ENDO PHARMACEUTICALS HOLDINGS INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) describes the principal factors affecting the results of operations, liquidity and capital resources, and critical accounting estimates at Endo. This discussion should be read in conjunction with our audited Consolidated Financial Statements and related notes thereto. Except for the historical information contained in this Report, including the following discussion, this Report contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page 1 of this Report.  EXECUTIVE SUMMARY  About the Company  We are a U.S. based, specialty healthcare solutions company with a diversified business model, operating in four key business segments - Branded Pharmaceuticals, Generics, Devices and Services. These segments reflect a 2011 reassessment of our reporting structure, whereby management is better able to assess its prospects and future cash flow potential to ultimately make more informed operating decisions about resource allocation and the enterprise as a whole. We deliver an innovative suite of complementary branded and generic drugs, devices, services and clinical data to meet the needs of patients in areas such as pain management, urology, endocrinology and oncology. We believe that recent healthcare reform in the U.S. places a premium on providing cost-effective healthcare solutions, like those we offer. Over the past two years, we have invested in and reshaped our company through a combination of organic and strategic growth initiatives, creating a company that we believe is positioned to address the changing economics that are driving the transformation of the U.S. healthcare environment.  We believe our diversified business model enables us to strengthen our partnerships with providers, payers and patients by offering multiple products and platforms to deliver healthcare solutions. We have a portfolio of branded pharmaceuticals that includes established brand names such as Lidoderm®, Opana® ER, Voltaren® Gel, Percocet ®, Frova®, Supprelin® LA, Vantas ®, Valstar® and Fortesta® Gel. Branded products comprised approximately 61% of our revenues in 2011, with 30% of our revenues coming from Lidoderm®. Our non-branded generic portfolio, which accounted for 21% of revenues in 2011, currently consists of products primarily focused on pain management. We generally focus on selective generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. Device revenue accounted for 11% of total revenues in 2011 and our services segment accounted for the remaining 2011 revenue.                                           79

--------------------------------------------------------------------------------

Table of Contents

2011-A Year in Review

  During 2011, we achieved revenue growth for the thirteenth consecutive year and further diversified our Branded Pharmaceuticals, Generics, Devices, and Services businesses in key therapeutic areas, including pain management and urology. We executed on our growth strategy by acquiring AMS, a market leading provider of medical devices and therapies that help restore pelvic health. Our acquisition of AMS furthers Endo's evolution from a product-driven company to a healthcare solutions provider, strengthens our leading core urology franchise and expands our presence in the medical devices market. During 2011, we acquired two businesses in the healthcare information technology area which will help us leverage our position in the urology space. Additionally, in December 2011, the FDA approved a new formulation of Opana ® ER designed to be crush-resistant, which will continue to be called Opana ® ER (oxymorphone hydrochloride) Extended-Release Tablets CII with the same dosage strengths, color and packaging and similar tablet size. Endo anticipates transitioning in the first half of 2012 from the original formulation to the new formulation.  Total revenues for the year ended December 31, 2011 were $2.73 billion, a 59% increase over 2010, with net income of $187.6 million, or $1.55 per diluted share, as compared to $259.0 million or $2.20 per diluted share in 2010. The increase in revenues was driven by organic growth in our branded pharmaceuticals product portfolio, including Lidoderm®, Opana® ER and Voltaren ® Gel, as well as our June 2011 acquisition of AMS, which contributed $300.3 million to our total 2011 revenue. Also included in 2011 revenue is $205.2 million, representing the full-year impact of our HealthTronics acquisition, compared to $102.1 million in 2010, representing the revenues of HealthTronics from July 2, 2010. Qualitest contributed revenue of $467.1 million in 2011, as compared to $30.3 million from November 30, 2010 to December 31, 2010.  

Business Environment

  The Company conducts its business within the pharmaceutical, devices, and healthcare services industries, which are highly competitive and subject to numerous government regulations. Many competitive factors may significantly affect the Company's sales of its products and services, including efficacy, safety, price and cost-effectiveness, marketing effectiveness, product labeling, quality control and quality assurance at our and our third-party manufacturing operations, and research and development of new products. To compete successfully for business in the healthcare industry, the Company must demonstrate that its products and services offer medical benefits as well as cost advantages. Currently, most of the Company's products compete with other products already on the market in the same therapeutic category, and are subject to potential competition from new products that competitors may introduce in the future. Generic competition is one of the Company's leading challenges. Similarly, the Company competes with other providers with respect to the devices and services we offer, as well as providers of alternative treatments.  In the pharmaceutical industry, the majority of an innovative product's commercial value is usually realized during the period that the product has market exclusivity. When a product loses exclusivity, it is no longer protected by a patent and is subject to new competing products in the form of generic brands. Upon loss of exclusivity, the Company can lose a major portion of that product's sales in a short period of time. Intellectual property rights have increasingly come under attack in the current healthcare environment. Generic drug firms have filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of certain of the Company's key pharmaceutical products, prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in ANDA filings, the generic firms will then introduce generic versions of the product at issue, resulting in the potential for substantial market share and revenue losses for that product. For a complete description of legal proceedings, see Note 14. Commitments and Contingencies-Legal Proceeding in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.  The healthcare industry is subject to various government-imposed regulations authorizing prices or price controls that have and will continue to have an impact on the Company's sales. The U.S. Congress and some state legislatures have considered a number of proposals and have enacted laws that could result in major changes in the current healthcare system, either nationally or at the state level. Driven in part by budget concerns,                                           80

--------------------------------------------------------------------------------

Table of Contents

Medicaid access and reimbursement restrictions have been implemented in some states and proposed in many others. In addition, the Medicare Prescription Drug Improvement and Modernization Act provides outpatient prescription drug coverage to senior citizens in the U.S. This legislation has had a modest favorable impact on the Company as a result of an increase in the number of seniors with drug coverage. At the same time, there continues to be a potential negative impact on the U.S. pharmaceutical business that could result from pricing pressures or controls.  The growth of Managed Care Organizations (MCOs) in the U.S. has increased competition in the healthcare industry. MCOs seek to reduce healthcare expenditures for participants by making volume purchases and entering into long-term contracts to negotiate discounts with various pharmaceutical providers. Because of the market potential created by the large pool of participants, marketing prescription drugs to MCOs has become an important part of the Company's strategy. Companies compete for inclusion in MCO formularies and the Company generally has been successful in having its major products included. The Company believes that developments in the managed care industry, including continued consolidation, have had and will continue to have a generally downward pressure on prices.  

Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn may impact the Company's business.

  Pharmaceutical production processes are complex, highly regulated and vary widely from product to product. We contract with various third party manufacturers and suppliers to provide us with raw materials used in our products and finished goods. Our most significant agreements are with Novartis Consumer Health, Inc., Teikoku Seiyaku Co., Ltd., Mallinckrodt Inc., Noramco, Inc., Almac Pharma Services and Sharp Corporation. Shifting or adding manufacturing capacity can be a lengthy process that could require significant expenditures and regulatory approvals. If for any reason we are unable to obtain sufficient quantities of any of the finished goods or raw materials or components required for our products, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.  

Healthcare Reform

  On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and Affordable Care Act (PPACA), which will make major changes to the U.S. healthcare system. On March 30, 2010, the President signed H.R. 4872, the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act), which included a package of changes to the PPACA, as well as additional elements to reform health care in the U.S.  While some provisions of the new healthcare reform law have already taken effect, most of the provisions to expand access to health care coverage will not be implemented until 2014 and beyond. Since implementation is incremental to the enactment date of the law, there are still many challenges and uncertainties ahead. Such a comprehensive reform measure will require expanded implementation efforts on the part of federal and state agencies embarking on rule-making to develop the specific components of their new authority. The Company will monitor closely the implementation and any attempts to repeal, replace, or remove funding of the new health care reform law. This effort will primarily take place on two fronts: 1) in Congress through attempts to pass legislation to overturn all or specific sections of the law and 2) in the Courts through attempts to have the law declared unconstitutional.  The U.S. Supreme Court announced that it will hear the legal challenges to the health care reform law in 2012. The court will consider the constitutionality of the individual mandate, as well as whether the overall health care law can still stand even if the individual mandate is ruled unconstitutional. The Court's decision could significantly impact on the number of Americans who would be afforded access to health care services under the Patient Protection and Affordable Care Act.  Barring a Supreme Court ruling that the Patient Protection and Affordable Care Act is unconstitutional, the passage of the PPACA and the Reconciliation Act will result in a transformation of the delivery and payment for                                           81

--------------------------------------------------------------------------------

Table of Contents

  health care services in the U.S. The combination of these measures will expand health insurance coverage to an estimated 32 million Americans. In addition, there are significant health insurance reforms that are expected to improve patients' ability to obtain and maintain health insurance. Such measures include: the elimination of lifetime caps; no rescission of policies; and no denial of coverage due to preexisting conditions. The expansion of healthcare insurance and these additional market reforms should result in greater access to the Company's products.  Our estimate of the overall impact of healthcare reform reflects a number of uncertainties. However, we believe that the impact to our business will be largely attributable to changes in the Medicare Part D Coverage Gap, the imposition of an annual fee on branded prescription pharmaceutical manufacturers, and increased rebates in the Medicaid Fee-For-Service Program and Medicaid Managed Care plans. There are a number of other provisions in the legislation that collectively are expected to have a small impact, including originator average manufacturers' price (AMP) for new formulations, and the expansion of 340B pricing to new entities. These various elements of healthcare reform adversely impacted total revenues by approximately $40 million in 2011 compared to approximately $20 million in 2010.  In the U.S., the Medicare Prescription Drug Improvement and Modernization Act of 2003 continues to provide an effective prescription drug benefit to seniors and individuals with disabilities in the Medicare program (Medicare Part D). Uncertainty will continue to exist due to Congressional proposals that have the potential to impose new costs and increase pricing pressures on the pharmaceutical industry.  In response to the U.S. debt-ceiling crisis, Congress passed the Budget Control Act of 2011 on August 2, 2011. Within the Act, Congress created the Joint Select Committee on Deficit Reduction (JSC), which was charged with issuing a formal recommendation on how to reduce the federal deficit by $1.2 to $1.5 trillion over the next ten years. The Budget Control Act provided that if Congress failed to pass a deficit reduction plan by December 23, 2011, a process of sequestration would occur on January 1, 2013 which will result in across-the-board spending cuts to certain government programs, including Medicare, in order to meet the deficit reduction goal. Since the JSC failed to put forth a proposal and Congress ultimately failed to pass a deficit reduction plan, the sequestration process is scheduled to be triggered in 2013. The automatic spending cuts that would occur as a result of the sequestration process are unpalatable for many lawmakers and Congress may use the 2012 session to consider repealing the cuts by finding savings in other programs, such as Medicaid.  Governmental Regulation  The development, testing, manufacture, holding, packaging, labeling, distribution, marketing, and sales of our products and our ongoing product development activities are subject to extensive and rigorous government regulation. The Federal Food, Drug and Cosmetic Act (FFDCA), the Controlled Substances Act and other federal and state statutes and regulations govern or influence the testing, manufacture, packaging, labeling, storage, record keeping, approval, advertising, promotion, sale and distribution of pharmaceutical products. Noncompliance with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production and/or distribution, refusal of the government to enter into supply contracts or to approve NDAs and ANDAs, civil penalties and criminal prosecution.  FDA approval is typically required before each dosage form or strength of any new drug can be marketed. Applications for FDA approval to market a drug must contain information relating to efficacy, safety, toxicity, pharmacokinetics, product formulation, raw material suppliers, stability, manufacturing processes, packaging,  

labeling, and quality control. The FDA also has the authority to require post-approval testing after marketing has begun and to suspend or revoke previously granted drug approvals. Product development and approval within this regulatory framework requires many years and involves the expenditure of substantial resources.

  Based on scientific developments, post-market experience, or other legislative or regulatory changes, the current FDA standards of review for approving new pharmaceutical products are sometimes more stringent than those that were applied in the past. Some new or evolving review standards or conditions for approval were not applied to many established products currently on the market, including certain opioid products. As a result, the                                           82

--------------------------------------------------------------------------------

Table of Contents

FDA does not have as extensive safety databases on these products as on some products developed more recently. Accordingly, we believe the FDA has recently expressed an intention to develop such databases for certain of these products, including many opioids.  In particular, the FDA has expressed interest in specific chemical structures that may be present as impurities in a number of opioid narcotic active pharmaceutical ingredients, such as oxycodone, which based on certain structural characteristics and laboratory tests may indicate the potential for having mutagenic effects.  More stringent controls of the levels of these impurities have been required and may continue to be required for FDA approval of products containing these impurities. Also, labeling revisions, formulation or manufacturing changes and/or product modifications may be necessary for new or existing products containing such impurities. The FDA's more stringent requirements together with any additional testing or remedial measures that may be necessary could result in increased costs for, or delays in, obtaining approval for certain of our products in development. Although we do not believe that the FDA would seek to remove a currently marketed product from the market unless such mutagenic effects are believed to indicate a significant risk to patient health, we cannot make any such assurance.  We cannot determine what effect changes in the FDA's laws or regulations, when and if promulgated, or changes in the FDA's legal or regulatory interpretations, may have on our business in the future. Changes could, among other things, require expanded or different labeling, additional testing, the recall or discontinuance of certain products, additional record keeping and expanded documentation of the properties of certain products and scientific substantiation. Such changes, or new legislation, could have a material adverse effect on our business, financial condition, results of operations and cash flows. In December 2003, Congress passed measures intended to speed the process by which generic versions of brand name drugs are introduced to the market. Among other things, these measures are intended to limit regulatory delays of generic drug applications and penalize companies that reach agreements with makers of brand name drugs to delay the introduction of generic versions. These changes could result in increased generic competition for our branded and generic products and could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, on September 27, 2007, Congress enacted the Food and Drug Administration Amendments Act of 2007 (FDAAA) that re-authorized requirements for testing drug products in children, where appropriate, and included new requirements for post-approval studies or clinical trials of drugs that are known to or that signal the potential to pose serious safety risks, and authority to require risk evaluation and mitigation strategies, or REMS to ensure that the benefits of a drug outweigh the risks of the drug, all of which may increase the time and cost necessary for new drug development as well as the cost of maintaining regulatory compliance for a marketed product.  The evolving and complex nature of regulatory requirements, the broad authority and discretion of the FDA and the generally high level of regulatory oversight results in a continuing possibility that from time to time, we will be adversely affected by regulatory actions despite ongoing efforts and commitment to achieve and maintain full compliance with all regulatory requirements.  

Pipeline Developments

In January 2012, the Company signed a worldwide license and development agreement with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BEMA® Buprenorphine, a transmucosal form of buprenorphine which incorporates a bioerodible mucoadhesive

  (BEMA ®) technology and is currently in phase III trials for the treatment of moderate to severe chronic pain. At this time, the Company made an upfront payment to BioDelivery for $30.0 million, which was expensed as Research and development in the first quarter of 2012.  In December 2011, the FDA approved a new formulation of Opana® ER designed to be crush-resistant, which will continue to be called Opana® ER with the same dosage strengths, color and packaging and similar tablet size. Endo anticipates transitioning in the first half of 2012 from the original formulation to the new formulation.                                           83 

--------------------------------------------------------------------------------

Table of Contents

  On December 27, 2011 and November 11, 2011, the Company terminated development of pagoclone and the octreotide implant for the treatment of acromegaly, respectively, after conducting an in-depth review of the Company's research and development activities, including an analysis of research and development priorities, focus and available resources for current and future projects and the commercial potential for the product.  In addition, during the first quarter of 2011, the Company assessed all of its in-process research and development (IPR&D) assets and concluded, separately, to discontinue development of its octreotide implant for the treatment of carcinoid syndrome due to recent market research that indicates certain commercial challenges, including the expected rate of physician acceptance and the expected rate of existing patients willing to switch therapies.  In 2011, we announced topline results from a Phase II study comparing the novel investigational drug axomadol against placebo in the treatment of patients with moderate-to-severe chronic lower back pain. The results indicated that axomadol did not meet predetermined study end points; consequently, we terminated the Grünenthal Axomadol Agreement.  In January 2011, the Company entered into a Discovery, Development and Commercialization Agreement (the 2011 Orion Agreement) with Orion Corporation (Orion) to exclusively co-develop products for the treatment of certain cancers and solid tumors. In January 2011, Endo exercised its option to obtain a license to jointly develop and commercialize Orion's Anti-Androgen program focused on castration-resistant prostate cancer, one of Orion's four contributed research programs, and made a corresponding payment to Orion for $10 million, which was expensed as Research and development in the first quarter of 2011.  

Change in Directors and Executive Officers

  On March 3, 2011, the Registrant increased the size of its Board of Directors from eight to nine and appointed David B. Nash, M.D., M.B.A. to fill this new vacancy. Dr. Nash is the founding dean of the Jefferson School of Population Health, located on the campus of Thomas Jefferson University in Philadelphia, Pennsylvania, having taken that position in 2008. Previously, Dr. Nash was the Chairman of the Department of Health Policy of the Jefferson Medical College from 2003 to 2008. Dr. Nash is internationally recognized for his work in outcomes management, medical staff development and quality-of-care improvement; his publications have appeared in more than 100 articles in major journals. Dr. Nash serves on the Board of Directors of Humana Inc., one of the nation's largest publicly traded health and supplemental benefits companies. Dr. Nash also has served as a member of the Board of Trustees of Catholic Healthcare Partners in Cincinnati, Ohio. The Board believes that Dr. Nash brings a value-added set of attributes that enhance the Company's ability to help people achieve lifelong well-being. Dr. Nash is a widely recognized innovator in an emerging medical discipline that unites population health, health policy, and individual health.  Corporate Headquarters Lease  On October 28, 2011, our subsidiary Endo Pharmaceuticals Inc. entered into a lease agreement with RT/TC Atwater LP, a Delaware limited partnership, for a new Company headquarters to consist of approximately 300,000 square feet of office space located at 1400 Atwater Boulevard, Malvern, Pennsylvania. The term of this triple net lease is twelve years and includes three renewal options, each for an additional sixty (60)-month period. The lease is expected to commence early 2013 with a monthly lease rate for the initial year of $0.5 million, increasing by 2.25% each year thereafter. Under the terms of this lease, we will have a continuous and recurring right throughout the initial four (4) years of the lease term to lease up to approximately one hundred fifty thousand (150,000) additional square feet. We are responsible for all tenant improvement costs, less a tenant improvement allowance of $45 per square foot.  

RESULTS OF OPERATIONS

  The Company reported net income attributable to Endo Pharmaceuticals Holdings Inc. for 2011 of $187.6 million or $1.55 per diluted share on total revenues of $2.73 billion compared with net income of $259.0 million or $2.20 per diluted share on total revenues of $1.72 billion for 2010.                                           84

--------------------------------------------------------------------------------

Table of Contents

Consolidated Results Review

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Revenues

  Total revenues in 2011 increased 59% to $2.73 billion from $1.72 billion in the comparable 2010 period. This increase in revenues is primarily driven by our recent acquisition of AMS, from which we derived $300.3 million in revenue, plus the full-year impact from our 2010 acquisitions, including $467.1 million in revenues from Qualitest and $205.2 million in revenues from HealthTronics. The remaining increase in total revenue was driven by organic growth in our branded pharmaceuticals product portfolio including Lidoderm®, Opana ® ER and Voltaren® Gel. Sales growth of our branded pharmaceuticals was essentially volume driven.  The following table provides a breakdown of our revenues for the years ended December 31 (dollars in thousands). We have retrospectively revised the segment presentation for all periods presented reflecting the change from three to four reportable segments.                                                    2011                      2010                                              $            %            $            %        Lidoderm®                            825,181        30         782,609        46        Opana®ER                             384,339        14         239,864        14        Voltaren®Gel                         142,701         5         104,941         6        Percocet®                            104,600         4         121,347         7        Frova®                                58,180         2          59,299         3        Supprelin®LA                          50,115         2          46,910         3        Other brands                          92,651         3         112,602         7         Total Branded Pharmaceuticals*     1,657,767        61       1,467,572        86        Total Generics                       566,854        21         146,513         9        Total Devices revenue                300,299        11              -         -        Total Services revenue               205,201         8         102,144         6         Total revenues*                    2,730,121       100       1,716,229       100     

* - Percentages may not add due to rounding.

   Lidoderm®. Net sales of Lidoderm ® in 2011 increased by $42.6 million or 5% to $825.2 million from $782.6 million in 2010. The growth in net sales is primarily attributable to increased volumes in 2011. In addition, we were required to pay Hind royalties based on net sales of Lidoderm® until this obligation expired on November 23, 2011. Hind royalties were recorded as a reduction to net sales due to the nature of the license agreement and the characteristics of the license involvement by Hind in Lidoderm®. Due to the expiration of this obligation, these royalties decreased from $86.8 million in 2010 to $77.9 million in 2011, which had a favorable impact to 2011 net sales of $8.9 million. Lidoderm® had solid performance this year and continues to generate strong cash flow that we can use to invest in our business to continue to further diversify our revenue base.  Opana® ER. Net sales of Opana®ER in 2011 increased by 60% or $144.5 million to $384.3 million from $239.9 million in 2010. The growth in net sales is primarily attributable to continued prescription and market share growth of the product, as we continue to drive our promotional efforts through physician targeting. In addition, our strategy to contract with managed care organizations has resulted in increases in volume as we have broadened our access for the brand. In December 2011, Novartis Consumer Health, Inc.'sLincoln, Nebraska manufacturing facility was temporarily shut down to facilitate its implementation of certain manufacturing process improvements. These improvements are intended to address the possibility of rare instances of errors in the packaging of the tablets, potentially resulting in product mix-ups. The temporary supply disruption is not related to the efficacy or safety of Endo's products. As a result, there will be a short-term supply constraint on Opana ® ER in early 2012, while we begin production of the new formulation of Opana ® ER, designed to be                                           85

--------------------------------------------------------------------------------

Table of Contents

  crush-resistant, at a third party manufacturing facility managed by Endo's development partner, Grünenthal. The Company estimates that this facility will achieve scale and start to fully supply market demand by late March or early April 2012.  Voltaren ® Gel. Net sales of Voltaren® Gel in 2011 increased by $37.8 million or 36% to $142.7 million from $104.9 million in 2010. The increase was driven by volume. The Company launched Voltaren® Gel in March 2008 and we believe the growth of Voltaren® Gel since its launch is driven by the product's proven clinical efficacy combined with our continued promotional activities aimed at increasing product awareness in the target audience. As a result of the temporary shut-down of the Novartis Consumer Health Lincoln, Nebraska manufacturing facility, there will be a short-term supply constraint of Voltaren ® Gel. Endo will begin production of Voltaren® Gel at an alternative Novartis Consumer Health, Inc. manufacturing source. The precise timing of the initial resupply date remains somewhat uncertain; however, at this point, we expect resupply to begin during early second quarter and to reach commercial scale by the end of second quarter 2012. We would expect to return to promotional activities at that time.  

Percocet®. Net sales of Percocet® in 2011 decreased by $16.7 million or 14% to $104.6 million from $121.3 million in 2010. The decrease is primarily attributable to decreased volumes during 2011 as compared to 2010.

Frova ®. Net sales of Frova® in 2011 decreased by $1.1 million or 2% to $58.2 million from $59.3 million in 2010. The decrease in net sales is primarily attributable to reduced volumes during 2011 as compared to 2010, partially offset by price increases.

