefit Plan

Anchen Taiwan has a non-domestic pension plan, which is funded in accordance with applicable local laws and regulations. Pension costs from January 1 to March 31, 2010, the Anchen Taiwan spin-off date, were approximately $33,000. Subsequent to the spin-off of Anchen Taiwan as discussed in Note 3, the Company ceased incurring costs associated with the non-domestic pension plan.

Note 9 – Stockholders’ Equity

A summary of the changes in stockholders equity for the nine months ended September 30, 2011 consisted of the following:



Stockholders' equity, December 31, 2010		$ 165,336,780
	Net income	8,765,051
	Other comprehensive loss	(72,361)
	Share-based compensation expense (1)	1,964,002
	Repurchase of treasury shares	(16,654)
	Common stock issued under equity incentive plan	310
Stockholders' equity, September 30, 2011		$ 175,977,128

(1)

Share-based compensation expense included above includes equity-settled awards only.

Accumulated Other Comprehensive Income (Loss)

The Company reports items required to be recognized under GAAP as components of comprehensive income (loss), including unrealized gains and losses on available-for-sale securities and currency translation adjustments in stockholders’ equity in its condensed consolidated financial statements.

- 15 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The functional currency of Anchen Taiwan, is its local currency. Accordingly, all assets and liabilities of its foreign operations are translated to U.S. dollars at the rate in effect at the balance sheet date, and revenues and expenses are translated to U.S. dollars at the average rate in effect during the period. The gains and losses from the translation of the subsidiary’s financial statements into U.S. dollars are recorded directly into accumulated other comprehensive income (loss). Currency transaction gains and losses are included in the Company’s results of operations. As discussed in Note 3, the Company determined that it was not required to consolidate Anchen Taiwan in its condensed consolidated financial statements subsequent to March 30, 2010 as a result of spinning off Anchen Taiwan. Accordingly, the Company charged the currency translation adjustments balance in accumulated other comprehensive loss as of the spin-off date to retained earnings.

The components of comprehensive income for the nine months ended September 30, 2011 and 2010 consisted of the following:


			Nine Months Ended September 30,
			2011	2010

Net income (loss) attributable to common shareholders			$ 9,586,569	$ (7,189,326)
Other comprehensive loss:
		Unrealized (loss) gain on investments	(72,361)	32,460
	Total other comprehensive (loss) gain		(72,361)	32,460
Total comprehensive income (loss)			$ 9,514,208	$ (7,156,866)

Note 10 – Marketing and Distribution Arrangement

Pursuant to the 150mg Agreement, the Company is to supply fully finished and packaged products, which includes tablets packaged in bottles, prior to the commercial launch date and tablets in bulk form only, subsequent to the launch date. Teva is to reimburse the Company for manufacturing and packaging costs for pre-launch quantities delivered to Teva and for manufacturing costs only for post-launch quantities based on pre-defined terms in the agreement.

Based on an analysis of the profit split reports and other information received from Teva and its own internal information, the Company makes adjustments, if deemed necessary, to recognize alliance revenue to be consistent with its other revenue recognition policies. The Company launched its 150mg BPP in May 2008 through its partnership with Teva and recorded approximately $7.9 million and $3.0 million of alliance revenue for the nine months ended September 30, 2011 and 2010, respectively.

- 16 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Collaborative Arrangements

Research and development expenses incurred under collaborative agreements were approximately $10.8 million and $7.1 million for the nine months ended September 30, 2011 and 2010, respectively. Included in these amounts were approximately $1.5 million and $3.3 million in nonrefundable milestone payments required under the agreements for the nine months ended September 30, 2011 and 2010, respectively. Additionally, the Company made a $3.0 milestone payment in 2009 which is refundable at the option of the Company if the product under the agreement is not approved by the FDA by December 31, 2011. The Company capitalized the milestone payment as an intangible asset on its consolidated balance sheet based on the future benefit associated with the payment.

Note 12 — Commitments and Contingencies

Legal Matters

Cyclobenzaprine Hydrochloride Litigation. In July 2009, the Company was named as defendants in a lawsuit in the United States District Court for the District of Delaware by Eurand, Inc. The litigation alleges that the Company’s proposed cyclobenzaprine hydrochloride extended-release drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. The trial was held in September 2010 and the Company is currently awaiting judgment. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Quetiapine Fumarate Litigation. In April 2010, the Company was named as defendants in a lawsuit by AstraZeneca Pharmaceutical LP. The litigation alleges that the Company’s proposed quetiapine fumarate drug product, if marketed in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patent. The bench trial date was completed in October 2011and the Company is awaiting the judgment by the court. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

