UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2010

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

For the transition period from to

Commission file number 001-34172

Fresenius Kabi Pharmaceuticals Holding, Inc.

(Exact name of registrant as specified in its charter)


Delaware		98-0589183
(State of Incorporation)		(I.R.S. Employer Identification No.)

Else-Kroener-Strasse 1 61352 Bad Homburg v.d.H. Germany		+49 (6172) 608 0
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

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


Contingent Value Rights, par value $0.001 per share		The NASDAQ Stock Market LLC
(Title of Class)		(Name of each exchange on which registered)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

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

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

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of February 22, 2011, all of the shares of the registrant’s common stock were held by Fresenius Kabi AG.

Fresenius Kabi Pharmaceuticals Holding, Inc.

FORM 10-K

For the Year Ended December 31, 2010

TABLE OF CONTENTS


		Page
	PART I	1

Item 1.	Business		1

Item 1A.	Risk Factors		12

Item 1B.	Unresolved Staff Comments		19

Item 2.	Properties		20

Item 3.	Legal Proceedings		20

Item 4.	Removed and Reserved		23

	PART II	23

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23

Item 6.	Selected Financial Data		24

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		40

Item 8.	Financial Statements and Supplementary Data		41

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		79

Item 9A.	Controls and Procedures		79

Item 9B.	Other Information		80

	PART III	80

	PART IV	80

Item 15.	Exhibits, Financial Statement Schedule and Reports on Form 8-K		80

	Signatures		82

PART I

Item 1.

BUSINESS

Unless the context otherwise requires, references in this report to “Fresenius Kabi Pharmaceuticals,” “FKP Holdings, Inc.,” “FKP Holdings,” “the Company,” “we,” “us” and “our” refer to “Fresenius Kabi Pharmaceuticals Holding, Inc. and its subsidiaries, including our operating subsidiary APP Pharmaceuticals, Inc, or “APP” (and its subsidiaries APP Pharmaceuticals, LLC, APP Pharmaceuticals Manufacturing, LLC, and Pharmaceutical Partners of Canada, Inc.). References to “the Merger” refer to the Merger between a subsidiary of FKP Holdings, an indirect wholly owned subsidiary of Fresenius SE & Co. KGaA (“Fresenius”), a societas europaea organized under the laws of the European Union and Germany, and APP. References to “New APP,” and “APP Pharmaceuticals,” refer to the company prior to the merger with FKP Holdings and after the separation from Abraxis BioScience, Inc. in 2007. References to “Old Abraxis” refer to Abraxis BioScience, Inc. prior to the separation in 2007 and related transactions and references to “New Abraxis” refer to New Abraxis Inc., which was our wholly owned subsidiary prior to the separation and which changed its name to Abraxis BioScience, Inc. following the separation. References to the “distribution,” “separation” or “spin-off” refer to the transactions occurring in 2007, in which the proprietary business was separated from Old Abraxis and New Abraxis became an independent publicly-traded company.

Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K and other documents we file with the Securities and Exchange Commission contain forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which could cause our actual results to differ materially from those implied by such forward-looking statements, due to a number of factors, many of which are beyond our control, which include, but are not limited to:

•

the market adoption of and demand for our existing and new pharmaceutical products;

•

our ability to maintain and/or improve sales and earnings performance;

•

the ability to successfully manufacture products in an efficient, time-sensitive and cost effective manner;

•

our ability to service our debt;

•

the impact on our products and revenues of patents and other proprietary rights licensed or owned by us, our competitors and other third parties;

•

our ability, and that of our suppliers, to comply with laws, regulations and standards, and the application and interpretation of those laws, regulations and standards, that govern or affect the pharmaceutical industry, the non-compliance with which may delay or prevent the sale of our products;

•

the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals;

•

the availability and price of acceptable raw materials and components from third-party suppliers;

•

evolution of the fee-for-service arrangements being adopted by our major wholesale customers;

•

risks inherent in divestitures and spin-offs, including business risks, legal risks and risks associated with the tax and accounting treatment of such transactions;

•

inventory reductions or fluctuations in buying patterns by wholesalers or distributors;

•

the effect of the Merger on APP’s customer and supplier relationships, operating results and business generally;

•

risks that the Merger will disrupt APP’s current plans and operations, and the potential difficulties in retaining APP’s employees as a result of the Merger;

•

the outcome of any pending or future litigation and administrative claims;

•

the impact of recent legislative changes to the governmental reimbursement system;

•

potential restructurings of FKP Holdings and its subsidiaries (which include APP and its subsidiaries) which could affect its ability to generate revenues;

•

challenges of integration and restructuring associated with the Merger or other planned acquisitions and the challenges of achieving anticipated synergies; and

•

the impact of any product liability, or other litigation to which the Company is, or may become a party.

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” and similar expressions are generally intended to identify forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise. Readers should carefully review the factors described in Item 1A: Risk Factors below and other documents we file from time to time with the Securities and Exchange Commission for a more detailed description of the risks and other factors that may affect the forward-looking statements. Readers should understand that it is not possible to predict or identify all such factors. Consequently, readers should not consider any such list to be a complete set of all potential risks or uncertainties.

The CVRs

On September 10, 2008, FKP Holdings completed the Merger, following which APP became a wholly-owned subsidiary of FKP Holdings. Under the terms of the Merger, Fresenius acquired all of the outstanding common stock of APP for $23.00 in cash per share (the “Cash Purchase Price”) plus a contingent value right (“CVR”). The maximum amount payable under the CVR indenture is $6.00 per CVR. Our obligation to make a cash payment on the CVRs was determined on the basis of cumulative Adjusted EBITDA (as defined in the CVR indenture) for a three-year period ending on December 31, 2010, referred to as the “CVR measuring period.” The CVRs were intended to give holders an opportunity to participate in any Adjusted EBITDA, as defined in the CVR indenture, generated during the CVR measuring in excess of a threshold amount. Each CVR represented the right to receive a pro rata portion of an amount equal to 2.5 times the amount, if any, by which cumulative Adjusted EBITDA of APP and FKP Holdings and their subsidiaries on a consolidated basis, exceeded $1.268 billion for the CVR measuring period. Since Adjusted EBITDA for the CVR measuring period did not exceed this threshold amount, no amounts will be payable on the CVRs and the CVRs will expire valueless.

The CVRs do not represent equity, or voting securities of FKP Holdings, and they do not represent ownership interests in FKP Holdings. Holders of the CVRs are not entitled to any rights of a stockholder or other equity or voting securities of FKP Holdings, either at law or in equity. Similarly, holders of CVRs are not entitled to any dividends declared or paid with respect to any equity security of FK Holdings. A holder of a CVR is entitled only to those rights set forth in the CVR indenture. Additionally, the right to receive amounts payable under the CVRs, if any amount had been payable, is subordinated to all senior obligations of FKP Holdings. The CVRs currently trade on NASDAQ under the symbol “APCVZ”.

Under the terms of the CVR indenture, the amount payable in respect of each CVR is determined based on Adjusted EBITDA. As a result, in addition to reporting financial results in accordance with generally accepted accounting principles (“GAAP”), FKP Holdings also must calculate and present Adjusted EBITDA, which is a non-GAAP financial measure, for the cumulative period from January 1, 2008 until the expiration of the CVR measurement period (which was December 31, 2010) and settlement of the CVRs.

The calculation of Adjusted EBITDA under the CVR indenture for the year ended December 31, 2010 and the cumulative period from January 1, 2008 to December 31, 2010 is as follows (in thousands):


	For the Twelve Month Period Beginning January 1, 2010 and Ending December 31, 2010			For the Cumulative Period Beginning January 1, 2008 and Ending December 31, 2010
EBITDA CALCULATION:
Net income (loss)	$	109,569		$	(223,718	)

Interest expense		282,553			779,093
Interest income		(26	)		(1,674	)
Income taxes		42,653			39,127
Depreciation		19,842			57,082
Amortization		38,717			520,645
Intangible asset impairment		1,400			1,400
Fixed asset impairment		3,440			8,812

EBITDA	$	498,148		$	1,180,767


*Reconciliation to Adjusted EBITDA:*
Stock compensation		643			6,772
Merger and separation related costs		1,361			50,556
Puerto Rico costs *		—			29,475
Technology transfer costs *		—			6,425
Change in the value of contingent value rights		(42,282	)		(151,661	)
Other taxes		1,308			2,357
Gain on sale of fixed assets		(594	)		(185	)
Consulting fees		—			600
Foreign currency (gain)/loss		(679	)		(3,153	)
Puerto Rico closure costs		743			1,149
Other charges		4,837			2,484

Adjusted EBITDA – per CVR	$	463,485		$	1,125,586

*	Puerto Rico costs and Technology transfer costs reached the combined add back limit of $35.9 million as of June 30, 2009.

LOGO

FKP Holdings believes that its presentation of these non-GAAP financial measures is consistent with the requirements of the CVR indenture and also provides useful supplementary information to help investors in understanding the underlying operating performance and cash generating capacity of the Company. The calculation is based on the interpretation of the definition of Adjusted EBITDA set forth in the CVR indenture by management of FKP Holdings and the final determination of Adjusted EBITDA under the CVR indenture is subject to the terms of the CVR indenture.

FKP Holdings does use these non-GAAP financial measures internally for operating, budgeting and financial planning purposes and also believes that its presentation of these non-GAAP financial measures can assist management and investors in assessing the financial performance and underlying strength of its core business. The non-GAAP financial measures presented by FKP Holdings may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measures are in addition to, and not a substitute for or superior to, measures of financial performance calculated in accordance with GAAP.

Because any amount payable to the holders of CVRs would have been settled in cash, the CVRs are classified as liabilities in the consolidated financial statements. The estimated fair value of the CVRs at the date of acquisition was included in the cost of the acquisition. At each reporting date, the CVRs are marked-to-market based on the closing price of a CVR as reported by NASDAQ, and the change in the fair value of the CVRs for the reporting period is included in the statement of operations.

CVR Expiration

Within 15 days of the filing of this Form 10-K, we will deliver the CVR statement required by the CVR indenture to the trustee under the CVR indenture and the holders of record of the CVRs. As set forth above, the CVR statement will indicate that our and our subsidiaries’ cumulative Adjusted EBITDA for the measuring period did not exceed the threshold specified in the CVR indenture and that the CVRs are valueless. Shortly following the delivery of such statement, we intend to notify the NASDAQ of our intention to deregister the CVRs under the Securities Exchange Act of 1934 (the “Exchange Act”) and delist the CVRs from the NASDAQ. Following such notice, as permitted by the rules of the SEC and the NASDAQ, we intend within approximately 20 days to delist the CVRs from the NASDAQ and deregister the CVRs under Section 12(b) of the Exchange Act and terminate our reporting requirements under the Exchange Act. In addition, the register of CVR holders will be closed by the trustee and no further transfers of the CVRs will be recorded.

Our Business

We are an integrated pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only company with a primary focus on the injectable oncology, anti-infective, anesthetic/analgesic and critical care markets. We believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried.

Our products are generally used in hospitals, long-term care facilities, alternate care sites and clinics within North America. Unlike the retail pharmacy market for oral products, the injectable pharmaceuticals marketplace is largely made up of end users who have relationships with group purchasing organizations (or “GPOs”), and/or specialty distributors who distribute products within a particular end-user market, such as oncology clinics. GPOs and specialty distributors generally enter into collective product purchasing agreements with pharmaceutical suppliers like us in an effort to secure more favorable drug pricing on behalf of their members.

Our Organizational History

Fresenius Kabi Pharmaceuticals Holding, Inc. (“FKP Holding” or the “Company”) is a wholly-owned subsidiary of Fresenius Kabi AG, and an indirect wholly-owned subsidiary of Fresenius SE & Co. KGaA (“Fresenius”), a partnership limited by shares organized under the laws of Germany. FKP Holding was formed on July 2, 2008, in order to facilitate the acquisition of APP Pharmaceuticals, Inc. (“APP or the Predecessor”) discussed below. See Note 3 to the consolidated financial statements – Merger with APP for details.

On September 10, 2008, FKP Holding completed the acquisition of APP (the “Merger”) pursuant to an Agreement and Plan of Merger dated July 6, 2008 (the “Merger Agreement”), and APP became a wholly-owned subsidiary of FKP Holding. Effective with the Merger, each outstanding share of common stock of APP and certain stock options and restricted stock units of APP were converted into the right to receive $23.00 in cash, without interest, and one Contingent Value Right (“CVR”), issued by FKP Holding and representing the right to receive a cash payment, without interest, of up to $6.00 determined in accordance with the terms of the CVR Agreement. Refer to Note 4 to the consolidated financial statements - Contingent Value Rights (CVR), for further details. The aggregate consideration paid in the Merger was $4,908.1 million, including $997.5 million in assumed APP debt. FKP Holding incurred $3,856 million in new external and intercompany debt due to Fresenius and its affiliates in connection with the Merger, the aggregate proceeds of which were used to pay the Merger consideration, repay a portion of APP’s then outstanding indebtedness and pay fees and expenses related to the Merger. See Note 8 to the consolidated financial statements - Long-Term Debt and Credit Facility.

The results of APP’s operations have been included in the consolidated financial statements of FKP Holding since September 10, 2008. APP is a fully-integrated pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products with a primary focus on the oncology, anti-infective, anesthetic/analgesic and critical care markets. APP manufactures a comprehensive range of dosage formulations, and its products are used in hospitals, long-term care facilities, alternate care sites and clinics within North America. The Merger is an important step in Fresenius’ growth strategy. Through the merger with APP, Fresenius gains entry to the U.S. pharmaceuticals market and achieves a leading position in the global I.V. generics industry. The North American platform also provides further growth opportunities for Fresenius’ existing product portfolio.

Prior to the Merger, FKP Holding had not carried on any activities or operations except for those activities incidental to its formation and in connection with the transactions related to the Merger. Following the Merger, the business of FKP Holding consists exclusively of that of APP. Accordingly, for accounting purposes FKP Holding is considered the successor to APP and the consolidated financial statements included in Item 8 are presented for two distinct periods: the periods preceding the Merger, or “predecessor” periods (all periods prior to September 10, 2008), and the period after the merger, or “successor” period (from the inception of FKP Holding on July 2, 2008, which includes the results of APP from September 10, 2008, the date of acquisition). The Company applied purchase accounting to the opening balance sheet on September 10, 2008. The Merger resulted in a new basis of accounting for the assets acquired and liabilities assumed in connection with the acquisition of APP beginning on September 10, 2008. As a result of the acquisition and the application of purchase accounting as described above, the consolidated financial information for the period after the acquisition is presented on a different basis than that for the periods before the acquisition and, therefore, is not comparable.

APP is a Delaware corporation that was formed in 2007. American Pharmaceutical Partners, Inc. (“Old APP”) was a Delaware corporation formed in 2001. On April 18, 2006, Old APP completed a merger with American BioScience Inc. (or “ABI”), Old APP’s former parent. In connection with the closing of that merger, Old APP’s certificate of incorporation was amended to change its original name of American Pharmaceutical Partners, Inc. to Abraxis BioScience, Inc. which we refer to as “Old Abraxis.”

On November 13, 2007, Old Abraxis separated into two independent publicly-traded companies, APP Pharmaceuticals Inc., which held the Abraxis Pharmaceutical Products business, focusing primarily on manufacturing and marketing our oncology, anti-infective and critical care hospital-based generic injectable products and marketing our proprietary anesthetic/analgesic products (which we refer to collectively as the “hospital-based business”), and Abraxis BioScience, Inc. (“New Abraxis”) which held the Abraxis Oncology and Abraxis Research businesses (which we refer to as the “proprietary business”). APP continued to operate the hospital-based business under the name APP Pharmaceuticals, Inc. APP and New Abraxis entered into a series of agreements in connection with the separation, including a credit facility under which APP borrowed $1 billion, a portion of which was paid to New Abraxis in connection with the separation, and a $150 million revolving credit facility. These credit facilities were retired in connection with the Merger and replaced with a similar external facility.

Our Products

Injectable Oncology Products

We presently manufacture and market 22 injectable oncology products in 52 dosages and formulations. According to IMS Health, Inc., or IMS, a pharmaceutical market research firm, during the last 12 months ending November 2010, we were a market leader for 6 of these products in terms of units sold in the United States. Net revenue of our injectable oncology products was $114.2 million in 2010 and represented 10% of total 2010 revenue.

Oncology Products:

Carboplatin. Carboplatin is indicated for the initial treatment of advanced ovarian carcinoma in combination with other chemotherapeutic agents and for the palliative treatment of recurrent ovarian carcinoma after prior chemotherapy. Carboplatin is the generic equivalent of Bristol-Myers Squibb Company’s Paraplatin^®. We launched the liquid and lyophilized versions of carboplatin in October 2004, and we received approval for the liquid, 600 mg, multi-dose vial form of the product in February 2006.

Doxorubicin. Doxorubicin is indicated for use in adjuvant therapy for the treatment of breast cancer where there is evidence of axillary lymph node involvement following tumor resection. Doxorubicin has been successful in producing regression in disseminated neoplastic conditions, including several types of leukemias, ovarian, breast and bladder cancers as well as Hodgkin’s disease. Doxorubicin is the generic equivalent of Pharmacia & Upjohn Company’s Adriamycin^®. We launched the liquid version of doxorubicin in August 2007.

Fludarabine. Fludarabine is indicated for the treatment of adult patients with B-cell chronic lymphocytic leukemia whose disease is unresponsive, or has progressed, despite treatment with an alkylinating-agent containing regimen. We market both the liquid and lyophilized formulations. We launched fludarabine in October 2007.

Fluorouracil. Fluorouracil is part of a class of drugs known as “antineoplastics” which are used in the treatment of various cancers to slow or stop the growth of cancer cells. Fluorouracil is indicated for the palliative management of carcinoma of the colon, rectum, breast, stomach and pancreas and is the generic equivalent of Sicor Pharmaceuticals’ Adrucil^®. We launched fluorouracil in December 1998.

Ifosfamide. Ifosfamide is a chemotherapy drug used to treat germ cell testicular cancer and is often given in combination with mesna. Bristol-Myers originally marketed ifosfamide under the brand name Ifex^®. In response to customer requests, we were the first to offer individually packaged generic ifosfamide; our lyophilized form eliminated the need for the refrigerated storage required by the previous generic ifosfamide/mesna kit packaging. We launched ifosfamide in July 2002 with 180-day exclusivity.

Irinotecan. Irinotecan is a chemotherapy drug used to treat advanced cancer of the large intestine and rectum. It is indicated as a component of first-line therapy in combination with 5-fluorouracil and leucovorin for patients with metastatic colorectal cancer. The drug is also indicated for patients with metastatic colorectal cancer whose disease has recurred or progressed following initial fluorouracil-based therapy. We launched irinotecan in February 2008.

Mesna. Mesna is a cytoprotectant used to treat the side effects associated with certain chemotherapy drugs. Bristol-Myers originally marketed mesna under the brand name Mesnex^®. Launched in May 2001, we were the first to market a generic version of mesna.

Paclitaxel Injection. Paclitaxel is an antineoplastic drug indicated as a first-line therapy in combination with Cisplatin for the treatment of advanced carcinoma of the ovary, as well as non-small cell lung cancer. As a second-line treatment, Paclitaxel is approved for the treatment of (a) AIDS-related Kaposi’s sarcoma; and (b) breast cancer after failure of combination chemotherapy for metastatic disease or relapse within 6 months. Paclitaxel is also indicated as an adjuvant therapy for the treatment of node-positive breast cancer. Paclitaxel is the generic equivalent of Bristol-Meyers Squibb’s Taxol^®.

Cisplatin Injection. Cisplatin is an antineoplastic drug approved for use in combination with other chemotherapeutic agents as the treatment for metastatic testicular tumors or metastatic ovarian tumors in patients who have already received appropriate non-pharmacological therapy. As a single agent, Cisplatin is indicated (a) as a secondary-line therapy for metastatic ovarian tumors refractory to standard chemotherapy; and (b) for patients with transitional cell bladder cancer which is no longer amenable to surgery and/or radiotherapy. Cisplatin is the generic equivalent to Platino-AQ^®, a product of Bristol-Meyers Squibb.