  Supprelin ® LA. Net sales of Supprelin® LA in 2011 increased by $3.2 million or 7% to $50.1 million from $46.9 million in 2010. This increase was driven primarily by volume growth during 2011, resulting primarily from an increase in new patient starts and a growing base of continued care patients. We believe this growth is largely due to a strong base of national opinion leader support and ongoing efforts to streamline the treatment initiation process.  Other brands. Net sales of our other branded products in 2011 decreased by $20.0 million or 18% to $92.7 million from $112.6 million in 2010. This decrease is primarily attributable to decreased sales of Opana® as demand continues to shift from Opana® to Opana® ER. This decrease was partially offset by the 2011 launch of Fortesta® Gel, which contributed $14.9 million of net sales in 2011 as well as increased sales of both Vantas® and Valstar®.  Generics. Net sales of our generic products in 2011 increased by $420.3 million or 287% to $566.9 million from $146.5 million in 2010. This increase was primarily driven by our acquisition of Qualitest on November 30, 2010. Qualitest products contributed $446.2 million of net sales of generic products in 2011, compared with $30.3 million in 2010.  Devices. Revenues from our devices business in 2011 were $300.3 million and were primarily attributable to sales of products from our AMS subsidiary, which we acquired in June 2011. AMS products that represented approximately 1% or more of our consolidated total revenues in 2011 included the AMS 700® series of inflatable prostheses, the AMS 800® artificial urinary sphincter, the GreenLightTM laser therapy products used to treat BPH, the Monarc® subfascial hammock and the ElevateTM anterior pelvic floor repair system.  Services. Revenues from our services business in 2011 increased by $103.1 million to $205.2 million from $102.1 million in 2010. This increase was driven by the full-year impact of HealthTronics, which contributed six months of revenue in 2010 compared to a full year of revenue in 2011. The $205.2 million consisted primarily of lithotripsy fees of $110.2 million, cryosurgery treatment fees of $26.0 million and other service revenues from our HealthTronics business.                                           86 

--------------------------------------------------------------------------------

Table of Contents

Gross Margin, Costs and Expenses

The following table sets forth costs and expenses for the years ended December 31 (dollars in thousands):

                                                         2011                                    2010                                              $             % of revenues             $             % of revenues Cost of revenues                          1,065,208                    39           504,757                    29 Selling, general and administrative         824,534                    30           547,605                    32 Research and development                    182,286                     7           144,525                     8 Asset impairment charges                    116,089                     4            35,000                     2 Acquisition-related items, net               33,638                     1            18,976                     1  Total costs and expenses*                 2,221,755                    81         1,250,863                    73     

* - Percentages may not add due to rounding.

Costs of Revenues and Gross Profit Margin

  Costs of revenues in 2011 increased by $560.5 million or 111%, to $1,065.2 million from $504.8 million in 2010, primarily due to the acquisition of AMS in June 2011 and a full year of activity from our 2010 acquisitions. Gross profit margins were 61% in 2011 compared with 71% in 2010. The reduction in gross profit margin in 2011 is primarily due to our 2010 acquisitions, which contributed a lower gross profit margin percentage than Endo's legacy products. Costs of revenues have also been unfavorably impacted by the increased amortization expense resulting from the intangible assets recognized as part of our recent acquisitions. Amortization expense in Costs of revenues was $185.5 million, $84.0 million and $62.9 million in 2011, 2010 and 2009, respectively. Beginning in November 2011, the Teikoku royalty based on net sales of Lidoderm® is also included in Costs of revenues. These decreases in gross profit margin were partially offset by the elimination of the royalty obligation related to net sales of Opana® ER in September 2010, subsequent to our acquisition of Penwest.  

Selling, General and Administrative Expenses

  Selling, general and administrative expenses in 2011 increased by 51% to $824.5 million from $547.6 million in 2010. The increase in Selling, general and administrative expenses is primarily attributable to our second half 2010 acquisitions and our June 2011 acquisition of AMS, which, on a combined basis, contributed approximately $250.4 million of Selling, general and administrative expense during 2011 compared with $24.7 million during 2010. The increase was also partially driven by certain separation costs and other integration initiatives associated with our acquisitions totaling $21.8 million during 2011. The remaining increase is primarily attributable to the overall growth of our business and the related increases in costs. Selling, general and administrative expenses as a percentage of revenue decreased to 30% in 2011 from 32% in 2010.  

Research and Development Expenses

  Research and development expenses in 2011 increased by 26% to $182.3 million from $144.5 million in 2010. This increase is primarily driven by the addition of AMS's and Qualitest's research and development portfolios to our existing programs, the progress of our branded pharmaceutical portfolio's development, and the expansion of our efforts in the pharmaceutical discovery and device research and development areas.  We invest in research and development because we believe it is important to our long-term competitiveness. As a percent of revenues, R&D expense was approximately 7%, 8% and 13% in 2011, 2010 and 2009, respectively. The variation in R&D expense as a percent of revenues is primarily due to upfront and milestone payments to third party collaborative partners included in R&D expense totaling $19.1 million or 1% of revenue, $23.9 or 1% of revenue million and $77.1 million or 5% of revenue in 2011, 2010 and 2009, respectively. In addition to upfront and milestone payments, total research and development expenses include the costs of discovery research, preclinical development, early- and late-clinical development and drug formulation, as well as clinical trials, medical support of marketed products, other payments under third-party collaborations and contracts and other costs. Research and development spending also includes enterprise-wide costs which support                                           87

--------------------------------------------------------------------------------

Table of Contents

  our overall research and development infrastructure. These enterprise-wide costs are not allocated by product or to specific R&D projects. Unallocated enterprise-wide R&D costs were $63.5 million, $57.3 million and $40.1 million in 2011, 2010 and 2009, respectively.  We continually evaluate our portfolio of R&D assets to appropriately balance our early-stage and late-stage programs in order to support future growth of the Company. With the addition of Qualitest in November 2010, the Company's pharmaceutical R&D programs now include projects in a diversified set of therapeutics areas, including pain management, urology, central nervous system (CNS) disorders, and immunosuppression, oncology, women's health and hypertension markets, among others.  We manage our pharmaceutical R&D programs on a portfolio basis, investing resources in each stage of research and development from early discovery through late-stage development. These stages include: (1) early-stage projects consisting of assets in both preclinical and Phase I programs; (2) middle-stage projects consisting of assets in Phase II programs, and (3) late-stage projects consisting of assets in Phases III programs, assets in which an NDA is currently pending approval, or on-market assets in post marketing Phase IV programs.  We consider our branded R&D programs in Phase III, or late-stage development, to be our significant R&D programs as they could potentially have an impact on our near-term revenue and earnings. As of December 31, 2011, our late-stage branded pharmaceutical programs, excluding on-market assets, include AveedTM, BEMA® Buprenorphine and UrocidinTM.  The Company's pharmaceutical research and development efforts are also focused on the goal of developing a balanced, diversified portfolio of innovative and clinically differentiated generic products across a wide range of therapeutic areas. We generally focus on selective generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. We believe products with these characteristics will face a lesser degree of competition and therefore provide longer product life cycles and higher profitability than commodity generic products. For the years ended December 31, 2011, 2010 and 2009, the Company's direct R&D expense related to generics was $29.1 million, $17.5 million and $24.2 million, respectively.  FDA approval of an abbreviated new drug application (ANDA) is required before a generic equivalent of an existing or reference-listed drug can be marketed. As of December 31, 2011, we have approximately 50 ANDAs under active FDA review in multiple therapeutic areas. The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the manufacturer of the reference listed drug is entitled to one or more statutory exclusivity periods, during which the FDA is prohibited from approving generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date.  We are also committed to developing new products and improving our current products in our medical device business to provide physicians and patients with better clinical outcomes through less invasive and more efficiently delivered therapies. Most of these R&D activities are conducted in our Minnesota and California facilities, although we also work with physicians, research hospitals, and universities around the world. Many of the ideas for new and improved products come from a global network of leading physicians who also work with us in evaluating new concepts and in conducting clinical trials to gain regulatory approvals. We conduct applied research in areas that we think will likely lead to product commercialization activities. This research is often done at a technology platform level such that the science can be utilized to develop a number of different products. The development process for any new product can range from months to several years, primarily depending on the regulatory pathway required for approval.  Our product development engineers work closely with their marketing partners to identify important needs in the urology, gynecology, urogynecology and colorectal markets. The team then analyzes the opportunities to optimize the value of the product development portfolio. Our product development teams continue to improve our current product lines and develop new products to increase our market share and also expand the markets we serve. In addition, we believe our clinical data will continue to drive market expansion for our therapies and demonstrates our technology leadership position.                                           88

--------------------------------------------------------------------------------

Table of Contents

The following table presents the composition of our total R&D expense as of December 31, 2011 and, for our branded pharmaceuticals R&D portfolio, the number of projects by stage of development:

                                        Research and Development Expense                        Number of Projects  at                                              (in thousands)                                   December 31, 2011                                                                                Preclinical        Phase       Phase       Phase                                    2011             2010          2009         and Phase I          II       III(1)        IV Early-stage                     $    26,638       $  22,872     $   9,418                12 Middle-stage                         11,697          13,373        50,729                             - Late-stage                           21,447          33,485        60,779                                          2           4  Sub-Total *                     $    59,782       $  69,730     $ 120,926  Generics portfolio *                 29,121          17,452        24,242 Devices portfolio *                  29,850              -             - Enterprise-wide unallocated R&D costs                            63,533          57,343        40,149  Total R&D expense               $   182,286         144,525       185,317     

* Excludes all costs not allocated to specific products and R&D projects.

(1) Includes projects for which an NDA has been filed with the FDA.

   These amounts are not necessarily indicative of our future R&D spend or our future R&D focus. Over time, our R&D spend among categories is unpredictable. We continually evaluate each product under development in an effort to allocate R&D dollars efficiently to projects we believe to be in the best interests of the Company based on, among other factors, the performance of such products in preclinical and/or clinical trials, our expectations regarding the potential future regulatory approval of the product and our view of the potential commercial viability of the product in light of market conditions.  R&D expenses, in total dollars, are expected to increase as a result of our recent strategic acquisitions and the expansion of our efforts in the pharmaceutical discovery and device R&D areas. As we continue to execute on our strategy of being a healthcare solutions provider with an integrated business model that includes branded and generic prescription drugs, medical devices and healthcare services, the composition of research and development expense may change reflecting our focus on these multiple products and platforms.  

Asset Impairment Charges

  In May 2010, Teva Pharmaceutical Industries Ltd. terminated the pagoclone development and licensing arrangement with the Company upon the completion of the Phase IIb study. As a result, the Company concluded that there was a decline in the fair value of the corresponding indefinite-lived intangible asset. Accordingly, we recorded a $13.0 million impairment charge during the year ended December 31, 2010.  As part of our 2010 annual review of all IPR&D assets, we conducted an in-depth review of both octreotide indications. This review covered a number of factors including the market potential of each product given its stage of development, taking into account, among other things, issues of safety and efficacy, product profile, competitiveness of the marketplace, the proprietary position of the product and its potential profitability. Our 2010 review resulted in no impact to the carrying value of our octreotide - acromegaly intangible asset. However, the analysis identified certain commercial challenges with respect to the octreotide - carcinoid syndrome intangible asset including the expected rate of physician acceptance and the expected rate of existing patients willing to switch therapies. Upon analyzing the Company's research and development priorities, available resources for current and future projects, and the commercial potential for octreotide - carcinoid syndrome, the Company decided to discontinue development of octreotide for the treatment of carcinoid syndrome. As a result of the above developments, the Company recorded a pre-tax non-cash impairment charge of $22.0 million in 2010 to write-off, in its entirety, the octreotide - carcinoid syndrome intangible asset.                                           89

--------------------------------------------------------------------------------

Table of Contents

  In September 2011, the Company recorded a pre-tax non-cash impairment charge of $22.7 million to completely impair its cost method investment in a privately-held company focused on the development of an innovative treatment for certain types of cancer. This impairment was recorded due to the negative clinical trial results related to this company's lead asset.  On November 11, 2011, the Company decided to terminate development of its octreotide implant for the treatment of acromegaly and, on December 27, 2011, terminated its pagoclone development program after conducting an in-depth review of the Company's research and development activities, including an analysis of research and development priorities, focus and available resources for current and future projects and the commercial potential for the products. Accordingly, we recorded pre-tax non-cash impairment charges of $8.0 million and $9.0 million, respectively, in 2011 to completely write-off the remaining pagoclone intangible asset and the octreotide - acromegaly intangible asset.  As part of our 2011 annual review of all IPR&D assets, we conducted an in-depth review of one of the lead IPR&D assets we acquired from Qualitest. This review covered a number of factors including the market potential of this product given its stage of development, taking into account, among other things, issues of safety and efficacy, product profile, competitiveness of the marketplace, the proprietary position of the product and its potential profitability. As part of this review, the Company also considered a deficiency received from the FDA on an ANDA submission for this asset, which was received during the fourth quarter of 2011. As a result of the 2011 review as well as the regulatory challenges and changes in the development timeline resulting from the FDA's request, the Company terminated its development of this asset. In addition, as a result changes in market conditions since the acquisition date, there has been a significant deterioration in the commercial potential for this product. Accordingly, we recorded a pre-tax non-cash impairment charge of $71.0 million in 2011 to write off the intangible asset in its entirety.  

Our remaining 2011 asset impairment charges of $5.4 million were related to various other long-lived assets for which we determined the carrying amount was not fully recoverable.

Acquisition-Related Items, net

  Acquisition-related items, net in 2011 were $33.6 million of expense compared to $19.0 million of expense in 2010. Acquisition-related items, net in 2011 primarily consisted of transaction fees of $41.0 million, including legal, separation, integration, and other expenses for our recent acquisitions, partially offset by a favorable change in the fair value of the acquisition-related contingent consideration of $7.4 million, which was recorded as a gain. The change in the fair value of the acquisition-related contingent consideration primarily reflects changes to our present value assumptions associated with our valuation models. This compares to 2010 transaction fees of $70.4 million, including legal, separation, integration, and other expenses for our 2010 acquisitions, partially offset by a favorable change in the fair value of the acquisition-related contingent consideration of $51.4 million, which was recorded as a gain. The 2010 and 2011 change in the fair value of the acquisition-related contingent consideration was primarily due to management's assessment that it would not be obligated to make contingent consideration payments related to octreotide.  

Interest Expense, net

The components of interest expense, net for the years ended December 31 are as follows (in thousands):

                                                2011           2010                    Interest expense        $ 148,623      $ 47,956                    Interest income              (599 )      (1,355 )                     Interest expense, net   $ 148,024      $ 46,601                                             90 

--------------------------------------------------------------------------------

Table of Contents

  Interest expense in 2011 was $148.6 million compared with $48.0 million in 2010. The increase in interest expense was primarily attributable to increases to our average total indebtedness in 2011 compared to 2010. In 2011, we incurred $66.6 million of interest expense on our $1.3 billion of senior notes, of which $400.0 million originated in November 2010 and the remaining $900.0 million in June 2011. This compares to $3.1 million of senior note interest in 2010. Our 2011 interest expense related to our credit facilities was $51.3 million compared to $5.4 million in 2010. This increase was largely attributable to the 2011 Credit Facility entered into in June 2011, which provided $2.2 billion of term loan indebtedness compared to $400.0 million of term loan indebtedness at December 31, 2010. These increases were partially offset by reduced interest expense on our Non-recourse Notes, which incurred $7.3 million of interest expense in 2010 until they were retired in the third quarter of 2010.  

Interest income decreased to $0.6 million in 2011 compared to $1.4 million in 2010. This decrease is a result of the fluctuations in the amount of cash invested in interest-bearing accounts, including our money market funds and auction-rate securities, as well as the yields on those investments.

Loss (Gain) on Extinguishment of Debt

  In June 2011, we terminated the 2010 Credit Facility and established the 2011 Credit Facility. Unamortized financing costs associated with the prior credit facilities totaled approximately $14.7 million on June 17, 2011. In accordance with the applicable accounting guidance for debt modifications and extinguishments, approximately $8.5 million of this amount was written off and is included in the Condensed Consolidated Statements of Operations as a Loss on extinguishment of debt.  In September 2011 and December 2011, we made prepayments of $135.0 million and $125.0 million, respectively, on our Term Loan B Facility. In accordance with the applicable accounting guidance for debt modifications and extinguishments, approximately $3.4 million of the remaining unamortized financing costs were written off in connection with our 2011 prepayments and included in the Consolidated Statements of Operations as a Loss on extinguishment of debt.  

Other Income, net

  The components of other income, net for the years ended December 31 are as follows (in thousands):                                                         2011          2010           Gain on trading securities               $     -       $ (15,420 )           Loss on auction-rate securities rights         -          15,659           Other income                               (3,268 )       (2,172 )            Other income, net                        $ (3,268 )    $  (1,933 )    During 2010, the value of our trading auction-rate securities increased by $15.4 million. The increases in fair value were more than offset by losses recorded as a result of decreases in the fair value of our auction-rate securities rights totaling $15.7 million. As all auction-rate securities rights were exercised and all trading auction-rate securities were sold on June 30, 2010, there were no subsequent changes to their respective fair values.  

Income Tax

  Income tax expense in 2011 decreased 18% from 2010 to $109.6 million. This fluctuation is due to a $69.0 million decrease in income before income tax and the decrease in our effective income tax rate to 31.2% from 31.8% in 2010. The decrease in the effective income tax rate is primarily due to an increase in non-taxable income attributable to non-controlling interests in the current period as compared to the comparable 2010 period, the release of reserves related to uncertain tax positions due to statute of limitations expirations and audit settlements, an increase in the Domestic Production Activities deduction, and a decrease in transactions costs                                           91

--------------------------------------------------------------------------------

Table of Contents

  from acquisitions in the current period as compared to the comparable 2010 period. This decrease was partially offset by a lower benefit from non-taxable reductions in the fair value of contingent consideration in the current period as compared to the comparable 2010 period, the establishment of a valuation allowance in the current period against an anticipated capital loss on our cost method investment in a privately-held company and a charge for the non-deductible Branded Prescription Drug fee enacted in 2011.  

Net income attributable to noncontrolling interests

  As a result of our July 2010 acquisition of HealthTronics, we own interests in various partnerships and limited liability corporations (LLCs) where we, as the general partner or managing member, exercise effective control. Accordingly, we consolidate various entities where we do not own 100% of the entity in accordance with the accounting consolidation principles. Net income attributable to noncontrolling interests relates to the portion of the net income of these partnerships and LLCs not attributable, directly or indirectly, to our ownership interests. Net income attributable to noncontrolling interest increased to $54.5 million in 2011 from $28.0 million in 2010 due to the results of our HealthTronics subsidiary, which contributed six months of results in 2010 compared to a full year in 2011.  

2012 Outlook

  We estimate that our 2012 total revenues will be between $3.15 billion and $3.30 billion. Our estimate is based on the continued growth of both our generic and branded product portfolios, driven by ongoing prescription demand for our key inline products, including Lidoderm®, Opana ® ER, and Voltaren® Gel, and the full-year effect of the AMS acquisition. We currently expect the effects of the temporary supply constraints linked to the Novartis facility shutdown to have a disproportionate effect on first quarter revenues. We believe our estimate contemplates a range of outcomes related to certain assumptions, including recovery from the Novartis supply disruption and the recent procedural volume pressures in the AMS Women's Health business. Cost of revenues as a percent of total revenues is expected to increase when compared to 2011. This increase is expected due to a full year of amortization expense associated with the intangible assets acquired with AMS as well as growth in lower margin generic and branded pharmaceutical products in 2012, partially offset by a full year's revenues from the AMS acquisition. Selling, general and administrative expenses, as a percentage of revenues, are expected to decline in 2012, relative to 2011, reflecting new approaches to customer segmentation and marketing, annualized effects of the prior year's cost reduction efforts and forecasted synergies associated with our AMS acquisition. Absolute selling, general and administrative expenses, however, will increase, reflecting the full year effects of our acquisitions. As well, we will continue to provide promotional support behind our key on-market products. Research and development expenses are expected to increase due to the addition of AMS's research and development portfolio to our existing programs, the progress of our branded pharmaceutical portfolio's development, as well as the expansion of our efforts in the pharmaceutical discovery and device research and development areas. Of course, there can be no assurance that the Company will achieve these results.  

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Revenues

  Total revenues in 2010 increased 17% to $1.72 billion from $1.46 billion in the comparable 2009 period. This increase in revenues is primarily driven by organic growth in our branded pharmaceuticals product portfolio, including Lidoderm®, Opana® ER and Voltaren® Gel, as well as our 2010 acquisitions, including $102.1 million in revenues from HealthTronics and $30.3 million in revenues from Qualitest. Lastly, included in 2010 are the revenues from the products we acquired, including Supprelin ® LA and other brands, resulting from our acquisition of Indevus. The full year of revenues from these products in 2010 compares to a partial year in 2009 as the revenue from Indevus was included from February 23, 2009 through December 31, 2009. For the year-ended December 31, 2010, sales growth was essentially volume driven, while price fluctuations had no material impact.                                           92 

--------------------------------------------------------------------------------

Table of Contents

The following table provides a breakdown of our revenues for the years ended December 31 (dollars in thousands):

                                                   2010                      2009                                              $            %            $            %        Lidoderm®                            782,609        46     $   763,698        52        Opana®ER                             239,864        14         171,979        12        Voltaren®Gel                         104,941         6          78,868         5        Percocet®                            121,347         7         127,090         9        Frova®                                59,299         3          57,924         4        Supprelin®LA                          46,910         3          27,822         2        Other brands                         112,602         7         108,729         7         Total Branded Pharmaceuticals*     1,467,572        86       1,336,110        91        Total Generics                       146,513         9         124,731         9        Total Devices                             -         -               -         -        Total Services revenue               102,144         6              -         -         Total revenues*                    1,716,229       100     $ 1,460,841       100     

* - Percentages may not add due to rounding.

   Lidoderm®. Net sales of Lidoderm ® in 2010 increased by $18.9 million or 2% to $782.6 million from $763.7 million in 2009. The growth of this product has slowed, in recent years, as it matures and competition in the topical pain market increases. Notwithstanding, the product has had a solid performance this year and continues to generate strong cash flow that we can use to invest in our business to continue to further diversify our revenue base.  Opana ® ER. Net sales of Opana® ER in 2010 increased by 39% or $67.9 million to $239.9 million from $172.0 million in 2009. The growth in net sales is primarily attributable to continued prescription and market share growth of the product. In addition, our strategy to effectively contract with managed care organizations has resulted in increases in volume as we have broadened our access for the brand.  Voltaren® Gel. Net sales of Voltaren® Gel in 2010 increased by $26.1 million or 33% to $104.9 million from $78.9 million in 2009. The increase was driven by volume. The Company launched Voltaren® Gel in March 2008. We believe the growth of Voltaren® Gel since its launch is driven by improved formulary positioning with MCOs, and the product's proven clinical efficacy combined with our continued promotional activities aimed at increasing product awareness in the target audience. We believe we are establishing a strong position in the osteoarthritis market with Voltaren ® Gel.  Percocet®. Net sales of Percocet® in 2010 decreased by $5.7 million or 5% to $121.3 million from $127.1 million in 2009. The decrease is primarily attributable to decreased volumes during 2010 as compared to 2009, partially offset by price increases.  