- 17 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Doxercalciferol Litigation. In June 2010, the Company was named as defendants in a lawsuit in the United States District Court for the District of Delaware by Genzyme Corporation. The litigation alleges that the Company’s proposed doxercalciferol drug product, if marketed and sold in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patent. The trial has been completed, but is awaiting decision from the court.. The case is complex and the court still needs to conduct factual inquiries and findings of fact; the Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Guanfacine Hydrochloride Litigation. In June 2010, the Company was named as defendants in a lawsuit by Shire LLC. The litigation alleges that the Company’s proposed guanfacine hydrochloride extended-release drug product in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. A markman hearing has been fully briefed and the Company is awaiting a decision from the court.. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Dexlansoprazole Litigation. In April 2011, the Company was named as defendants in a lawsuit by Takeda Pharmaceuticals North America, Inc. The litigation alleges that the Company’s proposed dexlansoprazole drug product, if marketed in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. A hearing is set for February 2012. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Carvedilol Phosphate Litigation. In September 2011, the Company was named as defendants in a lawsuit by Flamel Technologies S.A. The litigation alleges that the Company’s proposed carvedilol phosphate drug product, if marketed in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. The Complaint has not been served with the complaint and accordingly no court date has been set.. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Naproxen and Esomeprazole Magnesium Litigation. In October 2011, the Company was named as defendants in a lawsuit by AstraZeneca Pharmaceutical LP. The litigation alleges that the Company’s proposed naproxen and esomeprazole magnesium drug product, if marketed in the United States in accordance with the Company’s ANDA filed with the U.S FDA, would infringe on their patents. The Complaint has not been served with the complaint and accordingly no court date has been set.. The Company believes that there is currently no risk or range of potential loss to the Company arising from this litigation and that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Note 13 — Investments and Fair Value

- 18 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

maximize the use of observable inputs. The standard describes a fair value hierarchy based on these levels of input, of which the first two are considered observable and the last is considered unobservable, that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for the Company’s financial assets and liabilities measured at fair value:


	Level 1	Level 2	Level 3	Total
September 30, 2011
Cash	$32,023,313	$ -	$ -	$32,023,313
Cash equivalents	40,836,127	-	-	40,836,127
U.S. corporate debt securities	-	17,405,246	-	17,405,246
State and municipal obligations	-	10,390,801	-	10,390,801
Certificates of deposit	-	750,508	-	750,508
Total cash and investments	$72,859,440	$28,546,555	$ -	$101,405,995


December 31, 2010
Cash	$ 7,609,463	$ -	$ -	$ 7,609,463
Cash equivalents	9,976,145	-	-	9,976,145
U.S. corporate debt securities	-	36,916,415	-	36,916,415
State and municipal obligations	-	12,870,013	-	12,870,013
Total cash and investments	$17,585,608	$49,786,428	$ -	$67,372,036

Note 14 — Related Party Transactions

The Company contracts with TWI Pharma to perform research and development related to generic drugs. As discussed in Note 3, the Company completed the spin-off of Anchen Taiwan on March 30, 2010. Contract research and development expenses of $697,092 charged to the Company by Anchen Taiwan from January 1 to March 30, 2010 were eliminated in consolidation. Subsequent to the spin-off date, contract research and development expenses charged to the Company by TWI Pharma were reflected in the Company’s consolidated financial statements. As the Company did not consolidate TWI Holding and its subsidiaries subsequent to spin-off, contract work performed by TWI Pharma were accounted for as related party transactions. Contract research and development expenses charged to the Company by TWI Pharma and reflected in the Company’s consolidated statement of operations under research and development expenses were $0.7 million and $1.2 million for the nine months ended September 30, 2011 and 2010, respectively.

The Company also purchases a portion of its raw materials from TWI Pharma under a contract manufacturing arrangement. Contract manufacturing expenses of $1,587,387 charged to the Company by Anchen Taiwan from January 1 to March 30, 2010 were eliminated in consolidation. Contract manufacturing expenses charged to the Company by TWI Pharma and reflected in the Company’s consolidated statement of operations were $5.6 million and $4.0 million for the nine months ended September 30, 2011 and 2010, respectively.

- 19 -

ANCHEN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Biotech purchased certain intellectual property in connection with products which were under development by the Company. TWI Biotech acquired these assets at a purchase price of $2.4 million based on a valuation performed by an independent appraiser. The Company reflected the gain on the sale, net of associated expenses in gain on sale of assets in its consolidated statement of operations for the nine months ended September 30, 2010.

As of September 30, 2011, receivable from and payable to TWI Pharma were $45,276 and $365,709, respectively. As of December 31, 2010, receivable from and payable to TWI Pharma were $720,379 and $1,549,071, respectively.