Oxaliplatin for Injection. Oxaliplatin is an antineoplastic agent indicated for use in combination with Fluorouracil/leucovorin for (a) adjuvant therapy of stage III colon cancer in patients who have undergone complete resection of the primary tumor; and (b) treatment of advanced colorectal cancer. Oxaliplatin for Injection is the generic alternative for Eloxatin^®, the brand name product of Sanofi Aventis US. Importantly, as opposed to the Eloxatin^® that is currently on the market in the liquid form, our product is a liquid and lyophilized powder.

Topotecan for Injection. Topotecan for Injection is indicated for small cell lung cancer sensitive disease after failure of first-line chemotherapy, and is also indicated for use in combination therapy with Cisplatin for stage IV-B, and for recurrent, or persistent carcinoma of the cervix not amenable to curative treatment with surgery and/or radiation therapy. APP markets Topotecan for Injection in 4 mg single dose vials; the product is bar-coded and preservative-free.

Injectable Anti-Infective Products

We manufacture and market 28 injectable anti-infective products. According to IMS, we were the United States market leader for 11 injectable anti-infective products in terms of units or dollars sold during the last twelve months ending November 2010. Our injectable anti-infective products generated net revenues of $278.8 million in 2010 and represented 24% of 2010 total net revenues.

We believe we offer one of the most comprehensive portfolios of injectable anti-infective products, including twelve different classes of antimicrobials.

Anti-Infective Products:

Aztreonam. Aztreonam for Injection, USP is indicated for the treatment of infections caused by susceptible gram-negative microorganisms, including urinary tract infections, lower respiratory tract infections, septicemia, skin and skin-structure infections including those associated with postoperative wounds, ulcers and burns, intra-abdominal infections and gynecologic infections. It is also indicated for adjunctive therapy to surgery in the management of infections caused by susceptible organisms. APP launched Aztreonam in single dose vials of 1 gram, 20 mL and 2 gram, 30 mL in June 2010. APP’s Aztreonam is AP-rated, bar-coded and latex-free.

Ampicillin. Ampicillin is a penicillin based antibiotic, which treats various types of infections of the skin, central nervous system, heart, respiratory tract, sinuses, ear and kidney.

Ampicillin and Sulbactam. Ampicillin and Sulbactam is an injectable antibacterial combination consisting of the seminsynthetic antibiotic ampicillin sodium and the beta-lactamase inhibitor sulbactam sodium. Administered intravenously or intramuscular, Ampicillin and Sulbactam is indicated for the treatment of several skin and skin structure, intra-abdominal and gynecological infections due to susceptible strains of microorganisms. Ampicillin and Sulbactam is the generic equivalent of Pfizer Inc.’s Unasyn^®. We launched this product in November 2006.

Azithromycin. Azithromycin is indicated for the treatment of community-acquired pneumonia and pelvic inflammatory disease when caused by susceptible microorganisms. Azithromycin is the generic equivalent of Pfizer Inc.’s Zithromax^®. We launched azithromycin in February 2006.

Cefotetan. Cefotetan is a second-generation cephalosporin with a broad range of anti-microbial activity. Cefotetan is often used for surgical prophylaxis and offers the longest half-life of any cephalopsorin. AstraZeneca marketed the innovator product under the brand name Cefotan^®. We launched cefotetan in September 2007 and are currently the only company to market cefotetan vials in the United States.

Vancomycin. Vancomycin is an antibiotic used to treat some types of Staph, Strep or other infections, particularly in patients who are allergic to penicillins or cephalosporins. Eli Lilly originally marketed vancomycin under the brand name Vancocin^®.

Injectable Critical Care Products

We manufacture and market more than 87 injectable critical care products including 29 anesthetic/analgesic products. According to IMS, 23 of our critical care products held first position and 13 of our critical care products held second position in the United States market in terms of dollars sold in the last twelve months ending November 2010. Our critical care and anesthetic/analgesic products generated net revenues of approximately $739.1 million for the year ended December 31, 2010, and represented 65% of 2010 total net revenues.

Critical Care Products:

Heparin . Injectable heparin is a blood thinner used to prevent and treat blood clotting, especially during and after surgery. We manufacture the most comprehensive line of injectable therapeutic heparin. During 2008, we increased our manufacturing capacity and production and are currently the leading supplier in the U.S. market of therapeutic heparin vials.

Oxytocin. Oxytocin is used to induce labor at term and control postpartum bleeding. Wyeth-Ayerst originally marketed oxytocin under the brand name Pitocin^®. We currently hold the number one unit and dollar share position for oxytocin in the US market.

Levothyroxine. Levothyroxine is used as replacement or supplemental therapy in hypothyroidism. APP introduced 2 codes of Levothyroxine in 2008 and we continue to be the only U.S. supplier.

Hydralazine. Hydralazine is used for hypertension and congestive heart failure. APP entered this market in 2001. A shortage of product in 2006 by American Regent allowed APP to take the U.S. market; we continue to maintain leadership in sales and units.

Thiamine. Thiamine HCL is a water soluble vitamin used for thiamine deficiency. APP has been the U.S. market leader in sales and units since 2001.

Chorionic. Human Chorionic Gonadotropin (HCG) is used as part of assisted reproductive technology (ART) program, induces ovulation and pregnancy in infertile females when the cause of infertility is functional. Also used for treatment of hypogonadotroic hypogonadism and prepubertal cryptorchidism.

Protamine. Protamine Sulfate is an antidote, used for heparin overdoses and to neutralize heparin during surgery and dialysis procedures. APP has been the U.S. market leader in sales and units since 2001.

Dexamethasone. Dexamethasone Sodium Phosphate is primarily used as an anti-inflammatory or immunosuppressant agent in the treatment of a variety of diseases. APP has been the market leader in number of units since 2004.

Propofol. Propofol is an intravenous sedative-hypnotic agent and the first of a new class of intravenous anesthetic agents—the alkylphenols. Propofol is indicated for the induction of general anesthesia in adult and pediatric patients; maintenance of general anesthesia in adult and pediatric patients; and intensive care unit sedation for intubated, mechanically ventilated adults. Propofol was launched as an authorized generic of Diprivan in the fourth quarter of 2009.

Diprivan. Diprivan^® is a patent protected, intravenous sedative-hypnotic agent containing Ethylenediaminetetraacetic acid (EDTA), and the first of a new class of intravenous anesthetic agents—the alkylphenols. Diprivan^® is indicated for the induction of general anesthesia in adult and pediatric patients; maintenance of general anesthesia in adult and pediatric patients; and intensive care unit sedation for intubated, mechanically ventilated adults. Zeneca Pharmaceuticals first commercially introduced Diprivan^® in the United States in 1989, and we purchased this product from AstraZeneca in June 2006

Naropin. Naropin^® is a patent protected long-acting local anesthetic that contains ropivicaine HCI, which is a member of the amino amide class of local anesthetics. Naropin^® is indicated for the production of local or regional anesthesia for surgery and for acute pain management. AstraZeneca developed Naropin^®, and we purchased this product from AstraZeneca in June 2006.

Injectable Pharmaceutical Products under Development

We believe that we are currently a leader in injectable abbreviated new drug applications, or “ANDA”. Since June 1, 1998, when we acquired 14 pending ANDAs, we have filed 114 applications with the Food and Drug Administration (“FDA”) and received a total of 96 product approvals through December 31, 2010.

We currently have approximately 30 ANDAs pending with the FDA and over 40 product candidates under development across our oncology, anti-infective and critical care product categories.

Research and Development

We have approximately 63 employees dedicated to product development who have expertise in areas such as pharmaceutical formulation, analytical chemistry and drug delivery. We leased a 48,000 square foot research and development facility in Melrose Park, IL which terminated on December 31, 2010. We currently lease and operate 56,000 square feet in a research and development facility in Skokie, Illinois.

When developing new products, we consider a variety of factors, including:

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potential pricing and gross margins;

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existing and potential market size;

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high barriers to entry;

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patent expiration date;

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our manufacturing capabilities and access to raw materials;

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potential development and competitive challenges; and

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whether these products complement our existing products and the opportunity to leverage these products with the development of additional products.

We have made, and will continue to make, substantial investment in research and development. Research and development costs totaled $28.1 million in 2010, $28.3 million in 2009 and $51.5 million for the combined predecessor and successor period in 2008. Costs for the combined predecessor and successor period in 2008 includes Puerto Rico start-up facility costs.

Sales and Marketing

Our products are primarily marketed by a dedicated sales force to hospitals, long-term care facilities, alternate care sites, and clinics who administer injectable products in their offices. Many purchases by these customers are made through arrangements with Group Purchasing Organizations (GPOs), which negotiate collective purchasing agreements on behalf of their members, or through specialty distributors, which specialize in particular therapeutic categories such as oncology. We sell to members of all of the major GPOs in the United States, which we believe collectively represent over 95% of all hospital-based pharmaceutical purchasers in the United States. We also sell products to the leading specialty distributors. We believe we have access to nearly 100% of the buyers of injectable products in the United States. Our sales force is comprised of approximately 32 field sales and national accounts professionals, supported by our customer service and sales support groups. Our representatives typically have substantial injectable pharmaceutical sales experience in the geographic region in which they operate.

We currently derive, and expect to continue to derive, a large percentage of our revenue from customers that are members of a small number of GPOs. Sales to our three major wholesale customers comprised 74%, 74%, and 79% of our 2010, 2009 and 2008 gross revenue, respectively. As is traditional in the pharmaceutical industry, a significant amount of our generic pharmaceutical products are sold to end users under GPO contracts through a relatively small number of drug wholesalers, which comprise the primary pharmaceutical distribution chain in the United States. Currently, fewer than ten GPOs control a large majority of sales to hospital customers. We have purchasing arrangements with the major GPOs in the United States, including AmeriNet, Inc., Broadlane Healthcare Corporation, HealthTrust Purchasing Group, MedAssets Inc., Novation, LLC, Cardinal Health Purchasing, PACT, LLC, Premier Purchasing Partners, LP, International Oncology Network, Oncology Therapeutic Network, and U.S. Oncology, Inc. In order to maintain these relationships, we believe we need to be a reliable supplier, offer a broad product line, remain price competitive, comply with FDA regulations and provide high-quality products. Our GPO agreements are typically multi-year in duration and may be terminated on short notice.

Competition

Competition among pharmaceutical and other companies that develop, manufacture or market pharmaceutical products is intense. We compete with these entities in all areas of business, including competing to attract and retain qualified scientific and technical personnel.

We face competition from major, brand name pharmaceutical companies as well as generic manufacturers such as Hospira, Inc., Bedford Laboratories, Baxter Laboratories and Teva Pharmaceuticals, as well as increased competition from new, overseas competitors.

Revenue and gross profit derived from sales of generic pharmaceutical products tend to follow a pattern based on regulatory and competitive factors. As patents for brand name products and related exclusivity periods expire, the first generic pharmaceutical manufacturer to receive regulatory approval for generic versions of these products is generally able to achieve significant market penetration and higher margins. As competing generic manufacturers receive regulatory approvals on similar products, market share, revenue and gross profit typically decline. The level of market share, revenue and gross profit attributable to a particular generic pharmaceutical product is normally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch in relation to competing approvals and launches. We continue to develop and introduce new products in a timely and cost-effective manner and identify niche products in order to maintain our revenue and gross margins.

Regulatory Considerations

Prescription pharmaceutical products are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and promotion of the products under the Federal Food Drug and Cosmetic Act and the Public Health Services Act, and by comparable agencies in foreign countries. FDA approval is required before any dosage form of any drug can be marketed in the United States. All applications for FDA approval must contain information relating to pharmaceutical formulation, stability, manufacturing, processing, packaging, labeling and quality control.

Generic Drug Approval

The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, established abbreviated FDA approval procedures for those drugs that are no longer protected by patents and which are shown to be equivalent to previously approved proprietary drugs. Approval to manufacture these drugs is obtained by filing an abbreviated new drug application, or an ANDA. An ANDA is a comprehensive submission that must contain data and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications and stability of the generic drug, as well as analytical methods, manufacturing process validation data and quality control procedures. As a substitute for clinical studies, the FDA may require data indicating that the ANDA drug formulation is equivalent to a previously approved proprietary drug. In order to obtain an ANDA approval of strength or dosage form that differs from the referenced brand name drug, an applicant must file and have granted an ANDA Suitability Petition. A product is not eligible for ANDA approval if it is not determined by the FDA to be equivalent to the referenced brand name drug or if it is intended for a different use. However, such a product might be approved under a New Drug Application, or an NDA, with supportive data from clinical trials.

One advantage of the ANDA approval process is that an ANDA applicant generally can rely upon equivalence data in lieu of conducting pre-clinical testing and clinical trials to demonstrate that a product is safe and effective for its intended use. We generally file ANDAs to obtain approval to manufacture and market our generic products. No assurance can be given that ANDAs submitted for our products will receive FDA approval on a timely basis, if at all.

Sales and Marketing Regulations

We are also subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain arrangements that do not violate the anti-kickback statutes. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations or court decisions addressing some of these practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third party payers (including Medicare and Medicaid), claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. The activities of our strategic partners relating to the sale and marketing of our products may be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). If the government were to allege against or convict us of violating these laws, there could be a material adverse effect on us. Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities.

Other Regulations

We are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other current and potential future federal, state, or local laws, rules, and/or regulations. Our research and development activities involve the controlled use of chemicals, biological materials and other hazardous materials. We believe that our procedures comply with the standards prescribed by federal, state, or local laws, rules, and/or regulations; however, the risk of injury or accidental contamination cannot be completely eliminated.

Manufacturing

Our manufacturing operations are located in Melrose Park, Illinois; Grand Island, New York; and Raleigh, North Carolina. These manufacturing facilities include dedicated cephalosporin powder filling (discontinued during 2010), liquid filling line and oncolytic manufacturing suites. In aggregate, our facilities encompass approximately 937,000 square feet of manufacturing, packaging, laboratory, office and warehouse space. In 2010, we closed the Barceloneta, Puerto Rico manufacturing facility that we acquired in connection with the Merger, and transferred its production operations to existing Company plants in the United States.

We can produce a broad range of dosage formulations, including lyophilized products, liquids, both aseptically filled and terminally sterilized, and powders. We currently produce approximately 190 million vials of product per year and have the capacity to produce 250 million vials of product per year.

In addition to manufacturing, we have fully integrated manufacturing support systems, including quality assurance, quality control, regulatory affairs and inventory control. These support systems enable us to maintain high standards of quality for our products and simultaneously deliver reliable services and goods to our customers on a timely basis.

We are required to comply with the applicable FDA manufacturing requirements contained in the FDA’s current Good Manufacturing Practice, or cGMP, regulations. cGMP regulations require quality control and quality assurance as well as the corresponding maintenance of records and documentation. Our manufacturing facilities must meet cGMP requirements to permit us to manufacture our products. We are subject to the periodic inspection of our facilities, procedures and operations and/or the testing of our products by the FDA, the Drug Enforcement Administration and other authorities to assess our compliance with applicable regulations.

Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.

Raw Materials

The manufacture of our products requires raw materials and other components that must meet stringent FDA requirements. Some of these raw materials and other components currently are available only from a limited number of sources. Additionally, regulatory approvals for a particular product denote the raw materials and components, and the suppliers for such materials that may be used for that product. Even when more than one supplier exists, we may elect to list, and in some cases have only listed, one supplier in our applications with the FDA. Any change in or addition of a supplier not previously approved must then be submitted through a formal approval process with the FDA. From time to time, it is necessary to maintain increased levels of certain raw materials due to the anticipation of raw material shortages or in response to market opportunities.

Intellectual Property

We rely on trade secrets, unpatented proprietary know-how, continuing technological innovation and patent protection to preserve our competitive position. Our success depends on our ability to operate without infringing the patents and proprietary rights of third parties. We cannot determine with certainty whether patents or patent applications of other parties will materially affect our ability to make, use or sell any products. A number of pharmaceutical companies, biotechnology companies, universities and research institutions may have filed patent applications or may have been granted patents that cover aspects of our or our licensors’ products, product candidates or other technologies.

Intellectual property protection is highly uncertain and involves complex legal and factual questions. Our patents and those for which we have or will license rights may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection or competitive advantages to us. We and our licensors may not be able to develop patentable products. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us.

Third-party patent applications and patents could reduce the coverage of the patents licensed, or that may be licensed to or owned by us. If patents containing competitive or conflicting claims are issued to third parties, we may be enjoined from commercialization of products or be required to obtain licenses to these patents or to develop or obtain alternative technology. In addition, other parties may duplicate, design around or independently develop similar or alternative technologies to our licensors or ours.

Litigation may be necessary to enforce patents issued or licensed to us or to determine the scope or validity of another party’s proprietary rights. U.S. Patent and Trademark Office interference proceedings may be necessary if we and another party both claim to have invented the same subject matter. We could incur substantial costs and our management’s attention would be diverted if:

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patent litigation is brought by third parties;

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we are party to or participate in patent suits brought against or initiated by our licensors;

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we initiate similar suits; or

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we are party to or participate in an interference proceeding.

In addition, we may not prevail in any of these actions or proceedings.

Employees

As of December 31, 2010, we had a total of 1,472 full-time employees, of which 63 were engaged in research and development, 371 were in quality assurance and quality control, 731 were in manufacturing, 98 were in sales and marketing and 209 were in administration and finance. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have not experienced any work stoppage and consider our relations with our employees to be good.

Environment

We believe that our operations comply in all material respects with applicable laws and regulations concerning the environment. While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not expected to have, a material adverse effect on our earnings or competitive position.

Available Information

Our Internet address is www.apppharma.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, are available free of charge on our website as soon as reasonably practical after they are electronically filed or furnished to the SEC. These filings may also be read and copied at the SEC’s Public Reference Room at 450 Fifth Street N.W., Washington D.C., 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The information found on our website shall not be deemed incorporated by reference by any general statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent we specifically incorporate the information found on our website by reference, and shall not be deemed filed under such Acts.

The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information about issuers that file reports electronically with the SEC. The address of that site is http://www.sec.gov.

Item 1A.

RISK FACTORS

You should carefully consider the risks described below before investing in our securities. The risks described below are not only risks unique to our company. Our business is also subject to the risks that affect many other companies, such as competition and general economic conditions. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity.

Risks Related to the Contingent Value Rights

CVR holders will not receive any payment on the CVRs and the CVRs will expire valueless.

The right to receive any future payment on the CVRs was contingent upon our and our consolidated subsidiaries’ achievement of cumulative Adjusted EBITDA (calculated in accordance with the CVR indenture) in excess of the threshold specified in the CVR indenture, which was $1.268 billion for the three years ending December 31, 2010, or the measurement period. Our and our consolidated subsidiaries’ Adjusted EBITDA for the measurement period was $1.126 billion. Since our cumulative Adjusted EBITDA did not exceed the required threshold during the measuring period, no payment will be made under the CVRs and the CVRs will expire valueless. See Note 4 to the consolidated financial statements—Contingent Value Rights (CVR).

The CVRs will expire shortly following the filing of this 10-K and we will deregister and delist the CVRs shortly thereafter and following such actions the CVRs will have no value

We previously listed the CVRs on the NASDAQ with the trading symbol “APCVZ”. Within 15 days of the filing of this Form 10-K, we will deliver the CVR statement required by the CVR indenture to the trustee under the CVR indenture and the holders of record of the CVRs. As set forth above, the CVR statement will indicate that ours and our subsidiaries cumulative Adjusted EBITDA for the measuring period did not exceed the threshold specified in the CVR indenture. Shortly following the delivery of such statement, we intend to notify the NASDAQ of our intention to deregister the CVRs under the Securities Exchange Act of 1934 (the “Exchange Act”) and delist the CVRs from the NASDAQ. Within approximately 10 days following such notice, as permitted by the rules of the SEC and the NASDAQ, we intend to file a Form 25 with the NASDAQ and the SEC to delist the CVRs from the NASDAQ and deregister the CVRs under Section 12(b) of the Exchange Act. Within approximately 10 days of the filing of the Form 25, we intend to file a Form 15 with the SEC to terminate our reporting requirements under the Exchange Act. In addition, the trustee under the CVR indenture will be discharged and the register of CVR holders will be closed and no further transfers of the CVRs will be recorded. Following such actions the CVRs will have expired and will cease to have any value.