Frova®. Net sales of Frova® in 2010 increased by $1.4 million or 2% to $59.3 million from $57.9 million in 2009. The growth in net sales is primarily attributable to price increases, partially offset by decreases in volume.

  Supprelin® LA. Net sales of Supprelin® LA during 2010 increased by $19.1 million or 69% from the comparable 2009 period. This increase was driven primarily by volume growth in 2010, as well as a full twelve months of activity in 2010 compared to a partial period in 2009. In 2010, volume growth was driven primarily by an increase in new patient starts and a growing base of continued care patients. We believe this growth is largely due to a strong base of national opinion leader support and ongoing efforts to streamline the treatment initiation process.                                           93 

--------------------------------------------------------------------------------

Table of Contents

  Other brands. Net sales of our other branded products in 2010 increased by $3.9 million or 4% to $112.6 million from $108.7 million in 2009. This increase is primarily attributable to a full year of royalty revenue from Sanctura® and Sanctura XR® compared to approximately ten months in 2009.  Generics. Net sales of our generic products in 2010 increased by $21.8 million or 17% to $146.5 million from $124.7 million in 2009. This increase was primarily driven by our acquisition of Qualitest on November 30, 2010, which contributed $30.3 million of net sales of generic products in 2010. This increase was partially offset by a shortage of other competing generic opioids in the market during the first half of 2009, which was an anomaly and did not recur to the same extent during 2010.  

Service revenues. Service revenues were $102.1 million during 2010. This amount consists of revenues from the acquisition of HealthTronics.

Gross Margin, Costs and Expenses

The following table sets forth costs and expenses for the years ended December 31 (dollars in thousands):

                                                         2010                                     2009                                              $             % of revenues             $              % of revenues Cost of revenues                            504,757                    29           375,058                     26 Selling, general and administrative         547,605                    32           534,523                     37 Research and development                    144,525                     8           185,317                     13 Asset impairment charges                     35,000                     2            69,000                      5 Acquisition-related items, net               18,976                     1           (93,081 )                   (6 )  Total costs and expenses*                 1,250,863                    73         1,070,817                     73     

* - Percentages may not add due to rounding.

Costs of Revenues and Gross Profit Margin

  Costs of revenues in 2010 increased by $129.7 million or 35%, to $504.8 million from <money>$375.1 million in 2009, primarily due to increased revenues in 2010. Gross profit margins were 71% in 2010 compared with 74% in 2009. The reduction in gross profit margin in 2010 is primarily due to the acquisitions of HealthTronics and Qualitest, which have contributed a lower gross profit margin percentage than Endo's branded pharmaceuticals net sales relative to total revenues. Gross profit margin has also been unfavorably impacted by the increased amortization expense in 2010 compared to the 2009 period as a result of our recent acquisitions, including a full twelve months of amortization on the acquired Indevus intangible assets. Lastly, gross profit margin was negatively impacted by the increase in royalty expense recorded on net sales of Opana® ER during 2010 compared to 2009, as a result of the expiration of the 50% royalty holiday during the three months ended March 31, 2010, partially offset by the elimination of this royalty obligation in the latter portion of the year, subsequent to our acquisition of Penwest. This royalty, however, was no longer payable beginning on September 20, 2010 as a result of the acquisition of Penwest.  

Selling, General and Administrative Expenses

  Selling, general and administrative expenses in 2010 increased by 2% to $547.6 million from $534.5 million in 2009. The increase in Selling, general and administrative expenses for 2010 compared to 2009 is primarily attributable to increased expenses as a result of our acquisitions of HealthTronics, Qualitest, and Penwest of $24.7 million as well as $10.1 million of certain costs incurred in connection with continued efforts to enhance the cost structure of the Company, and $6.7 million in start-up costs associated with our contract sales organization. These amounts were partially offset by a reduction in Selling, general and administrative expenses                                           94

--------------------------------------------------------------------------------

Table of Contents

from Indevus in 2010 compared to 2009 resulting from further integration of Indevus into our operations during 2010, the favorable impact of certain cost reduction initiatives, and the timing of certain sales and marketing programs.

Research and Development Expenses

Research and development expenses in 2010 decreased by 22% to $144.5 million from $185.3 million in 2009. This decrease is primarily a result of lower upfront and milestone payments in 2010, as compared to 2009.

Asset Impairment Charges

  In May 2010, Teva Pharmaceutical Industries Ltd. terminated the pagoclone development and licensing arrangement with the Company upon the completion of the Phase IIb study. As a result, the Company concluded that there was a decline in the fair value of the corresponding indefinite-lived intangible asset. Accordingly, we recorded a $13.0 million impairment charge in 2010. As part of our annual review of all IPR&D assets, we conducted an in-depth review of both octreotide indications. This review covered a number of factors including the market potential of each product given its stage of development, taking into account, among other things, issues of safety and efficacy, product profile, competitiveness of the marketplace, the proprietary position of the product and its potential profitability. Our review resulted in no impact to the carrying value of our octreotide - acromegaly intangible asset. However, the analysis identified certain commercial challenges with respect to the octreotide - carcinoid syndrome intangible asset including the expected rate of physician acceptance and the expected rate of existing patients willing to switch therapies. Upon analyzing the Company's research and development priorities, available resources for current and future projects, and the commercial potential for octreotide - carcinoid syndrome, the Company has decided to discontinue development of octreotide for the treatment of carcinoid syndrome. As a result of the above developments, the Company recorded a pre-tax non-cash impairment charge of $22.0 million in 2010, to write-off, in its entirety, the octreotide - carcinoid syndrome intangible asset.  This compares to a $65.0 million impairment charge relating to the write-down of our AveedTM indefinite-lived intangible asset and a $4.0 million write-off of our Pro2000 indefinite-lived intangible asset in 2009. However, due to the unsuccessful Phase III clinical trials for Pro2000, which were completed in December of 2009, the Company concluded there was no further value or alternative use associated with this indefinite-lived asset. As a result of the FDA's response letter received in December of 2009, the Company reassessed the fair value of our AveedTM indefinite-lived intangible asset and concluded that the asset was impaired due to a change in probability of approval, relative timing of commercialization and the changes to the targeted population of eligible recipients. The extent of the impairment was partially offset due to the Company being notified that the U.S. patent office had issued a Notice of Allowance on a patent covering the AveedTM formulation. The patent should expire no earlier than late 2025.  