On August 24, 2011, the Company sold its 198,000 shares of TWI Holding preferred stock for $29,817,330 to an entity controlled by Chih-Ming Chen, Ph.D. (“Dr. Chen”), the Company’s principal shareholder, in exchange for a promissory note which accrues interest at 4.725 percent per annum (see Note 5). In August 2011, the Company recognized a gain of $3.2 million in connection with the sale. On the Company’s condensed consolidated balance sheet as of September 30, 2011, the principal amount of the promissory note was reflected as a current note receivable of $29,960,147 which included related interest receivable of $142,817.

Note 15 — Subsequent Event

On November 17, 2011, the Company was acquired by Par Pharmaceutical, Inc. (“Par”), a wholly-owned subsidiary of Par Pharmaceutical Companies, Inc. Pursuant to the Agreement and Plan of Merger, dated as of August 23, 2011, as amended (the “Merger Agreement”), and the Agreement and Amendment to Merger Agreement, dated November 17, 2011, Par paid approximately $412.8 million, for all of the issued shares of stock of the Company. This consideration was exclusive of the amount of cash and indebtedness held by the Company as of the date of closing. Pursuant to the Merger Agreement, the Company was required to dispose of certain assets and settle certain liabilities prior to the close, including but not limited to all assets and obligations related to the Company’s remaining interest in TWI Holdings, as discussed in Note 3 and Note 5; disposition of certain product rights; transaction expenses incurred by the Company prior to the closing; certain benefits liabilities; and fees associated with the Company’s Securityholders’ Representative. In addition, an amount was deposited with PNC Bank, N.A. as escrow agent, to fund certain post-closing liabilities. Certain aspects of the consideration are subject to further post-closing adjustment.

- 20 -


Delaware	File Number 1-10827	22-3122182
(State or other jurisdiction of	(Commission File Number)	(I.R.S. Employer
incorporation or organization)		Identification No.)


300 Tice Boulevard, Woodcliff Lake, NJ	07677
(Address of principal executive offices)	(Zip Code)



Exhibit No.		Description
2.1*		Agreement and Plan of Merger dated as of August 23, 2011 between Par Pharmaceutical, Inc. and Admiral Acquisition Corp., on the one hand, and Anchen Incorporated and Chih-Ming Chen, Ph.D., as securityholders’ representative, on the other hand.


2.2**		Agreement and Amendment to Agreement and Plan of Merger entered into as of November 17, 2011 between Par Pharmaceutical, Inc. and Admiral Acquisition Corp., on the one hand, and Anchen Incorporated and Chih-Ming Chen, Ph.D., as securityholders’ representative, on the other hand.
10.1*		Voting Agreement between Par Pharmaceutical, Inc. and Chih-Ming Chen, Ph.D.
10.2**		Credit Agreement, dated as of November 17, 2011, by and among Par Pharmaceutical Companies, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank National Association and PNC Bank National Association as Co-Syndication Agents, DNB NOR Bank ASA and SunTrust Bank as Co-Documentation Agents, and J.P. Morgan Securities LLC, U.S. Bank National Association and PNC Bank Capital Markets LLC as Joint Lead Arrangers.


23.1		Consent of Melby and Meador Accountancy Corp.
99.1		The audited Consolidated Financial Statements of Anchen listed in Item 9.01 (a) above.
99.2		The unaudited Condensed Consolidated Financial Statements of Anchen listed in Item 9.01 (a) above.
99.3		Unaudited pro forma condensed combined financial information listed in item 9.01 (b) above.



Exhibit No.		Description
2.1*		Agreement and Plan of Merger dated as of August 23, 2011 between Par Pharmaceutical, Inc. and Admiral Acquisition Corp., on the one hand, and Anchen Incorporated and Chih-Ming Chen, Ph.D., as securityholders’ representative, on the other hand.


2.2**		Agreement and Amendment to Agreement and Plan of Merger entered into as of November 17, 2011 between Par Pharmaceutical, Inc. and Admiral Acquisition Corp., on the one hand, and Anchen Incorporated and Chih-Ming Chen, Ph.D., as securityholders’ representative, on the other hand.
10.1*		Voting Agreement between Par Pharmaceutical, Inc. and Chih-Ming Chen, Ph.D.
10.2**		Credit Agreement, dated as of November 17, 2011, by and among Par Pharmaceutical Companies, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank National Association and PNC Bank National Association as Co-Syndication Agents, DNB NOR Bank ASA and SunTrust Bank as Co-Documentation Agents, and J.P. Morgan Securities LLC, U.S. Bank National Association and PNC Bank Capital Markets LLC as Joint Lead Arrangers.