Since the CVRs will expire valueless, the CVRs may not trade or may trade at low volumes until they expire and are delisted and deregistered.

Although the CVRs are currently listed on the NASDAQ, given the fact that our and our consolidated subsidiaries Adjusted EBITDA for the three year period ended December 31, 2010 did not exceed the required threshold under the CVR indenture and the CVRs will expire valueless, there may be little or no market demand for the CVRs, making it difficult or impossible to resell the CVRs, which would have an adverse effect on the resale price, if any, of the CVRs. In addition, holders of CVRs may incur brokerage charges in connection with the resale of the CVRs, which in some cases could exceed the proceeds realized by the holder from the resale of its CVRs.

Risk Factors Related to Our Business

If we are unable to develop and commercialize new products, our ability to generate revenue will deteriorate.

Profit margins for a pharmaceutical product generally decline as new competitors enter the market. As a result, our future success will depend on our ability to commercialize the product candidates we are currently developing, as well as our ability to develop new products in a timely and cost-effective manner. We currently have approximately 30 ANDAs pending with the FDA, and approximately 40 product candidates under various stages of development. Successful development and commercialization of product candidates will require significant investment in many areas, including research and development and sales and marketing, and we may not realize a return on those investments. In addition, development and commercialization of new products are subject to inherent risks, including:

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failure to receive necessary regulatory approvals;

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difficulty or impossibility of manufacture on a large scale;

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prohibitive or uneconomical costs of marketing products;

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inability to secure raw material or components from third-party vendors in sufficient quantity or quality or at a reasonable cost;

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failure of our products to be developed or commercialized prior to the successful marketing of similar or superior products by third parties;

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lack of acceptance by customers;

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impact of authorized generic competition;

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infringement on the proprietary rights of third parties;

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new patents may be granted for existing products, which could prevent the introduction of newly-developed products for additional periods of time; and

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grant to another manufacturer by the FDA of a 180-day period of marketing exclusivity under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, as patents or other exclusivity periods for brand name products expire.

The timely and continuous introduction of new products is critical to our business. Our ability to grow revenue will deteriorate if we are unable to successfully develop and commercialize new products, which could have an adverse effect on our business.

As a result of the acquisition, we now have substantially more debt.

We now have substantial indebtedness as a result of the consummated acquisition. As of December 31, 2010 we have $ 3.7 billion of outstanding indebtedness; comprised of approximately $0.8 billion of term loans from a group of financial institutions and $2.9 billion of intercompany loans. There can be no assurance that our businesses will be able to generate sufficient cash flows from operations to meet our debt service obligations. Our level of indebtedness will have important consequences, including limiting our ability to invest operating cash flow to expand our businesses or execute our strategies, to capitalize on business opportunities and to react to competitive pressures, because we will need to dedicate a substantial portion of these cash flows to service our debt. In addition, we could be unable to refinance or obtain additional financing because of market conditions, high levels of debt and the restrictions included in the debt instruments executed in connection with our recent acquisition.

If sales of key products decline, our business may be adversely affected.

Our top ten products comprised approximately 58% of our total net revenue for the year ended December 31, 2010, with the top five products accounting for 44% of our total net revenue. Our key products could lose market share or revenue due to numerous factors, many of which are beyond our control, including:

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lower prices offered on similar products by other manufacturers;

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substitute or alternative products or therapies;

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development by others of new pharmaceutical products or treatments that are more effective than our products;

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introduction of other generic equivalents or products which may be therapeutically interchanged with our products;

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interruptions in manufacturing or supply;

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changes in the prescribing practices of physicians;

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changes in third-party reimbursement practices; and

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migration of key customers to other manufacturers or sellers.

Any factor adversely affecting the sale of our key products may cause our revenues to decline.

If we or our suppliers are unable to comply with ongoing and changing regulatory standards, sales of our products could be delayed or prevented.

Virtually all aspects of our business, including the development, testing, manufacturing, processing, quality, safety, efficacy, packaging, labeling, record-keeping, distribution, storage and advertising and promotion of our products and disposal of waste products arising from these activities, are subject to extensive regulation by federal, state and local governmental authorities in the United States, including the FDA and the Department of Health and Human Services Office of Inspector General (OIG). Our business is also subject to regulation in foreign countries. Compliance with these regulations is costly and time-consuming.

Our manufacturing facilities and procedures and those of our suppliers are subject to ongoing regulation, including periodic inspection by the FDA and foreign regulatory agencies. For example, manufacturers of pharmaceutical products must comply with detailed regulations governing current good manufacturing practices, including requirements relating to quality control and quality assurance. We must spend funds, time and effort in the areas of production, safety, quality control and quality assurance to ensure compliance with these regulations. We cannot assure you that our manufacturing facilities or those of our suppliers will not be subject to regulatory action in the future.

Our products must receive appropriate regulatory clearance before they can be sold in a particular country, including the United States. We may encounter delays in the introduction of a product as a result of, among other things, failure of clinical trials to show safety or efficacy, undesirable side effects, insufficient or incomplete submissions to the FDA for approval of a product, objections by another company to submissions for approval, patent protection covering brand name products, patent challenges by other companies which result in a 180-day exclusivity period awarded to the challenger, and changes in regulatory policy during the period of product development or during the regulatory approval process. The FDA has the authority to revoke drug approvals previously granted and remove from the market previously approved products for various reasons, including issues related to current good manufacturing practices for that particular product or in general. We may be subject from time to time to product recalls initiated by them or by the FDA. Delays in obtaining regulatory approvals, the revocation of a prior approval or product recalls could impose significant costs on us and adversely affect our ability to generate revenue.

Our inability or the inability of our suppliers to comply with applicable FDA and other regulatory requirements can result in, among other things, warning letters, fines, consent decrees restricting or suspending our manufacturing operations, delay of approvals for new products, injunctions, civil penalties, recall or seizure of products, total or partial suspension of sales and criminal prosecution. Any of these regulatory actions could materially and adversely affect our ability to generate and receive revenue and result in the incurrence of significant expenses.

State pharmaceutical marketing compliance and reporting requirements may expose us to regulatory and legal action by state governments or other government authorities.

In recent years, several states, including California, Vermont, Maine, Minnesota, New Mexico, West Virginia and Nevada in addition to the District of Columbia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs and file periodic reports on sales, marketing, pricing and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and available guidance is limited. Unless we are in full compliance with these laws, we could face enforcement action and fines and other penalties and could receive adverse publicity, all of which could harm our business.

If side effects or manufacturing problems are identified after the products are on the market, we may be subject to additional regulatory requirements or enforcement.

If side effects are identified after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of products, additional clinical trials, changes in labeling of products, and changes to or re-approvals of our manufacturing facilities may be required, any of which could have a material adverse effect on our sales of the affected products.

After any of our products are approved for commercial use, we or regulatory bodies could decide that changes to the product labeling are needed to ensure the safety and effectiveness of the products. Label changes may be necessary for a number of reasons, including the identification of actual or theoretical safety or efficacy concerns by regulatory agencies or the discovery of significant problems with a similar product that implicates an entire class of products. Any significant concerns raised about the safety or efficacy of the products could also result in the need to reformulate those products, to conduct additional clinical trials, to make changes to the manufacturing processes, or to seek re-approval of the relevant manufacturing facilities. Significant concerns about the safety and effectiveness of a product could ultimately lead to the revocation of its marketing approval. The revision of product labeling or the regulatory actions described above could be required even if there is no clearly established connection between the product and the safety or efficacy concerns that have been raised. The revision of product labeling or the regulatory actions described above could have a material adverse effect on our sales of the affected products and on our business and results of operations.

The manufacture of our products is highly exacting and complex, and if we or our suppliers encounter production problems, our business may suffer.

Almost all of the pharmaceutical products we make are sterile, injectable drugs. We also purchase some of these products from other companies. The manufacture of all the products is highly exacting and complex, due in part to strict regulatory requirements and standards which govern both the manufacture of a particular product and the manufacture of these types of products in general. Problems may arise during their manufacture due to a variety of reasons including equipment malfunction, failure to follow specific protocols and procedures and environmental factors. If problems arise during the production of a batch of product, that batch of product may have to be discarded. This could, among other things, lead to loss of the cost of raw materials and components used, lost revenue, time and expense spent in investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If such problems are not discovered before the product is released to the market, recall costs may also be incurred. To the extent we experience problems in the production of our pharmaceutical products, this may be detrimental to our business, operating results and reputation.

Our market is highly competitive, and if we are unable to compete successfully, our revenue will decline and our business will be harmed.

The markets for injectable pharmaceutical products are highly competitive, rapidly changing and undergoing consolidation. Most of our products are generic injectable versions of brand name products that are still being marketed by proprietary pharmaceutical companies. The first company to market a generic product is often initially able to achieve high sales, profitability and market share with respect to that product. Prices, revenue and market size for a product typically decline, however, as additional generic manufacturers enter the market.

We face, and will continue to face, competition from major, brand-name pharmaceutical companies as well as generic manufacturers such as Hospira, Inc., Bedford Laboratories, Baxter Laboratories (including Elkin-Sinn), SICOR Inc. (acquired by Teva Pharmaceuticals USA) and Mayne Pharma (acquired by Hospira, Inc.) and, in the future, increased competition from new, foreign competitors. Smaller and foreign companies may also prove to be significant competitors, particularly through collaboration arrangements with large and established companies. Some of our competitors have significantly greater research and development, financial, sales and marketing, manufacturing, regulatory and other resources than we have. As a result, they may be able to devote greater resources to the development, manufacture, marketing or sale of their products, receive greater resources and support for their products, initiate or withstand substantial price competition, more readily take advantage of acquisition or other opportunities, or otherwise more successfully market their products.

Any reduction in demand for our products could lead to a decrease in prices, fewer customer orders, reduced revenues, reduced margins and reduced levels of profitability or loss of market share. These competitive pressures could adversely affect our business and operating results.

We face uncertainty related to pricing and reimbursement and health care reform.

In both domestic and foreign markets, sales of our products will depend, in part, on the availability of reimbursement from third-party payers such as government health administration authorities, private health insurers, health maintenance organizations and other health care-related organizations. However, reimbursement by such payors is presently undergoing reform, and there is significant uncertainty at this time how this will affect sales of certain pharmaceutical products. There is possible U.S. legislation or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including under Medicaid and Medicare, and the importation of prescription drugs that are marketed outside the U.S. and sold at prices that are regulated by governments of various foreign countries.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together the “Act”) was enacted in the U.S. This legislation contains several provisions that impact our business. Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the first quarter of 2010. These include (1) an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on our branded prescription drugs, and from 11% to 13% on our generic prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340(B) Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers. For the fiscal year ended December 31, 2010, we do not believe that these effective provisions of the legislation have had a material impact on our business. However, there are significant unknowns surrounding the actual implementation of the provisions of the legislation, and it is currently not possible to determine what effect, if any, the implementation of the legislation will have on our business in the longer-term.

The Medicaid program also requires pharmaceutical manufacturers to report certain information to the Centers for Medicare & Medicaid Services (CMS) on a periodic basis, including average manufacturer price and best price. The Medicare program requires manufacturers of Part B drugs, generally injectables, to report average sales prices to CMS on a quarterly basis. If a pharmaceutical manufacturer is found to have knowingly submitted false information to the government, it may be liable for civil monetary penalties per item of false information.

Beginning in 2011, the Act requires drug manufacturers to provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”). Also, beginning in 2011, we will be assessed our share of a new fee payable by all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and the Department of Veterans Affairs and Public Health Service discount programs) made during the previous year.

Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation, rules and regulations designed to contain or reduce the cost of health care. Existing regulations that affect the price of pharmaceutical and other medical products may also change before any of our products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we develop in the future. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services and litigation has been filed against a number of pharmaceutical companies in relation to these issues. Additionally, significant uncertainty exists as to the reimbursement status of newly approved injectable pharmaceutical products. Our products may not be considered cost effective or adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an adequate return on our investment.

If we are unable to maintain key customer arrangements, sales of our products and revenue will decline.

Almost all injectable pharmaceutical products are sold to customers through arrangements with group purchasing organizations, or GPOs, and distributors. The majority of hospitals contract with the GPO of their choice for their purchasing needs. Prior to the Merger, APP derived, and we expect will continue to derive, a large percentage of its revenue through a small number of GPOs. Currently, fewer than ten GPOs control a large majority of sales to hospital customers.

We have purchasing arrangements with the major GPOs in the United States, including AmeriNet, Inc., Broadlane Healthcare Corporation, MedAssets Inc., Novation, LLC, PACT, LLC, Premier Purchasing Partners, LP, International Oncology Network, and U.S. Oncology, Inc. In order to maintain these relationships, we believe that we need to be a reliable supplier, offer a broad product line, remain price competitive, comply with FDA regulations and provide high-quality products. The GPOs through which we sell our products also have purchasing agreements with other manufacturers that sell competing products and the bid process for products like ours is highly competitive. Most of our GPO agreements may be terminated on short notice. If we are unable to maintain these arrangements with GPOs and key customers, revenue from our products will probably decline.

The strategy to license rights to or acquire and commercialize proprietary or other specialty injectable products may not be successful, and we may never receive any return on our investment in these product candidates.

We may license rights to or acquire or commercialize proprietary or other specialty injectable products or technologies. Other companies, including those with substantially greater financial and sales and marketing resources, will compete with us to license rights to or acquire or commercialize these products. We may not be able to license rights to or acquire these proprietary or other products or technologies on acceptable terms, if at all. Even if we obtain rights to a pharmaceutical product and commit to payment terms, including, in some cases, up-front license payments, we may not be able to generate product sales sufficient to create a profit or otherwise avoid a loss.

A product candidate may fail to result in a commercially successful drug for other reasons, including the possibility that the product candidate may:

•

fail to receive necessary regulatory approvals;

•

be difficult or uneconomical to produce in commercial quantities;

•

be precluded from commercialization by proprietary rights of third parties; or

•

fail to achieve market acceptance.

The marketing strategy, distribution channels and levels of competition with respect to any licensed or acquired product may be different from those of our current products, and we may not be able to compete favorably in any new product category.

We depend heavily on the principal members of our management team, the loss of whom could harm our business.

We depend heavily on the principal members of our executive management team. Each of the members of our executive management team is employed “at will.” The loss of the services of any member of our executive management team may significantly delay or prevent the achievement of our product development or business objectives.

To be successful, we must attract, retain and motivate key employees, and the inability to do so could seriously harm our operations.

To be successful, we must attract, retain and motivate executives and other key employees. We face competition for qualified scientific, technical and other personnel, which may adversely affect our ability to attract and retain key personnel. We also must attract and motivate employees and keep them focused on our strategies and goals.

We depend on third parties to supply raw materials and other components and we may not be able to obtain sufficient quantities of these materials, which will limit our ability to manufacture our products on a timely basis and harm our operating results.

The manufacture of our products requires raw materials and other components that must meet stringent FDA requirements. Some of these raw materials and other components are available only from a limited number of sources. Additionally, our regulatory approval for each particular product specifies the raw materials and components, and the suppliers for such materials, that we may use for that product. Obtaining approval to change, substitute or add a raw material or component, or the supplier of a raw material or component, can be time consuming and expensive, as testing and regulatory approval is necessary. If our suppliers are unable to deliver sufficient quantities of these materials on a timely basis or we encounter difficulties in our relationships with these suppliers, the manufacture and sale of our products may be disrupted, and our business, operating results and reputation could be adversely affected.

Other companies may claim that we infringe on their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling our products.

Our success depends in part on our ability to operate our business without infringing the patents and proprietary rights of third parties. The manufacture, use, offer for sale and sale of pharmaceutical products have been subject to substantial litigation in the pharmaceutical industry. These lawsuits relate to the enforceability, validity and infringement of patents or proprietary rights of third parties. Infringement litigation is prevalent with respect to generic versions of products for which the patent covering the brand name product is expiring, particularly since many companies which market generic products focus their development efforts on products with expiring patents. A number of pharmaceutical companies, biotechnology companies, universities and research institutions may have filed patent applications or may have been granted patents that cover aspects of our products or their licensors’ products, product candidates or other technologies.

Future or existing patents issued to third parties may contain claims that conflict with our products. We are subject to infringement claims from time to time in the ordinary course of our business, and third parties could assert infringement claims against us in the future with respect to our current products, products we may develop or products we may license. In addition, our patents and patent applications, or those of our licensors, could face other challenges, such as interference, opposition and reexamination proceedings. Any such challenge, if successful, could result in the invalidation of, or a narrowing of scope of, any such patents and patent applications. Litigation or other proceedings could force us to:

•

stop or delay selling, manufacturing or using products that incorporate or are made using the challenged intellectual property;

•

pay damages; or

•

enter into licensing or royalty agreements that may not be available on acceptable terms, if at all.

Any litigation or interference proceedings, regardless of their outcome, would likely delay the regulatory approval process, be costly and require significant time and attention of key management and technical personnel.

Our inability to protect our intellectual property rights in the United States and foreign countries could limit our ability to manufacture or sell our products.

We rely on trade secrets, unpatented proprietary know-how, continuing technological innovation and patent protection to preserve our competitive position. Our patents and those for which we have or will license rights, may be challenged, invalidated, infringed or circumvented, and the rights granted in those for which we hold patents may not provide proprietary protection or competitive advantages to us. We and our licensors may not be able to develop patentable products. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us. Third-party patents could reduce the coverage of the patents licensed, or that may be licensed to or owned by us. If patents containing competitive or conflicting claims are issued to third parties, we may be prevented from commercializing the products covered by such patents, or may be required to obtain or develop alternate technology. In addition, other parties may duplicate, design around or independently develop similar or alternative technologies.

We may not be able to prevent third parties from infringing or using our intellectual property. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite these efforts to protect this proprietary information, however, unauthorized parties may obtain and use information that we regard as proprietary. Other parties may independently develop similar know-how or may even obtain access to our technologies.

The laws of some foreign countries do not protect proprietary information to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign countries.

The U.S. Patent and Trademark Office and the courts have not established a consistent policy regarding the breadth of claims allowed in pharmaceutical patents. The allowance of broader claims may increase the incidence and cost of patent interference proceedings and the risk of infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights.

We may become subject to federal and state false claims or other similar litigation brought by private individuals and the government.

The Federal False Claims Act allows persons meeting specified requirements to bring suit alleging false or fraudulent Medicare or Medicaid claims and to share in any amounts paid to the government in fines or settlement. These suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that a health care company will have to defend a false claim action, pay fines and/or be excluded from Medicare and Medicaid programs. Federal false claims litigation can lead to civil monetary penalties, criminal fines and imprisonment and/or exclusion from participation in Medicare, Medicaid and other federally-funded health programs. Other alternate theories of liability may also be available to private parties seeking redress for such claims. A number of parties have brought claims against numerous pharmaceutical manufacturers, and we cannot be certain that such claims will not be brought against us, or if they are brought, that such claims might not be successful. A majority of states have enacted their own false claim act statutes and have used them to bring similar suits against pharmaceutical manufacturers.

We may need to change our business practices to comply with changes to, or may be subject to charges under, the fraud and abuse laws.

We are subject to various federal and state laws pertaining to health care fraud and abuse, including the federal Anti-Kickback Statute and its various state analogues, the federal False Claims Act and marketing and pricing laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs such as Medicare and Medicaid. We believe that we are in substantial compliance with these laws, but the government could disagree and challenge our practices, which could materially and adversely affect our business. We may have to change our advertising and promotional business practices, or our existing business practices could be challenged as unlawful due to changes in laws, regulations or rules or due to administrative or judicial findings, which could materially adversely affect our business.

We may be required to defend lawsuits or pay damages for product liability claims.

Product liability is a major risk in testing and marketing pharmaceutical products. We may face substantial product liability exposure for products that we sell after regulatory approval. Historically, we carried product liability insurance and we continue to carry such policies. Product liability claims, regardless of their merits, could exceed policy limits, divert management’s attention and adversely affect our reputation and the demand for our products.