Acquisition-Related Items, net

  Acquisition-related items, net in 2010 were $19.0 million in expense compared to $93.1 million of income in 2009. Acquisition-related items, net in 2010 primarily consisted of transaction fees of $70.4 million, including legal, separation, integration, and other expenses for our 2010 acquisitions, partially offset by favorable changes in the fair value of the acquisition-related contingent consideration of $51.4 million, which was recorded as a gain. The change in the fair value of the acquisition-related contingent consideration was primarily due to management's current assessment that it will not be obligated to make contingent consideration payments based on the anticipated timeline for the NDA filing and FDA approval of octreotide for the treatment of acromegaly. This compares to $93.1 million in income in 2009, in which we incurred $35.0 million of acquisition-related costs which were attributable to transaction fees, professional service fees, employee retention and separation arrangements and other costs related to the Indevus acquisition. These costs were more than offset by favorable changes in the fair value of the acquisition-related contingent consideration which resulted in a gain of $128.1 million during the year ended December 31, 2009.                                           95</pre>
--------------------------------------------------------------------------------
  Table of Contents
Interest Expense (Income), net
The components of interest expense, net for the years ended December 31 are as follows (in thousands):
                                                2010          2009                    Interest expense        $ 47,956      $ 41,247                    Interest income           (1,355 )      (3,529 )                     Interest expense, net   $ 46,601      $ 37,718    Interest expense in 2010 was $48.0 million compared with $41.2 million for the comparable period in 2009. This increase is primarily due to $8.5 million of interest expense resulting from the $800.0 million of indebtedness the Company incurred in November of 2010. Interest income decreased to $1.4 million in 2010 compared to $3.5 million in 2009. This decrease is a result of the fluctuations in the amount of cash invested in interest-bearing accounts, including our money market funds and auction-rate securities, as well as the yields on those investments.  
Loss (Gain) on Extinguishment of Debt
  As a result of the cash tender offer for any and all outstanding Non-recourse notes, which closed in September 2009, the Company accepted for payment and purchased Non-recourse notes at a purchase price of $1,000 per $1,000 principal amount, for a total amount of approximately $48 million (excluding accrued and unpaid interest up to, but not including, the payment date for the Notes, fees and other expenses in connection with the tender offer). The aggregate principal amount of Non-recourse notes purchased represents approximately 46% of the $105 million aggregate principal amount of Non-recourse notes that were outstanding prior to the tender offer closing. Accordingly, the Company recorded a $4.0 million gain on the extinguishment of debt, net of transaction costs. The gain was calculated as the difference between the aggregate amount paid to purchase the Non-recourse notes and their carrying amount.  
Other Income, net
  The components of other income, net for the years ended December 31 are as follows (in thousands):                                                         2010           2009           Gain on trading securities                 (15,420 )      (15,222 )           Loss on auction-rate securities rights      15,659         11,662           Other (income) expense                      (2,172 )          231            Other income, net                        $  (1,933 )    $  (3,329 )    During 2010, the value of our trading auction-rate securities increased by $15.4 million. The increase in fair value was more than offset by losses recorded as a result of decreases in the fair value of our auction-rate securities rights totaling $15.7 million. These changes were primarily a result of the Company exercising the auction-rate securities rights in the second quarter of 2010 and liquidating our outstanding UBS AG (UBS) auction-rate security portfolio at par value. During 2009, the value of our trading auction-rate securities increased by $15.2 million, which was partially offset by losses recorded as a result of decreases in the fair value of our auction-rate securities rights totaling $11.7 million.  Income Tax  Income tax expense in 2010 increased by 43% to $133.7 million from $93.3 million in 2009. The increase in income tax expense is due to the increase in income before income tax as compared to 2009, as well as the increase in our effective income tax rate to 31.8% from 25.9% in 2009. The increase in the effective income tax rate is primarily the result of a smaller favorable impact related to changes in the fair value of acquisition related                                           96
--------------------------------------------------------------------------------
  Table of Contents
  contingent consideration of $15.7 million in 2010, compared to $40.5 million in 2009. These impacts resulted from non-taxable reductions in the fair value of contingent consideration of $44.8 million in 2010, compared to $115.7 million in 2009. The increase in rate was also impacted by an increase in non-deductible transaction costs, which unfavorably impacted 2010 income tax expense by $9.6 million, compared to $3.3 million in 2009. These increases were partially offset by the impact of the noncontrolling interests in our consolidated limited partnerships and limited liability companies assumed with the HealthTronics acquisition, as they are not taxable to Endo and favorably impacted 2010 income tax expense by $9.8 million.  
Business Segment Results Review
  In the fourth quarter of 2011, as a result of our strategic planning process, the Company's executive leadership team reorganized the manner in which it views our various business activities. Management's intention was to better understand the entity's performance, better assess its prospects and future cash flow potential and ultimately make more informed operating decisions about resource allocation and the enterprise as a whole. Based on this change, we reassessed our reporting structure under the applicable accounting guidance and determined that the Company now has four reportable segments. We have retrospectively revised the segment presentation for all periods presented reflecting the change from three to four reportable segments. This change in our segments has no impact on the Company's consolidated financial statements for all years presented.  The four reportable business segments in which the Company now operates include: (1) Branded Pharmaceuticals, (2) Generics, (3) Devices and (4) Services. Each segment derives revenue from the sales or licensing of their respective products or services and is discussed below.  
Branded Pharmaceuticals
  This group of products includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this operating segment include Lidoderm ®, Opana® ER, Percocet®, Voltaren ® Gel, Frova®, Supprelin® LA, Vantas ®, Valstar® and Fortesta® Gel.  
Generics
  This segment is comprised of our legacy Endo non-branded generic portfolio and the portfolio from our recently acquired Qualitest business. Our generics business has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. With the addition of Qualitest, the segment's product offerings now include products in the pain management, urology, central nervous system (CNS) disorders, immunosuppression, oncology, women's health and hypertension markets, among others.  
Devices
  The Devices segment currently focuses on providing technology solutions to physicians treating men's and women's pelvic health conditions and operates in the following business lines: men's health, women's health, and BPH therapy. These business lines are discussed in greater detail within Note 5. Acquisitions in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. We distribute devices through our direct sales force and independent sales representatives in the U.S., Canada, Australia, Brazil and Western Europe. Additionally, we distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our devices or services customers or distributors accounted for ten percent or more of our total revenues during 2011, 2010 or 2009. Foreign subsidiary sales are predominantly to customers in Western Europe, Canada, Australia and Brazil.                                           97
--------------------------------------------------------------------------------
  Table of Contents
Services
  The Services segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics across the U.S. These services are sold through the following business lines: lithotripsy services, prostate treatment services, anatomical pathology services, medical products manufacturing, sales and maintenance and electronic medical records services. These business lines are discussed in greater detail within Note 5. Acquisitions in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.  We evaluate segment performance based on each segment's adjusted income (loss) before income tax, a financial measure not determined in accordance with U.S. generally accepted accounting principles (GAAP). We define adjusted income (loss) before income tax as income (loss) before income tax before certain upfront and milestone payments to partners, acquisition-related items, net, cost reduction initiatives, impairments of long-lived assets, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, and certain other items that the Company believes do not reflect its core operating performance.  Certain corporate general and administrative expenses are not allocated and are therefore included within Corporate unallocated. We calculate consolidated adjusted income (loss) before income tax by adding the adjusted income (loss) before income tax of each of our reportable segments to corporate unallocated adjusted income (loss) before income tax.  We refer to adjusted income (loss) before income tax in making operating decisions because we believe it provides meaningful supplemental information regarding the Company's operational performance. For instance, we believe that this measure facilitates its internal comparisons to its historical operating results and comparisons to competitors' results. The Company believes this measure is useful to investors in allowing for greater transparency related to supplemental information used by us in our financial and operational decision-making. In addition, we have historically reported similar financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our financial reporting at this time. Further, we believe that adjusted income (loss) before income tax may be useful to investors as we are aware that certain of our significant stockholders utilize adjusted income (loss) before income tax to evaluate our financial performance. Finally, adjusted income (loss) before income tax is utilized in the calculation of adjusted diluted net income per share, which is used by the Compensation Committee of Endo's Board of Directors in assessing the performance and compensation of substantially all of our employees, including our executive officers.  There are limitations to using financial measures such as adjusted income (loss) before income tax. Other companies in our industry may define adjusted income (loss) before income tax differently than we do. As a result, it may be difficult to use adjusted income (loss) before income tax or similarly named adjusted financial measures that other companies may use to compare the performance of those companies to our performance. Because of these limitations, adjusted income (loss) before income tax should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. The Company compensates for these limitations by providing reconciliations of our consolidated adjusted income (loss) before income tax to our consolidated income before income tax, which is determined in accordance with U.S. GAAP and included in our Consolidated Statements of Operations in our Consolidated Financial Statements included in this Annual Report on Form 10-K.                                           98
--------------------------------------------------------------------------------
  Table of Contents
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Revenues
  The following table displays our revenue by reportable segment for 2011 and 2010 (in thousands):                                                              2011            2010    Branded Pharmaceuticals                             $ 1,657,767     $ 1,467,572    Generics                                                566,854         146,513    Devices(1)                                              300,299              -    Services                                                205,201         102,144 
   Total consolidated revenues to external customers   $ 2,730,121$ 1,716,229
(1) The following table displays our devices revenue by geography (in thousands).
     International revenues were not material to any of our other segments for any     of the years presented.                                                     2011        2010                      Devices:                      United States            $ 202,462     $  -                      International               97,837        -                       Total devices revenues   $ 300,299     $  -    Branded Pharmaceuticals. Net sales during 2011 increased 13% to $1,657.8 million from $1,467.6 million in 2010. This increase was primarily driven by increased revenues from Opana® ER, Lidoderm® and Voltaren® Gel, partially offset by decreased revenues from Percocet® and certain other brands.  Generics. Net sales of our generic products in 2011 increased by $420.3 million or 287% to $566.9 million from $146.5 million in 2010. This increase was primarily driven by our acquisition of Qualitest on November 30, 2010. Qualitest products contributed $446.2 million of net sales of generic products in 2011, compared with $30.3 million in 2010.  Devices. Revenues from our devices business in 2011 were $300.3 million and were primarily attributable to sales of products from our AMS subsidiary, which we acquired in June 2011. AMS products that represented approximately 1% or more of our consolidated total revenues in 2011 included the AMS 700® series of inflatable prostheses, the AMS 800® artificial urinary sphincter, the GreenLightTM laser therapy products used to treat BPH, the Monarc® subfascial hammock and the ElevateTM anterior pelvic floor repair system.  Services. Revenues from our services business in 2011 increased by $103.1 million to $205.2 million from $102.1 million in 2010. This increase was driven by the full-year impact of HealthTronics, which contributed six months of revenue in 2010 compared to a full year of revenue in 2011. The $205.2 million consisted primarily of lithotripsy fees of $110.2 million, cryosurgery treatment fees of $26.0 million and other service revenues from our HealthTronics business.  
Adjusted income (loss) before income tax
The following table displays our adjusted income (loss) before income tax by reportable segment and for 2011 and 2010 (in thousands):
                                                               2011            2010   Branded Pharmaceuticals                                $  890,951      $  757,453   Generics                                                  107,204          24,722   Devices                                                    82,418              -   Services                                                   68,769          35,538   Corporate unallocated                                    (318,100 )      (194,459 ) 
  Total consolidated adjusted income before income tax   $  831,242$  623,254
                                            99 
--------------------------------------------------------------------------------
  Table of Contents
Branded Pharmaceuticals. Adjusted income before income tax during 2011 increased 18% to $891.0 million from $757.5 million in 2010. This increase was primarily driven by increased revenues from our Branded Pharmaceuticals segment as well as the decrease in the royalty expense to Penwest from $29.8 million during 2010 to zero during 2011. This royalty was eliminated upon our acquisition of Penwest in the third quarter of 2010.  Generics. Adjusted income before income tax during 2011 increased 334% to $107.2 million from $24.7 million in 2010. This increase was primarily driven by increased revenues from our Qualitest acquisition as well as decreased research and development expense as a percentage of revenues.  
Devices. Adjusted income before income tax during 2011 was $82.4 million and was attributable to our AMS subsidiary, which we acquired in June 2011.
  Services. Adjusted income before income tax during 2011 was $68.8 million compared to $35.5 million in 2010. This increase was driven by our acquisition of HealthTronics, which contributed six months of results in 2010 compared to a full year in 2011.  Corporate unallocated. Corporate unallocated adjusted loss before income tax during 2011 increased 64% to $318.1 million from $194.5 million in 2010, which is primarily attributable to the overall growth of our business and the related increase in corporate costs, including increases in net interest expense of $101.4 million.  Reconciliation to GAAP. The table below provides reconciliations of our consolidated adjusted income (loss) before income tax to our consolidated income before income tax, which is determined in accordance with U.S. GAAP, for the years ended December 31, 2011 and 2010 (in thousands):                                                                     Twelve Months Ended                                                                     December 31,                                                                 2011             2010
Total consolidated adjusted income before income tax         $  831,242
    $ 623,254 Upfront and milestone payments to partners                      (28,098 )        (23,850 ) Acquisition-related items, net                                  (33,638 )        (18,976 ) Cost reduction initiatives                                      (21,821 )        (17,245 ) Asset impairment charges                                       (116,089 )  
     (35,000 ) Amortization of intangible assets related to marketed products and customer relationships
                            (190,969 )        (83,974 ) Inventory step-up                                               (49,438 )         (6,289 ) Non-cash interest expense                                       (18,952 )        (16,983 ) Loss on extinguishment of debt, net                             (11,919 )   
          -
 Accrual for unfavorable court decision for litigation           (11,263 )   
          -
 Other income (expense), net                                       2,636     
        (239 )
  Total consolidated income before income tax                  $  351,691
$ 420,698
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Revenues
The following table displays our revenue by reportable segment for 2010 and 2009 (in thousands):
                                                2010            2009                 Branded Pharmaceuticals   $ 1,467,572     $ 1,336,110                 Generics                      146,513         124,731                 Devices                            -               -                 Services                      102,144              -                  Total revenues            $ 1,716,229     $ 1,460,841                                            100 
--------------------------------------------------------------------------------
  Table of Contents
Branded Pharmaceuticals. Net sales during 2010 increased 10% to $1,467.6 million from $1,336.1 million in 2009. This increase was primarily driven by increased revenues of Lidoderm®, Opana® ER and Opana® and Voltaren ® Gel. Also, included in the 2010 amount are the full-year revenues from the products we acquired, including Supprelin ® LA and other brands, from Indevus. This compares to a partial year in 2009 as the revenue from Indevus products was included from February 23, 2009 through December 31, 2009.  Generics. Net sales during 2010 increased 17% to $146.5 million from $124.7 million in 2009. This increase was primarily driven by our acquisition of Qualitest in November 2010, which contributed $30.3 million of net sales to our Generics segment in 2010. This increase was partially offset by a shortage of other competing generic opioids in the market during the first half of 2009, which was an anomaly and did not recur to the same extent during 2010.  
Services. Revenue during 2010 was $102.1 million. This amount consists of revenues from the acquisition of HealthTronics in July 2010.
Adjusted income (loss) before income tax
The following table displays our adjusted income (loss) before income tax by reportable segment and for 2010 and 2009 (in thousands):
                                                               2010            2009   Branded Pharmaceuticals                                $  757,453      $  642,997   Generics                                                   24,722          28,557   Devices                                                        -               -   Services                                                   35,538              -   Corporate unallocated                                    (194,459 )      (174,994 ) 
  Total consolidated adjusted income before income tax   $  623,254$  496,560
Branded Pharmaceuticals. Adjusted income (loss) before income tax during 2010 increased 18% to $757.5 million from $643.0 million in 2009. This increase was primarily driven by increased revenues from our Branded Pharmaceuticals segment as well as decreases in operating expenses as a result of companywide cost reduction initiatives, particularly related to sales and marketing.  Generics. Adjusted income (loss) before income tax during 2010 decreased 13% to $24.7 million from $28.6 million in 2009. This decrease was primarily driven by the operating expenses related to our acquisition of Qualitest in November 2010, as well as investments that the company is making in the legacy Endo generics portfolio. These amounts were partially offset by increased revenues from our Generics business in 2010 compared to 2009.  
Services. Adjusted income (loss) before income tax during 2010 was $35.5 million. This amount consists of the operating results of HealthTronics, which we acquired in July 2010.
  Corporate unallocated. Corporate unallocated adjusted loss before income tax during 2010 increased 11% to $194.5 million from $175.0 million in 2009. Corporate unallocated adjusted loss before income tax as a percent of consolidated total revenues decreased to 11.3% in 2010 compared to 12.0% in 2009. These fluctuations were primarily driven by the continued growth of the business in 2010, partially offset by the favorable impact of companywide cost reduction initiatives.                                          101 
--------------------------------------------------------------------------------
  Table of Contents
  Reconciliation to GAAP. The table below provides reconciliations of our consolidated adjusted income (loss) before income tax to our consolidated income before income tax, which is determined in accordance with U.S. GAAP, for the years ended December 31, 2010 and 2009 (in thousands):                                                                     Twelve Months Ended                                                                     December 31,                                                                 2010            2009
Total consolidated adjusted income before income tax          $ 623,254
   $ 496,560 Upfront and milestone payments to partners                      (23,850 )       (77,099 ) Acquisition-related items, net                                  (18,976 )        93,081 Cost reduction initiatives                                      (17,245 )        (2,549 ) Asset impairment charges                                        (35,000 )  
    (69,000 ) Amortization of intangible assets related to marketed products and customer relationships
                             (83,974 )       (62,931 ) Inventory step-up                                                (6,289 )       (11,268 ) Non-cash interest expense                                       (16,983 )       (14,719 ) Gain on extinguishment of debt, net                                  -      
      4,025
 Other (expense) income, net                                        (239 )   
      3,560
  Total consolidated income before income tax                   $ 420,698
$ 359,660
LIQUIDITY AND CAPITAL RESOURCES
  Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are for working capital for operations, licenses, milestone payments, capital expenditures and debt service payments. The Company continues to maintain a sufficient level of working capital, which was approximately $666.3 million at December 31, 2011 compared to $623.7 million and $808.4 million at December 31, 2010 and 2009, respectively. Historically, we have generated positive cash flow from operating activities and have had broad access to financial markets that provide liquidity. Cash, cash equivalents and current marketable securities were approximately $547.6 million at December 31, 2011 compared to $466.2 million and $733.7 million at December 31, 2010 and 2009, respectively. Cash and cash equivalents at December 31, 2011, 2010 and 2009 primarily consisted of bank deposits, time deposits and money market funds.  In 2012, we expect that sales of our currently marketed branded and generic products as well as our devices and our services will allow us to continue to generate positive cash flow from operations. We expect cash generated from operations together with our cash, cash equivalents and current marketable securities to be sufficient to cover cash needs for working capital, general corporate expenses, the payment of contractual obligations, including scheduled principal and interest payments on our outstanding borrowings, capital expenditures, common stock repurchases, if any, and any regulatory and/or sales milestones that may become due.  Beyond 2012, we expect cash generated from operations together with our cash, cash equivalents and marketable securities to continue to be sufficient to cover cash needs for working capital and general corporate purposes, certain acquisitions of other businesses, including the potential payments of up to approximately $336.5 million in contingent cash consideration payments related to our acquisitions of Indevus and Qualitest, products, product rights, or technologies, the payment of contractual obligations, including principal and interest payments on our indebtedness and our Revolving Credit Facility (defined below), and certain minimum royalties due to Novartis and the regulatory or sales milestones that may become due. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our near-term product candidates. Any of the above could adversely affect our future cash flows. We may need to obtain additional funding for future strategic transactions, to repay our outstanding indebtedness, or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.                                          102
--------------------------------------------------------------------------------
  Table of Contents
  We may also elect to incur additional debt or issue equity or convertible securities to finance ongoing operations, acquisitions or to meet our other liquidity needs. Any issuances of equity securities or convertible securities could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact net income per share in future periods. An acquisition may be accretive or dilutive and by its nature, involves numerous risks and uncertainties.  
A description of our current debt agreements is below.
  Credit Facility. On June 17, 2011, the Company terminated its existing credit facility and established a $1,500 million, five-year senior secured term loan facility (the Term Loan A Facility), a $700 million, seven-year senior secured term loan facility (the Term Loan B Facility, and, together with the Term Loan A Facility, the Term Loan Facilities), and a $500 million, five-year senior secured revolving credit facility (the 2011 Revolving Credit Facility and, together with the Term Loan Facilities, the 2011 Credit Facility) with Morgan Stanley Senior Funding, Inc., as administrative agent, Bank of America, N.A., as Syndication Agent, and certain other lenders. The 2011 Credit Facility was established primarily to finance our acquisition of AMS and is available for working capital, general corporate purposes and lines of credit. The agreement governing the 2011 Credit Facility (the 2011 Credit Agreement) also permits up to $500 million of additional revolving or term loan commitments from one or more of the existing lenders or other lenders with the consent of Morgan Stanley Senior Funding, Inc. (the administrative agent) without the need for consent from any of the existing lenders under the 2011 Credit Facility.  The obligations of the Company under the 2011 Credit Facility are guaranteed by certain of the Company's domestic subsidiaries and are secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011 Credit Facility contains certain usual and customary covenants, including, but not limited to covenants to maintain maximum leverage and minimum interest coverage ratios. Borrowings under the 2011 Credit Facility bear interest at an amount equal to a rate calculated based on the type of borrowing and the Company's Leverage Ratio. For term A loans and revolving loans (other than Swing Line Loans), the Company is permitted to elect to pay interest based on an adjusted LIBOR rate plus between 1.75% and 2.50% or an Alternate Base Rate (as defined in the 2011 Credit Agreement) plus between 0.75% and 1.50%. For term B loans, the Company may elect to pay interest based on an adjusted LIBOR rate plus 3.00% or an Alternate Base Rate plus 2.00%. The Company will pay a commitment fee of between 37.5 to 50 basis points, payable quarterly, on the average daily unused amount of the Revolving Credit Facility.  In September 2011 and December 2011, we made prepayments of $135.0 million and $125.0 million, respectively, on our Term Loan B Facility. Pursuant to our rights under the 2011 Credit Agreement, we elected to apply a portion of the September 2011 prepayment against all remaining contractual payments such that we had no remaining principal payment obligations until the maturity of the Term Loan B Facility on June 17, 2018.  7.00% Senior Notes Senior Notes due 2019. On June 8, 2011, we entered into an indenture among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, which governs the terms of the Company's $500.0 million aggregate principal amount of 7.00% Senior Notes due 2019 (the 2019 Notes). The 2019 Notes were issued in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) to qualified institutional buyers in accordance with Rule 144A and to persons outside of the U.S. pursuant to Regulation S under the Securities Act. The 2019 Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company's domestic subsidiaries. The Company used the net proceeds of the 2019 Notes offering to partially finance the acquisition of AMS, and to pay related fees and expenses.  The 2019 Notes bear interest at a rate of 7.00% per year, accruing from June 8, 2011. Interest on the 2019 Notes is payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2012. The 2019 Notes will mature on July 15, 2019, subject to earlier repurchase or redemption in accordance with the terms of the indenture governing the 2019 Notes. The indenture governing the 2019 Notes contains covenants                                          103
--------------------------------------------------------------------------------
  Table of Contents
  that, among other things, restrict the Company's ability and the ability of certain of its restricted subsidiaries to incur certain additional indebtedness and issue preferred stock; make certain dividends, distributions, investments and other restricted payments; sell certain assets; agree to any restrictions on the ability of restricted subsidiaries to make payments to the Company; create certain liens; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; and consolidate, merge or sell substantially all of the Company's assets. These covenants are subject to a number of important exceptions and qualifications, including the fall away or revision of certain of these covenants upon the 2019 Notes receiving investment grade credit ratings.  7.00% Senior Notes Senior Notes due 2020. On November 23, 2010, we entered into an indenture among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, which governs the terms of the Company's $400.0 million aggregate principal amount of 7.00% Senior Notes due 2020 (the 2020 Notes). The 2020 Notes were issued in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) to qualified institutional buyers in accordance with Rule 144A and to persons outside of the U.S. pursuant to Regulation S under the Securities Act. The 2020 Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company's domestic subsidiaries. The Company used the net proceeds of the 2020 Notes offering to partially finance the acquisition of Qualitest, and to pay related fees and expenses.  The 2020 Notes bear interest at a rate of 7.00% per year, accruing from November 23, 2010. Interest on the 2020 Notes is payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. The 2020 Notes will mature on December 15, 2020, subject to earlier repurchase or redemption in accordance with the terms of the indenture governing the 2020 Notes. The indenture governing the 2020 Notes contains covenants that, among other things, restrict the Company's ability and the ability of certain of its restricted subsidiaries to incur certain additional indebtedness and issue preferred stock; make certain dividends, distributions, investments and other restricted payments; sell certain assets; agree to any restrictions on the ability of restricted subsidiaries to make payments to the Company; create certain liens; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; and consolidate, merge or sell substantially all of the Company's assets. These covenants are subject to a number of important exceptions and qualifications, including the fall away or revision of certain of these covenants upon the 2020 Notes receiving investment grade credit ratings.  7.25% Senior Notes Senior Notes due 2022. On June 8, 2011, we entered into an indenture among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, which governs the terms of the Company's $400.0 million aggregate principal amount of 7.25% Senior Notes due 2022 (the 2022 Notes). The 2022 Notes were issued in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) to qualified institutional buyers in accordance with Rule 144A and to persons outside of the U.S. pursuant to Regulation S under the Securities Act. The 2022 Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company's domestic subsidiaries. The Company used the net proceeds of the 2022 Notes offering to partially finance the acquisition of AMS, and to pay related fees and expenses.  The 2022 Notes bear interest at a rate of 7.25% per year, accruing from June 8, 2011. Interest on the 2022 Notes is payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2012. The 2022 Notes will mature on January 15, 2022, subject to earlier repurchase or redemption in accordance with the terms of the indenture governing the 2022 Notes. The indenture governing the 2022 Notes contains covenants that, among other things, restrict the Company's ability and the ability of certain of its restricted subsidiaries to incur certain additional indebtedness and issue preferred stock; make certain dividends, distributions, investments and other restricted payments; sell certain assets; agree to any restrictions on the ability of restricted subsidiaries to make payments to the Company; create certain liens; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; and consolidate, merge or sell substantially all of the Company's assets. These covenants are subject to a number of important exceptions and qualifications, including the fall away or revision of certain of these covenants upon the 2022 Notes receiving investment grade credit ratings.                                          104 
--------------------------------------------------------------------------------
  Table of Contents
  2011 Exchange Offer. On October 14, 2011, the Company filed a Form S-4 Registration Statement with the Securities and Exchange Commission. On October 31, 2011, it filed a prospectus pursuant to Rule 424(b)(3). Pursuant to both filings, the Company offered to exchange the 2019 Notes, 2020 Notes and 2022 Notes for a like principal amount of new notes having identical terms that have been registered under the Securities Act of 1933, as amended. On November 30, 2011, 100% of the 2019 Notes, 2020 Notes and 2022 Notes had been properly tendered in the exchange offer and not withdrawn.  1.75% Convertible Senior Subordinated Notes due 2015. As discussed in Note 18. Debt, in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, in April 2008, we issued $379.5 million in aggregate principal amount of 1.75% Convertible Senior Subordinated Notes due April 15, 2015 (the Convertible Notes) in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.  Holders of the Convertible Notes may convert their notes based on a conversion rate of 34.2466 shares of our common stock per $1,000 principal amount of notes (the equivalent of $29.20 per share), subject to adjustment upon certain events, only under the following circumstances as described in the indenture for the Convertible Notes: (1) during specified periods, if the price of our common stock reaches specified thresholds; (2) if the trading price of the Convertible Notes is below a specified threshold; (3) at any time after October 15, 2014; or (4) upon the occurrence of certain corporate transactions. We will be permitted to deliver cash, shares of Endo common stock or a combination of cash and shares, at our election, to satisfy any future conversions of the notes. It is our current intention to settle the principal amount of any conversion consideration in cash.  The Convertible Notes are only included in the dilutive net income per share calculation using the treasury stock method during periods in which the average market price of our common stock was above the applicable conversion price of the Convertible Notes, or $29.20 per share. In these periods, under the treasury stock method, we calculated the number of shares issuable under the terms of these notes based on the average market price of the stock during the period, and included that number in the total diluted shares outstanding for the period.  We have entered into convertible note hedge and warrant agreements that, in combination, have the economic effect of reducing the dilutive impact of the Convertible Notes. However, we separately analyze the impact of the convertible note hedge and the warrant agreements on diluted weighted average shares outstanding. As a result, the purchases of the convertible note hedges are excluded because their impact would be anti-dilutive. The treasury stock method is applied when the warrants are in-the-money with the proceeds from the exercise of the warrant used to repurchase shares based on the average stock price in the calculation of diluted weighted average shares. Until the warrants are in-the-money, they have no impact to the diluted weighted average share calculation. The total number of shares that could potentially be included if the warrants were exercised is approximately 13 million.                                          105