23.1		Consent of Melby and Meador Accountancy Corp.
99.1		The audited Consolidated Financial Statements of Anchen listed in Item 9.01 (a) above.
99.2		The unaudited Condensed Consolidated Financial Statements of Anchen listed in Item 9.01 (a) above.
99.3		Unaudited pro forma condensed combined financial information listed in item 9.01 (b) above.


	Years Ended December 31,
	2010	2009
Revenue:
Product revenue	$ 77,612,283	$ 46,541,411
Alliance revenue	3,356,820	18,920,538
Total revenue	80,969,103	65,461,949
Cost and expenses:
Cost of product revenue	35,027,802	22,653,130
Research and development	38,266,490	30,004,526
Selling, general and administrative	12,254,189	10,042,056
Total cost and expenses	85,548,481	62,699,712
Operating income (loss)	(4,579,378)	2,762,237
Interest income, net	886,717	1,611,139
Other income (expense), net	1,615,471	(15,887)
Income (loss) before income taxes	(2,077,190)	4,357,489
Income tax provision (benefit)	(1,660,239)	1,175,396
Net income (loss)	$ (416,951)	$ 3,182,093


								Accumulated
				Additional				Other
	Comprehensive	Common Stock		Paid-in	Deferred	Treasury	Retained	Comprehensive
	Income	Shares	Amount	Capital	Compensation	Stock	Earnings	Income (Loss)	Total
Balances at December 31, 2008		24,128,845	$ 2,413	$23,707,644	$(633,650)	$ (1,177,523)	$140,935,470	$ (350,942)	$ 162,483,412
Components of comprehensive income:
Net income	$ 3,182,093	-	-	-	-	-	3,182,093	-	3,182,093
Unrealized gain on investments	8,276	-	-	-	-	-	-	8,276	8,276
Currency translation adjustments	243,381	-	-	-	-	-	-	243,381	243,381
Total comprehensive income	$ 3,433,750
Dividend distribution		-	-	-	-	-	(52,503)	-	(52,503)
Stock option and restricted stock expense		-	-	524,688	192,861	-	-	-	717,549
Stock issued under equity incentive plan		35,988	3	118,639	-	-	-	-	118,642
Repurchase of common stock		-	-	-	-	(281,092)	-	-	(281,092)
Balances at December 31, 2009		24,164,833	$ 2,416	$24,350,971	$(440,789)	$ (1,458,615)	$144,065,060	$ (99,285)	$ 166,419,758
Components of comprehensive loss:
Net loss	$ (416,951)	-	-	-	-	-	(416,951)	-	(416,951)
Unrealized gain on investments	24,421	-	-	-	-	-	-	24,421	24,421
Currency translation adjustments	145,528	-	-	-	-	-	-	145,528	145,528
Total comprehensive loss	$ (247,002)
Dividend distribution		-	-	-	-	-	(948,175)	-	(948,175)
Stock option and restricted stock expense		-	-	470,400	192,844	-	-	-	663,244
Stock issued under equity incentive plan		1,225	1	4,137	-	-	-	-	4,138
Repurchase of common stock		-	-	-	-	(12,889)	-	-	(12,889)
Spin-off of subsidiary		-	-	-	-	-	(504,327)	(37,967)	(542,294)
Balances at December 31, 2010		24,166,058	$ 2,417	$24,825,508	$(247,945)	$(1,471,504)	$142,195,607	$ 32,697	$ 165,336,780


	December 31,
	2009	2008
	As restated	As restated
	(Note 2)	(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$ 85,932,000	$ 21,828,733
Restricted cash	469,505	305,261
Short-term investments	22,142,124	71,390,904
Accounts receivable, net	7,732,415	4,702,232
Notes receivable	453,607	12,055,101
Income tax receivable	7,551,883	22,193,828
Inventories	15,664,651	14,551,785
Deferred income tax benefit	1,317,405	3,305,770
Prepaid expenses and other current assets	1,389,234	2,453,529
Total current assets	142,652,824	152,787,143
Property, plant and equipment, net	43,919,579	39,464,575
Intangible assets, net	3,250,000	-
Notes receivable	-	442,392
Deferred income tax benefit	2,790,668	336,117
Other assets	200,700	251,341
Total assets	$ 192,813,771	$ 193,281,568