Fluctuations in our effective tax rate may adversely affect our business and results of operations.

Our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate could result in an unfavorable change in our effective tax rate, which change could have an adverse effect on our business and results of our operations.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 2.

PROPERTIES

We operate various facilities in the United States, Canada and Puerto Rico, which have an aggregate size of approximately 1,218,000 square feet. Our facilities include the following:

Location

Use

Own/
Lease

Lease Expiration

Approximate
Square Feet

Schaumburg, Illinois

Administration

Lease

July 2016

48,000

Schaumburg, Illinois

Administration

Lease

May 2015

22,000

Schaumburg, Illinois

Administration

Lease

May 2021

16,000

Ontario, Canada

Business office

Lease

June 2014

10,000

Melrose Park, Illinois

Manufacturing ⁽¹⁾

Lease

December 2011

122,000

Skokie, Illinois

Research and Development

Lease

May, 2021

56,000

Melrose Park, Illinois

Warehouse and administrative

Lease

December 2011

71,000

Bensenville, Illinois

Distribution facility

Lease

September 2012

129,000

Grand Island, New York

Manufacturing ⁽²⁾

Own

—

210,000

Grand Island, New York

Manufacturing ⁽³⁾

Own

—

148,000

Grand Island, New York

Warehouse and administrative ⁽³⁾

Own

—

120,000

Barceloneta, Puerto Rico

Manufacturing ⁽⁴⁾

Own

—

172,000

Raleigh, North Carolina

Manufacturing ⁽⁵⁾

Own

—

94,000

1,218,000

(1)	We also use this facility for packaging, laboratory, office and warehouse space and have the option to extend the lease through December 2012.

(2)	Approximately 5,700 square feet of manufacturing space has been leased to New Abraxis through December 2011, with an option to extend until December 2012 in certain circumstances.

(3)	This facility was purchased in September 2008 from Astellas Pharma Manufacturing, Inc., and was leased back to Astellas through July 2009. We have occupied the facility since the end of the lease with Astellas.

(4)

Approximately 90,000 square feet of the Puerto Rico facility was conveyed to New Abraxis, representing the active pharmaceutical ingredients manufacturing plant. In 2009, we finalized a plan to close the Barceloneta, Puerto Rico manufacturing facility, and to transfer its production operations to existing Company plants in the United States. We ceased production in this facility in mid 2010.

(5)	This facility was purchased in November 2009 from Catalent Pharma Solutions, LLC.

Item 3.

LEGAL PROCEEDINGS

We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims have included assertions that our products infringe existing patents, allegations of product liability and also claims that the uses of our products have caused personal injuries. We believe we have substantial defenses in these matters, however litigation is inherently unpredictable. Consequently any adverse judgment or settlement could have a material adverse effect on our results of operations, cash flows or financial condition for a particular period.

Summarized below are the more significant legal matters pending to which we are a party:

Patent Litigation

Pemetrexed Disodium

We had filed an abbreviated new drug application, or “ANDA”, seeking approval from the FDA to market pemetrexed disodium for injection, 500 mg/vial. The Reference Listed Drug for APP’s ANDA is Alimta^®, a chemotherapy agent for the treatment of various types of cancer marketed by Eli Lilly. Eli Lilly is believed to be the exclusive licensee of certain patent rights from Princeton University. We notified Eli Lilly and Princeton University of our ANDA filing pursuant to the provisions of the Hatch-Waxman Act and, in June 2008, Eli Lilly and Princeton University filed a patent infringement action in the U.S. District Court for the District of Delaware seeking to prevent us from marketing this product until after the expiration of U.S. Patent 5,344,932, which is alleged to expire in 2016. Eli Lilly’s lawsuit against Teva was subsequently consolidated into this action. In a bench ruling on November 15, 2010, the Judge ruled for Eli Lilly, upholding the validity of its ‘932 patent. APP intends to appeal the ruling. On December 17, 2010, both APP and Eli Lilly filed Proposed Findings of Facts and Conclusions of Law with the Court.

On October 29, 2010, Eli Lilly filed a second patent infringement suit against APP pertaining to its ‘209 patent for Pemetrexed in the United States District Court for the Southern District of Indiana. The ‘209 patent is scheduled to expire on May 24, 2022. APP’s response is due on February 21, 2011.

Naropin^®

In March 2007 we filed a complaint for patent infringement against Navinta LLC in the U.S District Court for the District of New Jersey. Navinta filed an ANDA seeking approval from the FDA to market ropivacaine hydrochloride injection, in the 2 mg/ml, 5 mg/ml and 10 mg/ml dosage forms. The Reference Listed Drug for Navinta’s ANDA is APP’s proprietary product Naropin^®. This matter proceeded to trial on July 20, 2009. The U.S. District Court, District of New Jersey reached a judgment in favor of the Company on August 3, 2009, determining that Navinta’s ANDA product infringed on the Company’s proprietary product Naropin. The judgment has been appealed by Navinta.

On July 22, 2010, APP filed a second action against Navinta/Sandoz, Hospira and Sagent/Strides in the same court alleging that defendants had filed separate ANDA applications for generic Naropin infringing patent-in-suit from the prior litigation. Sagent/Strides and Hospira were subsequently dismissed from the case after they made assurances before the Court that they would not seek FDA approval of their ANDA prior to the expiration of the patents. On August 17, 2010, the Patent and Trademark Office granted Navinta’s request for Re-examination of two of the patents-at-issue in the prior litigation. On November 9, 2010, the United States Court of Appeals for the Federal Circuit reversed and vacated the lower court’s ruling.

On December 9, 2010, APP filed a combined Petition for Panel Rehearing and Rehearing En Banc to review the ruling issued by the Court of Appeals. Navinta filed its response to APP’s petition on January 7, 2011 and the Petition is currently pending. In the meantime, APP has sought and the Court issued a Temporary Restraining Order preventing Navitna from immediately seeking FDA approval of its ANDA in the event APP’s Petition to the Circuit Court of Appeals is denied and a mandate issues. APP has also filed a third complaint against Navinta/Sandoz not only seeking infringement claims, but a declaratory judgment and a preliminary and permanent injunction preventing FDA approval of Navinta’s ANDA.

Bivalirudin

We have filed an ANDA seeking approval from the FDA to market generic bivalirudin, 250 mg/vial for intravenous injection. The reference listed drug for APP’s ANDA is Angiomax, for use as an anticoagulant in patients with unstable angina and currently marketed by The Medicines Co. The Medicines Co. is believed to be the exclusive assignee of certain patent rights. The patent, alleged to be generally directed to bivalirudin compositions, was issued on September 1, 2009. APP notified The Medicines Co. of our ANDA filing pursuant to the provisions of the Hatch-Waxman Act, and on October 8, 2009, The Medicines Co. filed a patent infringement action in the United States District Court for the District of Delaware seeking to prevent APP from marketing this product until after the patent’s expiration. We filed our Answer and Counterclaims on December 9, 2009. The Medicines Co. filed its response on December 28, 2009.

On March 23, 2010, the Judge ordered that this case be consolidated with four other infringement actions against Teva/Pliva Hrvatska for pre-trial purposes. On March 24, 2010, an interim protective order and scheduling order was approved by the Judge.

On April 26, 2010, APP filed another ANDA related to Bivalirudin. The Medicines Co. filed its infringement suit on June 1, 2010, and APP filed its Answer and Counter-Claims on June 28, 2010. The Parties have agreed to consolidate these actions. A similar suit by the Medicines Co. against Hospira for alleged patent infringement related to Bivalirudin was also consolidated into these actions.

Discovery is currently underway. Because of the additional patent claim and the addition of Hospira as a defendant, the fact discovery deadline was extended to May 6, 2011.

On August 3, 2010, in a related action in the United States District Court, Eastern District of Virginia, The Medicines Co. was granted summary judgment against the United States Government in its quest to vacate a prior ruling of the Patent and Trademark Office denying a patent term extension for its ‘404 bivalirudin patent. The Court applied a business day rather than calendar day construction to the term extension deadline. On August 19, 2010, APP filed a Motion to Intervene, which was denied on September 13, 2010. On September 17, 2010, APP filed a Notice of Appeal with the United States Court of Appeals for the Federal Circuit on both the patent term extension ruling and the Motion to Intervene. On October 5, 2010, The Medicines Co. filed a Motion to Dismiss the Appeal, which was denied on February 2, 2011.

Gemcitabine

We had filed an ANDA seeking approval from the FDA to market gemcitabine for injection, 200 mg base/vial, 1 g base/vial and 2 g base/vial. The reference listed drug for APP’s ANDA is Gemzar, for use as a treatment for non-small lung cancer, pancreatic cancer, breast cancer and ovarian cancer. Eli Lilly is the holder of the New Drug Application for Gemzar and is believed to be the owner of the patent rights, which are set to expire on November 7, 2012, followed by a six month period of pediatric market

exclusivity ending on May 7, 2013. APP notified Eli Lilly of our ANDA filing pursuant to the provisions of the Hatch-Waxman Act on November 4, 2009. On December 16, 2009, Eli Lilly filed a patent infringement action in the United States District Court in the Southern District of Indiana seeking to prevent APP from marketing this product until after the patent’s expiration. APP was served on January 7, 2010 and filed a Motion to Dismiss on March 19, 2010, basing its motion on the adjudicated invalidity of the patent in another action. While the Motion was pending, the Judge issued a Case Management Order, and set a trial date of January 2012.

On July 29, 2010, the Court of Appeals for the Federal Circuit affirmed the District Court’s opinion of patent invalidity in the other action and APP was dismissed from this matter on December 1, 2010.

Ameridose

We have filed a lawsuit against Ameridose, LLC in the United States District Court, District of New Jersey alleging infringement of our ‘086, ‘525 and ‘489 patents related to Naropin. The complaint, filed on August 10, 2010 and served on August 13, 2010, seeks injunctive relief and treble damages due to the willful and deliberate nature of the infringement. Ameridose filed its Answer and Counter-claims on September 24, 2010. On December 10, 2010, APP was granted leave to file a First Amended Complaint naming Medisca, Inc. as an additional defendant. On that same day, Ameridose filed a Motion to Stay the action pending the Patent and Trademark Office’s Re-Examination of the Patents-in-Suit in the Navinta Action. That Motion is currently pending.

Product Liability Matters

Sensorcaine

We have been named as a defendant in numerous personal injury/product liability actions brought against us and other pharmaceutical companies and medical device manufacturers by plaintiffs claiming that they suffered injuries resulting from the post-surgical release of certain local anesthetics into the shoulder joint via a pain pump. We acquired several generic anesthetic products from AstraZeneca in June 2006. Pursuant to the Asset Purchase Agreement with AstraZeneca, we are responsible for indemnifying Astra Zeneca for defense of suits alleging injuries occurring after the acquisition date (unless the drugs are determined to be defective in manufacturing, in which case AstraZeneca will indemnify us pursuant to that certain Manufacturing and Supply Agreement entered into by us and AstraZeneca). Likewise, Astra Zeneca agreed to indemnify us for suits alleging injuries occurring prior to the acquisition date. We maintain product liability insurance for these matters. All of our local anesthetic products are approved by the FDA and continue to be marketed and sold to customers. Since December 2009, more than 180 cases naming APP or New Abraxis have been dismissed due to lack of product identification or failure to plead with sufficient specificity to withstand a Motion to Dismiss.

Currently, there are five cases naming APP as a defendant, four of those involving an alleged event occurring after the June 2006 product acquisition date.

Aredia and Zometa

We have been named as a defendant in approximately 25 personal injury/product liability cases brought against us and other manufacturers by plaintiffs claiming that they suffered injuries resulting from the use of pamidronate (the generic equivalent of Aredia^®) prescribed for the management of metastic bone disease. Plaintiffs’ allege Aredia causes osteonecrosis to the jaw.

Twenty-one cases, consisting of 31 plaintiffs, naming APP have been transferred to a multi district litigation in the Eastern District of New York. After little progress in determining product identification, the Judge ordered the Plaintiffs to amend their complaints to reflect sufficient product identification by August 20, 2010. At a status conference on September 2010, the Judge granted an extension to October 20, 2010. One additional case naming APP and other defendants is currently comprised of 116 plaintiffs and was originally filed on April 26, 2010 in the Eastern District of New York and is still pending transfer to the multi district litigation. In its Second Amended Complaint, filed on January 7, 2011, APP is identified by 105 plaintiffs.

Plaintiff fact sheets and a proposed case management order were submitted on January 21, 2011. A first round of motions to dismiss will be due on April 18, 2011.

There are currently two remaining cases filed against the Company in a coordinated proceeding in the Superior Court of New Jersey, Middlesex County. A final product identification report by plaintiffs was due on July 23, 2010, but was also extended. On February 2, 2011, plaintiffs reported that they served product identification subpoenas in these cases. The next case management conference is March 14, 2011.

Heparin

We currently have been named as a defendant in 11 personal injury/product liability cases, 10 involving allegations of side-effects from heparin-induced thrombocytopenia (“HIT”), and one alleging Active Pharmaceutical Ingredient (“API”) contamination. These cases have been filed in multiple state and federal jurisdictions. Motions to Dismiss are pending in three cases and product identification discovery is proceeding in four cases.

In re Reglan/Metaclopraminde

APP has been named along with numerous other defendants in 38 short form complaints alleging Extrapyramidial Symptoms (EPS) and Involuntary Movement Disorder for ingestion of Reglan. APP’s predecessor in interest, Fujisawa, ceased manufacturing and distribution of this product in 1994, which pre-dates the formation of the Company. APP is actively seeking dismissal of all these cases.

As of February 2011, APP has been named in 84 complaints, but has also been dismissed as a defendant from 26 of these cases due to insufficient product identification.

Regulatory Matters

We are subject to regulatory oversight by the FDA and other regulatory authorities with respect to the development and manufacture of our products. Failure to comply with regulatory requirements can have a significant effect on our business and operations. Management has designed and operates a system of controls to attempt to ensure compliance with applicable regulatory requirements.

Item 4.

REMOVED AND RESERVED

Part II.

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock

On September 10, 2008, FKP Holdings completed the Merger, following which APP became a wholly-owned subsidiary of FKP Holdings. Under the terms of the Merger, Fresenius acquired all of the outstanding common stock of APP for $23.00 in cash per share (the “Cash Purchase Price”) plus a contingent value right (“CVR”). Our obligation to make a cash payment on the CVRs was determined on the basis of cumulative Adjusted EBITDA (as defined in the CVR indenture) for a three-year period ending on December 31, 2010. Since Adjusted EBITDA for that period did not exceed the required threshold amount, no amounts will be payable on the CVRs and the CVRs will expire valueless. See Note 3 – Merger with APP and Note 4 – Contingent Value Rights (CVR), to the consolidated financial statements for more details. The CVRs are currently traded on NASDAQ under the symbol “APCVZ”.

Issuer Purchases of Equity Securities

We did not purchase any of our securities during the fourth quarter of 2010.

Item 6.

SELECTED FINANCIAL DATA


				(Successor)									(Predecessor)
	Year ended December 31, 2010			Year ended December 31, 2009			July 2, 2008 through December 31, 2008			January 1, 2008 through September 9, 2008			Year ended December 31, 2007			Year ended December 31, 2006
							(in thousands)
Net revenue	$	1,142,671		$	888,686		$	280,836		$	495,797		$	647,374		$	583,201

Gross profit		576,587			435,129			107,762			248,160			315,328			295,122

Income (loss) from continuing operations ⁽¹⁾		109,569			(30,385	)		(312,445	)		9,543			82,179			55,226
Loss from discontinued operations, net of taxes		—			—			—			—			(47,821	)		(102,123	)

Net income (loss)	$	109,569		$	(30,385	)	$	(312,445	)	$	9,543		$	34,358		$	(46,897	)

The composition of stock-based compensation included above is as follows:
Cost of sales	$	—		$	—		$	—		$	1,275		$	2,502		$	2,668
Research and development		—			—			—			436			602			554
Selling, general and administrative		643			360			19			4,039			8,977			7,902
Discontinued operations		—			—			—			—			16,517			23,899

	$	643		$	360		$	19		$	5,750		$	28,596		$	35,023

Other data:
Net cash provided by (used in) operating activities	$	229,031		$	13,295		$	(37,042	)	$	105,515		$	12,351		$	324,977
Net cash used in investing activities		(10,500	)		(5,563	)		(3,683,468	)		(13,839	)		(89,022	)		(372,800	)
Net cash provided by (used in) financing activities		(222,556	)		(10,892	)		3,733,428			5,016			66,893			59,391

Consolidated balance sheet data as of December 31:
Working capital (deficit)	$	(408,659	)	$	(273,880	)	$	93,343		$	—		$	216,727		$	65,556
Total assets		4,703,166			4,858,685			4,837,746			—			1,077,587			1,773,721
Long term debt, less current portion		3,144,396			3,436,662			3,718,322			—			995,000			165,000
Total stockholder’s equity (deficit)		645,656			539,076			550,724			—			(79,771	)		1,033,361

(1)	Net of income attributable to non-controlling interest of $11,383 in 2006.

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following management’s discussion and analysis of financial condition and results of operations, or MD&A, is intended to assist the reader in understanding our company, including our operating results and financial position. The MD&A is provided as a supplement to, and should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1: Business”; “Item 1A: Risk Factors”; “Item 6: Selected Financial Data”; and “Item 8: Financial Statements and Supplementary Data.”

Background

Our products are generally used in hospitals, long-term care facilities, alternate care sites and clinics within North America. Unlike the retail pharmacy market for oral products, the injectable pharmaceuticals marketplace is largely made up of end users who have relationships with group purchasing organizations, or GPOs, and/or specialty distributors who distribute products within a particular end-user market, such as oncology clinics. GPOs and specialty distributors generally enter into collective product purchasing agreements with pharmaceutical suppliers like us in an effort to secure more favorable drug pricing on behalf of their members.

Fresenius Kabi Pharmaceuticals Holding, Inc. (“FKP Holding” or the “Company”) is a wholly-owned subsidiary of Fresenius Kabi AG, and an indirect wholly-owned subsidiary of Fresenius SE & Co. KGaA (“Fresenius”), a societas europaea organized under the laws of Germany. FKP Holdings was formed on July 2, 2008, in order to facilitate the acquisition of APP Pharmaceuticals, Inc. (“APP or the Predecessor”) discussed below. See Note 3 to the consolidated financial statements – Merger with APP for details.

On September 10, 2008, FKP Holdings completed the acquisition of APP (the “Merger”) pursuant to an Agreement and Plan of Merger dated July 6, 2008 (the “Merger Agreement”), and APP became a wholly-owned subsidiary of FKP Holdings. Effective with the Merger, each outstanding share of common stock of APP and certain stock options and restricted stock units of APP were converted into the right to receive $23.00 in cash, without interest, and one Contingent Value Right (“CVR”), issued by FKP Holdings and representing the right to receive a cash payment, without interest, of up to $6.00 determined in accordance with the terms of the CVR Agreement. Refer to Note 4 to the consolidated financial statements – Contingent Value Rights (CVR), for further details. The aggregate consideration paid in the Merger was $4,908.1 million, including $997.5 million in assumed APP debt. We incurred $3,856 million in new external and intercompany debt due to Fresenius and its affiliates in connection with the Merger, the aggregate proceeds of which were used to pay the Merger consideration, repay a portion of APP’s then outstanding indebtedness and pay fees and expenses related to the Merger. See Note 8 to the consolidated financial statements – Long-Term Debt and Credit Facility.

The results of APP’s operations have been included in the consolidated financial statements of FKP Holdings since September 10, 2008. APP is a fully-integrated pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products with a primary focus on the oncology, anti-infective, anesthetic/analgesic and critical care markets. APP manufactures a comprehensive range of dosage formulations, and its products are used in hospitals, long-term care facilities, alternate care sites and clinics within North America. The Merger is an important step in Fresenius’ growth strategy. Through the merger with APP, Fresenius gains entry to the U.S. pharmaceuticals market and achieves a leading position in the global I.V. generics industry. The North American platform also provides further growth opportunities for Fresenius’ existing product portfolio. Additionally, Fresenius expects to be able to market APP’s product range through its international marketing and sales network, enabling Fresenius to sell APP’s products globally.