--------------------------------------------------------------------------------
  Table of Contents
  The following table provides the range of shares that would be included in the dilutive net income per share calculation for the Convertible Notes and warrants based on share price sensitivity (in thousands except per share data):                                 00000       00000          00000       00000       00000       00000          00000       00000                                  Three months ended March 31, 2011                   Three months ended June 30, 2011                              -5%       Actual           +5%        +10%         -5%       Actual           +5%        +10% Average market price of Endo common stock:         $ 33.20     $ 34.95        $ 36.70     $ 38.45     $ 38.13     $ 40.14        $ 42.15     $ 44.15 Impact on dilutive shares: Convertible Notes            1,566       2,138          2,656       3,127       3,044       3,543          3,993       4,401 Warrants                        -           -              -           -           -           46            663       1,222                               1,566       2,138 (1)      2,656       3,127       3,044       3,589 (1)      4,656       5,623                                    00000          00000          00000       00000        00000         00000          00000       00000                                  Three months ended September 30, 2011                  Three months ended December 31, 2011                               -5%          Actual           +5%        +10%          -5%         Actual           +5%        +10% Average market price of Endo common stock:         $   32.05       $ 33.74        $ 35.43     $ 37.11     $   30.53      $ 32.14        $ 33.75     $ 35.35 Impact on dilutive shares: Convertible Notes              1,156         1,750          2,285       2,770           566        1,187          1,752       2,261 Warrants                          -             -              -           -             -            -              -           -                                 1,156         1,750 (1)      2,285       2,770           566        1,187 (1)      1,752       2,261     
(1) Amount included in total diluted shares outstanding of 120.8 million,
    122.7 million, 120.8 million and 120.4 million for the respective three month
    periods ended March 31, 2011, June 30, 2011, September 30, 2011 and
December 31, 2011.
   In accordance with applicable guidance, we calculate our year-to-date basic and diluted shares outstanding using an average of each quarter's basic and diluted share amounts. Accordingly, the actual dilutive impact of our Convertible Notes and warrants for the year ended December 31, 2011 was 2.2 million shares.  3.25% Convertible AMS Notes Due 2036 and 4.00% Convertible AMS Notes Due 2041. As a result of our acquisition of AMS, the Company assumed AMS's 3.25% Convertible Notes due 2036 (the 2036 Notes) and 4.00% Convertible Notes due 2041 (the 2041 Notes and, together with the 2036 Notes, the AMS Notes). In accordance with the indentures governing the AMS Notes, the AMS Notes were immediately convertible upon the closing of Endo's acquisition of AMS. From the AMS Acquisition Date until the make whole premium on the 2036 Notes expired on August 9, 2011, we paid $95.7 million to redeem $61.4 million of the 2036 Notes at a stated premium of 1.5571. From the AMS Acquisition Date until the make whole premium on the 2041 Notes expired on August 1, 2011, we paid $423.4 million to redeem $249.9 million of the 2041 Notes at a stated premium of 1.6940. Our obligation remaining related to the AMS Notes is less than $1.0 million at December 31, 2011, excluding accrued interest.  Share Repurchase Program. Pursuant to our previously announced $750 million share repurchase plan, we may, from time to time, seek to repurchase our equity in open market purchases, privately-negotiated transactions, accelerated stock repurchase transactions or otherwise. This program does not obligate Endo to acquire any particular amount of common stock. Repurchase activity, if any, will depend on factors such as levels of cash generation from operations, cash requirements for investment in the Company's business, timing and extent of future business development activity, repayment of future debt, if any, current stock price, market conditions and other factors. The share repurchase program may be suspended, modified or discontinued at any time. As a result of a two-year extension approved by the Board of Directors in February 2012, the share repurchase plan is set to expire in April 2014. Pursuant to the existing share repurchase program, we purchased approximately 0.9 million shares of our common stock during 2011 totaling $34.7 million and approximately 2.5 million shares of our common stock during 2010 totaling $59.0 million.                                          106
--------------------------------------------------------------------------------
  Table of Contents
  Employee Stock Purchase Plan. At our Annual Meeting of Stockholders held in May of 2011, our shareholders approved the Endo Pharmaceuticals Holdings Inc. Employee Stock Purchase Plan (the ESPP). The ESPP is a Company-sponsored plan that enables employees to voluntarily elect, in advance of any of the four quarterly offering periods ending March 31, June 30, September 30 and December 31 of each year, to contribute up to 10 percent of their eligible compensation, subject to certain limitations, to purchase shares of common stock at 85 percent of the lower of the closing price of Endo common stock on the first or last trading day of each offering period. The maximum number of shares that a participant may purchase in any calendar year is equal to $25,000 divided by the closing selling price per share of our common stock on the first day of the offering period, subject to certain adjustments. Compensation expense will be calculated in accordance with the applicable accounting guidance and will be based on the share price at the beginning or end of each offering period and the purchase discount. Obligations under the ESPP may be satisfied by the reissuance of treasury stock, by the Company's purchase of shares on the open market or by the authorization of new shares. The maximum number of shares available under the ESPP, pursuant to the terms of the ESPP plan document, is one percent of the common shares outstanding on April 15, 2011 or approximately 1.2 million shares. The ESPP shall continue in effect until the earlier of (i) the date when no shares of Stock are available for issuance under the ESPP, at which time the ESPP shall be suspended pursuant to the terms of the ESPP plan document, or (ii) December 31, 2022, unless earlier terminated.  
The ESPP became effective on May 25, 2011 when approved by the Company's stockholders, with the plan commencing on January 1, 2012. Accordingly, there was no impact to our Consolidated Financial Statements in 2011.
Marketable Securities. Beginning in 2008 and continuing through 2011, the securities and credit markets have been experiencing severe volatility and disturbance, increasing risk with respect to certain of our financial assets. As a result of our auction-rate securities rights agreement with UBS (described in more detail below), we have been able to minimize our credit risk losses. On June 30, 2010, we were able to exercise our auction-rate securities rights (the Rights), described below, with UBS and liquidate our remaining UBS auction-rate security portfolio at par value. At December 31, 2011 and 2010, $18.8 million of our marketable securities portfolio was invested in auction-rate debt securities with ratings of AAA. Our investment policy seeks to preserve the value of capital, consistent with maximizing return on the Company's investment, while maintaining adequate liquidity and security. This policy specifically prohibits the investment in auction-rate securities as well as the investment in any security that is below investment grade. However, such restrictions were implemented on a prospective basis and did not impact the Company's ability to continue to hold the auction-rate securities it was invested in when the amended investment policy was adopted.  The underlying assets of our auction-rate securities are student loans. Student loans are insured by the Federal Family Education Loan Program, or FFELP. As of December 31, 2011, the yields on our long-term auction-rate securities were 0.24%. These yields represent the predetermined "maximum" reset rates that occur upon auction failures according to the specific terms within each security's prospectus. Total interest recognized on our auction-rate securities during 2011, 2010 and 2009 was less than $0.1 million, $0.7 million and $2.4 million, respectively. The issuers have been making interest payments promptly.  The Company determined that an income approach (present value technique) that maximizes the use of observable market inputs is the preferred approach to measuring the fair value of our securities. Specifically, the Company used the discount rate adjustment technique to determine an indication of fair value.  To calculate a price for our auction-rate securities, the Company calculates duration to maturity, coupon rates, market required rates of return (discount rate) and a discount for lack of liquidity in the following manner:    
     •   The Company identifies the duration to maturity of the auction-rate
         securities as the time at which principal is available to the investor.
         This can occur because the auction-rate security is paying a coupon that
         is above the required rate of return, and the Company treats the security
         as being called. It can also occur because the market has returned to          normal and the Company treats the auctions as                                           107 
--------------------------------------------------------------------------------
  Table of Contents
       having recommenced. Lastly, and most frequently, the Company treats the        principal as being returned as prepayment occurs and at the maturity of        the security. The initial life used for each remaining security,
       representing time to maturity, was eight years as of December 31, 2011 and
December 31, 2010.    
     •   The Company calculates coupon rates based on estimated relationships
         between the maximum coupon rate (the coupon rate in event of a failure)
         and market interest rates. The representative coupon rate was 3.61% on
December 31, 2011 and 5.10% at December 31, 2010. The Company calculates
         appropriate discount rates for securities that include base interest
         rates, index spreads over the base rate, and security-specific spreads.
         These spreads include the possibility of changes in credit risk over time.
         The spread over the base rate applied to our securities was 204 basis          points at December 31, 2011 and 218 basis points at December 31, 2010.    
     •   The Company believes that a market participant would require an adjustment
         to the required rate of return to adjust for the lack of liquidity. We do
         not believe it is unreasonable to assume a 150 basis points adjustment to
         the required rate of return and a term of either three, four or five years
         to adjust for this lack of liquidity. The increase in the required rate of
         return decreases the prices of the securities. However, the assumption of
         a three, four or five-year term shortens the times to maturity and
         increases the prices of the securities. The Company has evaluated the
         impact of applying each term and the reasonableness of the range indicated
         by the results. The Company chose to use a four-year term to adjust for
         the lack of liquidity as we believe it is the point within the range that
         is most representative of fair value. The Company's conclusion is based in
         part on the fact that the fair values indicated by the results are
         reasonable in relation to each other given the nature of the securities
         and current market conditions.
   At December 31, 2011, the fair value of our auction-rate securities, as determined by applying the above described discount rate adjustment technique, was approximately $17.5 million, representing a 7%, or $1.3 million discount from their original purchase price or par value. This compares to approximately $17.3 million, representing an 8%, or $1.5 million discount from their original purchase price or par value at December 31, 2010. Had the Company chosen to apply a three or five year term with respect to the liquidity adjustment at December 31, 2011, the resultant fair values would have been $17.2 million and $17.8 million, respectively. We believe we have appropriately reflected our best estimate of the assumptions that market participants would use in pricing the assets in a current transaction to sell the asset at the measurement date.  Given the uncertainty in the auction-rate securities market, the Company cannot predict when future auctions related to our existing auction-rate securities portfolio will be successful. However, we do not employ an asset management strategy or tax planning strategy that would require us to sell any of our existing securities at a loss. Furthermore, there have been no adverse changes in our business or industry that could require us to sell the securities at a loss in order to meet working capital requirements.  
At December 31, 2011 and December 31, 2010, the fair value of our auction-rate securities rights was zero.
  Working Capital. Working capital increased to $666.3 million as of December 31, 2011 from $623.7 million as of December 31, 2010. The components of our working capital for the years ended December 31, are below (in thousands):                                              2011             2010             2009     Total current assets              $  1,788,096      $ 1,359,534      $ 1,280,581     Less: Total current liabilities     (1,121,778 )       (735,828 )       (472,180 )      Working capital                   $    666,318      $   623,706      $   808,401                                            108 
--------------------------------------------------------------------------------
  Table of Contents
  Working capital increased slightly from 2010 to 2011 primarily as a result of the current assets and liabilities assumed in connection with our second quarter 2011 acquisition of AMS and the net cash retained from our 2011 financings to acquire AMS. These amounts were partially offset by the use of cash to prepay $260.0 million of our Term Loan indebtedness.  Working capital decreased from 2009 to 2010 primarily as a result of expenditures for our acquisitions of HealthTronics, Penwest, and Qualitest. The acquisitions were further offset by the operating results of HealthTronics, Penwest, and Qualitest, and the sale of $230.3 million of auction-rate debt securities, $205.0 million of which were non-current assets as of December 31, 2009.  The following table summarizes our statement of cash flows and liquidity (dollars in thousands):                                                        2011              2010             2009 Net cash flow provided by (used in): Operating activities                            $    702,115       $  453,646       $  295,406 Investing activities                              (2,374,092 )       (896,323 )       (245,509 ) Financing activities                               1,752,681          200,429         (117,128 ) Effect of foreign exchange rate                          702               -                -  Net (decrease) increase in cash and cash equivalents                                           81,406         (242,248 )        (67,231 ) Cash and cash equivalents, beginning of period                                               466,214          
708,462          775,693
  Cash and cash equivalents, end of period        $    547,620       $  466,214       $  708,462  Current ratio                                          1.6:1            1.8:1            2.7:1 Days sales outstanding                                    45               46               43   Net Cash Provided by Operating Activities. Net cash provided by operating activities was $702.1 million for the year ended December 31, 2011, a 55% increase from 2010. Net cash provided by operating activities was $453.6 million for the year ended December 31, 2010, a 54% increase from the comparable 2009 period. Significant components of our operating cash flows for the years ended December 31, are as follows (in thousands):                                                           2011            2010             2009 Cash Flow Data-Operating Activities: Net income                                           $ 242,065       $ 287,020       $  266,336 Depreciation and amortization                          237,414         108,404           80,381 Stock-based compensation                                46,013          22,909           19,593 Change in fair value of acquisition-related contingent consideration                                (7,363 )       (51,420 )       (128,090 ) Asset impairment charges                               116,089          35,000           69,000 Loss on auction-rate securities rights                      -           15,659           11,662 Unrealized gain on trading securities                       -          (15,420 )        (15,222 ) Loss (gain) on extinguishment of debt                   11,919              -            (4,025 ) Changes in assets and liabilities which provided cash                                                    99,581          43,672           12,428 Other, net                                             (43,603 )         7,822          (16,657 )  Net cash provided by operating activities            $ 702,115       $ 
453,646       $  295,406
    Net cash provided by operating activities represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Operating cash flow is derived by adjusting net income for noncontrolling interests, non-cash operating items, gains and losses attributed to investing and financing activities and changes in operating assets and liabilities resulting from timing differences between the receipts and payments of cash and when the transactions are recognized in our results of operations. As a result, changes in cash from operating activities reflect, among other things, the timing of cash collections from                                          109
--------------------------------------------------------------------------------
  Table of Contents
  customers, payments to suppliers, managed care organizations and government agencies, collaborative partners, employees, and tax payments in the ordinary course of business. Our operating cash flow benefited from a full year of cash from operations from our Qualitest acquisition and from a partial year of cash generated from AMS operations. In addition, net cash provided by operations was higher due in part to timing and an increasing lag in payments to managed care organizations attributed to government agencies' administrative delays.  Net Cash (Used in) Investing Activities. Net cash used in investing activities was $2,374.1 million for the year ended December 31, 2011 compared to $896.3 million and $245.5 million for the years ended December 31, 2010 and 2009, respectively.  The increase in cash used in investing actives in 2011 compared to 2010 is primarily related to net cash paid for the acquisition of AMS of $2.4 billion in 2011 compared to $1.1 billion in 2010. Additionally, sales of trading securities and other investments in 2011 totaled $85.0 million in 2011 compared to $231.1 million in 2010.  The increase in cash used in investing actives in 2010 compared to 2009 is primarily related to cash consideration paid for the acquisitions of HealthTronics, Penwest, and Qualitest of $1,105.0 million, net of cash acquired, compared to $250.4 million of cash used for the Indevus transaction in 2009. The 2010 amounts were offset slightly due to the proceeds received of $231.1 million for sales of our auction-rate and available for sale securities compared to $23.8 million in 2009.  
Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $1,752.7 million in 2011 compared to $200.4 million in 2010 and $117.1 million used in financing activities in 2009.
  The increase in cash provided by financing activities from 2010 to 2011 is primarily a result of our new borrowings during 2011 of $3,018.0 million, which is net of debt issuance costs of $82.5 million, partially offset by payments on our Term Loan Facilities of $689.9 million and the AMS Notes of $519.0 million.  The change from 2009 to 2010 is primarily a result of the Company's issuance of $786.6 million of new indebtedness, net of debt issuance and transactions costs. The 2010 cash inflow was partially offset by $59.0 million related to share repurchases, $61.6 million in payments to redeem the remaining Non-recourse notes, a $40.2 million payment in July of 2010 to retire the HealthTronics senior credit facility, and a $406.8 million payment in November 2010 to retire Qualitest's debt then outstanding under its senior credit facility as well as the associated interest rate swap. Additionally, during 2010, the exercise of equity awards provided $20.9 million of cash flows from financing activities compared to $8.0 million in 2009.  Research and Development. Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and exploring the value of our existing products in treating disorders beyond those currently approved in their respective labels. We may seek to mitigate the risk in, and expense of, our research and development programs by entering into collaborative arrangements with third parties. However, we intend to retain a portion of the commercial rights to these programs and, as a result, we still expect to spend significant funds on our share of the cost of these programs, including the costs of research, preclinical development, clinical research and manufacturing.  We expect to continue to incur significant levels of research and development expenditures as we focus on the development and advancement of our product and services pipeline. There can be no assurance that results of any ongoing or future preclinical or clinical trials related to these projects will be successful, that additional trials will not be required, that any drug or product under development will receive FDA approval in a timely manner or at all, or that such drug or product could be successfully manufactured in accordance with U.S. current Good Manufacturing Practices or successfully marketed in a timely manner, or at all, or that we will have sufficient funds to develop or commercialize any of our products.                                          110
--------------------------------------------------------------------------------
  Table of Contents
  Manufacturing, Supply and Other Service Agreements. We contract with various third-party manufacturers and suppliers to provide us with raw materials used in our products, finished goods and certain services. Our most significant agreements are with Novartis Consumer Health, Inc., Novartis AG, Teikoku Seiyaku Co., Ltd., Mallinckrodt Inc., Noramco, Inc., Sharp Corporation, and Ventiv Commercial Services, LLC. As a result of a temporary shutdown by Novartis Consumer Health Division of its manufacturing facility which manufactures Opana ® ER, among other products, we are expediting the production of our recently approved formulation of Opana ® ER, designed to be crush-resistant, at a manufacturing facility managed by our development partner, Grünenthal. If, for any reason, we are unable to obtain sufficient quantities of any of the finished goods or raw materials or components required for our products, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. For a complete description of commitments under manufacturing, supply and other service agreements, see Note 14. Commitments and Contingencies in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.  License and Collaboration Agreements. We have agreed to certain contingent payments in certain of our license, collaboration and other agreements. Payments under these agreements generally become due and payable only upon the achievement of certain developmental, regulatory, commercial and/or other milestones. Due to the fact that it is uncertain if and when these milestones will be achieved, such contingencies have not been recorded in our Consolidated Balance Sheets and are not reflected in the expected cash requirements for Contractual Obligations table below. In addition, under certain arrangements, we may have to make royalty payments based on a percentage of future sales of the products in the event regulatory approval for marketing is obtained. From a business perspective, we view these payments favorably as they signify that the products are moving successfully through the development phase toward commercialization. For a complete description of our contingent payments involving our license and collaboration agreements, see Note 7. License and Collaboration Agreements and Note 14. Commitments and Contingencies in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.  Acquisitions. As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds in the future to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or costs of restructuring activities.  
AMS
  On June 17, 2011 (the AMS Acquisition Date), the Company completed its acquisition of all outstanding shares of common stock of AMS for approximately $2.4 billion in aggregate consideration, including $70.8 million related to existing AMS stock-based compensation awards and certain other amounts, at which time AMS became a wholly-owned subsidiary of the Company. AMS's shares were purchased at a price of $30.00 per share.  
AMS is a worldwide developer and provider of technology solutions to physicians treating men's and women's pelvic health conditions. The AMS business and applicable services include:
Men's Health.
  AMS supplies surgical solutions for the treatment of male urinary incontinence, the involuntary release of urine from the body. The fully implantable AMS 800® system includes an inflatable urethral cuff to restrict flow through the urethra and a control pump that allows the patient to discreetly open the cuff when he wishes to urinate. Since 2000, AMS has also been selling the InVance® sling system, a less-invasive procedure for men with moderate incontinence, and in 2007, AMS released the AdVance® sling system for the treatment of mild to                                          111
--------------------------------------------------------------------------------
  Table of Contents
moderate stress urinary incontinence. AMS also offers the UroLume® endoprosthesis stent as a less invasive procedure for patients who may not be good surgical candidates, as well as for men suffering from bulbar urethral strictures.
  AMS also supplies penile implants to treat erectile dysfunction, the inability to achieve or maintain an erection sufficient for sexual intercourse, with a series of semi-rigid malleable prostheses and a complete range of more naturally functioning inflatable prostheses, including the AMS 700® MS. AMS has refined its implants over the years with improvements to the AMS 700 ® series of inflatable prostheses, including the AMS 700 LGX® and the MS Pump®. Another key factor that distinguishes AMS's products is the use of the InhibiZone® antibiotic coating, which received FDA approval in July 2009 for AMS's product claim that InhibiZone® reduces the rate of revision surgery due to surgical infections.  Women's Health.  AMS offers a broad range of systems, led by Monarc® and MiniArc®, to treat female stress urinary incontinence, which generally results from a weakening of the tissue surrounding the bladder and urethra which can be a result of pregnancy, childbirth and aging. Monarc® incorporates unique helical needles to place a self-fixating, sub-fascial hammock through the obturator foramin. AMS's MiniArc ® Single-Incision Sling for stress incontinence was released in 2007 and requires just one incision to surgically place a small sling under the urethra, which minimizes tissue disruption and potential for blood loss, thereby allowing the procedure to be done with less anesthesia on an outpatient basis. In 2010, AMS launched the MiniArc PreciseTM, which is designed to enhance the ease and accuracy of placement of the MiniArc® device.  AMS also offers solutions for pelvic floor prolapse and other pelvic floor disorders, which may be caused by pregnancy, labor, and childbirth. In 2008, AMS introduced the Elevate® transvaginal pelvic floor repair system, with no external incisions. Using an anatomically designed needle and self-fixating tips, Elevate® allows for safe, simple and precise mesh placement through a single vaginal incision. The posterior system was launched in 2008 and the anterior system was launched in 2009.  
BPH Therapy.
  AMS's products can be used to relieve restrictions on the normal flow of urine from the bladder caused by bladder obstructions, generally the result of BPH or bulbar urethral strictures. AMS offers men experiencing a physical obstruction of the prostatic urethra an alternative to a TURP, with the GreenLightTM photovaporization of the prostate. This laser therapy is designed to reduce the comorbidities associated with TURP. AMS's GreenLightTM XPS and MoXyTM Liquid Cooled Fiber provide shorter treatment times with similar long-term results compared to other laser systems. The GreenLightTM laser system offers an optimal laser beam that balances vaporization of tissue with coagulation to prevent blood loss and providing enhanced surgical control compared to other laser systems. AMS also offers the StoneLight® laser and SureFlexTM fiber optics for the treatment of urinary stones. StoneLight® is a lightweight and portable 15-watt holmium laser that offers the right amount of power to effectively fragment most urinary stones. The SureFlexTM fiber optic line is engineered to deliver more energy safely and effectively, even under maximum scope deflection, for high performance holmium laser lithotripsy.  
AMS's TherMatrx® product is designed for those men not yet to the point of urethral obstruction, but for whom symptomatic relief is desired. It is a less-invasive tissue ablation technique that can be performed in a physician's office using microwave energy delivered to the prostate.
  The acquisition of AMS furthers Endo's evolution from a pharmaceutical product-driven company to a healthcare solutions provider, strengthens our leading core urology franchise and expands our presence in the medical devices market. We believe the combination of AMS with Endo's existing platform will provide additional cost-effective solutions across the entire urology spectrum.                                          112 
--------------------------------------------------------------------------------
  Table of Contents
  The operating results of AMS from and including June 18, 2011 are included in the accompanying Consolidated Statements of Operations. The Consolidated Balance Sheet as of December 31, 2011 reflects the acquisition of AMS.  
The following table summarizes the fair values of the assets acquired and liabilities assumed at the AMS Acquisition Date (in thousands):
                                                 June 17, 2011         Measurement                                               (As  initially          period            June 17, 2011                                                 reported)           adjustments         (As  adjusted)
Cash and cash equivalents                    $         47,289      $          -        $         47,289 Commercial paper                                       71,000                 -                  71,000 Accounts receivable                                    73,868                 -                  73,868 Other receivables                                         791               (161 )                  630 Inventories                                            75,525               (156 )               75,369 Prepaid expenses and other current assets               7,133                 -                   7,133 Income taxes receivable                                11,179             (1,712 )                9,467 Deferred income taxes                                  15,360               (820 )               14,540 Property, plant and equipment                          57,372               (959 )               56,413 Other intangible assets                             1,390,000           (130,000 )            1,260,000 Other assets                                            4,581                 -                   4,581  Total identifiable assets                    $      1,754,098      $    (133,808 )     $      1,620,290  Accounts payable                             $          9,437      $         890       $         10,327 Accrued expenses                                       45,648                187                 45,835 Deferred income taxes                                 507,019            (90,384 )              416,635 Long-term debt                                        520,012                363                520,375 Other liabilities                                      23,578                 -                  23,578  Total liabilities assumed                    $      1,105,694      $    
(88,944 )     $      1,016,750
  Net identifiable assets acquired             $        648,404      $     (44,864 )     $        603,540 Goodwill                                     $      1,752,427      $      
44,009       $      1,796,436
 Net assets acquired                          $      2,400,831      $        (855 )     $      2,399,976    The above estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the AMS Acquisition Date to estimate the fair value of assets acquired and liabilities assumed. The Company believes that information provides a reasonable basis for estimating the fair values but the Company is waiting for additional information necessary to finalize those amounts, particularly with respect to the estimated fair value of intangible assets, property, plant and equipment, contingent assets and liabilities, and deferred income taxes. Thus, the provisional measurements of fair value reflected are subject to change. Such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the AMS Acquisition Date. Measurement period adjustments relate primarily to revisions in estimated cash flows for certain products after obtaining additional information regarding facts and circumstances existing as of the AMS Acquisition Date.                                          113 
--------------------------------------------------------------------------------
  Table of Contents
  The valuation of the intangible assets acquired and related amortization periods are as follows:                                                                     Amortization                                                Valuation            Period                                              (in  millions)       (in years)
       Customer Relationships:        Men's Health                         $           97.0                17        Women's Health                                   37.0                15        BPH                                              26.0                13         Total                                $          160.0                16         Developed Technology:        Men's Health                         $          690.0                18        Women's Health                                  150.0                 9        BPH                                             161.0                18         Total                                $        1,001.0                16         Tradename:        AMS                                  $           45.0                30        GreenLight                                       12.0                15         Total                                $           57.0                27         In Process Research & Development:        Oracle                               $           12.0               n/a        Genesis                                          14.0               n/a        TOPAS                                             8.0               n/a        Other                                             8.0               n/a         Total                                $           42.0               n/a         Total other intangible assets        $        1,260.0               n/a    The fair value of the developed technology, IPR&D and customer relationship assets were estimated using a discounted present value income approach. Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The fair value of the AMS and GreenLight tradenames were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be received if the Company were to license the AMS or GreenLight tradename. Thus, we derived the hypothetical royalty income from the projected revenues of AMS and GreenLight products, respectively. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.  The $1,796.4 million of goodwill has been assigned to our Devices segment. The goodwill recognized is attributable primarily to strategic and synergistic opportunities across the entire urology spectrum, expected corporate synergies, the assembled workforce of AMS and other factors. Approximately $14.5 million of goodwill is expected to be deductible for income tax purposes.  