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit facility	$ 625,978	$ 610,500
Current portion of notes payable	1,068,718	1,019,114
Trade accounts payable	6,200,816	4,391,905
Customer deposits	2,081,570	2,130,334
Income taxes payable	2,025,598	1,194,054
Other current liabilities	9,737,925	14,936,466
Total current liabilities	21,740,605	24,282,373
Notes payable	2,744,598	3,643,696
Other long-term obligations	289,118	263,396
Deferred income tax liability	1,619,692	1,753,402
Total liabilities	26,394,013	29,942,867
Stockholders' equity:
Common stock — par value $0.0001 per share
Shares authorized: 30,000,000 as of December 31, 2009 and 2008; shares issued:
24,164,833 and 24,128,845 as of December 31, 2009 and 2008, respectively	2,416	2,413
Additional paid-in capital	24,350,971	23,707,644
Deferred compensation	(440,789)	(633,650)
Treasury stock at cost: 231,756 and 175,362 shares as of December 31, 2009
and 2008, respectively	(1,458,615)	(1,177,523)
Retained earnings	144,065,060	141,790,759
Accumulated other comprehensive loss	(99,285)	(350,942)
Total stockholders’ equity	166,419,758	163,338,701
Total liabilities and shareholders’ equity	$ 192,813,771	$ 193,281,568


	December 31, 2009
	As Reported (1)	ASC 718 Adoption	Stock-based Compensation Adjustments	Income Tax Adjustments	As Restated
Condensed Consolidated Balance Sheet Data:
Total current assets	$ 141,973,185	$ -	$ -	$ 679,639	$ 142,652,824
Total assets	192,108,036	-	(112,189)	817,924	192,813,771
Total current liabilities	20,145,945	-	-	1,594,660	21,740,605
Total liabilities	24,799,353	-	-	1,594,660	26,394,013
Additional paid-in capital	25,530,805	-	(1,179,834)	-	24,350,971
Retained earnings	143,774,151	-	1,067,645	(776,736)	144,065,060
Total liabilities and stockholders' equity	192,108,036	-	(112,189)	817,924	192,813,771

Condensed Consolidated Statement of Operations Data:
Total revenue	$ 65,461,949	$ -	$ -	$ -	$ 65,461,949
Cost of product revenue	22,687,134	-	(34,004)	-	22,653,130
Research and development	30,177,535	-	(173,009)	-	30,004,526
Selling, general and administrative	10,221,475	-	(179,419)	-	10,042,056
Operating income	2,375,805	-	386,432	-	2,762,237
Interest income and expense, net	1,611,139	-	-	-	1,611,139
Other income and expense, net	(15,887)	-	-	-	(15,887)
Income before income taxes	3,971,057	-	386,432	-	4,357,489
Income tax provision	1,205,937	-	48,012	(78,553)	1,175,396
Net income	$ 2,765,120	$ -	$ 338,420	$ 78,553	$ 3,182,093
(1) As reported in the 2009 and 2008 consolidated financial statements originally issued on July 31, 2010.


	December 31, 2008
	As Reported (2)		ASC 718 Adoption	Stock-based Compensation Adjustments	Income Tax Adjustments	As Restated
Condensed Consolidated Balance Sheet Data:
Total current assets	$ 153,097,747		$ -	$ -	$(310,604)	$ 152,787,143
Total assets	193,434,542		218,460	(60,830)	(310,604)	193,281,568
Total current liabilities	28,611,352		(72,890)	-	(4,256,089)	24,282,373
Total liabilities	34,156,080		(72,890)	-	(4,140,323)	29,942,867
Additional paid-in capital	22,003,590		2,494,109	(790,055)	-	23,707,644
Retained earnings	139,434,574		(2,202,758)	729,225	3,829,718	141,790,759
Total liabilities and stockholders' equity	193,434,542		218,460	(60,830)	(310,604)	193,281,568

Condensed Consolidated Statement of Operations Data:
Total revenue		$215,253,231	$ -	$ -	$ -	$ 215,253,231
Cost of product revenue		12,745,263	70,309	(13,077)	-	12,802,495
Production scale-up		58,231	-	-	-	58,231
Research and development		21,458,777	231,794	(13,364)	-	21,677,207
Selling, general and administrative		11,217,618	427,016	(156,111)	136,587	11,625,110
Operating income		169,773,342	(729,119)	182,552	(136,587)	169,090,188
Interest income and expense, net		3,680,808	-	-	137,595	3,818,403
Other income and expense, net		47,010	-	-	-	47,010
Income before income taxes		173,501,160	(729,119)	182,552	1,008	172,955,601
Income tax provision		65,661,267	(115,479)	25,479	(2,470,466)	63,100,801
Net income		$107,839,893	$ (613,640)	$ 157,073	$ 2,471,474	$ 109,854,800

(2) As reported in the 2008 and 2007 consolidated financial statements originally issued on March 31, 2009.