Prior to the Merger, FKP Holdings had not carried on any activities or operations except for those activities incidental to its formation and in connection with the transactions related to the Merger. Following the Merger, the business of FKP Holdings consists exclusively of that of APP. Accordingly, for accounting purposes FKP Holdings is considered the successor to APP and the consolidated financial statements included in Item 8 are presented for two distinct periods: the periods preceding the Merger, or “predecessor” periods (all periods prior to September 10, 2008), and the period after the merger, or “successor” period (from the inception of FKP Holdings on July 2, 2008, which includes the results of APP from September 10, 2008, the date of acquisition). The Company applied purchase accounting to the opening balance sheet on September 10, 2008. The Merger resulted in a new basis of accounting for the assets acquired and liabilities assumed in connection with the acquisition of APP beginning on September 10, 2008. As a result of the acquisition and the application of purchase accounting as described above, the consolidated financial information for the period after the acquisition is presented on a different basis than that for the periods before the acquisition and, therefore, is not comparable.

RESULTS OF OPERATIONS

Overview

The following table sets forth the results of our operations for each of the three years ended December 31, 2010, 2009 and 2008, and forms the basis for the following discussion of our operating activities. For accounting purposes, the Company has separated its historical financial results for the Predecessor Company (APP) for all periods prior to September 10, 2008, the effective date of the merger, and the Successor Company (FKP Holdings) for all periods after July 2, 2008 (the date of inception). The separate presentation is required as there was a change in accounting basis, which occurred when purchase accounting was applied to the acquisition of the Predecessor. Purchase accounting requires that the historical carrying value of assets acquired and liabilities assumed be adjusted to fair value, which may yield results that are not comparable on a period-to-period basis due to the different, and sometimes higher, cost basis associated with the allocation of the purchase price.

For purposes of discussing our historical results of operations, the following table compares the results of the successor companies for the year ended December 31, 2009 with the combined results of the predecessor and successor companies for the year ended December 31, 2008, which we refer to as the combined 2008 year period. This comparative presentation is intended to facilitate the discussion of relevant trends and changes affecting our operating results. Where significant, the effect of merger related transactions and the application of purchase accounting are highlighted.


										Favorable/ (Unfavorable)
	Year Ended December 31,									2010 vs. 2009						2009 vs. 2008
	2010			2009			2008			$			%			$			%
	(in thousands, except percentages)
Consolidated statements of operations data:
Net revenues
Critical care	$	739,142		$	576,574		$	476,091		$	162,568			28	%	$	100,483			21	%
Anti-infective		278,831			226,035			225,274			52,796			23	%		761			0	%
Oncology		114,187			78,108			65,321			36,079			46	%		12,787			20	%
Contract manufacturing and other		10,511			7,969			9,947			2,542			32	%		(1,978	)		-20	%

Total net revenue		1,142,671			888,686			776,633			253,985			29	%		112,053			14	%
Cost of sales		566,084			453,557			420,711			(112,527	)		-25	%		(32,846	)		-8	%

Gross profit		576,587			435,129			355,922			141,458			33	%		79,207			22	%
Percent of total net revenue		50.5	%		49.0	%		45.8	%
Operating expenses:
Research and development		28,119			28,277			51,485			158			1	%		23,208			45	%
Percent of total net revenue		2.5	%		3.2	%		6.6	%
Selling, general and administrative		116,069			89,994			94,270			(26,075	)		-29	%		4,276			5	%
Percent of total net revenue		10.2	%		10.1	%		12.1	%
Merger related in-process research and development charge		—			—			365,700			—			—	%		365,700			100	%
Amortization of merger related intangibles		36,650			36,650			21,492			—			—	%		(15,158	)		-71	%
Impairment of fixed assets		3,440			5,372			—			1,932			36	%		(5,372	)		—
Other merger related costs		1,361			1,447			46,749			86			6	%		45,302			97	%
Separation related costs		—			625			2,381			625			100	%		1,756			74	%

Total operating expenses		185,639			162,365			582,077			(23,274	)		-14	%		419,712			72	%

Percent of total net revenue		16.2	%		18.3	%		74.9	%
Income (loss) from operations		390,948			272,764			(226,155	)		118,184			43	%		498,919			221	%
Percent of total net revenue		34.2	%		30.7	%		-29.1	%
Interest expense		(63,797	)		(83,185	)		(97,709	)		19,388			23	%		14,524			15	%
Intercompany interest expense		(218,756	)		(248,956	)		(66,690	)		30,200			12	%		(182,266	)		-273	%
Unrealized gain on change in fair value of contingent value rights		42,282			8,163			101,216			34,119			418	%		(93,053	)		-92	%
Interest income and other, net		1,545			3,379			360			(1,834	)		-54	%		3,019			839	%

Income (loss) before income taxes		152,222			(47,835	)		(288,978	)		200,057			418	%		241,143			83	%
Income tax expense (benefit)		42,653			(17,450	)		13,924			60,103			-344	%		31,374			225	%

Net income (loss)		109,569			(30,385	)		(302,902	)	$	139,954			461	%	$	272,517			90	%

Percent of total net revenue		9.6	%		-3.4	%		-39.0	%

Operating Results

Net revenues

Total net revenues for the year ended December 31, 2010 increased $254.0 million, or 29%, to $1,142.7 million as compared to $888.7 million for the same period in 2009.

Net revenues for our critical care products for the year ended December 31, 2010 increased $162.5 million, or 28%, to $739.1 million as compared to $576.6 million for the prior year period, driven primarily by new product launches during 2010, along with increases in net sales due to competitor supply constraints for certain of our products. Net revenue from anti-infective products for the year ended December 31, 2010 increased by $52.8 million to $278.8 million compared to $226.0 million in the prior year period, due to new product launches in 2010 and increases in net sales due to competitor supply constraints for certain of our products. Net revenue for oncology products for the year ended December 31, 2010 increased by $36.1 million, or 46%, to $114.2 million over the prior year period, driven primarily by non-recurring product sales in the second quarter of 2010 along with new product launches and increases in net sales due to competitor supply constraints. Contract manufacturing and other revenue for the year ended December 31, 2010 increased by $2.5 million to $10.5 million from $8.0 million for the prior year period.

Total net revenues for the year ended December 31, 2009 increased $112.1 million, or 14%, to $888.7 million as compared to $776.6 million for the combined 2008 period.

Net revenues for our critical care products for the year ended December 31, 2009 increased to $100.5 million, or 21%, to $576.6 million as compared to $476.1 million for the combined 2008 year period, driven primarily by greater market penetration of our pre-existing products and by new product launches in 2009. Net revenue from anti-infective products for the year ended December 31, 2009 increased by $0.7 million to $226.0 million compared to $225.3 million for the combined 2008 year period. Net revenue for oncology products for the year ended December 31, 2009 increased by $12.8 million, or 20%, to $78.1 million over the combined 2008 year period, primarily due to new product launches in 2009. Contract manufacturing and other revenue for the year ended December 31, 2009 decreased by $1.9 million to $8.0 million from $9.9 million for the combined 2008 year period.

Gross profit

Gross profit for the year ended December 31, 2010 was $576.6 million, or 50.5% of total net revenue, as compared to $435.1 million, or 49.0% of total net revenue, in the same period of 2009. The improvement in the overall gross profit and related margin was primarily due to the overall increase in net sales, new product launches and improved product mix in 2010.

Gross profit for the year ended December 31, 2009 was $435.1 million, or 49.0% of total net revenue, as compared to $355.9 million, or 45.8% of total net revenue, in the combined 2008 year period. The improvement in the overall gross profit percentage was primarily due to improved product mix in 2009 and the inclusion of purchase-accounting related amortization in cost of sales for the combined 2008 year period, partially offset by the reporting of $22.8 million of our 2009 Puerto Rico facility costs in cost of sales as we completed our production validation and transfer of products to our Puerto Rico facility. In 2008, we reported $26.3 million of our Puerto Rico facility costs in research and development until we completed production validation and transfer of products to the facility, which occurred in September 2008. Cost of sales for the combined 2008 year period included $11.0 million in non-cash amortization of intangible product rights associated with a product acquisition. Cost of sales for the combined 2008 year period also included $45.5 million of non-cash expense reflecting the portion of the purchase accounting step-up in inventory associated with the Merger attributable to inventory sold during the period. Excluding the impact of the Puerto Rico facility costs and these non-cash charges, gross profit margin for the twelve months ended December 31, 2009 and the combined 2008 year period would have been 51.5% and 53.1%, respectively.

Research and development, or R&D

Research and development expense for the twelve months ended December 31, 2010 decreased $0.2 million, or 1%, to $28.1 million as compared to $28.3 million for the same period in 2009. The decrease was due primarily to the timing of projects during 2010.

Research and development expense for the twelve months ended December 31, 2009 decreased $23.2 million, or 45.1%, to $28.3 million as compared to $51.5 million for the combined 2008 year period. The decrease was due primarily to the classification of $22.8 million of 2009 costs associated with our Puerto Rico facility in cost of goods sold as described above. Excluding costs associated with our Puerto Rico facility, research and development expense increased $3.1 million from $25.2 million for the combined 2008 year period to $28.3 million in 2009.

Selling, general and administrative, or SG&A

Selling, general and administrative expense for the twelve months ended December 31, 2010 increased $26.1 million to $116.1 million, or 10.2% of total net revenue, from $90.0 million, or 10.1% of total net revenue, for the same period in 2009. The increase in costs was in line with the increase in net sales, and also included the effects of severance related charges recorded during the first quarter of 2010, accrued settlement fees related to a commercial contract and higher professional fees.

Selling, general and administrative expense for the twelve months ended December 31, 2009 decreased $4.3 million to $90.0 million, or 10.1% of total net revenue, from $94.3 million, or 12.1% of total net revenue, for the combined 2008 year period. The decrease in costs was due primarily to the capitalization of $6.8 million in legal fees in 2009, associated with the defense of our Naropin patent. Similar fees incurred in the combined 2008 year period were expensed as we had not concluded that the likelihood of a successful defense of the patent was probable. Without this effect, SG&A expense would have increased to $96.8 million, or 10.9% of total net revenue for the twelve months ended December 31, 2009.

Amortization, impairment, merger and separation costs

The twelve months ended December 31, 2010 included $38.0 million of amortization of Merger-related intangibles and other costs associated with the Merger with APP, as compared to $38.1 million for the same period in 2009.

Results for the twelve months ended December 31, 2010 included $3.4 million of expenses related mainly to the impairment of production equipment for discounted products. As a result of the finalization of a plan to close the Puerto Rico manufacturing facility during the year ended December 31, 2009, $5.4 million of impairment charges were reflected in the 2009 results. Separation costs for the year ended December 31, 2009 totaled $0.6 million as compared to $2.4 million for the combined 2008 year period.

The twelve months ended December 31, 2009 included $38.1 million of amortization of Merger-related intangibles and other costs associated with the Merger with APP. The combined 2008 year period included merger related costs of $433.9 million, comprised of $46.7 million of direct professional fees and transaction related costs associated with the Merger, $21.5 million of amortization of merger related intangibles, and $365.7 million related to the write-off of in-process research and development representing the value assigned in purchase accounting to projects that had not yet reached technological feasibility and had no alternative future use, which was immediately charged to expense as required under applicable generally accepted accounting principles (GAAP). The $46.7 million of direct professional fees and transaction related costs associated with the Merger were recognized in the predecessor period ended September 9, 2008.

Interest Expense and Intercompany Interest Expense

Total interest on third party and intercompany debt decreased $49.6 million to $282.5 million for the twelve months ended December 31, 2010 from $332.1 million for the same period in 2009. Interest expense on third party debt decreased to $63.8 million for the twelve months ended December 31, 2010, compared to $83.2 million for the same period in 2009. The decrease in third party interest expense is primarily due to the lower interest rates charged on outstanding borrowings due to the replacement of Term Loan B with Term Loan C instruments in March 2010. Intercompany interest expense decreased $30.2 million to $218.8 million for the twelve months ended December 31, 2010 compared to $249.0 million in the prior year period, driven mainly by lower interest rates on outstanding borrowings due to the replacement of Term Loan B with Term Loan C instruments and a decrease in overall intercompany debt of $115.3 million to $2,918.0 million as of December 31, 2010 from $3,033.3 million for the same period in 2009. The intercompany interest expense in 2009 also reflects the write-off of $14.6 million in unamortized debt issue costs in connection with the intercompany debt restructuring in the first quarter of 2009.

Interest expense on third party debt decreased to $83.2 million for the twelve months ended December 31, 2009, compared to $97.7 million for the combined 2008 year period. The decrease in third party interest expense was primarily due to the lower average third party debt levels and interest rates along with recognition in the combined 2008 year period of $12.2 million of interest expense resulting from the write-off of loan fees related to the credit facility established in connection with the November 13, 2007 spin-off of New Abraxis, which was assumed in the Merger and repaid, and the write-off of $13.4 million of unamortized deferred financing fees associated with the bridge loan that was restructured in the fourth quarter of 2008. The bridge facility was refinanced in the first quarter of 2009 and we wrote-off the remaining unamortized financing fees of $14.6 million at that time. Also, included in third party interest expense in the combined 2008 year period is the loss on settlement of our predecessor’s interest rate swap of $2.7 million, which occurred in the predecessor period ended September 9, 2008, prior to the Merger. Intercompany interest expense was $249.0 million for the twelve months ended December 31, 2009, reflecting the $3,033.2 million of outstanding intercompany debt.

Other income, other non-operating items

Interest income and other, net consists primarily of interest earned on invested cash and cash equivalents, and the impact of foreign currency rate changes on intercompany trading and debt accounts denominated in Euros and Canadian dollars, as well as the related non-hedging derivative instruments, other financing costs and (gains)losses on the sale of fixed assets. Interest income and other, net was $1.5 million for the twelve months ended December 31, 2010 compared to $3.4 million in the same period in 2009.

Additionally, in 2010 we recognized $42.3 million of income resulting from the change in fair value of the contingent value rights (CVRs) issued to APP shareholders in connection with the Merger compared to $8.2 million in the same period in 2009. The estimated fair value of the CVRs at the date of the acquisition was included in the acquisition cost and is adjusted at each reporting date (marked-to-market) based on the closing price of a CVR as reported by NASDAQ, with the change in the fair value of the CVR for the reporting period being included in non-operating income.

Interest income and other, net was $3.4 million for the twelve months ended December 31, 2009 compared to $0.4 million in the combined 2008 year period, with the increase due to gain on foreign currency transactions and fixed asset sales.

In 2009, we recognized $8.2 million of income resulting from the change in fair value of the contingent value rights (CVRs) issued to APP shareholders in connection with the Merger compared to $101.2 million in the successor period in 2008.

Provision for Income Taxes

For the twelve month period ended December 31, 2010, FKP Holdings reported an income tax expense of $42.7 million on a pretax loss from continuing operations of $152.2 million, or an effective tax rate of 28.0%, compared to an income tax benefit of $17.5 million on a pre-tax loss of $47.8 million, or an effective benefit rate of 36.5%, for the same period in 2009. The 2010 and 2009 rates differ from the statutory U.S. federal tax rate of 35% due primarily to the tax cost of a hypothetical distribution of the profits of our foreign subsidiaries and additional tax and interest costs recorded in connection with the U.S. Federal income tax examination offset by the non-taxable change in the fair value of the CVRs, a domestic production activities deduction realized in 2010, as well as the effect of state and foreign income taxes.

For the successor period ended December 31, 2008, we reported an income tax benefit of $26.4 million on a pretax loss from continuing operations of $338.8 million, or an effective benefit rate of 7.8%. This rate differs from the statutory U.S. federal tax rate of 35% due primarily to the inclusion in pretax loss from continuing operations of $365.7 million related to the write-off of in-process research and development costs recognized in accounting for the Merger and a $101.2 million gain related to the change in fair value of the CVRs during the period, which are not included in the determination of taxable income, as well as the effect of state and foreign income taxes.

Tax expense on pretax income from continuing operations for the predecessor period from January 1, 2008 through September 9, 2008 was $40.3 million on pre-tax income from continuing operations of $49.9 million, or an effective tax rate of 80.9%. This rate differs from the statutory U.S. federal tax rate of 35% due primarily to the inclusion in pretax income from continuing operations of approximately $44.5 million of nondeductible costs incurred by APP relating to the Merger, as well as the effect of state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The following table summarizes key elements of our financial position as of December 31, 2010, 2009 and 2008, and our sources and (uses) of cash and cash equivalents for the indicated periods in 2010, 2009 and 2008:


	December 31, 2010			December 31, 2009			December 31, 2008
	(in thousands)
Summary Financial Position:
Cash, cash equivalents and short-term investments	$	8,844		$	10,469		$	42,241
Working capital	$	(408,659	)	$	(273,880	)	$	93,343
Total assets	$	4,703,166		$	4,858,685		$	4,837,746
Total stockholder’s equity (deficit)	$	645,656		$	539,076		$	550,724


	Successor									Predecessor
	For the twelve months ended December 31, 2010			For the twelve months ended December 31, 2009			July 2 through December 31, 2008			January 1 through September 9, 2008
Summary of Sources and (Uses) of Cash and Cash Equivalents:
				(in thousands)
Operating activities	$	229,031		$	13,295		$	(37,042	)	$	105,515
Investing activities		(10,500	)		(5,563	)		(3,683,468	)		(13,839	)
Financing activities		(222,556	)		(10,892	)		3,733,428			5,016
Effect of exchange rates on cash and cash equivalents		2,400			5,188			(4,477	)		(2,283	)

Increase (decrease) in cash and cash equivalents		(1,625	)		2,028			8,441			94,409

Cash and cash equivalents, beginning of period		10,469			8,441			—			31,788

Cash and cash equivalents, end of period	$	8,844		$	10,469		$	8,441		$	126,197

Sources and Uses of Cash

Overview

In connection with the Merger, our parent contributed $900.0 million and loaned approximately $3.0 billion to FKP Holdings. We used the proceeds of the capital contribution and intercompany loans to complete the Merger. We also assumed our predecessor’s credit facility in connection with the Merger, which we retired and replaced with a similar facility. Principally as a result of these transactions, as of December 31, 2010 we have $3.7 billion of outstanding indebtedness; comprised of approximately $0.8 billion of term loans from a group of financial institutions and $2.9 billion of intercompany loans.

We anticipate that available cash and cash equivalents, cash generated from operations, and funds available under our credit facility or through borrowings or capital contributions from Fresenius, our parent, will be sufficient to finance our operations, including ongoing product development and capital expenditures for at least the next twelve months. In the event we engage in future acquisitions or capital projects, we may have to raise additional capital through additional borrowings or through additional intercompany debt. Fresenius has committed to the Company that it will provide financial support to FKP Holdings sufficient for it to satisfy its obligations and debt service requirements arising under all existing financing instruments that were entered into in connection with the Merger, and to which the Company is a party, as they come due until at least January 1, 2012.

Operating Activities

Cash flow from operations has been our primary source of liquidity. Net cash provided by operating activities was $229.0 million for the twelve months ended December 31, 2010 as compared to $13.3 million for the same period in 2009. The change in cash provided by operating activities for the 2010 period as compared to 2009 was primarily due to higher net earnings, improved collections on accounts receivable, and better management of inventory and accounts payable balances. Operating cash flows for 2009 were impacted by net settlements of non-current intercompany receivables and payables with our parent company resulting in an operating cash outflow of $70.0 million in 2009. Excluding the settlement of non-current intercompany balances with our parent, cash flow from operations would have been $83.3 million for the twelve months ended December 31, 2009.

Net cash provided by operating activities was $13.3 million for the twelve months ended December 31, 2009 as compared to $68.5 million for the combined 2008 year period. Net cash provided by operating activities for the 2009 period included the net settlement of non-current intercompany receivables and payables with our parent company resulting in operating cash outflow of $70.0 million in 2009. The settlement was funded by borrowings on the Company’s target revolver and was repaid through proceeds from short term intercompany notes. Other significant items included in operating cash flows in 2009 included the impact of the increase in inventories and accrued intercompany interest, and the collection of tax receivables. Excluding the settlement of intercompany balances with our parent, cash flow from operations would have been $83.3 million for the twelve months ended December 31, 2009. For the successor and predecessor periods in 2008, net cash provided (used) in operating activities was ($37.0) million and $105.5 million, respectively. The reduction in operating cash flow in the 2008 successor period was due to higher levels of cash required for working capital.