Deferred tax assets of $14.5 million are related primarily to federal net operating loss and credit carryforwards of AMS and its subsidiaries. Deferred tax liabilities of $416.6 million are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.
                                      114
--------------------------------------------------------------------------------
  Table of Contents
  The Company recognized $28.8 million of AMS acquisition-related costs that were expensed during 2011. These costs are included in Acquisition-related items, net in the accompanying Consolidated Statements of Operations and are comprised of the following items (in thousands):                                                         Acquisition-related Costs                                                             Year Ended                                                          December 31, 2011   Bank fees                                         $                    16,070   Legal, separation, integration, and other costs                        12,684    Total                                             $                    28,754   
The amounts of revenue and net loss of AMS included in the Company's Consolidated Statements of Operations from and including June 18, 2011 to December 31, 2011 are as follows (in thousands, except per share data):
                                                                   Revenue and  Income                                                                  included in  the                                                                    Consolidated                                                                    Statements of                                                                   Operations from                                                               and including June 18,                                                              2011 to December 31, 2011 Revenue                                                     $                   300,299 Net loss attributable to Endo Pharmaceuticals Holdings Inc.                                               $                      (329 ) Basic and diluted net loss per share                        $               
         -
   The following supplemental pro forma information presents the financial results as if the acquisition of AMS had occurred on January 1, 2010 for the years ended December 31, 2011 and 2010. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2010, nor are they indicative of any future results.                                                                         Year Ended                                                                     December 31,                                                                2011             2010
Pro forma consolidated results (in thousands, except per share data): Revenue
                                                     $ 2,968,497      $ 2,259,104 Net income attributable to Endo Pharmaceuticals Holdings Inc.                                                        $   214,487      $   199,776 Basic net income per share                                  $      1.84      $      1.72 Diluted net income per share                                $      1.77      $      1.69   These amounts have been calculated after applying the Company's accounting policies and adjusting the results of AMS to reflect factually supportable adjustments that give effect to events that are directly attributable to the AMS Acquisition, including the borrowing under the 2011 Credit Facility, 2019 Notes, and 2022 Notes as well as the additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property, plant and equipment, inventory, and intangible assets, had been applied on January 1, 2010, together with the consequential tax effects.  
Qualitest
  On November 30, 2010 (the Qualitest Acquisition Date), Endo completed its acquisition of all of the issued and outstanding capital stock of Generics International (US Parent), Inc. (Qualitest) from an affiliate of Apax Partners, L.P. for approximately $770.0 million. In addition, Endo paid $406.8 million to retire Qualitest's outstanding debt and related interest rate swap on November 30, 2010. In connection with the Qualitest                                          115
--------------------------------------------------------------------------------
  Table of Contents
  acquisition, $108 million of the purchase price was placed into two separate escrow accounts. One of the escrow accounts was $8 million, some of which was used to fund working capital adjustments, as defined in the Qualitest Stock Purchase Agreement. This escrow was settled during the third quarter of 2011. There is also a $100 million escrow account that will be used to fund all claims arising out of or related to the Qualitest acquisition.  In connection with the $100 million escrow account, to the extent that we are able to realize tax benefits for costs that are funded by the escrow account, we will be required to share these tax benefits with Apax.  
Qualitest is a manufacturer and distributor of generic drugs and over-the-counter pharmaceuticals throughout the U.S. Qualitest's product portfolio is comprised of 175 product families in various forms including tablets, capsules, creams, ointments, suppositories, and liquids. This acquisition has enabled us to gain critical mass in our generics business while strengthening our pain portfolio through a larger breadth of product offerings.
  The operating results of Qualitest from November 30, 2010 are included in the accompanying Consolidated Statements of Operations. The Consolidated Balance Sheet as of December 31, 2010 reflects the acquisition of Qualitest, effective November 30, 2010, the date the Company obtained control of Qualitest.  
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Qualitest Acquisition Date (in thousands):
                                           November 30, 2010          Measurement                                           (As initially              period              November 30, 2010                                             reported)              adjustments             (As adjusted) Cash and cash equivalents              $            21,828        $          -          $            21,828 Accounts receivable                                 93,228                   -                       93,228 Other receivables                                    1,483                   -                        1,483 Inventories                                         95,000                   -                       95,000 Prepaid expenses and other current assets                                       2,023                 (122 )                     1,901 Deferred income taxes                               63,509                7,531                      71,040 Property, Plant and equipment                      135,807                   -                      135,807 Other intangible assets                            843,000               (7,000 )                   836,000  Total identifiable assets              $         1,255,878        $         409         $         1,256,287  Accounts payable                       $            27,422        $          (1 )       $            27,421 Accrued expenses                                    55,210                4,141                      59,351 Deferred income taxes                              207,733                 (412 )                   207,321 Long-term debt                                     406,758                   -                      406,758 Other liabilities                                    9,370                  117                       9,487  Total liabilities assumed              $           706,493        $       3,845         $           710,338  Net identifiable assets acquired       $           549,385        $      (3,436 )       $           545,949 Goodwill                               $           219,986        $       4,112         $           224,098  Net assets acquired                    $           769,371        $         676         $           770,047   
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Qualitest Acquisition Date. As of December 31, 2011, our measurement period adjustments are complete.
                                          116  
--------------------------------------------------------------------------------
  Table of Contents
  The valuation of the intangible assets acquired and related amortization periods are as follows:                                                                                     Amortization                                                             Valuation               Period                                                           (in millions)           (in years) Developed Technology: Hydrocodone and acetaminophen                            $         119.0                    17 Oxycodone and acetaminophen                                         30.0                    17 Promethazine                                                        46.0                    16 Isosorbide Mononitrate ER                                           42.0                    16 Multi Vitamins                                                      38.0                    16 Trazodone                                                           17.0                    16 Butalbital, acetaminophen, and caffeine                             25.0                    16 Triprevifem                                                         16.0                    13 Spironolactone                                                      13.0                    17 Hydrocortisone                                                      34.0                    16 Hydrochlorothiazide                                                 16.0                    16 Controlled Substances                                               52.0                    16 Oral Contraceptives                                                  8.0                    13 Others                                                             162.0                    17  Total                                                    $         618.0                    16  In Process Research & Development: Generics portfolio with anticipated 2011 launch          $          63.0                   n/a Generics portfolio with anticipated 2012 launch                     30.0                   n/a Generics portfolio with anticipated 2013 launch                     17.0                   n/a Generics portfolio with anticipated 2014 launch(1)                  88.0                   n/a  Total                                                    $         198.0                   n/a  Tradename: Qualitest tradename                                      $          20.0                    15  Total                                                    $          20.0                    15  Total other intangible assets                            $         836.0                   n/a     
(1) During the fourth quarter of 2011, the Company received a deficiency from the
FDA on an ANDA submission for one of its lead assets in this portfolio.
    Subsequently, in early 2012, the Company terminated its development program
    for this asset as a result of the regulatory challenges and changes in the
    development timeline resulting from the FDA's request. In addition, as a
    result changes in market conditions since the acquisition date, there has
    been a significant deterioration in the commercial potential for this
    product. Accordingly, we recorded a pre-tax non-cash impairment charge of
$71.0 million in 2011 to write off the intangible asset in its entirety,
    which was assigned to our generics segment and recorded in the Asset
    impairment charges line of our Consolidated Statements of Operations.
   The fair value of the developed technology assets and IPR&D assets were estimated using an income approach. Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used probability-weighted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were generally assumed to extend through the economic useful life of the developed technology, IPR&D asset or tradename. The fair value of the Qualitest tradename was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be received if the Company were to license the Qualitest tradename. Thus, we derived the hypothetical royalty income from the projected revenues of Qualitest.                                          117
--------------------------------------------------------------------------------
  Table of Contents
  The $224.1 million of goodwill was assigned to our Generics segment. The goodwill recognized is attributable primarily to expected purchasing, manufacturing and distribution synergies as well as its assembled workforce. Approximately $170.4 million of goodwill is expected to be deductible for income tax purposes.  Deferred tax assets of $71.0 million are related primarily to federal and state net operating loss and credit carryforwards of Qualitest and its subsidiaries. Deferred tax liabilities of $207.3 million are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.  The Company recognized $8.0 million and $38.8 million of Qualitest acquisition-related items, net that were expensed during 2011 and 2010, respectively. These amounts are included in Acquisition-related items, net in the accompanying Consolidated Statements of Operations and are comprised of the following items (in thousands):                                                                Acquisition-related Costs                                                              Year Ended December 31,                                                          2011                     2010 Bank fees                                             $        -              $      14,215 Legal, separation, integration, and other costs             8,284           
         24,572
 Changes in fair value of acquisition-related contingent consideration                                     (313 )                      -  Total                                                 $     7,971             $      38,787   
The amounts of revenue and net loss of Qualitest included in the Company's Consolidated Statements of Operations for the year ended December 31, 2010 are as follows (dollars in thousands, except per share data):
                                                       Revenue and                                                Net Loss  included in                                                   the Consolidated                                                    Statements of                                                   Operations from                                                  November 30, 2010                                                 to December 31, 2010             Revenue                            $               30,323             Net loss                           $               (3,056 )             Basic and diluted loss per share   $                (0.03 )   The following supplemental pro forma information presents the financial results as if the acquisition of Qualitest had occurred on January 1, 2010 for the year ended December 31, 2010. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2010, nor are they indicative of any future results.                                                                         Year Ended                                                                   December 31, 2010 Pro forma consolidated results (in thousands, except per share data): Revenue                                                          $         
2,038,761
 Net income attributable to Endo Pharmaceuticals Holdings Inc.                                                             $           243,710 Basic net income per share                                       $              2.10 Diluted net income per share                                     $              2.07   These amounts have been calculated after applying the Company's accounting policies and adjusting the results of Qualitest to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property, plant and equipment and intangible assets, had been applied on January 1, 2010, together with the consequential tax effects.                                          118 
--------------------------------------------------------------------------------
  Table of Contents
Penwest Pharmaceuticals Co.
  On September 20, 2010 (the Penwest Acquisition Date), the Company completed its tender offer for the outstanding shares of common stock of Penwest and on November 4, 2010, we closed this acquisition for approximately $171.8 million in aggregate cash consideration, at which time Penwest became our wholly-owned subsidiary. On August 22, 2011, Penwest was merged into Endo Pharmaceuticals Inc., at which time Penwest ceased its existence as a separate legal entity.  
This transaction contributes to Endo's core pain management franchise and permits us to maximize the value of our oxymorphone franchise.
  The operating results of Penwest from September 20, 2010 are included in the accompanying Consolidated Statements of Operations. The Consolidated Balance Sheets as of December 31, 2010 reflects the acquisition of Penwest, effective September 20, 2010, the date the Company obtained control of Penwest.  
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Penwest Acquisition Date (in thousands):
                                                           September 20,                                                             2010            Cash and cash equivalents                   $        22,343            Marketable securities                                   800            Accounts receivable                                  10,866            Other receivables                                       131            Inventories                                             407            Prepaid expenses and other current assets               493            Deferred income taxes                                29,765            Property, plant and equipment                           915            Other intangible assets                             111,200            Other assets                                          2,104             Total identifiable assets                   $       179,024             Accounts payable                            $           229            Income taxes payable                                    160            Penwest shareholder liability                            -            Accrued expenses                                      1,542            Deferred income taxes                                40,168            Other liabilities                                     4,520             Total liabilities assumed                   $        46,619             Net identifiable assets acquired            $       132,405            Goodwill                                    $        39,361             Net assets acquired                         $       171,766    The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Penwest Acquisition Date. As of December 31, 2011, our measurement period adjustments are complete.                                          119
--------------------------------------------------------------------------------
  Table of Contents
The valuation of the intangible assets acquired and related amortization periods are as follows (in millions):
                                                                  Amortization                                                                   Period                                                 Valuation       (in years)           In Process Research & Development:           Otsuka                               $       5.5               n/a           A0001(1)                                     1.6               n/a            Total                                $       7.1               n/a            Developed Technology:           Opana®ER                             $     104.1                10            Total                                $     104.1                10            Total other intangible assets        $     111.2               n/a     
(1) The Company terminated Penwest's A0001 development program after conducting
    an in-depth review of the Company's research and development activities,
    including an analysis of research and development priorities, focus and
    available resources for current and future projects and the commercial
    potential for the product. Accordingly, we recorded a pre-tax non-cash
    impairment charges of $1.6 million in 2011 to completely write-off the A0001
    intangible asset, which was assigned to our Branded Pharmaceuticals segment
    and was recorded in the Asset impairment charges line in our Consolidated
    Statements of Operations.
   The fair values of the IPR&D assets and developed technology asset were estimated using an income approach. To calculate fair value, the Company used probability-weighted cash flows discounted at rates considered appropriate given the inherent risks associated with the asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were generally assumed to extend through the economic useful life of our developed technology or IPR&D asset.  
The $39.4 million of goodwill was assigned to our Branded Pharmaceuticals segment. The goodwill recognized is attributable primarily to the control premium associated with our oxymorphone franchise and other factors. None of the goodwill is expected to be deductible for income tax purposes.
  Deferred tax assets of $29.8 million are related primarily to federal net operating loss and credit carryforwards of Penwest. Deferred tax liabilities of $40.2 million are related primarily to the difference between the book basis and tax basis of the identifiable intangible assets.  The Company recognized $0.3 million and $10.7 million of Penwest acquisition-related costs that were expensed during 2011 and 2010, respectively. These costs are included in Acquisition-related items, net in the accompanying Consolidated Statements of Operations and are comprised of the following items (in thousands):                                                           Acquisition-related Costs                                                         Year Ended December 31,                                                       2011               2010   Bank fees                                         $      -        $         3,865   Legal, separation, integration, and other costs         259                 6,815    Total                                             $     259       $        10,680    Due to the pro forma impacts of eliminating the pre-existing intercompany royalties between Penwest and Endo, which were determined to be at fair value, we have not provided supplemental pro forma information as amounts are not material to the Consolidated Statements of Operations. We have also considered the impacts of Penwest, since the date we obtained a majority interest, on our Consolidated Statement of Operations and concluded amounts were not material.                                          120 
--------------------------------------------------------------------------------
  Table of Contents
HealthTronics, Inc.
  On July 2, 2010 (the HealthTronics Acquisition Date), the Company completed its initial tender offer for all outstanding shares of common stock of HealthTronics and obtained effective control of HealthTronics. On July 12, 2010, Endo completed its acquisition of HealthTronics for approximately $214.8 million in aggregate cash consideration for 100% of the outstanding shares, at which time HealthTronics became a wholly-owned subsidiary of the Company. HealthTronics' shares were purchased at a price of $4.85 per HealthTronics Share. In addition, Endo paid $40 million to retire HealthTronics debt that had been outstanding under its Senior Credit Facility. As a result of the acquisition, the HealthTronics Senior Credit Facility was terminated.  HealthTronics is a provider of healthcare services and manufacturer of certain related medical devices, primarily for the urology community. The HealthTronics business and applicable services include:  
Lithotripsy services.
HealthTronics provides lithotripsy services, which is a medical procedure where a device called a lithotripter transmits high energy shockwaves through the body to break up kidney stones. Lithotripsy services are provided principally through limited partnerships and other entities that HealthTronics manages, which use lithotripters. In 2011, physician partners used our lithotripters to perform approximately 50,000 procedures in the U.S. While the physicians render medical services, HealthTronics does not. As the general partner of limited partnerships or the manager of other types of entities, HealthTronics also provide services relating to operating its lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals, and surgery centers.  
Prostate treatment services.
HealthTronics provides treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, HealthTronics deploys three technologies in a number of its partnerships above: (1) PVP, (2) TUNA, and (3) TUMT. All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers, HealthTronics uses a procedure called cryosurgery, a process which uses lethal ice to destroy tissue such as tumors for therapeutic purposes. In April 2008, HealthTronics acquired Advanced Medical Partners, Inc., which significantly expanded its cryosurgery partnership base. In July 2009, HealthTronics acquired Endocare, Inc., which manufactures both the medical devices and related consumables utilized by its cryosurgery operations and also provides cryosurgery treatments. The prostate treatment services are provided principally by using equipment that HealthTronics leases from limited partnerships and other entities that HealthTronics manages. Benign prostate disease and cryosurgery cancer treatment services are billed in the same manner as its lithotripsy services under either retail or wholesale contracts. HealthTronics also provides services relating to operating the equipment, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting.  
Anatomical pathology services.
HealthTronics provides anatomical pathology services primarily to the urology community. HealthTronics has one pathology lab located in Georgia, which provides laboratory detection and diagnosis services to urologists throughout the U.S. In addition, in July 2008, HealthTronics acquired Uropath LLC, now referred to as HealthTronics Laboratory Solutions, which managed pathology laboratories located at Uropath sites for physician practice groups located in Texas, Florida and Pennsylvania. Through HealthTronics Laboratory Solutions, HealthTronics continues to provide administrative services to in-office pathology labs for practice groups and pathology services to physicians and practice groups with its lab equipment and personnel at the HealthTronics Laboratory Solutions laboratory sites.  
Medical products manufacturing, sales and maintenance.
HealthTronics manufactures and sells medical devices focused on minimally invasive technologies for tissue and tumor ablation through cryoablation, which is the use of lethal ice to destroy tissue, such as tumors, for
                                      121
--------------------------------------------------------------------------------
  Table of Contents
  therapeutic purposes. HealthTronics develops and manufactures these devices for the treatment of prostate and renal cancers and our proprietary technologies also have applications across a number of additional markets, including the ablation of tumors in the lung, liver metastases and palliative intervention (treatment of pain associated with metastases). HealthTronics manufactures the related spare parts and consumables for these devices. HealthTronics also sells and maintains lithotripters and related spare parts and consumables.  The acquisition of HealthTronics reflects Endo's desire to continue expanding our business beyond pain management into complementary medical areas where HealthTronics can be innovative and competitive. We believe this expansion will enable us to be a provider of multiple healthcare solutions and services that fill critical gaps in patient care.  The operating results of HealthTronics from July 2, 2010 are included in the accompanying Consolidated Statements of Operations. The Consolidated Balance Sheets as of December 31, 2010 reflects the acquisition of HealthTronics, effective July 2, 2010, the date the Company obtained control of HealthTronics.  
The following table summarizes the fair values of the assets acquired and liabilities assumed at the HealthTronics Acquisition Date (in thousands):
                                                           July 2, 2010            Cash and cash equivalents                   $        6,769            Accounts receivable                                 33,388            Other receivables                                    1,006            Inventories                                         12,399            Prepaid expenses and other current assets            5,204            Deferred income taxes                               46,489            Property, plant and equipment                       30,687            Other intangible assets                             73,124            Other assets                                         5,210             Total identifiable assets                   $      214,276             Accounts payable                            $        3,084            Accrued expenses                                    20,510            Deferred income taxes                               22,376            Long-term debt                                      43,460            Other liabilities                                    1,785             Total liabilities assumed                   $       91,215             Net identifiable assets acquired            $      123,061            Noncontrolling interests                    $      (63,227 )            Goodwill                                    $      155,009             Net assets acquired                         $      214,843    The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the HealthTronics Acquisition Date. As of December 31, 2011, our measurement period adjustments are complete.  The valuation of the intangible assets acquired and related amortization periods are as follows:                                                                  Amortization                                              Valuation           Period                                            (in millions)       (in years)           Endocare Developed Technology   $          46.3                10           HealthTronics Tradename                    14.6                15           Service Contract(1)                        12.2               n/a            Total                           $          73.1               n/a                                            122 
--------------------------------------------------------------------------------
  Table of Contents
(1) This intangible asset relates to our IGRT business, which was sold in
September 2011 for approximately $13.0 million. Accordingly, the carrying
    amount of this asset was reduced to zero at the time of sale.
   The fair value of the developed technology asset was estimated using a discounted present value income approach. Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used probability-weighted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were assumed to extend through the economic useful life of the purchased technology. The fair value of the HealthTronics Tradename was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be received if the Company were to license the HealthTronics Tradename. Thus, we derived the hypothetical royalty income from the projected revenues of HealthTronics' services.  HealthTronics has investments in partnerships and limited liability companies (LLCs) where we, as the general partner or managing member, exercise effective control. Accordingly, we consolidate various entities where we do not own 100% of the entity in accordance with the accounting consolidation principles. As a result, we are required to fair value the noncontrolling interests as part of our purchase price allocation. To calculate fair value, the Company used historical transactions which represented Level 2 data points within the fair value hierarchy to calculate applicable multiples of each respective noncontrolling interest in the partnerships and LLCs.  The $155.0 million of goodwill has been assigned to our Services segment. The goodwill recognized is attributable primarily to strategic and synergistic opportunities across the HealthTronics network of urology partnerships, expected corporate synergies, the assembled workforce of HealthTronics and other factors. Approximately $33.6 million of goodwill is expected to be deductible for income tax purposes.  
Deferred tax assets of $46.5 million are related primarily to federal net operating loss and credit carryforwards of HealthTronics and its subsidiaries. Deferred tax liabilities of $22.4 million are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.
  The Company recognized $3.7 million and $20.9 million of HealthTronics acquisition-related costs that were expensed during 2011 and 2010, respectively. These costs are included in Acquisition-related items, net in the accompanying Consolidated Statements of Operations and are comprised of the following items (in thousands):                                                              Acquisition-related Costs                                                            Year Ended December 31,                                                         2011                     2010 Bank fees                                           $         -              $       2,017 Acceleration of outstanding HealthTronics stock-based compensation                                      -             
         7,924
 Legal, separation, integration, and other costs            3,704                    10,988  Total                                               $      3,704             $      20,929    The amounts of revenue and net loss of HealthTronics included in the Company's Consolidated Statements of Operations for the year ended December 31, 2010 are as follows (dollars in thousands, except per share data):                                               Revenue and Net Loss included                                            in the Consolidated Statements                                              of Operations from July 2,                                              2010 to December 31, 2010        Revenue                            $                        102,144        Net loss                           $                         (8,098 )        Basic and diluted loss per share   $                          (0.07 )                                           123 
--------------------------------------------------------------------------------
  Table of Contents
  The following supplemental pro forma information presents the financial results as if the acquisition of HealthTronics had occurred on January 1, 2010 for the year ended December 31, 2010. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2010, nor are they indicative of any future results.                                                                         Year Ended                                                                   December 31, 2010 Pro forma consolidated results (in thousands, except per share data): Revenue                                                          $         
1,814,918
 Net income attributable to Endo Pharmaceuticals Holdings Inc.                                                             $           264,165 Basic net income per share                                       $              2.27 Diluted net income per share                                     $              2.24   These amounts have been calculated after applying the Company's accounting policies and adjusting the results of HealthTronics to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property, plant and equipment, and intangible assets, had been applied on January 1, 2010, together with the consequential tax effects.  Indevus  On February 23, 2009 (the Indevus Acquisition Date), the Company completed its initial tender offer for all outstanding shares of common stock of Indevus. Through purchases in subsequent offering periods, the exercise of a top-up option and a subsequent merger (the Indevus Merger), the Company completed its acquisition of Indevus on March 23, 2009, at which time Indevus became a wholly-owned subsidiary of the Company.  The Indevus shares were purchased at a price of $4.50 per share, net to the seller in cash, plus contractual rights to receive up to an additional $3.00 per share in contingent cash consideration payments, pursuant to the terms of the Indevus Agreement and Plan of Merger, dated as of January 5, 2009 (the Indevus Merger Agreement). Accordingly, the Company paid approximately $368.0 million in aggregate initial cash consideration for the Indevus shares and entered into the AveedTM Contingent Cash Consideration Agreement and the Octreotide Contingent Cash Consideration Agreement (each as defined in the Indevus Merger Agreement), providing for the payment of up to an additional $3.00 per share in contingent cash consideration payments, in accordance with the terms of the initial tender offer.  The total cost to acquire all outstanding Indevus shares pursuant to the initial tender offer and the Indevus Merger Agreement could be up to an additional approximately $267.0 million, if Endo is obligated to pay the maximum amounts under the AveedTM Contingent Cash Consideration Agreement and the Octreotide Contingent Cash Consideration Agreement. The fair value of those potential obligations is zero at December 31, 2011.  
Indevus was a specialty pharmaceutical company engaged in the acquisition, development, and commercialization of products to treat conditions in urology, endocrinology and oncology. Following the completion of the Indevus Merger, Indevus was renamed Endo Pharmaceuticals Solutions Inc.