	2009			2008
	Amortized Cost	Gross Unrealized Gains (Losses)	Estimated Fair Market Value	Amortized Cost	Gross Unrealized Gains	Estimated Fair Market Value
Debt
U.S. Corporate	$13,098,740	$8,718	$13,107,458	$ -	$ -	$ -
State and municipal	8,785,000	(447)	8,784,553	-	-	-
Preferred auction rate security	-	-	-	4,781,228	-	4,781,228
Certificates of Deposit	250,000	113	250,113	66,609,676	-	66,609,676
	$22,133,740	$8,384	$22,142,124	$71,390,904	$ -	$71,390,904


	December 31,
	2009	2008
Note receivable related to the Company’s marketing agreement with Teva Pharmaceutical (see Note 10). The note required Teva to make quarterly payments of $6,000,000 through June 2009 using an imputed annual interest rate of 8.25 percent.	$ -	$11,627,670

Note receivable related to the Company’s sale of its interest in Pharmosa to Bioneer. Based upon the current exchange rate, the note requires Bioneer to make a payment of approximately $454,000 in December 2010. The note bears interest at 3.5 percent Prt snnum	453,607	869,823
Total notes receivable	453,607	12,497,493
Less: current portion	453,607	12,055,101
Notes receivable less current portion	$ -	$ 442,392


2010	1,069,000
2011	1,069,000
2012	865,000
2013	279,000
2014	152,000
Thereafter	379,000
	$3,813,000


	December 31
	2009	2008
Inventories:
Raw materials	$ 7,883,829	$ 6,630,971
Work-in-process	294,256	1,755,751
Finished goods	7,486,566	6,165,063
Total	$15,664,651	$14,551,785


		Year Ended December 31, 2009

Unrecognized tax benefits, beginning of year		$1,953,376
Gross increases related to tax positions taken in prior years		-
Gross decreases related to tax positions taken in prior years		-
Gross increases related to tax positions taken in the current year		210,525
Gross decreases related to tax positions taken in the current year		-

Unrecognized tax benefits, end of year		$2,163,901


	Year Generated	Year of Expiration
Net operating losses:
$ 2,253,000 (U.S.)	2009	2029
$ 356,000 (Foreign)	2004	2014
$ 110,000 (Foreign)	2005	2015
$ 210,000 (Foreign)	2006	2016

Research and development and investment tax credits:
$ 633,000 (Foreign)	Various	2011-2013


	Options Available	Options Outstanding
Beginning	2,857,143	-
Options granted	(967,159)	967,159
Options exercised	-	(25,380)
Options canceled	387,477	(387,477)
Balance at December 31, 2005	2,277,461	554,302
Options granted	(364,800)	364,800
Options exercised	-	(5,247)
Options canceled	66,980	(66,980)
Balance at December 31, 2006	1,979,641	846,875
Options granted	(949,000)	949,000
Options exercised	-	(5,826)
Options canceled	67,462	(67,462)
Balance at December 31, 2007	1,098,103	1,722,587
Options granted	(359,900)	359,900
Options exercised	-	(489,381)
Options canceled	146,618	(146,618)
Balance at December 31, 2008	884,821	1,446,488
Options granted	(337,000)	337,000
Options exercised	-	(35,988)
Options canceled	103,764	(103,764)
Balance at December 31, 2009	651,585	1,643,736


	Number of Shares	Weighted-Average Grant Date Fair Value

Unvested restricted stock awards at December 31, 2007	-	$ -
Granted	115,000	5.51
Vested	-	-
Forfeited	-	-
Unvested restricted stock awards at December 31, 2008	115,000	$ 5.51
Granted	-	-
Vested	(35,002)	5.51
Forfeited	-	-
Unvested restricted stock awards at December 31, 2009	79,998	$ 5.51


2010	$ 1,396,000
2011	1,377,000
2012	1,401,000
2013	1,314,000
2014	1,320,000
Thereafter	3,233,000
	$10,041,000



	Par Pharmaceutical Companies, Inc. Historical		Anchen Historical		Pro Forma Adjustments				Pro Forma
ASSETS
Current Assets:
Cash and cash equivalents	$	225,969	$	72,859	$	(148,375	)	(3a)	$	150,453
Available for sale marketable debt securities		30,861		28,547		(28,547	)	(3h)		30,861
Accounts receivable, net		98,103		16,524		—				114,627
Notes receivable		—		29,960		(29,960	)	(3h)		—
Inventories		80,986		12,745		10,300		(3b)		104,031
Prepaid expenses and other current assets		22,537		2,372		5,645		(3d)		30,554
Deferred income tax assets		31,005		8,481		14,050		(3c)		53,536
Income taxes receivable		37,864		—		(5,645	)	(3d)		32,219
Total current assets		527,325		171,488		(182,532	)			516,281