Investing Activities

Our investing activities include cash paid for acquisitions, capital expenditures necessary to expand and maintain our manufacturing capabilities and infrastructure, and outlays to acquire various product or intellectual property rights needed to grow and maintain our business. Cash used in investing activities during the twelve months ended December 31, 2010 was $10.5 million, which included $13.5 million for purchases of property, plant and equipment offset by proceeds received on the sale of property, plant and equipment of $3.0 million.

Cash used in investing activities during the twelve months ended December 31, 2009 was $5.6 million, which included $16.7 million for purchases of property, plant and equipment along with an additional $2.0 million of payments related to the acquisition of APP and $10.7 million for the purchase of a manufacturing facility in Raleigh, North Carolina and $10.1 million related to cash paid for intangible assets. Cash used in investing activities was offset by $33.9 million of payments received on intercompany notes receivable and cash proceeds on sale of fixed assets.

Cash used in investing activities during the combined 2008 year period was $3,697.3 million ($3,683.5 million cash used in the successor period and $13.8 million of cash used in the predecessor period), which included the payments for the acquisition assets of APP, net of cash of $3,624.2 million and the purchase of a manufacturing facility adjacent to our Grand Island facility.

Financing Activities

Financing activities generally include external borrowings under our credit facility and intercompany borrowing activity with Fresenius and its affiliated companies, and, prior to the Merger, the issuance or repurchase of our common stock and proceeds from the exercise of employee stock options. Net cash used in financing activities for the twelve months ended December 31, 2010 was $222.6 million which reflected net payments on external and internal borrowings of $76.5 million and $132.4 million, respectively, along with payments of deferred financing costs of $13.7 million.

Net cash used in financing activities for the twelve months ended December 31, 2009 was $10.9 million which reflected net proceeds on external and internal borrowings of $31.3 million and $25.3 million, respectively, offset by payments of deferred financing costs of $67.5 million.

Net cash provided by financing activities for the combined 2008 year period was $3,738.4 million ($3,733.4 million of cash provided in the successor period and $5.0 million of cash provided in the predecessor period) which reflected the $900.0 million capital contribution received from Fresenius and proceeds from the external and intercompany borrowings incurred to finance the Merger totaling $3,856.4 million, offset by the retirement of pre-merger debt of $997.5 million and Merger-related payments of certain financing costs of $25.5 million.

Sources of Financing and Capital Requirements

A summary of our external and intercompany debt is as follows (in thousands):


	December 31, 2010		December 31, 2009
External debt
Senior Credit Facilities, with interest at variable rates based on LIBOR plus a margin. Term loan B2 and C2 are subject to a minimum rate
Term loan A2, due in semi-annual installments through September 10, 2013	$	391,000	$	462,500
Term loan B2, due in equal semi-annual installments with a final balloon payment on September 10, 2014		—		458,944
Term loan C2, due in equal semi-annual installments beginning June 10, 2010, with a final balloon payment on September 10, 2014		404,219		—
Target revolving credit facility loan, due at expiration of the facility on September 10, 2013		—		—

A summary of our external and intercompany debt is as follows (in thousands):


	December 31, 2010			December 31, 2009
Total external debt		795,219			921,444
Current maturities of external debt		(127,475	)		(76,475	)

Long-term external debt	$	667,744		$	844,969

Internal debt
Intercompany Credit Facilities
Short-term unsecured intercompany loans payable to Fresenius Kabi AG, due in 30 to 60 days from date of issue, with interest at fixed rates	$	309,000		$	360,000
Secured senior intercompany loans payable to a financing subsidiary of Fresenius SE & Co. KGaA, with interest at variable rates based on LIBOR or EURIBOR plus a margin. Term loan B1 and C1 are subject to a minimum rate
Term loan A1, due in semi-annual installments through September 10, 2013		391,000			462,500
Term loan B1, due in equal semi-annual installments with a final balloon payment on September 10, 2014		—			657,742
Term loan C1, due in equal semi-annual installments with a final balloon payment on September 10, 2014		579,313			—
Euro currency term loan B1 (€195.5 million), due in equal semi-annual installments with a final balloon payment on September 10, 2014		—			265,791
Euro currency term loan C1 (€162.5 million), due in equal semi-annual installments with a final balloon payment on September 10, 2014		217,133			—
Unsecured intercompany loans payable to a financing subsidiary of Fresenius SE & Co. KGaA, due July 15, 2015, with interest at fixed rates
US dollar denominated		500,000			500,000
Euro currency denominated (€115.7 million)		154,589			166,668
Unsecured intercompany loans payable to Fresenius Kabi AG, due September 10, 2014, with interest at fixed rates
US dollar denominated		722,826			601,775
Euro currency denominated loans payable (€33.0 million as of December 31, 2010 and €13 million as of December 31, 2009)		44,095			18,728

Total intercompany debt		2,917,956			3,033,204
Current maturities of intercompany debt		(441,302	)		(441,511	)

Long-term intercompany debt	$	2,476,654		$	2,591,693

Fresenius Merger—Credit Agreements

On August 20, 2008, in connection with the acquisition of APP, Fresenius entered into various credit arrangements to assist in funding the transaction. These credit facilities included a Senior Credit Facilities Agreement and a Bridge Facility Agreement. Proceeds from borrowings under these credit facilities, together with other available funds provided by Fresenius through equity contributions and loans to FKP Holdings and its subsidiaries, were utilized to complete the purchase of APP on September 10, 2008.

The Senior Credit Facilities Agreement provided Fresenius and certain of its subsidiaries with various credit facilities. These include two term loan facilities and a $150 million revolving credit facility under which APP Pharmaceuticals, LLC, a wholly owned subsidiary of APP, is the obligor.

Pursuant to the Senior Credit Facilities Agreement, FKP Holdings and its subsidiaries have entered into various secured senior intercompany loans with finance subsidiaries of Fresenius SE & Co. KGaA (collectively, the “Senior Intercompany Loans”), the amount, maturity and other financial terms of which correspond to those applicable to the loans provided to such borrowers under the Senior Credit Facilities Agreement described above. The Senior Intercompany Loans are guaranteed by FKP Holdings and certain of its affiliates and subsidiaries and secured by the assets of FKP Holdings and certain of its affiliates and subsidiaries. The Senior Intercompany Loans provide for an event of default and acceleration if there is an event of default and acceleration under the Senior Credit Facilities Agreement, but acceleration of the Senior Intercompany Loans may not occur prior to acceleration of the loans under the Senior Credit Facilities Agreement. By entering into the Senior Intercompany Loans, Fresenius effectively pushed-down its Merger-related term loan borrowings under the Senior Credit Facilities Agreement to the FKP Holdings group.

The Senior Credit Facilities Agreement contains a number of affirmative and negative covenants that are assessed at the Fresenius level and are not separately assessed at FKP Holdings or its subsidiaries. The Company’s obligations under the Senior Credit Facilities Agreement are unconditionally guaranteed by Fresenius SE & Co. KGaA and certain of its subsidiaries, and are secured by a first-priority security interest in substantially all tangible and intangible assets of APP Pharmaceuticals, Inc. and APP Pharmaceuticals, LLC.

Post-Merger Activity

In October 2008, the amount available under the Senior Credit Facilities Agreement was increased and the full amount of the increase to the facility was drawn down. These funds, along with an additional $166.9 million of proceeds from other intercompany borrowings were used to repay a portion of the balance outstanding under the Bridge Facility Agreement. On January 21, 2009, the borrower under the Bridge Facility Agreement, which is an affiliate of Fresenius, issued two tranches of notes in a private placement. Proceeds of the notes issuance were used, among other things, to repay in full the balance outstanding under the Bridge Facility Agreement. Upon the repayment of the bridge loan, the Bridge Intercompany Loan was refinanced and replaced with an Intercompany Dollar Loan of $500 million and an Intercompany Euro Loan of €115.7 million. These new intercompany loans are not guaranteed or secured. As a result of the refinancing, in the first quarter of 2009, the Company wrote-off $14.6 million of Bridge Intercompany Loan unamortized debt issuance costs and incurred debt issuance costs of $67.5 million for the new Intercompany Dollar and Euro loans.

On each of December 10, 2009 and February 10, 2010, the Company entered into three unsecured intercompany loans with Fresenius Kabi AG in the amounts of €13 million, $46.3 million and $32.3 million and €20 million, $71.3 million and $49.8 million, respectively. These loans replaced Senior Intercompany Loans of like amounts. These Fresenius Kabi AG notes bear fixed interest rates. There was no change to principal maturity dates as a result of this exchange of notes.

On March 18, 2010, the 2008 Senior Credit Facilities Agreement was amended, and Term Loan B, consisting of APP’s Term Loan B2 and Term Loan B1 were replaced with a lower interest bearing Term Loan C, consisting of APP’s Term Loan C2 and Term Loan C1. There was no change to principal amount outstanding as a result of this exchange of notes. The amendments to the 2008 Senior Credit Agreement also modified certain of the financial covenants, which are measured at the consolidated Fresenius SE & Co. KGaA level, as defined in the agreement. As a result of the debt replacement in the first quarter of 2010, the Company incurred debt issuance costs of $13.7 million for the Term Loan C, of which $12.2 million was paid directly by the Company and $1.5 million was pushed down from the Parent.

Subsequent to the period ended September 30, 2010, the Company replaced the outstanding Target Revolver with fixed rate unsecured intercompany notes with Fresenius Kabi AG which mature monthly.

There was no amount outstanding under the target revolver at December 31, 2010 and 2009. The following is the repayment schedule for Term Loans A2 and C2, the target revolver and the intercompany loans outstanding as of December 31, 2010 (in thousands):


	Term Loan A2		Term Loan C2		Target Revolver		Intercompany Fresenius		Total
2011	$	122,500	$	4,975	$	—	$	441,302	$	568,777
2012		150,000		4,975		—		159,802		314,777
2013		118,500		4,975		—		128,303		251,778
2014		—		389,294		—		1,533,958		1,923,252
2015		—		—		—		654,589		654,589

	$	391,000	$	404,219	$	—	$	2,917,953	$	3,713,173

Derivatives

The Company does not engage in the trading of derivative financial instruments except where the Company’s objective is to manage the variability of forecasted inventory purchases due to changes in foreign currency exchange rates, and the variability of payments of principal and interest attributable to changes in interest or foreign currency exchange rates. In general, the Company enters into derivative transactions in limited situations based on management’s assessment of current market conditions and perceived risks.

As a result of the use of derivative instruments, the Company is exposed to counterparty credit risk when these instruments are in an asset position. The Company manages the counterparty credit risk by entering into derivative contracts only with its Parent company and its affiliates. As a result, as of December 31, 2010, the Company does not expect to experience any losses as a result of default of its counterparty.

the Euro-denominated notes principal balance. We have entered into foreign currency swaps with affiliates of Fresenius for the total of the Euro-denominated notes principal balance. These agreements mature at various dates through January 2012, and are not designated as hedging instruments for accounting purposes. During the year ended December 31, 2010, 2009 and the successor period in 2008, we recognized a foreign currency (loss)/gain of approximately ($31.9) million, $30.1 million and $4.0 million, respectively, in our other income (expense) related to the change in fair value of these swap agreements. These foreign currency (losses)/gains were offset by $32.6 million, ($26.2) million and ($8.2) million in currency gains/(losses) we recorded in 2010, 2009 and in the successor period in 2008, in order to adjust the carrying value of the Euro-denominated notes to reflect the year-end exchange rate.

We have also entered into foreign currency hedges for the €6.3 million of future cash flows related to the interest payments due on the €195.5 million notes through October 2012, and €15.2 million of future cash flows related to the interest payments on the €115.7 million note through January 2012. These foreign currency agreements have been designated as hedges of our exposure to fluctuations in interest payments on outstanding Euro-denominated borrowings due to changes in Euro/U.S. dollar exchange rates (a cash flow hedge).

During the second quarter of 2010, we entered into foreign currency forward contracts for €22.7 million of future cash flows related to certain forecasted inventory purchases from July 2010 through June 2011. These foreign currency agreements have been designated as hedges of our exposure to fluctuations in future payments related to these forecasted purchases due to changes in Euro/U.S. dollar exchange rates (a cash flow hedge). At December 31, 2010 we have €13.8 million of outstanding foreign currency forward contracts related to the forecasted transactions.

Interest Rate Swaps: On November 3, 2008, we entered into four interest rate swap agreements with Fresenius for an aggregate notional principal amount of $900 million, (the “2008” interest rate swaps”). These agreements require us to pay interest at an average fixed rate of 3.97% and entitle us to receive interest at a variable rate equal to three-month LIBOR, which is equal to the benchmark for the term A Loans being hedged, on the notional amount. The 2008 interest rate swaps expire in October 2011 and December 2013. During the third quarter of 2010 we entered into six additional interest rate swap agreements with Fresenius for an aggregate principal amount of $600 million, (the “2010 interest rate swaps”). These swap agreements require us to pay interest at an average fixed rate of 2.16% and entitle us to receive interest at a variable rate equal to three-month LIBOR, subject to a minimum LIBOR, which is equal to the benchmark rate for the Term C Loan being hedged, on the notional amount. The 2010 interest rate swaps expire on September 10, 2014 and all interest rate swaps have been designated as hedges of our exposure to fluctuations in interest payments on outstanding variable rate borrowings due to changes in interest rates (a cash flow hedge).

Capital Requirements

Our future capital requirements will depend on numerous factors, including:

•

the obligations placed upon our company from our credit agreements discussed above, including any debt covenants related to those obligations;

•

working capital requirements and production, sales, marketing and development costs required to support our business;

•

the need for manufacturing expansion and improvement;

•

the transfer of products from our Puerto Rico to Raleigh and Grand Island manufacturing facilities;

•

the requirements of any potential future acquisitions, asset purchases or equity investments; and

•

the amount of cash generated by operations, including potential milestone and license revenue.

We anticipate that available cash and short-term notes receivable, cash generated from operations, and funds available under our credit facility or through borrowings or capital contributions from Fresenius, our parent, will be sufficient to finance our operations, including ongoing product development and capital expenditures for at least the next twelve months. In the event we engage in future acquisitions or capital projects, we may have to raise additional capital through additional borrowings or through additional intercompany debt. Fresenius has committed to the Company that it will provide financial support to FKP Holdings sufficient for it to satisfy its obligations and debt service requirements arising under all existing financing instruments entered into in connection with the Merger, and to which the Company is a party, as they come due until at least January 1, 2012.

As described above, we are responsible for servicing the debt of $0.9 billion incurred in connection with the Merger, as well as to pay the principal and interest on the outstanding intercompany debt of $3.0 billion with funds generated by our operations. We expect that our funds generated by operations will be sufficient to satisfy all of our debt obligations, however it is likely that we will need to request that Fresenius refinance certain of our intercompany obligations, including those coming due in 2011, in order to extend their maturities.

Our ability to meet our debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer preferences, the success of product and marketing innovations and pressure from competitors. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. We may not be able to, at any given time, refinance this debt, sell assets or borrow more money on terms acceptable to us or at all, the failure to do any of which could have adverse consequences for our business, financial condition and results of operations.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations represent future cash commitments and liabilities under the amount and/or timing of agreements with third parties and intercompany agreements, and exclude contingent liabilities for which we cannot reasonably predict the amount and/or timing of future payment. The following information summarizes our contractual obligations and other commitments, including credit facilities and operating leases, as of December 31, 2010:


	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Term Loans A2 and C2 and intercompany loans principal repayments (excluding interest)	$	3,713,173	$	568,777	$	566,555	$	2,577,841	$	—
Operating lease obligations		25,893		7,236		6,432		4,579		7,646

Total	$	3,739,066	$	576,013	$	572,987	$	2,582,420	$	7,646

Obligations related to interest on debt and liabilities for uncertain tax positions are not included in the table above because the timing and amount of any required payments cannot be reasonably estimated.

We do not currently have any off-balance sheet arrangements that are material or reasonably likely to be material to our financial position or results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Revenue Recognition

Product Revenue Recognition

We recognize revenue from the sale of a product and for contract manufacturing when title and risk of loss have transferred to the customer, collection is reasonably assured and we have no further performance obligations. This is typically when the product is received by the customer. At the time of sale, as further described below, we reduce sales and provide for estimated chargebacks, contractual allowances or customer rebates, product returns and customer credits and cash discounts. These provisions are established based on consideration of such factors as our historical experience, estimated and actual customer inventory levels, the terms of customer rebate arrangements, and current contract sales terms with wholesalers and end-user customers, among others. We have extensive, internal historical information on chargebacks, rebates and customer returns and credits which we use in determining the related provision and reserve requirements. As further described below, due to the nature of our generic injectable products and their primary use in hospital and clinical settings with generally consistent demand, we believe that this internal historical data, in conjunction with review of available third-party data, provides a reliable basis for such estimates. In 2009, we continued to revise our methodology to estimate certain of our sales provisions to reflect the availability of new information. Accruals for sales provisions are presented in our financial statements as a reduction of revenue and accounts receivable or, in the case of contractual allowances, an increase in accrued liabilities. We regularly review information related to these estimates and adjust our reserves accordingly if, and when, actual experience differs from estimates.

We periodically review the wholesale supply levels of our more significant products by reviewing inventory reports purchased or available from wholesalers, evaluating our unit sales volumes, and assessing data from third-party market research firms and our periodic visits to wholesaler warehouses. Based on this information, we attempt to keep a consistent wholesale stocking level of approximately two- to six-weeks across our hospital-based products. The buying patterns of our customers do vary from time to time, both from customer to customer and product to product, but we do not believe that variances in our historic wholesale stocking levels or speculative buying activity in our hospital-based distribution channels has had a significant impact on our historic sales comparisons or sales provisions.

Sales Provisions

Our sales provisions totaled $1,178.3 million, $1,478.5 million, and $1,222.0 million, for the years ended December 31, 2010, 2009, and the combined 2008 year period, respectively, and related reserves totaled $139.1 million and $173.4 million at December 31, 2010 and 2009, respectively.

Chargebacks

Following industry practice, we typically sell our products to independent pharmaceutical wholesalers at wholesale list price. These wholesalers in turn sell our products to an end user, normally a hospital or alternative healthcare facility, at a lower contractual price previously established between the end user and us via a group purchasing organization, or GPO. GPOs enter into collective purchasing contracts with pharmaceutical suppliers to secure more favorable product pricing on behalf of their end-user members.

Our initial sale to the wholesaler, and the resulting receivable, are recorded at our wholesale list price. However, as our agreements with our wholesalers specify that they are entitled to a credit for the difference between the wholesale list price and the lower end-user contract price, we reduce reported sales and receivables by the difference between the wholesale list price and the estimated end-user contract price by recording a chargeback provision and reserve at the time of sale. When the wholesaler ultimately sells the product to the end user at the end-user contract price, the wholesaler charges us, via a chargeback, for the difference between the wholesale list price and the end-user contract price and such chargeback is offset against the chargeback reserve established at the time of sale. On a monthly basis, we compare our recorded chargeback reserve to our estimate of the net proceeds we will realize from the wholesaler based on the estimated ending wholesale units in the distribution channel pending chargeback and the estimated end-user selling price of those units and adjust the chargeback provision as necessary.

user contract-selling price we will realize when those units are sold. We base our estimates of these factors primarily on internal, product-specific sales and chargeback processing experience, estimated wholesaler inventory stocking levels, current contract pricing, IMS data and our expectation for future contract pricing changes. In our monthly assessment of the adequacy of our recorded chargeback reserve, we consider these same factors in estimating the ending wholesale units in the distribution channel pending chargeback and the net proceeds we will realize from the wholesaler. The amount of product in the channel is comprised of product at the distributor and product that the distributor has sold to an end-user, but has yet to report as end user sales. Accordingly, in estimating the ending wholesale units in the distribution channel pending chargeback, we also must make assumptions about the time lag between the date the product is sold to the wholesaler and the date the wholesaler sells the product to the end-user customer, and between the sale date and the date that sale is reported to us enabling us to process the chargeback. Physical inventory in the channel is based on inventory data received from certain of our wholesalers; for others it is estimated based on evaluation of our monthly sales to our wholesalers and our knowledge of inventory turnover at our major wholesalers. We estimate end user sales made but not yet reported to us based on either actual chargebacks processed in the following month or the historical average number of days to process a chargeback from the date of the end user sale. Our estimate of the chargeback provision and reserve could also be impacted by a number of market conditions that are beyond our control, including: competitive pricing, competitive products and changes impacting demand in both the distribution channel and at the level of the healthcare provider. We regularly review information related to these estimates and adjust our provisions and reserves accordingly if, and when, actual experience differs from our estimates.