  Approved products assumed in the acquisition included Sanctura® (trospium chloride) and Sanctura XR® (trospium chloride extended release capsules) for the treatment of overactive bladder (OAB); Supprelin ® LA (histrelin acetate) for treating central precocious puberty (CPP); Vantas ® (histrelin) for the palliative treatment of advanced prostate cancer; Delatestryl ® (testosterone enanthate) for the treatment of male hypogonadism; Hydron ® Implant, which is used as a drug delivery device and provides for a sustained release of a broad spectrum of drugs continuously; and Valstar® (valrubicin) for therapy of bacillus Calmette-Guerin (BCG)-refractory carcinoma in situ (as CIS) of the bladder.                                          124 
--------------------------------------------------------------------------------
  Table of Contents
  As of December 31, 2011, AveedTM (testosterone undecanoate) represents the primary development product from the Indevus acquisition. AveedTM is expected to be the first long-acting injectable testosterone preparation available in the U.S. for the treatment of male hypogonadism in the growing market for testosterone replacement therapies. AveedTM had historically been referred to as Nebido ®. On May 6, 2009, we received notice from the FDA that Nebido® was unacceptable as a proprietary name for testosterone undecanoate. In August 2009, we received approval from FDA to use the name AveedTM. On May 18, 2010, a new patent covering AveedTM was issued by the U.S. Patent and Trademark Office. The patent's expiration date is March 14, 2027. The Company acquired U.S. rights to AveedTM from Schering AG, Germany, in July 2005. In June 2008, we received an approvable letter from the FDA indicating that the NDA may be approved if the Company is able to adequately respond to certain clinical deficiencies related to the product. In September 2008, agreement was reached with the FDA with regard to the additional data and risk management strategy. In March 2009, the FDA accepted for review the complete response submission to the new drug application for AveedTM intramuscular injection. On December 2, 2009, we received a complete response letter from the FDA regarding AveedTM in response to our March 2009 complete response submission. In the complete response letter, the FDA has requested information from Endo to address the agency's concerns regarding very rare but serious adverse events, including post-injection anaphylactic reaction and pulmonary oily microembolism. The letter also specified that the proposed Risk Evaluation and Mitigation Strategy (REMS) is not sufficient. In 2010 and 2011, we met with the FDA to discuss the existing clinical data provided to the FDA as well as the potential path-forward. The Company is evaluating how best to address the concerns of the FDA and intends to have future dialogue with the agency regarding a possible regulatory pathway and is preparing a complete response. The outcome of future communications with the FDA could have a material impact on (1) management's assessment of the overall probability of approval, (2) the timing of such approval, (3) the targeted indication or patient population and (4) the likelihood of additional clinical trials.  Management believes the Company's acquisition of Indevus is particularly significant because it reflects our commitment to expand our business beyond pain management into complementary medical areas where we believe we can be innovative and competitive. The combined company markets products through its differentially deployed field sales forces and has the capability to develop innovative new therapies using a novel drug delivery technology.  The operating results of Indevus from February 23, 2009 are included in the accompanying Consolidated Statements of Operations. The Consolidated Balance Sheet as of December 31, 2009 reflects the acquisition of Indevus, effective February 23, 2009, the date the Company obtained control of Indevus. The acquisition date fair value of the total consideration transferred was $540.9 million, which consisted of the following (in thousands):                                                    Fair Value of                                                 Consideration                                                  Transferred                     Cash                       $       368,034                     Contingent consideration           172,860                      Total                      $       540,894                                            125 
--------------------------------------------------------------------------------
  Table of Contents
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Indevus Acquisition Date (in thousands):
                                                     February 23, 2009               Cash and cash equivalents          $           117,675               Accounts receivable                             14,591               Inventories                                     17,157               Prepaid and other current assets                 8,322               Property, plant and equipment                    8,856               Other intangible assets                        532,900               Deferred tax assets                            167,749               Other non-current assets                         1,331                Total identifiable assets          $           868,581                Accounts payable                   $             5,116               Accrued expenses                                26,725               Convertible notes                               72,512               Non-recourse notes                             115,235               Deferred tax liabilities                       210,647               Other non-current liabilities                   18,907                Total liabilities assumed                      449,142                Net identifiable assets acquired   $           419,439               Goodwill                           $           121,455                Net assets acquired                $           540,894   
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Indevus Acquisition Date.
  Of the $532.9 million of acquired intangible assets, $255.9 million was assigned to IPR&D. The remaining $277.0 million has been assigned to license rights and is subject to a weighted average useful life of approximately 11 years.  The valuation of the intangible assets acquired and related amortization periods are as follows:                                                                     Amortization                                                 Valuation           Period                                               (in millions)       (in years)         In Process Research & Development:         Valstar®(1)                          $          88.0               n/a         AveedTM(2)                                     100.0               n/a         Octreotide(3)                                   31.0               n/a         Pagoclone(4)                                    21.0               n/a         Pro2000(5)                                       4.0               n/a         Other                                           11.9               n/a          Total                                $         255.9               n/a          License Rights:         Hydrogel Polymer                     $          22.0                10         Vantas®                                         36.0                10         Sanctura®Franchise                              94.0                12         Supprelin®LA                                   124.0                10         Other                                            1.0                 4          Total                                $         277.0                11          Total other intangible assets        $         532.9                                            126 
--------------------------------------------------------------------------------
  Table of Contents
(1) The FDA approved the sNDA for Valstar® subsequent to the Indevus Acquisition
    Date. Therefore, Valstar® was initially classified as IPR&D and subsequently
    transferred to License Rights upon obtaining FDA approval and is being
    amortized over a 15 year useful life.
(2) As a result of the FDA's complete response letter related to our filed NDA,
    we performed an impairment analysis during the fourth quarter ended
December 31, 2009. We concluded there was a decline in the fair value of the
    indefinite-lived intangible. Accordingly, we recorded a $65.0 million
    impairment charge, which was assigned to our Branded Pharmaceuticals segment
    and was recorded in the Asset impairment charges line in our Consolidated
    Statements of Operations.
(3) As part of our 2010 annual review of all IPR&D assets, we conducted an
    in-depth review of both octreotide indications. This review covered a number
    of factors including the market potential of each product given its stage of
    development, taking into account, among other things, issues of safety and
    efficacy, product profile, competitiveness of the marketplace, the
    proprietary position of the product and its potential profitability. Our 2010
    review resulted in no impact to the carrying value of our octreotide -
    acromegaly intangible asset. However, the analysis identified certain
    commercial challenges with respect to the octreotide - carcinoid syndrome
    intangible asset including the expected rate of physician acceptance and the
    expected rate of existing patients willing to switch therapies. Upon
    analyzing the Company's research and development priorities, available
    resources for current and future projects, and the commercial potential for
    octreotide - carcinoid syndrome, the Company decided to discontinue
    development of octreotide for the treatment of carcinoid syndrome. As a
    result of the above developments, the Company recorded a pre-tax non-cash
    impairment charge of $22.0 million in 2010 to write-off, in its entirety, the
    octreotide - carcinoid syndrome intangible asset, which was assigned to our
Branded Pharmaceuticals segment and was recorded in the Asset impairment
    charges line in our Consolidated Statements of Operations. On November 11,
    2011, the Company separately decided to terminate development of the     octreotide implant for the treatment of acromegaly after conducting an     in-depth review of the Company's research and development activities,     including an analysis of research and development priorities, focus and     available resources for current and future projects and the commercial     potential for the product. Accordingly, we recorded a pre-tax non-cash     impairment charge of $9.0 million in 2011 to completely write-off the
    octreotide - acromegaly intangible asset, which was assigned to our Branded
    Pharmaceuticals segment and was recorded in the Asset impairment charges line
    in our Consolidated Statements of Operations.
(4) In May 2010, Teva terminated the development and licensing arrangement with
    us upon the completion of the Phase IIb study. We concluded there was a
    decline in the fair value of the indefinite-lived intangible asset.
    Accordingly, we recorded a $13.0 million impairment charge, which was
    assigned to our Branded Pharmaceuticals segment and was recorded in the Asset
    impairment charges line in our Consolidated Statements of Operations. On
December 27, 2011, the Company terminated its pagoclone development program
    after conducting an in-depth review of the Company's research and development
    activities, including an analysis of research and development priorities,
    focus and available resources for current and future projects and the
    commercial potential for the product. Accordingly, we recorded a pre-tax
    non-cash impairment charges of $8.0 million in 2011 to completely write-off
    the pagoclone intangible asset, which was assigned to our Branded
    Pharmaceuticals segment and was recorded in the Asset impairment charges line
    in our Consolidated Statements of Operations.
(5) In December 2009, our Phase III clinical trials for Pro2000 provided
    conclusive results that the drug was not effective. We concluded there was no
    further value or alternative future uses associated with this
    indefinite-lived asset. Accordingly, we recorded a $4.0 million impairment
    charge to write-off the Pro2000 intangible asset in its entirety, which was
    assigned to our Branded Pharmaceuticals segment and was recorded in the Asset
    impairment charges line in our Consolidated Statements of Operations.
   The fair value of the IPR&D assets and License Rights assets, with the exception of the hydrogel polymer technology, were estimated using an income approach. Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used probability-weighted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were generally assumed to extend either through or beyond the patent life of each product, depending on the circumstances particular to each product. The fair value of the hydrogel polymer technology was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be received if the Company were to license the technology. The hydrogel polymer technology is currently used in the following products: Vantas® and Supprelin® LA. Thus, we derived the hypothetical royalty income from the projected revenues of those drugs. The fair value of the hydrogel polymer technology also includes an existing royalty payable by the                                          127 
--------------------------------------------------------------------------------
  Table of Contents
  Company to the certain third party partners based on the net sales derived from drugs that use the hydrogel polymer technology. Discount rates applied to the estimated cash flows for all intangible assets acquired ranged from 13% to 20%, depending on the current stage of development, the overall risk associated with the particular project or product and other market factors. We believe the discount rates used are consistent with those that a market participant would use.  The $121.5 million of goodwill was assigned to our Branded Pharmaceuticals segment. The goodwill recognized is attributable primarily to the potential additional applications for the hydrogel polymer technology, expected corporate synergies, the assembled workforce of Indevus and other factors. None of the goodwill is expected to be deductible for income tax purposes.  The deferred tax assets of $167.7 million are related primarily to federal net operating loss and credit carryforwards of Indevus and its subsidiaries. The deferred tax liabilities of $210.6 million are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.  
During the years ended December 31, 2011, 2010 and 2009, we recorded $7.1 million in income, $51.4 million in income and $93.1 million in income for Indevus acquisition-related items, net. These amounts are included Acquisition-related items, net in the accompanying Consolidated Statements of Operations and are comprised of the following items (in thousands):
                                                             Acquisition-related Costs                                                            Year Ended December 31,                                                    2011            2010              2009 Investment bank fees, includes Endo and Indevus                                          $     -         $      -         $   13,030 Legal, separation, integration, and other items                                                  -                -   
          21,979
 Changes in fair value of acquisition-related contingent consideration                           (7,050 )        (51,420 )        (128,090 )  Total                                            $ (7,050 )      $ (51,420 )      $  (93,081 )   
The amounts of revenue and net loss of Indevus included in the Company's Consolidated Statements of Operations for the year ended December 31, 2009 are as follows (dollars in thousands, except per share data):
                                                   February 23, 2009 to                                                  December 31, 2009             Revenue                            $               66,719             Net loss                           $             (107,779 )             Basic and diluted loss per share   $                (0.92 )   Other  In the second half of 2011, as part of our effort to increase and broaden the relationships within the urology community, we acquired two electronic medical records software companies, Intuitive Medical Software, LLC and meridianEMR, Inc., which individually and combined represent immaterial acquisitions. These acquisitions provide electronic medical records for urologists. Together, these acquisitions provide access to approximately 1,850 urologists using data platforms that will enhance service offerings in urology practice management.  Legal Proceedings. We are subject to various patent, product liability, government investigations and other legal proceedings in the ordinary course of business. Contingent accruals are recorded when we determine that a loss related to a litigation matter is both probable and reasonably estimable. Due to the fact that legal proceedings and other contingencies are inherently unpredictable, our assessments involve significant judgments regarding future events.  For a complete description of legal proceedings, see Note 14. Commitments and Contingencies-Legal Proceeding in the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.                                          128
--------------------------------------------------------------------------------
  Table of Contents
Expected Cash Requirements for Contractual Obligations. The following table presents our expected cash requirements for contractual obligations for each of the following years subsequent to December 31, 2011 (in thousands):
                                                                                       Payment Due by Period Contractual Obligations                     Total            2012           2013           2014           2015            2016          Thereafter Lease obligations(1)                     $    127,124     $   15,412     $   26,159     $   11,658     $   10,095     $      7,804     $     55,996 Debt related payments(2)                    4,743,506        249,897       
291,975        306,773        711,696        1,040,505        2,142,660 Minimum purchase commitments to Novartis(3)
                                    24,267         11,200         11,200          1,867              -                -                - Minimum purchase commitments to Teikoku(4)                                     34,000         34,000              -              -              -                -                - Minimum Voltaren® royalty obligations due to Novartis(5)                             45,000         30,000         15,000              -              -                -                - Minimum advertising and promotion spend(6)                                        9,532          9,532              -              -              -                -                - Other obligations(7)                               48             48              -              -              -                -                -  Total                                    $  4,983,477     $  350,089     $  344,334     $  320,298     $  721,791     $  1,048,309     $  2,198,656     
(1) Includes minimum cash payments related to our leased automobiles, machinery
    and equipment and facilities, including the corporate headquarters in
Malvern, Pennsylvania, which is currently under construction. For the purpose
    of calculating our annual obligations related to our Malvern, Pennsylvania
    corporate headquarters lease, we have assumed a lease commencement during the
    first quarter of 2013. Under the terms of our leases for our current
    headquarters' in Chadds Ford, Pennsylvania, we will be required to pay all
    future minimum lease payments to the landlord upon vacating the Chadds Ford
    location. Based on an anticipated move in early 2013, we believe the future
    minimum lease payments due to our current landlord at that time will be
    approximately $12 million, which is reflected in 2013 above. As part of the
    construction of its new headquarters, the Company intends to pay for
    approximately $30 million in tenant improvements during 2012; however, this
    amount is not reflected above as the Company does not view these payments as
    legally binding.
(2) Includes minimum cash payments related to principal and interest, including
    commitment fees, associated with our indebtedness. Since future interest
    rates on our variable rate borrowings are unknown, for purposes of this
    contractual obligations table, amounts scheduled above were calculated using
    greater of (i) the respective contractual interest rate spread corresponding
    to our current leverage ratios or (ii) the respective contractual interest
    rate floor, if any.
(3) We are party to a long-term manufacturing and development agreement with
Novartis Consumer Health, Inc. (Novartis) whereby Novartis has agreed to
    manufacture certain of our commercial products and products in development.
    We are required to purchase, on an annual basis or pro rata portion thereof,
    a minimum amount of product from Novartis until the termination of the
    agreement in February 2014. The purchase price per product is equal to a
    predetermined amount per unit, subject to periodic adjustments. Since future
    price changes are unknown, for purposes of this contractual obligations
    table, all amounts scheduled above represent the minimum purchase quantities
    at the price currently existing under the agreement with Novartis. Due to the
    short-term supply issues at Novartis, we may seek a reduction to these     commitments. There can be no guarantee that such a reduction will be     successfully achieved.  
(4) On April 24, 2007, we amended our Supply and Manufacturing Agreement with
Teikoku Seiyaku Co., Ltd. / Teikoku Pharma USA, Inc. (collectively, Teikoku)
    dated as of November 23, 1998, pursuant to which Teikoku manufactures and
    supplies Lidoderm®(lidocaine patch 5%) (the Product) to Endo. This amendment
    is referred to as the Amended Agreement. Under the terms of the Amended
    Agreement, Endo has agreed to purchase a minimum number of Lidoderm® patches
    per year through 2012, representing the noncancelable portion of the Amended
    Agreement. The minimum purchase requirement shall remain in effect subsequent
    to 2012, except that Endo has the right to terminate the Amended Agreement
    after 2012, if we fail to meet the annual minimum requirement. Teikoku has
    agreed to fix the supply price of Lidoderm® for a specified period of time
    after which the price will be adjusted at future dates certain based on a
    price index defined in the Amended Agreement. Since future price changes are
    unknown, for purposes of this contractual obligations table, all amounts
    scheduled above represent the minimum patch quantities at the price currently
    existing under the Amended Agreement. Effective November 1, 2010, the parties
    amended the Amended Agreement. Pursuant to this amendment, Teikoku has agreed
    to supply additional Product at no cost to Endo in each of 2011, 2012 and
    2013 in the event Endo's firm orders of Product exceed certain thresholds in
    those years. We will update the Teikoku purchase commitments upon future
    price changes made in accordance with the Amended Agreement.                                           129 
--------------------------------------------------------------------------------   Table of Contents (5) Under the terms of the five-year Voltaren® Gel Agreement, Endo made an 
    up-front cash payment of $85 million. Endo has agreed to pay royalties to
    Novartis on annual Net Sales of the Licensed Product, subject to certain
    thresholds all as defined in the Voltaren® Gel Agreement. In addition,
    subject to certain limitations, Endo has agreed to make certain guaranteed
    minimum annual royalty payments beginning in the fourth year of the Voltaren®
    Gel Agreement, which may be reduced under certain circumstances, including
    Novartis's failure to supply the Licensed Product. These guaranteed minimum
    royalties will be creditable against royalty payments on a Voltaren® Gel
    Agreement year basis such that Endo's obligation with respect to each
    Voltaren ® Gel Agreement year is to pay the greater of (i) royalties payable
    based on annual net sales of the Licensed Product or (ii) the guaranteed
    minimum royalty for such Agreement year.
(6) Under the terms of the five-year Voltaren® Gel Agreement, Endo has agreed to
    certain minimum advertising and promotional spending, subject to certain
    thresholds as defined in the Voltaren ® Gel Agreement. Subsequent to June 30,
    2012, the minimum advertising and promotional spending are determined based
    on a percentage of net sales of the licensed product. Due to the short-term
    supply issues at Novartis, we may seek a reduction to these commitments.
    There can be no guarantee that such a reduction will be successfully
    achieved.
(7) This amount is comprised of obligations assumed in connection with our
    acquisition of Penwest, including costs associated with Penwest's
    collaborative discovery agreements and certain severance obligations.
   In addition, we have agreed to certain contingent payments in certain of our acquisition, license, collaboration and other agreements. Payments under these agreements generally become due and payable only upon the achievement of certain developmental, regulatory, commercial and/or other milestones. Due to the fact that it is uncertain if and when these milestones will be achieved, such contingencies have not been recorded in our Consolidated Balance Sheet and are not reflected in the table above. In addition, under certain arrangements, we may have to make royalty payments based on a percentage of future sales of the products in the event regulatory approval for marketing is obtained. From a business perspective, we view these payments favorably as they signify that the products are moving successfully through the development phase toward commercialization.  As of December 31, 2011, our liability for unrecognized tax benefits amounted to $46.9 million (including interest and penalties). Due to the nature and timing of the ultimate outcome of these uncertain tax positions, we cannot make a reasonably reliable estimate of the amount and period of related future payments. Therefore, our liability has been excluded from the above contractual obligations table.  Fluctuations. Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations may be due to the timing of new product launches, purchasing patterns of our customers, market acceptance of our products, the impact of competitive products and pricing, impairment of intangible assets, separation benefits, business combination transaction costs, upfront, milestone and certain other payments made or accrued pursuant to licensing agreements and changes in the fair value of financial instruments and contingent assets and liabilities recorded as part of a business combination. Further, a substantial portion of our net sales are through three wholesale drug distributors who in turn supply our products to pharmacies, hospitals and physicians. Accordingly, we are potentially subject to a concentration of credit risk with respect to our trade receivables.  Growth Opportunities. We continue to evaluate growth opportunities including strategic investments, licensing arrangements, acquisitions of businesses, product rights or technologies, and strategic alliances and promotional arrangements which could require significant capital resources. We intend to continue to focus our business development activities on further diversifying our revenue base through product licensing and company acquisitions, as well as other opportunities to enhance stockholder value. Through execution of our business strategy we intend to focus on developing new products through both an internal and a virtual research and development organization with greater scientific and clinical capabilities; expanding the Company's product line by acquiring new products and technologies in existing therapeutic and complementary areas; increasing revenues and earnings through sales and marketing programs for our innovative product offerings and effectively using the Company's resources; and providing additional resources to support our generics business.  Non-U.S. Operations. Our operations outside of the U.S. were not material during 2011. As a result, fluctuations in foreign currency exchange rates did not have a material effect on our financial statements.                                          130
--------------------------------------------------------------------------------
  Table of Contents
  In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2011, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $89.2 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.  
Inflation. We do not believe that inflation had a material adverse effect on our financial statements for the periods presented.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
CRITICAL ACCOUNTING ESTIMATES
  To understand our financial statements, it is important to understand our critical accounting estimates. The preparation of our financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, sales incentives and allowances, certain royalties, distribution service fees, returns and allowances. Significant estimates and assumptions are also required when determining the fair value of marketable securities and other financial instruments, the valuation of long-lived assets, income taxes, contingencies and stock-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results may differ significantly from our estimates.  We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition results of operations or cash flows. Our most critical accounting estimates are described below:  
Revenue recognition
Pharmaceutical products
  Our net pharmaceutical product sales consist of revenues from sales of our pharmaceutical products, less estimates for chargebacks, rebates, sales incentives and allowances, certain royalties, distribution service fees, returns and allowances as well as fees for services. We recognize revenue for product sales when title and risk of loss has passed to the customer, which is typically upon delivery to the customer, when estimated provisions for chargebacks, rebates, sales incentives and allowances, certain royalties, distribution service fees, returns and allowances are reasonably determinable, and when collectability is reasonably assured. Revenue from the launch of a new or significantly unique product, for which we are unable to develop the requisite historical data on which to base estimates of returns and allowances, due to the uniqueness of the therapeutic area or delivery technology as compared to other products in our portfolio and in the industry, may be deferred until such time that an estimate can be determined and all of the conditions above are met and when the product has achieved market acceptance, which is typically based on dispensed prescription data and other information obtained during the period following launch.                                          131 
--------------------------------------------------------------------------------
  Table of Contents
  Decisions made by wholesaler customers and large retail chain customers regarding the levels of inventory they hold (and thus the amount of product they purchase from us) can materially affect the level of our sales in any particular period and thus may not correlate to the number of prescriptions written for our products based on external third-party data. We believe that speculative buying of product, particularly in anticipation of possible price increases, has been the historic practice of many pharmaceutical wholesalers. Over the past three years, our wholesaler customers, as well as others in the industry, began modifying their business models from arrangements where they derive profits from price arbitrage, to arrangements where they charge a fee for their services. Accordingly, we have entered into Distribution Service Agreements (DSAs) with six of our wholesaler customers. These agreements, which pertain to branded products only, obligate the wholesalers to provide us with specific services, including the provision of periodic retail demand information and current inventory levels for our branded products held at their warehouse locations; additionally, under these DSAs, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits based on product demand.  Under the DSAs, we received information from our six wholesaler customers about the levels of inventory they held for our branded products as of December 31, 2011. Based on this information, which we have not independently verified, we believe that total branded inventory held at these wholesalers is within normal levels. In addition, we also evaluate market conditions for products primarily through the analysis of wholesaler and other third party sell-through and market research data, as well as internally-generated information.  
Devices
  As a result of our acquisition of AMS, we sell products in this segment through a direct sales force. A portion of our revenue is generated from consigned inventory or from inventory with field representatives. For these products, revenue is recognized at the time the product has been used or implanted. For all other transactions, we recognize revenue when title to the goods and risk of loss transfer to our customers providing there are no remaining performance obligations required from us or any matters requiring customer acceptance. In cases where we utilize distributors or ship product directly to the end user, we recognize revenue upon shipment provided all revenue recognition criteria have been met. We record estimated sales returns, discounts and rebates as a reduction of net sales in the period the related revenue is recognized.  
We provide incentives to customers, including volume based rebates. Customers are not required to provide documentation that would allow us to reasonably estimate the fair value of the benefit received and we do not receive an identifiable benefit in exchange for the consideration. Accordingly, the incentives are recorded as a reduction of revenue.
  Our Devices customers have rights of return for the occasional ordering or shipping error. We maintain an allowance for these returns and reduce reported revenue for expected returns from shipments during each reporting period. This allowance is based on historical and current trends in product returns.  
Services
  In our Services segment, we recognize revenue generally when services are provided or, in the case of fees for product sales and licensing applications, revenues are generally recognized upon delivery or for licensing fees, when the patient is treated. In our HealthTronics business, revenue is recognized based on the type of product or service sold, as follows:    
     •   Fees for urology treatments. A substantial majority of our Services
         revenues are derived from fees related to lithotripsy treatments performed
         using our lithotripters. For lithotripsy and prostate treatment services,
         we, through our partnerships and other entities, facilitate the use of our
<p>         equipment and provide other support services in connection with these
         treatments at hospitals and other health care facilities. The professional
         fee payable to the physician performing the procedure is generally billed          and collected by the physician.                                           132 
--------------------------------------------------------------------------------
  Table of Contents
     •   Fees for managing the operation of our lithotripters and prostate
         treatment devices. Through our partnerships and otherwise directly by us,
         we provide services related to operating our lithotripters and prostate
         treatment equipment and receive a management fee for performing these          services. We recognize revenue for these services as the services are          provided.    
     •   Fees for maintenance services. We provide equipment maintenance services
         to our partnerships as well as outside parties. These services are billed          either on a time and material basis or at a fixed contractual rate,
         payable monthly, quarterly, or annually. Revenues from these services are
         recorded when the related maintenance services are performed.    
     •   Fees for equipment sales, consumable sales and licensing applications. We
         manufacture and sell medical devices focused on minimally invasive
         technologies for tissue and tumor ablation through cryosurgery, and their
         related consumables. We also sell and maintain lithotripters and          manufacture and sell consumables related to the lithotripters. We          distribute the Revolix laser and consumables related to the laser. With          respect to some lithotripter sales, in addition to the original sales
         price, we receive a licensing fee from the buyer of the lithotripter for
         each patient treated with such lithotripter. In exchange for this
         licensing fee, we provide the buyer of the lithotripter with certain
         consumables. All the sales for equipment and consumables are recognized
         when the related items are delivered. Revenues from licensing fees are
         recorded when the patient is treated. In some cases, we lease certain
         equipment to our partnerships as well as third parties. Revenues from          these leases are recognized on a monthly basis or as procedures are          performed.    
     •   Fees for anatomical pathology services. We provide anatomical pathology
         services primarily to the urology community. Revenues from these services
         are recorded when the related laboratory procedures are performed.
Sales deductions
  When we recognize revenue from the sale of our products, we simultaneously record an adjustment to revenue for estimated chargebacks, rebates, sales incentives and allowances, certain royalties, DSA fees, returns and allowances. These provisions, as described in greater detail below, are estimated based on historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our wholesale and indirect customers and other competitive factors. If the assumptions we used to calculate these adjustments do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted.                                          133 