Property, plant and equipment, net		69,665		27,996		—				97,661
Intangible Assets, net		63,424		3,000		218,400		(3f)		284,824
Goodwill		63,729		—		217,112		(3e)		280,841
Other assets		6,495		363		6,644		(3g)		13,502
Non-current deferred income tax assets, net		55,451		3,233		(58,684	)	(3c)		—
Total Assets	$	786,089	$	206,080	$	200,940			$	1,193,109

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	—	$	—	$	17,500		(3g)	$	17,500
Accounts payable		21,551		2,771		—				24,322
Accrued expenses and other current liabilities		156,109		21,340		15,268		(3c)		192,717
Income taxes payable		—		5,645		(5,645	)	(3d)		—

Total current liabilities		177,660		29,756		27,123				234,539

Long-term debt, less current portion		—		—		332,500		(3g)		332,500
Other long-term liabilities		44,791		347		—				45,138
Deferred tax liabilities		—		—		23,234		(3c)		23,234
Commitments and contingencies		—		—		—				—

Total Stockholders’ equity		563,638		175,977		(181,917	)	(3i)		557,698

Total liabilities and stockholders’ equity	$	786,089	$	206,080	$	200,940			$	1,193,109



	Par Pharmaceutical Companies, Inc. Historical			Anchen Historical			Adjustments for TWI spin-off (3j)		Pro Forma Adjustments				Pro Forma
Revenues:
Net product sales	$	980,631		$	77,612	$	(146	)	$	—			$	1,058,097
Other product related revenues		28,243			3,357		—			—				31,600

Total revenues		1,008,874			80,969		(146	)		—				1,089,697

Cost of goods sold - other		620,904			35,028		444			(319	)	(3n)		656,057
Amortization expense		14,439			—		—			17,558		(3m)		31,997
Total cost of goods sold		635,343			35,028		444			17,239				688,054

Gross Margin		373,531			45,941		(590	)		(17,239	)			401,643
Operating expenses:
Research and development		50,369			38,266		(1,419	)		—				87,216
Selling, general and administrative		192,504			12,254		(641	)		—				204,117
Settlements and loss contingencies, net		3,762			—		—			—				3,762
Total Operating expenses		246,635			50,520		(2,060	)		—				295,095
Gain on sale of product rights and other		6,025			—		—			—				6,025
Operating income (loss)		132,921			(4,579	)	1,470			(17,239	)			112,573

Other income (expense), net		3,459			1,615		3			—				5,077
Interest income		1,257			997		—			(948	)	(3l)		1,306
Interest expense		(2,905	)		(110	)	31			(11,996	)	(3o)		(14,980	)
Income (loss) from continuing operations before income taxes		134,732			(2,077	)	1,504			(30,183	)			103,976

Provision (benefit) for income taxes		41,980			(1,660	)	3			(11,168	)	(3q)		29,155
Income (loss) from continuing operations	$	92,752		$	(417	) $	1,501		$	(19,015	)		$	74,821


Basic earnings (loss) per share of common stock
Income (loss) from continuing operations	$	2.70											$	2.18

Diluted earnings (loss) per share of common stock
Income (loss) from continuing operations	$	2.60											$	2.10
Weighted average number of common shares outstanding.
Basic		34,307												34,307
Diluted		35,644												35,644



	Amount (In thousands)
Cash paid for equity	$	410,000
Cash paid to settle benefit liabilities for two former Anchen executives¹		2,000
Cash paid for net working capital		753

Total cash consideration	$	412,753
¹ Represents cash we paid related to pre-existing severance agreements.


	As of September 30, 2011 (In thousands)
Cash and cash equivalents	$	—
Available for sale marketable debt securities		—
Accounts receivable, net		16,524
Inventories		23,045
Prepaid expenses and other current assets		8,017
Deferred income taxes		25,764
Income taxes receivable		—
Property, plant and equipment		27,996
Intangible assets, net		221,400
Other long-term assets, net		184

Total identifiable assets		322,930

Accounts payable		2,771
Accrued expenses and other current liabilities		36,608
Income taxes payable		5,645
Deferred tax liabilities – non-current		81,918
Other long-term liabilities		347

Total liabilities assumed		127,289

Net identifiable assets acquired		195,641

Goodwill		217,112

Net assets acquired	$	412,753


a.	The adjustment to the Cash and cash equivalents balance reflects the following:


	Amount (In thousands)
Proceeds from JP Morgan Facilities (1)	$	350,000
Total estimated cash purchase price (2)		(412,753	)
Debt issuance costs (3)		(7,451	)
Cash transaction costs (4)		(20,009	)
Elimination of Anchen’s historical cash balance (5)		(58,162	)
Total net change	$	(148,375	)


	(1)	See Note 1, Basis of Pro Forma Presentation.
	(2)	See Note 2, Consideration Transferred and Fair Value Estimate of Assets Acquired and Liabilities Assumed.
	(3)	The payment of $7.5 million of estimated debt issuance costs for the JP Morgan Facilities.
	(4)	Reflects $5.3 million of direct transaction costs incurred subsequent to September 30, 2011 and paid by us associated with the Anchen Acquisition as well as $14.7 million of transaction costs incurred subsequent to September 30, 2011 and paid by Anchen prior to the Anchen acquisition.
	(5)	Anchen’s cash balance was distributed to Anchen’s former securityholders with the closing of the Anchen Acquisition.


c.	Represents adjustments to deferred tax assets and liabilities as follows:


	Amount (In thousands)
Expected net deferred tax asset to be realized by the combined entity in the future	$	17,861
Estimated deferred income tax liability resulting from the purchase price allocation adjustments (1. below)		(3,811	)
	$	14,050

Estimated deferred income tax liability resulting from the purchase price allocation adjustments (1. below)	$	81,918
Reclass of Non-current deferred income tax assets, net into Deferred tax liabilities for presentation purposes		(58,684	)
	$	23,234

Payable to former Anchen Securityholders for deferred tax asset related to Anchen Acquisition (2. below)	$	3,554
Payable to former Anchen Securityholders for historical current deferred tax assets (2. below)		8,481
Payable to former Anchen Securityholders for historical non-current deferred tax assets (2. below)		3,233
	$	15,268

7
1. Represents the estimated deferred income tax liability resulting from the purchase price allocation adjustments made to the acquired assets of Anchen, excluding goodwill. The estimated income tax rates are based on the applicable enacted statutory tax rates as of the assumed acquisition date and appropriately reflect certain of our and Anchen basis differences that will not result in deductible amounts (resulting in deferred tax liabilities) in future years when the related financial reporting asset or liability will be recovered or settled. Deferred taxes are recognized for the temporary differences between assigned values in the purchase price allocation and the carryover tax basis of assets acquired and liabilities assumed.
2. Reflects payable of Anchen’s net deferred income tax assets that will be distributed to Anchen’s former securityholders when realized and settled through escrow.


f.	For the purpose of preparing the Unaudited Pro Forma Condensed Combined financial information, the total purchase price is allocated to the Anchen net tangible and intangible assets acquired and liabilities assumed based on their estimated values as of September 30, 2011. The valuation of the intangible assets acquired and related amortization periods are as follows:


	Valuation (In thousands)			Weighted Average Amortization Period (in years)
Developed Technology:
Developed Products	$	85,200			9

Covenant Not To Compete:
Covenant not to compete	$	9,000			3


In Process Research & Development:
IPR&D Products	$	80,500			n/a
Distributed IPR&D Products		46,700			n/a
Total	$	127,200

Total acquired intangible assets	$	221,400

Elimination of Anchen’s historical intangible asset	$	(3,000	)

Net Pro Forma Adjustment	$	218,400


g.	The adjustment to Long-term debt, less current portion represents $350 million borrowed under the JP Morgan Facilities in the form of a five-year term loan as of September 30, 2011, less $17.5 million of required principal repayments during the first year after the initial borrowing.


		Amount (In Thousands)
Debt issuance costs	$	7,451
Write-off of existing unamortized debt issuance costs		(628	)
Investment in TWI preferred shares (refer to Note 3h)		(179	)
	$	6,644


h.	Reflects the elimination of Anchen’s short term investments ($28.5 million) and notes receivable ($30.0 million), which were liquidated and distributed to Anchen’s former securityholders at the close of the Anchen Acquisition. Anchen’s investment in affiliate (TWI preferred shares) ($0.2 million) was also sold as a result of the Anchen Acquisition (refer to Note 3g).


i.	Reflects the elimination of Anchen’s historical stockholders’ equity as well as the recognition of the equity impact of certain other pro forma adjustments such as transaction fees related to the Anchen Acquisition.


k.	Elimination of advisory, legal and regulatory costs of $5.6 million (of which $3.2 million was recorded by us and the remaining $2.4 million was recorded by Anchen) that were directly attributable to the Anchen Acquisition but that are not expected to have a continuing impact on the combined entity’s results.


l.	Reflects lower interest income due to the use of our available cash balances to finance a portion of the Anchen Acquisition, calculated as the cash used for acquisition (see Note 3a) multiplied by the average interest income rate for the quarterly periods in the year ended December 31, 2010 and the nine months ended September 30, 2011.