--------------------------------------------------------------------------------
  Table of Contents
The following table presents the activity and ending balances for our product sales provisions for the last three years (in thousands):
                                   Returns and                                                 Other Sales                                 Allowances           Rebates           Chargebacks          Deductions             Total
Balance at January 1, 2009     $      38,982        $  104,667        $    
 35,982        $       5,142        $    184,773
  Current year provision                20,220           396,599              495,721               49,368             961,908 Prior year provision                  (1,287 )          (5,749 )              1,164                   -               (5,872 ) Payments or credits                   (9,641 )        (371,074 )           (480,963 )            (48,450 )          (910,128 )  Balance at December 31, 2009                           $      48,274        $  124,443        $      51,904        $       6,060        $    230,681  Additions related to acquisitions                          11,000            11,175                9,703                7,833              39,711 Current year provision                20,019           632,034              519,537               54,969           1,226,559 Prior year provision                  (2,520 )          (1,791 )                 21                   -               (4,290 ) Payments or credits                  (11,752 )        (562,636 )           (493,345 )            (53,542 )        (1,121,275 )  Balance at December 31, 2010                           $      65,021        $  203,225        $      87,820        $      15,320        $    371,386  Additions related to acquisitions                           3,594               194                   -                    -                3,788 Current year provision                52,027           842,674              801,543               85,147           1,781,391 Prior year provision                   3,697             2,312                   -                    -                6,009 Payments or credits                  (34,264 )        (739,494 )           (772,542 )            (79,125 )        (1,625,425 )  Balance at December 31, 2011                           $      90,075        $  308,911        $     116,821        $      21,342        $    537,149   
Returns and Allowances
  Our provision for returns and allowances consists of our estimates of future product returns, pricing adjustments and delivery errors. Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period of time both prior and subsequent to the product's expiration date. Our return policy allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. The primary factors we consider in estimating our potential product returns include:      •   the shelf life or expiration date of each product;       •   historical levels of expired product returns;          •   external data with respect to inventory levels in the wholesale          distribution channel;       •   external data with respect to prescription demand for our products; and          •   estimated returns liability to be processed by year of sale based on
         analysis of lot information related to actual historical returns.
   In determining our estimates for returns and allowances, we are required to make certain assumptions regarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, we make certain assumptions with respect to the extent and pattern of decline associated with generic competition. To make these assessments we utilize market data for similar products as analogs for our estimations. We use our best judgment to formulate these assumptions based on past experience and information available to us at the time. We continually reassess and make the appropriate changes to our estimates and assumptions as new information becomes available to us.  Our estimate for returns and allowances may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel. When we are aware of an increase in the level of inventory of our products in the distribution channel, we consider the reasons for the increase to determine if the increase may be temporary or other-than-temporary. Increases in inventory levels assessed as temporary will not                                          134
--------------------------------------------------------------------------------
  Table of Contents
  result in an adjustment to our provision for returns and allowances. Other-than-temporary increases in inventory levels, however, may be an indication that future product returns could be higher than originally anticipated and, accordingly, we may need to adjust our estimate for returns and allowances. Some of the factors that may be an indication that an increase in inventory levels will be temporary include:      •   recently implemented or announced price increases for our products; and    
  •   new product launches or expanded indications for our existing products.
Conversely, factors that may be an indication that an increase in inventory levels will be other-than-temporary include:
      •   declining sales trends based on prescription demand;          •   recent regulatory approvals to extend the shelf life of our products,
         which could result in a period of higher returns related to older product
         with the shorter shelf life;       •   introduction of new product or generic competition;       •   increasing price competition from generic competitors; and    
     •   recent changes to the National Drug Codes (NDCs) of our products, which
         could result in a period of higher returns related to product with the old          NDC, as our customers generally permit only one NDC per product for          identification and tracking within their inventory systems.   Rebates  We establish contracts with wholesalers, chain stores and indirect customers that provide for rebates, sales incentives, DSA fees, and other allowances. Some customers receive rebates upon attaining established sales volumes. We estimate rebates, sales incentives and other allowances based upon the terms of the contracts with our customers, historical experience, estimated inventory levels of our customers and estimated future trends. Our rebate programs can generally be categorized into the following four types:      •   direct rebates;       •   indirect rebates;       •   managed care rebates; and       •   Medicaid and Medicare Part D rebates.   Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer's purchases from us, including DSA fees paid to wholesalers under our DSA agreements, as described above. Indirect rebates are rebates paid to "indirect customers" which have purchased our products from a wholesaler under a contract with us.  We are subject to rebates on sales made under governmental and managed-care pricing programs. In estimating our provisions for these types of rebates, we consider relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. We estimate an accrual for managed-care, Medicaid and Medicare Part D rebates as a reduction of revenue at the time product sales are recorded. These rebate reserves are estimated based upon the historical utilization levels, historical payment experience, historical relationship to revenues and estimated future trends. Changes in the level of utilization of our products through private or public benefit plans and group purchasing organizations will affect the amount of rebates that we owe.  We participate in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector                                          135 
--------------------------------------------------------------------------------
  Table of Contents
  (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance, as well as field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be as much as 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, our Medicaid rebate provision includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. Our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Periodically, we adjust the Medicaid rebate provision based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of this provision for several periods. Medicaid pricing programs involve particularly difficult interpretations of statutes and regulatory guidance, which are complex and thus our estimates could differ from actual experience.  
We continually update these factors based on new contractual or statutory requirements, and significant changes in sales trends that may impact the percentage of our products subject to rebates.
Chargebacks
  The provision for chargebacks is one of the most significant and the most complex estimate used in the recognition of our revenue. We market and sell products directly to wholesalers, distributors, warehousing pharmacy chains, and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group purchasing organizations, collectively referred to as "indirect customers." We enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler's invoice price. Such credit is called a chargeback. The primary factors we consider in developing and evaluating our provision for chargebacks include:      •   the average historical chargeback credits;       •   estimated future sales trends; and    
     •   an estimate of the inventory held by our wholesalers, based on internal
         analysis of a wholesaler's historical purchases and contract sales.
   Other sales deductions  We offer our customers 2.0% prompt pay cash discounts. Provisions for prompt pay discounts are estimated and recorded at the time of sale. We estimate provisions for cash discounts based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience and the fact that we generally settle these amounts within thirty to sixty days.  Shelf-stock adjustments are credits issued to our customers to reflect decreases in the selling prices of our products. These credits are customary in the industry and are intended to reduce a customer's inventory cost to better reflect current market prices. The determination to grant a shelf-stock credit to a customer following a price decrease is at our discretion rather than contractually required. The primary factors we consider when deciding whether to record a reserve for a shelf-stock adjustment include:    
     •   the estimated number of competing products being launched as well as the
         expected launch date, which we determine based on market intelligence;
                                          136 
--------------------------------------------------------------------------------
  Table of Contents
      •   the estimated decline in the market price of our product, which we          determine based on historical experience and input from customers; and    
     •   the estimated levels of inventory held by our customers at the time of the
         anticipated decrease in market price, which we determine based upon          historical experience and customer input.  
Valuation of long-lived assets
  Long-lived assets, including property, plant and equipment, licenses, developed technology, tradenames and patents are assessed for impairment, whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows of the product. In the event the carrying value of the asset exceeds the undiscounted future cash flows of the product and the carrying value is not considered recoverable, impairment exists. An impairment loss is measured as the excess of the asset's carrying value over its fair value, generally based on a discounted future cash flow method, independent appraisals or preliminary offers from prospective buyers. An impairment loss would be recognized in net income in the period that the impairment occurs. As a result of the significance of our amortizable intangibles, any recognized impairment loss could have a material adverse impact on our financial position and/or results of operations.  Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets.  During 2011, the Company recorded a pre-tax non-cash impairment charge of $22.7 million to completely impair its cost method investment in a privately-held company focused on the development of an innovative treatment for certain types of cancer. This impairment was recorded due to the negative clinical trial results related to this company's lead asset.  
During 2010 and 2009, we did not recognize an impairment charge as a result of our review of long-lived assets.
  The cost of licenses are either expensed immediately or, if capitalized, are stated at cost, less accumulated amortization and are amortized using the straight-line method over their estimated useful lives ranging from 2 to 20 years, with a weighted average useful life of approximately 10 years. We determine amortization periods for licenses based on our assessment of various factors impacting estimated useful lives and cash flows of the acquired rights. Such factors include the expected launch date of the product, the strength of the intellectual property protection of the product and various other competitive, developmental and regulatory issues, and contractual terms. Significant changes to any of these factors may result in a reduction in the useful life of the license and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease. The value of these licenses is subject to continuing scientific, medical and marketplace uncertainty.  Acquired customer relationships are recorded at fair value upon acquisition and are amortized using estimated useful lives ranging from 13 to 17 years, with a weighted average useful life of approximately 16 years. We determine amortization periods for customer relationships based on our assessment of various factors impacting estimated useful lives and cash flows from the acquired assets. Such factors include the strength of the customer relationships, contractual terms and our plans regarding our future relations with our customers. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease.  
Acquired developed technology is recorded at fair value upon acquisition and amortized using estimated useful lives ranging from 3 to 20 years, with a weighted average useful life of approximately 16 years. We
                                      137
--------------------------------------------------------------------------------
  Table of Contents
  determine amortization periods for developed technology based on our assessment of various factors impacting estimated useful lives and cash flows of the acquired assets. Such factors include the strength of the intellectual property protection of the product and various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease. The value of these assets is subject to continuing scientific, medical and marketplace uncertainty.  Acquired tradenames are recorded at fair value upon acquisition and, if deemed to have definite lives, are amortized using estimated useful lives ranging from 15 to 30 years, with a weighted average useful life of approximately 22 years. We determine amortization periods for tradenames based on our assessment of various factors impacting estimated useful lives and cash flows from the acquired assets. Such factors include the strength of the tradename and our plans regarding the future use of the tradename. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease.  
Goodwill and indefinite-lived intangible assets
  Endo tests goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of January 1st. The goodwill test consists of a Step I analysis that requires a comparison between the respective reporting unit's fair value and carrying value. A Step II analysis would be required if the fair value of the reporting unit is lower than its carrying value. If the fair value of the reporting unit exceeds its carrying value, an impairment does not exist and no further analysis is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Although the Company has four operating segments, Branded Pharmaceuticals, Generics, Devices and Services, we have determined that the Company has seven reporting units; (1) Pain, (2) Generics, (3) Urology, Endocrinology and Oncology (UEO), (4) Anatomical Pathology Services, (5) Urology Services, (6) HealthTronics Information Technology Solutions (HITS) and (7) American Medical Systems (AMS).  
Goodwill
  As of January 1, 2012, our annual assessment date, we completed our annual recoverability review. Based upon recent market conditions, and, in some cases, a lack of comparable market transactions for similar assets, Endo determined that an income approach using a discounted cash flow model was an appropriate valuation methodology to determine each reporting unit's fair value. The income approach converts future amounts to a single present value amount (discounted cash flow model). Our discounted cash flow models are highly reliant on various assumptions, including estimates of future cash flow (including long-term growth rates), discount rate, and expectations about variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows. We believe we have appropriately reflected our best estimates of the assumptions that market participants would use in determining the fair value of our reporting units at the measurement dates.  There were no goodwill impairments as a result of performing our annual assessment. The results of our analyses showed that the fair value of each of our reporting units significantly exceeded their respective carrying values, with the exception of the AMS and HITS reporting units. These reporting units were recently acquired in 2011, and, as expected, there was a close correlation between the respective reporting units' fair values and carrying values.  
Indefinite-lived intangible assets
  On November 11, 2011, the Company decided to terminate development of its octreotide implant for the treatment of acromegaly and, on December 27, 2011, terminated its pagoclone development program after conducting an in-depth review of the Company's research and development activities, including an analysis of research and development priorities, focus and available resources for current and future projects and the                                          138 
--------------------------------------------------------------------------------
  Table of Contents
  commercial potential for the products. Accordingly, we recorded pre-tax non-cash impairment charges of $8.0 million and $9.0 million, respectively, in 2011 to completely write-off the remaining pagoclone intangible asset and the octreotide - acromegaly intangible asset.  During the fourth quarter of 2011, the Company received a deficiency from the FDA on an ANDA submission for one of its lead assets in this portfolio. Subsequently, in early 2012, the Company terminated its development program for this asset as a result of the regulatory challenges and changes in the development timeline resulting from the FDA's request. In addition, as a result changes in market conditions since the acquisition date, there has been a significant deterioration in the commercial potential for this product. Accordingly, we recorded a pre-tax non-cash impairment charge of $71.0 million in 2011 to write off the intangible asset in its entirety, which was assigned to our generics segment and recorded in the Asset impairment charges line of our Consolidated Statements of Operations.  In early 2012, the Company terminated Penwest's A0001 development program after conducting an in-depth review of the Company's research and development activities, including an analysis of research and development priorities, focus and available resources for current and future projects and the commercial potential for the product. Accordingly, we recorded a pre-tax non-cash impairment charges of $1.6 million in 2011 to completely write-off the A0001 intangible asset.  As of January 1, 2012, the Company tested its indefinite-lived intangible assets for recoverability. Similar to the approach for testing goodwill recoverability, Endo determined that an income approach using a discounted cash flow model was an appropriate valuation methodology to determine each indefinite-lived asset's fair value. Our discounted cash flow models are highly reliant on various assumptions, including estimates of future cash flow (including long-term growth rates), probability of commercial feasibility of each related project, discount rate, and expectations about variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows. We believe we have appropriately reflected our best estimates of the assumptions that market participants would use in determining the fair value of our indefinite-lived intangible assets at the measurement date. There were no additional impairments recorded as a result of performing our annual assessment other than those previously discussed above.  
Acquisition-related in-process research and development and contingent consideration
  Effective January 1, 2009, acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired IPR&D and contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.  There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, including IPR&D, we typically use the "income method." This method starts with our forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include: the amount and timing of projected future cash flows; the amount and timing of projected costs to develop the IPR&D into commercially viable products; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset's life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry, as well as expected changes in standards of practice for indications addressed by the asset.  Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives. Acquired IPR&D is designated as an indefinite-lived intangible asset until the associated research and development activities are completed or abandoned.                                          139
--------------------------------------------------------------------------------
  Table of Contents
  We account for contingent consideration in accordance with applicable guidance provided within the business combination rules. As part of our consideration for the Indevus and Qualitest acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our assumptions each reporting period, based on new developments, and record such amounts at fair value until such consideration is satisfied.  Indevus  The Indevus Contingent Consideration Agreements were measured and recognized at fair value upon the Indevus Acquisition Date and are required to be re-measured on a recurring basis, with changes to fair value recorded in Acquisition-related items, net in the accompanying Consolidated Statements of Operations. The fair values were determined using a probability-weighted discounted cash flow model, or income approach. This fair value measurement technique is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The valuation of each Indevus Contingent Consideration Agreement is described in further detail below:    
     •   AveedTM Contingent Consideration - The range of the undiscounted amounts
         the Company could pay under the AveedTM Contingent Cash Consideration
         Agreement is between zero and approximately $175.0 million. Under this          agreement, there are three scenarios that could potentially lead to
         amounts being paid to the former stockholders of Indevus. These scenarios
         are (1) obtaining an AveedTM With Label approval, (2) obtaining an AveedTM
         Without Label approval and (3) achieving the $125.0 million sales
         milestone on or prior to the fifth anniversary of the date of the first
         commercial sale of AveedTM should the AveedTM Without Label approval be
         obtained. The fourth scenario is AveedTM not receiving approval within
         three years of the closing of the Offer, which would result in no payment
         to the former stockholders of Indevus. Each scenario was assigned a
         probability based on the current regulatory status of AveedTM. The
         resultant probability-weighted cash flows were then discounted using a
         discount rate of U.S. Prime plus 300 basis points, which the Company
         believes is appropriate and is representative of a market participant
         assumption. Using this valuation technique, the fair value of the
         contractual obligation to pay the AveedTM Contingent Consideration was
         determined to be zero at December 31, 2011, $7.1 million at December 31,
         2010, and $133.1 million on the Indevus Acquisition Date.    
     •   Octreotide Contingent Consideration - The range of the undiscounted
         amounts the Company could pay under the Octreotide Contingent Cash
         Consideration Agreement is between zero and approximately $91.0 million.
         Under this agreement, the two scenarios that require consideration are          (1) approval of octreotide on or before the fourth anniversary of the
         closing of the Offer or (2) no octreotide approval on or before the fourth
         anniversary of the closing of the Offer. Each scenario was assigned a
         probability based on the current development stage of octreotide. The
         resultant probability-weighted cash flows were then discounted using a
         discount rate of U.S. Prime plus 300 basis points, which the Company
         believes is appropriate and is representative of a market participant
         assumption. Using this valuation technique, the fair value of the
         contractual obligation to pay the Octreotide Contingent Consideration was
         determined to be zero at both December 31, 2011 and December 31, 2010 and
$39.8 million on the Indevus Acquisition Date.          •   Valera Contingent Consideration - The range of the undiscounted amounts
         the Company could pay under the Valera Contingent Cash Consideration
         Agreement is between zero and approximately $33.0 million. The fair value
         of the Valera Contingent Consideration is estimated using the same
         assumptions used for the AveedTM Contingent Cash Consideration Agreement
         and Octreotide Contingent Cash Consideration Agreement, except that the
         probabilities associated with the Valera Contingent Consideration take          into account the probability of obtaining the Octreotide Approval on or          before the fourth anniversary of the closing of the Offer. This is due to          the fact that the Valera Contingent Consideration will not be paid unless
         octreotide for the treatment of acromegaly is approved prior to April 18,
         2012. Using this valuation technique, the fair value of the contractual
                                          140 
--------------------------------------------------------------------------------
  Table of Contents
       obligation to pay the Valera Contingent Consideration was determined to be
       zero at both December 31, 2011 and December 31, 2010 and $13.7 million on
       the Indevus Acquisition Date.
   At December 31, 2011, the aggregate fair value of the three Indevus Contingent Consideration Agreements decreased from $7.1 million at December 31, 2010 to zero at December 31, 2011. This decrease primarily reflects management's current assessment of the probability that it will not be obligated to make contingent consideration payments based on the anticipated timeline for the NDA filings and FDA approvals of AveedTM and octreotide for the treatment of acromegaly. The decrease in the liability was recorded as a gain and was included in Acquisition-related items, net in the accompanying Consolidated Statements of Operations.  As of December 31, 2011, there were no changes to the range of the undiscounted amounts the Company may be required to pay under any of the Indevus Contingent Consideration Agreements.  Qualitest  On November 30, 2010 (the Qualitest Acquisition Date), Endo acquired Qualitest, who was party to an asset purchase agreement with Teva Pharmaceutical Industries Ltd (Teva) (the Teva Agreement). Pursuant to this agreement, Qualitest purchased certain pipeline generic products from Teva and could be obligated to pay consideration to Teva upon the achievement of certain future regulatory milestones (the Teva Contingent Consideration).  The range of the undiscounted amounts the Company could pay under the Teva Agreement is between zero and $12.5 million. The Company is accounting for the Teva Contingent Consideration in the same manner as if it had entered into that arrangement with respect to its acquisition of Qualitest. Accordingly, the fair value was estimated based on a probability-weighted discounted cash flow model, or income approach. The resultant probability-weighted cash flows were then discounted using a discount rate of U.S. Prime plus 300 basis points. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Using this valuation technique, the fair value of the contractual obligation to pay the Teva Contingent Consideration was determined to be $8.7 million at December 31, 2011 and $9.0 million at December 31, 2010 and the Qualitest Acquisition Date, respectively.  The decrease balance at December 31, 2011 compared to December 31, 2010 primarily reflects changes of our present value assumptions associated with our valuation model. The decrease in the liability was recorded as a gain and is included in Acquisition-related items, net in the accompanying Consolidated Statements of Operations.  
As of December 31, 2011, there were no changes to the range of the undiscounted amounts the Company may be required to pay under the Teva Agreement.
Income taxes
  Provisions for income taxes are calculated on reported pre-tax income based on current tax laws, statutory tax rates and available tax incentives and planning opportunities in various jurisdictions in which we operate. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. We recognize deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. Significant judgment is required in determining income tax provisions and evaluating tax positions. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The factors used to assess the likelihood of realization are the Company's                                          141 
--------------------------------------------------------------------------------
  Table of Contents
  forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company's effective tax rate on future earnings.  At December 31, 2011, we had $444.8 million of gross deferred tax assets, which included federal and state net operating loss carryforwards (NOLs) of approximately $178.5 million, research and development credit carryforwards of $18.2 million, capital loss carryforwards of $16.4 million, alternative minimum tax and foreign tax credits of $2.6 million and temporary differences of approximately $229.1 million. At December 31, 2011, our NOLs and research and development credit carryforwards were related to multiple tax jurisdictions, including federal and various state jurisdictions, which expire at intervals between 2012 and 2032. We evaluate the potential realization of our deferred tax benefits on a jurisdiction-by-jurisdiction basis. Our analysis of the realization considers the probability of generating taxable income or other sources of income as defined within the applicable income tax authoritative guidance, which could be utilized to support the assets over the permitted carryforward period in each jurisdiction. Where we have determined under the more likely than not standard that we do not have a better-than-50% probability of realization, we establish a valuation allowance against that portion of the deferred tax asset where our analysis and judgment indicates a less-than-50% probability of realization. Based on our forecasted taxable income within these jurisdictions, we believe we will generate sufficient future taxable income to realize a significant portion of our deferred tax assets associated with our NOLs and research and development credit carryfowards. However, the Company does not anticipate future capital gains that would be required to obtain the tax benefit of our net unrealized capital loss. Accordingly, this deferred tax asset is offset by a valuation allowance of $16.4 million at December 31, 2011. In addition, due to our historical losses in certain state jurisdictions and the absence of sources of income, we have established a $5.1 valuation allowance for our state NOL carryforwards.  On a periodic basis, we evaluate the realizability of our deferred tax assets and liabilities and will adjust such amounts in light of changing facts and circumstances, including but not limited to future projections of taxable income, tax legislation, rulings by relevant tax authorities, tax planning strategies and the progress of ongoing tax audits. Settlement of filing positions that may be challenged by tax authorities could impact the income tax position in the year of resolution.  
Contingencies
  The Company is subject to various patent, product liability, government investigations and other legal proceedings in the ordinary course of business. Legal fees and other expenses related to litigation are expensed as incurred and included in Selling, general and administrative expenses. Contingent accruals are recorded when the Company determines that a loss related to a litigation matter is both probable and reasonably estimable. Due to the fact that legal proceedings and other contingencies are inherently unpredictable, our assessments involve significant judgments regarding future events.  
Stock-based compensation
  The Company accounts for its stock-based compensation plans in accordance with the guidance for share-based payments. Accordingly, all stock-based compensation is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expenses over the requisite service period. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. We use the Black-Scholes option pricing model to estimate the fair value of employee stock options.  The Black-Scholes option pricing model utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield (which is expected to be zero, as the Company has not paid cash dividends to date and does not currently expect to pay cash dividends) and the expected term of the option. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company's stock price and other factors. To the extent volatility of our stock price increases in the future, our estimates of the fair value of stock options granted                                          142
--------------------------------------------------------------------------------
  Table of Contents
  in the future could increase, thereby increasing stock-based compensation expense in future periods. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. We estimate the expected term of options granted based on our historical experience with our employees' exercise of stock options and other factors, including an estimate of the number of share-based awards which will be forfeited due to employee turnover. Changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. Changes in the inputs and assumptions can materially affect the measurement of the estimated fair value of our employee stock options. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Also, the accounting estimate of stock-based compensation expense is reasonably likely to change from period to period as further stock options are granted and adjustments are made for stock option forfeitures and cancellations.  
The fair value of our restricted stock grants is based on the fair market value of our common stock on the date of grant discounted for expected future dividends.
RECENT ACCOUNTING PRONOUNCEMENTS
  In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29 on interim and annual disclosure of pro forma financial information related to business combinations. The new guidance clarifies the acquisition date that should be used for reporting the pro forma financial information in which comparative financial statements are presented. It is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The provisions of this ASU have been incorporated into this filing for our 2011 acquisitions.  In December 2010, the FASB issued ASU 2010-28 on accounting for goodwill. The guidance clarifies the impairment test for reporting units with zero or negative carrying amounts. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The adoption is not expected to have a material impact on the Company's Consolidated Financial Statements.  In December 2010, the FASB issued ASU 2010-27 on accounting for the annual fee imposed by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. The new guidance specifies that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense. It is effective on a prospective basis for calendar years beginning after December 31, 2010. The amount expensed in 2011 related to this fee was approximately $18.0 million in 2011, which we charged as an operating expense ratably throughout 2011.  In May 2011, the FASB issued ASU 2011-04 on fair value disclosures. This guidance amends certain accounting and disclosure requirements related to fair value measurements. It is effective on a prospective basis for interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company is currently evaluating ASU 2011-04 but we do not expect the impact of adoption to be material.  In June 2011, the FASB issued ASU 2011-05 on the presentation of comprehensive income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 was initially to be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted.                                          143
--------------------------------------------------------------------------------
  Table of Contents
  However, the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to other comprehensive income were deferred in December 2011 upon the FASB's issuance of ASU 2011-12, which allows the FASB time to redeliberate whether to present the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income on the face of the financial statements for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, the Company is required to continue reporting reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 and ASU 2011-12 will not have an impact on the Company's consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.  In September 2011, the FASB issued ASU 2011-08 on testing goodwill for impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2011-08 will be effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating ASU 2011-08. 


Wordcount: 
38316