Our net chargeback reserve totaled $89.5 million and $129.0 million at December 31, 2010 and 2009, respectively. Due to information constraints in the distribution channel, it has not been practical, and has not been necessary, for us to capture and quantify the impact of current versus prior year activity on the chargeback provision. Information constraints within the distribution channel primarily relate to our inability to track product through the channel on a unit or specific lot basis. In addition, for the most part, we do not receive information from our customers with respect to the level of their sales that are subject to chargeback. The lack of information on a specific lot basis precludes us from tracking actual chargeback activity to the period of our initial sale. As a result, we rely on internal data, external wholesaler and IMS data and management estimates in order to estimate the amount of product in the channel subject to future chargeback. We also review current year chargeback activity to determine whether material changes in the provision relate to prior period sales; such changes have not been material to our consolidated statements of operations. A one percent decrease in our estimated end-user contract-selling prices would reduce total net revenue for the year ended December 31, 2010 by $0.7 million and a one percent increase in wholesale units pending chargeback at December 31, 2010 would decrease total net revenue for the year ended December 31, 2010 by $0.7 million.

Contractual Allowances, Fee for Service, Returns and Credits, Cash Discounts, Medicaid and Bad Debts

Our net reserve for other sales provisions totaled $49.6 million and $44.5 million at December 31, 2010 and 2009, respectively. Contractual allowances, which generally consist of rebates or administrative fees, are offered to certain wholesale customers, GPOs and end-user customers consistent with pharmaceutical industry practices. Settlement of rebates and fees due to customers generally occurs between one to fifteen (15) months from the date of sale. We establish an estimated reserve for contractual allowances at the time of sale based on the historical relationship between sales and such allowances. Upon receipt of request for credit, we establish a specific liability for the fees or rebates due to the customer based on the specific terms of each agreement by adjusting our original estimate.

From time to time we enter into inventory management agreements with our wholesale customers which require us to pay a fee in connection with their distribution of our products or their performance of other services, including for example providing us with sales data and performing other services and contractual rights for us. In addition, we may be required to enter into such agreements in the future in order to maintain our relationships with other such wholesalers. We are unable to ascertain the potential impact of the terms of any such future agreements on our sales, but do not believe that such future agreements would result in a substantial change in wholesale stocking levels of our products as compared to current levels.

Consistent with industry practice, our return policy permits our customers to return products within a window of time before and after the expiration of product dating. We provide for product returns and other customer credits at the time of sale by applying historical experience factors, generally based on historic data on credits issued by credit type or product, relative to related sales and we provide specifically for identified outstanding returns and credits in the period in which they become known.

We generally offer our customers a standard cash discount on our hospital-based products for prompt payments and, from time-to-time, may offer an additional discount and/or extended terms in support of product launches or other promotional programs. A provision for cash discounts is established at the time of sale based on the terms of sale and adjusted for historical experience factors regarding the level of cash discount taken.

We establish a reserve for bad debts based on general and identified customer credit exposure. Our actual losses due to bad debts were less than $0.2 million in each of 2010, 2009 and 2008.

Inventories

Inventories consist of products currently approved for marketing and costs related to certain products that are pending regulatory approval. From time to time, we capitalize inventory costs associated with products prior to regulatory approval based on our judgment of probable future regulatory approval, commercial success and realizable value. Such judgment incorporates our knowledge and best judgment of where the product is in the regulatory review process, our required investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. If final regulatory approval for such products is denied or delayed, we revise our estimates and judgments about the recoverability of the capitalized costs and, where required, provide reserves for or write-off such inventory in the period those estimates and judgments change.

We routinely review our inventory and establish reserves when the cost of the inventory is not expected to be recovered or the cost of a product exceeds estimated net realizable value. In instances where inventory is at or approaching expiration, is not expected to be saleable based on our quality and control standards or is selling for a price below cost, we reserve for any inventory impairment based on the specific facts and circumstances. Provisions for inventory reserves are reflected in the consolidated financial statements as an element of cost of sales; inventories are presented net of related reserves.

Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and capital loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated financial statements in the period that includes the legislative enactment date.

In determining our current income tax provision, we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. When we maintain deferred tax assets, we must assess the likelihood that these assets will be recovered through adjustments to future taxable income. To the extent we believe recovery is not likely, we establish a valuation allowance. We record an allowance reducing the asset to a value we believe is more likely than not to be recoverable based on our expectation of future taxable income. The accounting estimate related to the valuation allowance is susceptible to change from period to period as it requires management to make assumptions about our future income over the lives of the deferred tax assets. Forecasting future income requires us to use judgment. In estimating future income, we use our internal operating budgets and long-range planning projections. We develop our budgets and long-range projections based on recent results, trends, economic and industry forecasts influencing our performance, and planned timing of new product launches, among other factors. Significant changes in the expected realization of the deferred tax asset would require that we adjust the valuation allowance applied against the gross value of our total deferred tax assets, resulting in a change to net income.

As of December 31, 2010, management believes that all deferred tax assets are more likely than not to be fully realized.

Our company is subject to tax audits in numerous jurisdictions in the U.S. as well as in Canada and Puerto Rico. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the IRS and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The benefits of tax positions that are more likely than not of being sustained upon audit based on the technical merits of the tax position are recognized in the consolidated financial statements; positions that do not meet this threshold are not recognized. For tax positions that are at least more likely than not of being sustained upon audit, the largest amount of the benefit that is more likely than not of being sustained is recognized in the consolidated financial statements.

In evaluating our unrecognized tax positions, we consider a variety of factors, including the technical merits of our tax positions, new and changing interpretations of tax laws and regulations, and the status of any pending or potential examinations of our tax returns by the applicable tax authorities. APP and its subsidiaries file income tax returns in the US Federal jurisdiction, Canada, Puerto Rico, and various state jurisdictions. APP is currently under Federal income tax examination for its 2008 and 2009 tax years. APP is also currently under state income tax examinations in California, Illinois, New York and North Carolina for various tax years. Although not currently under examination or audit, APP’s Canadian income tax returns for the 2005 through 2009 tax years, its Puerto Rican income tax returns for 2006 through 2009 tax years and its state income tax returns for the 2003 through 2009 tax years remain open for possible examination by the appropriate governmental agencies. There are no other open federal, state, or foreign government income tax audits at this time.

As of December 31, 2010, the total amount of gross unrecognized tax benefits, which are reported in other liabilities in our consolidated balance sheet, was $19.8 million. This entire amount would impact income tax expense if recognized. In addition, we accrue interest and any necessary penalties related to unrecognized tax positions in our provision for income taxes. For the twelve months ended December 31, 2010, $0.5 million of such interest was accrued.

Impairment of long-lived assets

We test long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, for recoverability when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Examples of events or circumstances that may be indicative of impairment include:

•

A significant adverse change in legal factors or in the business climate that could affect the value of the asset, including, by way of example, a successful challenge of our patent rights resulting in generic competition earlier than expected.

•

A significant adverse change in the extent or manner in which an asset is used, including, by way of example, restrictions imposed by the FDA or other regulatory authorities that affect our ability to manufacture or sell a product.

•

A projection or forecast that demonstrates losses associated with an asset, including, by way of example, a change in a government reimbursement program that results in an inability to sustain projected product revenues or profitability or the introduction of a competitor’s product that results in a significant loss of market share.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

The value of intangible assets is determined primarily using the “income method,” which starts with a forecast of all expected future net cash flows. Accordingly, the potential for impairment for intangible assets may exist if actual revenues are significantly less than those initially forecasted or actual expenses are significantly more than those initially forecasted. Some of the more significant estimates and assumptions inherent in the intangible asset impairment assessment process include: the amount and timing of projected future cash flows; 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.

Valuation Goodwill

Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Goodwill is tested for impairment using a two-step test. The first step, which is used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

Significant judgment is applied when goodwill is assessed for impairment. In performing our assessment of the carrying value of goodwill, we use the present value of estimated future cash flows to establish the estimated fair value of our reporting unit as of the testing date. Estimating the discounted future cash flows involves significant assumptions. These assumptions are related to factors inherent in the business planning process, including future growth rates, the timing of introduction and level of acceptance of new products, the effects of competition, changes in volume, market pricing, cost, and business environment changes. Our assumed discount rate also has a significant impact on the estimated fair value of our reporting unit. Changes in economic and operating conditions impacting these assumptions could result in an impairment of goodwill in future periods. When available and as appropriate, we use comparative market multiples to corroborate the estimated fair value.

For the years presented, we did not recognize any goodwill impairment as the estimated fair value of our reporting unit with goodwill exceeded its carrying amount by more than 25%. While we believe that the assumptions used in estimating the fair value of our goodwill are reasonable and appropriate, we have recognized approximately $3.6 billion in goodwill in our consolidated balance sheet, and could be required to recognize significant goodwill impairment charges in the future if we have declines in profitability due to changes in volume, market pricing, cost, or the business environment. Future adverse changes in our economic environment could affect the discount rate and significant adverse changes to our business environment and future cash flows could cause us to record impairment charges in future periods which could be material.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06 that requires additional disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the sensitivity of fair value measurements to changes in assumptions, and (4) transfers between the three levels of the fair value hierarchy. The disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements are effective for fiscal years beginning after December 15, 2010, and for the interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance but does not anticipate it will have a material impact on our results of operations or financial condition. All other requirements of this ASU were effective in interim and annual periods beginning after December 15, 2009. The adoption of this guidance had no impact on our consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts to modify Step 1 of the goodwill impairment test; requiring companies with reporting units with zero or negative carrying amounts to perform Step 2 of the goodwill impairment analysis if it is more likely than not that a goodwill impairment exists. This guidance is effective for fiscal years beginning after December 15, 2010. Early adoption is not permitted. This guidance is not expected to impact our consolidated financial statements.

In June 2009, the FASB issued ASU 2009-17, which eliminates the exceptions to the rules requiring consolidation of qualifying special-purpose entities (the “QSPE”), which means more entities will be subject to consolidation assessments and reassessments. The guidance also requires ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity (“VIE”) and clarifies characteristics that identify a VIE. In addition, additional disclosures about a company’s involvement with a VIE and any significant changes in risk exposure due to that involvement are required. This guidance was effective for the Company beginning in 2010, and its adoption had no impact on our consolidated financial statements.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks associated with changes in interest rates and foreign currency exchange rates. Interest rate changes affect primarily our short-term advances to our parent and its affiliates and our debt obligations. Changes in foreign currency exchange rates can affect cash flows for inventory purchases, and interest and principal related to our debt obligations that are denominated in foreign currencies, as well as our operations outside of the United States.

Foreign Currency Risk: We have operations in Canada; however, both revenue and expenses of those operations are typically denominated in the currency of the country of operations, providing a partial hedge. Nonetheless, our Canadian subsidiary is presented in our financial statements in U.S. dollars and can be impacted by foreign currency exchange fluctuations through both (i) translation risk, which is the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and (ii) transaction risk, which is the risk that the currency impact of transactions denominated in currencies other than the subsidiary’s functional currency may vary due to currency fluctuations.

With respect to translation risk, even though there may be fluctuations of currencies against the U.S. dollar, which may impact comparisons with prior periods, the translation impact is included in accumulated other comprehensive income, a component of stockholder’s equity, and does not affect the underlying results of operations. Gains and losses related to transactions denominated in a currency other than the functional currency of the countries in which we operate are included in the consolidated statements of operations.

Included in our intercompany borrowings are several Euro-denominated notes, €195.5 million notes with a maturity in 2014 and a €115.7 million note with a maturity in 2015. In connection with these borrowings, we entered into intercompany foreign currency forward swap contracts in order to limit our exposure to changes in exchange rates on the Euro-denominated notes principal balance. We have entered into foreign currency swaps with affiliates of Fresenius for the total of the Euro-denominated notes principal balance. These agreements mature at various dates through January 2012, and are not designated as hedging instruments for accounting purposes.

We have also entered into foreign currency hedges for the €18.9 million of future cash flows related to the interest payments due on the €195.5 million notes through December 12, 2011, of which €6.3 million was remaining as of December 31, 2010 and for the €25.4 million of future cash flows related to the interest payments on the €115.7 million note through January 17, 2012 of which €15.2 million was remaining as of December 31, 2010. In addition, during 2010 we entered into foreign currency hedges for €22.7 million of future cash flows related to planned inventory purchases from a subsidiary of our parent company through July, 2011. These foreign currency agreements have been designated as hedges of our exposure to fluctuations in cash payments for inventory and interest payments on outstanding purchase orders and Euro-denominated borrowings due to changes in Euro/U.S. dollar exchange rates (a cash flow hedge).

Because we have entered into agreements to hedge our most significant exposures to changes in currency exchange rates (i.e. changes in Euro/U.S. dollar exchange rate) we do not believe that a change in the Euro/U.S. dollar exchange rate would have a significant impact on our operating results, financial position or cash flows.

Investment Risk: The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our activities without increasing risk. Since our merger with Fresenius, we use its cash management system to invest excess cash not needed for current operations. At December 31, 2010, we did not have any cash deposits with Fresenius.

Interest Rate Risk: We are also exposed to changes in interest rates on our variable rate borrowings. As of December 31, 2010, $795.2 million was outstanding on our credit facility and we had approximately $2.918 billion of outstanding intercompany loans. If the interest rates on our outstanding variable borrowings were to increase by 1%, our interest expense would increase by $12.8 million based on our outstanding debt balances at December 31, 2010.

We have entered into interest rate swap agreements with Fresenius for an aggregate notional principal amount of $1.500 billion. Agreements for $900 million notional principal require us to pay interest at an average fixed rate of 3.97% and entitle us to receive interest at a variable rate equal to three-month LIBOR, which is equal to the benchmark for the term A Loans being hedged, on the notional amount. These interest rate swaps expire in October 2011 and December 2013. The agreements for an aggregate principal amount of $600 million require us to pay interest at an average fixed rate of 2.16% and entitle us to receive interest at a variable rate equal to three-month LIBOR, subject to a minimum LIBOR, which is equal to the benchmark rate for the Term C Loan being hedged, on the notional amount. These interest rate swaps expire on September 10, 2014.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors

Fresenius Kabi Pharmaceuticals Holding, Inc.:

We have audited the accompanying consolidated balance sheets of Fresenius Kabi Pharmaceuticals Holding, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholder’s equity, and cash flows for each of the years in the two-year period ended December 31, 2010 and the period from July 2, 2008 through December 31, 2008, and the consolidated statements of operations, stockholders’ equity, and cash flows of APP Pharmaceuticals, Inc. and Subsidiaries (the Predecessor) for the period from January 1, 2008 through September 9, 2008. Our audits also included the information in the financial statement schedule included in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fresenius Kabi Pharmaceuticals Holding, Inc. and subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2010 and the period from July 2, 2008 through December 31, 2008, and the results of operations and cash flows of the Predecessor for the period from January 1, 2008 through September 9, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion the related information in the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective September 10, 2008, the Company acquired all of the outstanding stock of the Predecessor in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different basis than that for the periods before the acquisition and, therefore, is not comparable.

/s/ KPMG

Chicago, Illinois

February 21, 2011

Fresenius Kabi Pharmaceuticals Holding, Inc.

Consolidated Balance Sheets


	December 31, 2010			December 31, 2009
	(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents	$	8,844		$	10,469
Accounts receivable, net		52,201			85,517
Inventories		237,218			212,065
Prepaid expenses and other current assets		20,377			31,606
Current receivables from related parties		2,282			1,219
Income taxes receivable		—			51,963
Deferred income taxes		34,176			18,880

Total current assets		355,098			411,719
Property, plant and equipment, net		118,195			129,784
Intangible assets, net		466,198			506,215
Goodwill		3,662,173			3,664,371
Deferred financing costs		94,675			117,166
Other non-current assets, net		6,827			29,430

Total assets	$	4,703,166		$	4,858,685


Liabilities and stockholder’s equity
Current liabilities:
Accounts payable	$	70,125		$	53,238
Accrued liabilities		59,091			57,320
Current payables to related parties		13,061			9,914
Accrued intercompany interest		45,004			47,141
Income tax payable		1,006			—
Fair value of CVR liability-current portion		6,693			—
Current portion of long-term debt		127,475			76,475
Current portion of intercompany debt		441,302			441,511

Total current liabilities		763,757			685,599

Long-term debt		667,744			844,969
Deferred income taxes, non-current		70,181			77,593
Fair value of interest rate swaps with Parent and affiliates		58,031			53,188
Intercompany note payable to Parent and affiliates		2,476,652			2,591,693
Fair value of CVR liability- non-current		—			48,976
Other non-current liabilities		21,145			17,591

Total liabilities		4,057,510			4,319,609

Stockholder’s equity:
Common stock - $0.001 par value; 1,000 shares authorized issued and outstanding in 2010 and 2009		—			—
Additional paid-in capital		901,022			900,379
Accumulated deficit		(233,261	)		(342,830	)
Accumulated other comprehensive loss		(22,105	)		(18,473	)

Total stockholder’s equity		645,656			539,076

Total liabilities and stockholder’s equity	$	4,703,166		$	4,858,685

See accompanying notes to consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Consolidated Statements of Operations


	(Successor)									(Predecessor)
	Year ended December 31 2010			Year ended December 31 2009			July 2 through December 31 2008			January 1 through September 9 2008
	(in thousands)
Net revenue	$	1,142,671		$	888,686		$	280,836		$	495,797
Cost of sales		566,084			453,557			173,074			247,637

Gross profit		576,587			435,129			107,762			248,160
Operating expenses:
Research and development		28,119			28,277			16,352			35,133
Selling, general and administrative		116,069			89,994			31,374			62,896
Write-off of merger in-process research and development		—			—			365,700			—
Amortization of merger-related intangibles		36,650			36,650			11,209			10,283
Impairment of fixed assets		3,440			5,372			—			—
Merger related costs		1,361			1,447			2,529			44,220
Separation related costs		—			625			142			2,239

Total operating expenses		185,639			162,365			427,306			154,771

Income (loss) from operations		390,948			272,764			(319,544	)		93,389
Interest expense		(63,797	) )		(83,185	)		(52,585	)		(45,124	)
Intercompany interest expense		(218,756	)		(248,956	)		(66,690	)		—
Unrealized gain in the fair value of contingent value rights		42,282			8,163			101,216			—
Interest income and other, net		1,545			3,379			(1,233	)		1,593

Income (loss) before income taxes		152,222			(47,835	)		(338,836	)		49,858
Income tax expense (benefit)		42,653			(17,450	)		(26,391	)		40,315

Net income (loss)	$	109,569		$	(30,385	)	$	(312,445	)	$	9,543

The composition of stock-based compensation included above is as follows:
Cost of sales	$	—		$	—		$	—		$	1,275
Research and development		—			—			—			436
Selling, general and administrative		643			360			19			4,039

	$	643		$	360		$	19		$	5,750

See accompanying notes to consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Consolidated Statements of Stockholder’s Equity (Deficit)

Years Ended December 31, 2010, 2009 and 2008


	Common Stock				Additional Paid-in Capital			Retained Earnings (Deficit)			Other Comprehensive Income (Loss)			Treasury Stock				Total
	Shares		Amount		Additional Paid-in Capital			Retained Earnings (Deficit)			Other Comprehensive Income (Loss)			Shares		Amount		Total
	(in thousands, except share data)
Predecessor:

Balance, December 31, 2007		160,069,196	$	160	$	(96,357	)	$	13,715		$	2,711			—		—	$	(79,771	)

Exercise of stock options		849,853		1		7,431			—			—			—		—		7,431
Unrestricted stock vesting and stock options forfeited		68,149		—		46			—			—			—		—		46
Stock compensation expense		—		—		5,276			—			—			—		—		5,276
Unvested restricted stock under RSU II plan		—		—		1,596			—			—			—		—		1,596
Tax benefit of disqualifying disposition		—		—		1,509			—			—			—		—		1,509
Comprehensive income:		—		—		—			—			—			—		—
Net income		—		—		—			9,543			—			—		—		9,543
Foreign currency translation adjustments		—		—		—			—			(2,302	)		—		—		(2,302	)

Comprehensive income		—		—		—			—			—			—		—		7,241
Predecessor:

Balance, September 9, 2008		160,987,198	$	161	$	(80,499	)	$	23,258		$	409			—		—	$	(56,671	)


Successor:

Balance, July 2, 2008		—		—		—			—			—			—		—		—

Capital contribution from Fresenius Kabi AG		1,000		—		900,000			—			—			—		—		900,000
Stock compensation expense		—		—		19			—			—			—		—		19
Comprehensive income:
Net loss		—		—		—			(312,445	)		—			—		—		(312,445	)
Unrealized loss on Intercompany interest rate swap, net of $20,308 tax benefit		—		—		—			—			(32,338	)		—		—		(32,338	)
Foreign currency translation adjustments		—		—		—			—			(4,512	)		—		—		(4,512	)

Comprehensive loss		—		—		—			—			—			—		—		(349,295	)

Balance, December 31, 2008		1,000	$	—	$	900,019		$	(312,445	)	$	(36,850	)		—		—	$	550,724


	Common Stock				Additional Paid-in Capital		Retained Earnings (Deficit)			Other Comprehensive Income (Loss)			Treasury Stock				Total
	Shares		Amount		Additional Paid-in Capital		Retained Earnings (Deficit)			Other Comprehensive Income (Loss)			Shares		Amount		Total
	(in thousands, except share data)
Stock compensation expense		—		—		360		—			—			—		—		360
Comprehensive income:
Net loss		—		—		—		(30,385	)		—			—		—		(30,385	)
Unrealized gain on Intercompany interest rate swap, net of $6,235 tax		—		—		—		—			10,074			—		—		10,074
Foreign currency translation adjustments		—		—		—		—			5,216			—		—		5,216
Unrealized gain on foreign currency cash flow hedges, net of $1,928 tax		—		—		—		—			3,087			—		—		3,087

Comprehensive loss		—		—		—		—			—			—		—		(12,008	)

Balance, December 31, 2009		1,000	$	—	$	900,379	$	(342,830	)	$	(18,473	)		—		—	$	539,076

Stock compensation expense		—		—		643		—			—			—		—		643
Comprehensive income:
Net income		—		—		—		109,569			—			—		—		109,569
Unrealized loss on Intercompany interest rate swap, net of $3,220 tax benefit and $2,783 realized loss net of tax benefit $1,082 reclassified from accumulated other comprehensive income		—		—		—		—			(3,411	)		—		—		(3,411	)
Foreign currency translation adjustments		—		—		—		—			2,407			—		—		2,407
Unrealized loss on foreign currency cash flow hedges, net of $913 tax benefit		—		—		—		—			(2,628	)		—		—		(2,628	)

Comprehensive loss		—		—		—		—			—			—		—		106,580

Balance, December 31, 2010		1,000	$	—	$	901,022	$	(233,261	)	$	(22,105	)		—		—	$	645,656

See accompanying notes to consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Consolidated Statements of Cash Flows


	(Successor)									(Predecessor)
	Year Ended December 31, 2010			Year Ended December 31, 2009			July 2 through December 31, 2008			January 1 through September 9, 2008
Cash flows from operating activities:
Net income (loss)		109,569			(30,385	)		(312,445	)		9,543
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		19,842			17,841			6,896			12,503
Amortization		2,067			1,535			24			99
Amortization of product rights		—			—			17			10,960
Amortization of merger related inventory step-up		—			—			45,465			—
Merger related research and development charge		—			—			365,700			—
Amortization of merger related intangibles		36,650			36,650			11,208			10,284
Amortization of loan fees		36,234			39,422			19,727			1,534
Change in the fair value of contingent value rights		(42,282	)		(8,163	)		(101,216	)		—
Write-off of deferred financing fees		—			14,661			12,241			—
Stock-based compensation		643			360			19			5,749
(Gain)/loss on disposal of property, plant and equipment		(594	)		303			19			87
Excess tax benefit from stock-based compensation		—			—			—			(493	)
Loss/(gain) on non-cash foreign currency transactions		610			(4,308	)		1,527			—
Stock option grants/forfeitures		—			—			—			(328	)
Deferred income taxes		(16,375	)		(13,601	)		(3,270	)		(2,054	)
Impairment of intangible assets		1,400			—			—			—
Impairment of fixed assets		3,440			5,372			—			—
Other non cash charges		(723	)		169			—			—
Changes in operating assets and liabilities:
Accounts receivable, net		33,316			(7,535	)		(7,253	)		5,816
Income tax receivable		51,963			12,109			—			—
Current receivables from related parties		(1,063	)		(1,219	)		—			—
Inventories		(25,153	)		(42,989	)		11,181			(32,344	)
Prepaid expenses and other current and non-current assets		2,860			683			5,045			(1,460	)
Non-current receivables from related parties		—			27,832			—			37,223
Accounts payable and accrued expenses		15,112			21,308			(46,957	)		41,386
Income taxes payable		1,006			—			(44,970	)		6,696
Current payables to related parties		3,147			7,785			—			—
Intercompany payable Parent and affiliates		—			(97,717	)		—			—
Accrued intercompany interest		(2,137	)		30,406			—			—
Other non-current liabilities		(501	)		2,776			—			314

Net cash provided by (used in) operating activities		229,031			13,295			(37,042	)		105,515
Cash flows from investing activities:
Purchases of property, plant and equipment		(13,474	)		(16,723	)		(24,703	)		(13,039	)
Purchases of intangible assets		(100	)		(10,097	)		(750	)		(800	)
Proceeds from sale of fixed assets		3,074			154			—			—
Proceeds from (payments for) investment with related parties		—			33,800			(33,800	)		—
Assets acquired, net of cash		—			(12,697	)		(3,624,215	)		—

Net cash used in investing activities		(10,500	)		(5,563	)		(3,683,468	)		(13,839	)
Cash flows from financing activities
Proceeds from the exercise of stock options and the sale of stock under employee retirement and stock purchase plan		—			—			—			7,815


	(Successor)									(Predecessor)
	Year Ended December 31, 2010			Year Ended December 31, 2009			July 2 through December 31, 2008			January 1 through September 9, 2008
(Payments)/proceeds of borrowings under unsecured credit facility, net		(132,337	)		25,283			—			—
(Payments)/proceeds of borrowings under secured credit facility, net		(76,475	)		31,281			—			—
Proceeds from issuance of debt		—			—			3,856,451			—
Excess tax benefit from stock-based compensation		—			—			—			493
Repayment of borrowings		—			—			(997,500	)		(2,500	)
Payment of deferred financing costs		(13,744	)		(67,456	)		(25,523	)		(792	)
Equity contribution from Fresenius		—			—			900,000			—

Net cash (used) provided by financing activities		(222,556	)		(10,892	)		3,733,428			5,016
Effect of exchange rates on cash		2,400			5,188			(4,477	)		(2,283	)

Net (decrease) increase in cash and cash equivalents		(1,625	)		2,028			8,441			94,409
Cash and cash equivalents, beginning of period		10,469			8,441			—			31,788

Cash and cash equivalents, end of period	$	8,844		$	10,469		$	8,441		$	126,197

Supplemental disclosure of cash flow information:
Cash paid for interest		248,566			257,487			53,927			47,008
Cash (received) paid for income taxes, net of refunds		6,474			(19,166	)		6,135			45,270
Supplemental disclosure of noncash investing and financing activities:
Intercompany principal and interest payments made on Company’s behalf, net		—			9,906			—			—

See accompanying notes to consolidated financial statements

Fresenius Kabi Pharmaceuticals Holding, Inc.

Notes to Consolidated Financial Statements

December 31, 2010

1. Description of Business and Basis of Presentation

Our products are generally used in hospitals, long-term care facilities, alternate care sites and clinics within North America. Unlike the retail pharmacy market for oral products, the injectable pharmaceuticals marketplace is largely made up of end users who have relationships with group purchasing organizations, or GPOs, and/or specialty distributors who distribute products within a particular end-user market, such as oncology clinics. GPOs and specialty distributors generally enter into collective product purchasing agreements with pharmaceutical suppliers like us in an effort to secure more favorable drug pricing on behalf of their members.

Fresenius Kabi Pharmaceuticals Holding, Inc. is a wholly-owned subsidiary of Fresenius Kabi AG, and an indirect wholly-owned subsidiary of Fresenius SE & Co. KGaA (“Fresenius” or “Parent Company”), a societas europaea organized under the laws of Germany. FKP Holdings was formed on July 2, 2008, in order to facilitate the acquisition of APP Pharmaceuticals, Inc. (“APP or the Predecessor”) discussed below. See Note 3 to the consolidated financial statements – Merger with APP for details.

On September 10, 2008, FKP Holdings completed the acquisition of APP (the “Merger”) pursuant to an Agreement and Plan of Merger dated July 6, 2008 (the “Merger Agreement”), and APP became a wholly-owned subsidiary of FKP Holdings. Effective with the Merger, each outstanding share of common stock of APP and certain stock options and restricted stock units of APP were converted into the right to receive $23.00 in cash, without interest, and one Contingent Value Right (“CVR”), issued by FKP Holdings and representing the right to receive a cash payment, without interest, of up to $6.00 determined in accordance with the terms of the CVR Agreement. Refer to Note 4 to the consolidated financial statements – Contingent Value Rights (CVR), for further details. The aggregate consideration paid in the Merger was $4,908.1 million, including $997.5 million in assumed APP debt. We incurred $3,856 million in new external and intercompany debt due to Fresenius and its affiliates in connection with the Merger, the aggregate proceeds of which were used to pay the Merger consideration, repay a portion of APP’s then outstanding indebtedness and pay fees and expenses related to the Merger. Fresenius has committed to the Company that it will provide financial support to FKP Holdings sufficient for it to satisfy its obligations and debt service requirements arising under all existing financing instruments entered into in connection with the Merger, and to which the Company is a party, as they come due until at least January 1, 2011.

Prior to the Merger, FKP Holdings had not carried on any activities or operations except for those activities incidental to its formation and in connection with the transactions related to the Merger. Following the Merger, the business of FKP Holdings consists exclusively of that of APP. Accordingly, for accounting purposes FKP Holdings is considered the successor to APP and these consolidated financial statements are presented for two distinct periods: the periods preceding the Merger, or “predecessor” periods (all periods prior to September 10, 2008), and the period after the merger, or “successor” period (from the inception of FKP Holdings on July 2, 2008, which includes the results of APP from September 10, 2008, the date of acquisition). The Company applied purchase accounting to the opening balance sheet on September 10, 2008. The Merger resulted in a new basis of accounting for the assets acquired and liabilities assumed in connection with the acquisition of APP beginning on September 10, 2008. As a result of the acquisition and the application of purchase accounting as described above, the consolidated financial information for the period after the acquisition is presented on a different basis than that for the periods before the acquisition and, therefore, is not comparable.

2. Summary of Significant Accounting Policies

Consolidation

The accompanying consolidated successor period financial statements of FKP Holdings include the accounts of the Company and its majority-owned subsidiaries, including the assets, liabilities and results of operations of APP and its wholly owned subsidiaries (Pharmaceutical Partners of Canada, Inc. and APP Pharmaceuticals Manufacturing, LLC) from the date of the Merger. The accompanying consolidated predecessor period financial statements include the accounts of APP Pharmaceuticals, Inc. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year

Both the Company and the Predecessor use a calendar fiscal year, beginning on January 1 and ending on December 31.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates may also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, but management does not believe such differences will materially affect the Company’s financial position, results of operations or cash flows. Significant items subject to such estimates and assumptions include; provisions and reserves for chargebacks, contractual allowances, returns, credits, and cash discounts; the recoverability of inventory pending regulatory approval and the net realizable value of inventory; the carrying amount of property, plant and equipment, intangibles and goodwill; the valuation of deferred income tax assets; and liabilities for self-insured obligations and other contingencies.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents include investments having a maturity of three months or less at the time of acquisition. These short-term investments consist of highly-liquid, debt instruments that are recorded at cost. Since the Merger, excess cash not needed for current operations has been invested in short-term debt instruments issued by the Parent through its centralized cash management system. Income earned on short-term investments is recorded as interest income.

Accounts Receivable and Concentration of Credit Risk

Accounts receivable relate primarily to amounts owed by customers for trade sales of products. We typically enter into multi-year contractual agreements with GPOs and individual hospital groups to supply our products to end-user hospital and alternate site customers. As is traditional in the pharmaceutical industry, a significant amount of our generic pharmaceutical products are sold to end users under GPO contracts through a limited number of drug wholesalers, which comprise the primary pharmaceutical distribution chain in the United States. Collectively, and approximately proportionately, three of these wholesalers represented approximately 74% and 82% of accounts receivable at December 31, 2010 and 2009, respectively. An allowance for doubtful accounts is recorded to provide for estimated losses resulting from uncollectible accounts, and is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. To help control our credit exposure, we routinely monitor the creditworthiness of all of our customers, review outstanding customer balances for collectability and record allowances for bad debts as necessary. Historical credit losses have been insignificant.

Inventories

Inventories are stated at the lower of cost or market (net realizable value). Cost is determined under the first-in, first-out, or FIFO, method. Inventories consist of the following at December 31, 2010 and 2009:


	December 31, 2010						December 31, 2009
	Approved		Pending Regulatory Approval		Total Inventory		Approved		Pending Regulatory Approval		Total Inventory
	(in thousands)
Finished goods	$	91,742	$	181	$	91,923	$	70,551	$	16,733	$	87,284
Work in process		42,301		1,670		43,971		27,934		1,499		29,433
Raw materials		98,472		2,852		101,324		90,476		4,872		95,348

	$	232,515	$	4,703	$	237,218	$	188,961	$	23,104	$	212,065

At December 31, 2010 and December 31, 2009, inventory included $4.7 million and $23.1 million, respectively, in costs related to products pending FDA approval. The decrease in the inventory pending regulatory approval from December 31, 2009 to December 31, 2010, was due to increases in reserves related to uncertainty in the FDA approval of certain products.

We routinely review our inventory and establish reserves when the cost of the inventory is not expected to be recovered or the cost of a product exceeds estimated net realizable market value. In instances where inventory is at or approaching expiration, is not expected to be saleable based on our quality and control standards or is selling for a price below cost, we reserve for any inventory impairment based on the specific facts and circumstances. Provisions for inventory reserves are reflected in the consolidated financial statements as an element of cost of sales; inventories are presented net of related reserves.

Property, Plant and Equipment

Property, plant and equipment is stated on the basis of cost or allocated acquisition value. Provisions for depreciation are computed for financial reporting purposes using the straight-line method over the estimated useful life of the related asset; leasehold improvements are amortized over the lesser of the estimated useful life of the related asset or the term of the related lease. Amortization of leasehold improvements is included in depreciation expense. The estimated useful lives of assets are as follows:


Buildings and improvements			7-30 years
Machinery and equipment			3-10 years
Furniture and fixtures			5-7 years

Depreciation expense was $19.8 million in 2010, $17.8 million in 2009, and $6.9 million in the 2008 successor period and $12.5 million in the 2008 predecessor period (a total of $19.4 million in 2008).

Property, plant, and equipment consist of the following:


	December 31,
	2010			2009
	(in thousands)
Land	$	4,267		$	4,472
Building and improvements		46,821			44,065
Machinery and equipment		46,057			41,998
Furniture and fixtures		34,627			27,560
Construction in progress		31,046			36,470

		162,818			154,565
Less allowance for depreciation		(44,623	)		(24,781	)

	$	118,195		$	129,784

Included in property, plant, and equipment is $5.2 million and $0.0 million of assets held for sale as of December 31, 2010 and 2009, respectively. The held for sale assets mainly relate to manufacturing equipment at our Puerto Rico and Grand Island facilities.

Long-lived assets are evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets. We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable by comparing the carrying value to the sum of the estimated undiscounted future cash flows expected to result from the operation and eventual disposition of the asset group. If the sum of the undiscounted future cash flows is less than the carrying value, the fair value of the asset group is estimated. The amount of impairment is calculated by subtracting the estimated fair value of the asset group from the carrying value of the asset group. For the years ended December 31, 2010 and 2009, we recorded impairment charges related to property, plant and equipment of $3.4 million and $5.4 million, respectively. We did not record impairment charges in either the successor or predecessor periods in 2008.

Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life or productive capacity of an asset and we capitalize interest on major construction and development projects while in progress.

Gains or losses on disposition of property and equipment are recognized in interest income and other, net in the consolidated statements of operations.

Deferred Financing Costs

Costs incurred in connection with the issuance of and amendments to our credit facilities are capitalized and amortized using the effective interest method. Unamortized debt issue costs are written-off in conjunction with the refinancing or termination of the applicable debt arrangement prior to its scheduled maturity.

We recorded deferred financing costs of approximately $162 million associated with the senior secured credit agreement entered into in connection with the 2008 Merger and $13.3 million associated with the senior secured credit agreement entered into in connection with our Predecessor’s November 2007 separation from New Abraxis. In 2009, we wrote-off $14.6 million in unamortized debt issuance costs in connection with certain modifications to our intercompany loan agreements. In the 2008 successor period we wrote-off $12.2 million of unamortized deferred financing costs related to debt repaid in that period. Amortization and write-off of debt issue costs are recognized in third party and intercompany interest expense in the consolidated statements of operations.

In March of 2010, the 2008 Senior Credit Facilities Agreement was amended. As a result, the Company incurred and capitalized debt issuance costs of $13.7 million, of which $12.2 million was paid directly by the Company and $1.5 million was pushed down from the Parent.

Goodwill and Intangible Assets

We evaluate goodwill and other intangible assets not subject to amortization for impairment annually at October 1 or more frequently whenever indicators of potential impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, (i) significant decline in expected future cash flows, (ii) a sustained, significant decline in equity price and market capitalization, (iii) a significant adverse change in legal factors or in the business climate,(iv) unanticipated competition, and (v) slower growth rates. Goodwill is considered impaired when the fair value of a reporting unit is determined to be less than the carrying value including goodwill. The impairment loss is determined based on a comparison of the implied fair value of the reporting unit’s goodwill to the actual carrying value. Intangible assets not subject to amortization are considered impaired when the intangible asset’s fair value is determined to be less than the carrying value.

In performing our assessment of the carrying value of goodwill, we use the present value of estimated future cash flows to establish the estimated fair value of our reporting unit as of the testing date. This approach includes many assumptions related to future growth rates, discount rates, market comparables, control premiums and tax rates, among other considerations. Changes in economic and operating conditions impacting these assumptions could result in an impairment of goodwill in future periods. When available and as appropriate, we use comparative market multiples to corroborate the estimated fair value. In fiscal years 2010 and 2009, we did not recognize any goodwill impairment, as the estimated fair value of our reporting unit with goodwill exceeded its carrying amount as of our annual testing date in both periods.

Intangible assets subject to amortization are also evaluated for impairment periodically or when indicators of impairment are determined to exist. We test for impairment of intangible assets subject to amortization by comparing the sum of the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying value. If the sum of the estimated undiscounted future cash flows is less than the carrying value, the fair value of the asset group is determined. The amount of impairment, if any, is calculated by subtracting the fair value of the asset from the carrying value of the asset. Our impairment loss calculations require us to apply judgments in estimating future cash flows and asset fair values. These judgments include those required to develop asset level projections of future cash flows and assessments of the probability that certain business scenarios will be realized.

Other intangible assets could become impaired in the future or require additional charges as a result of declines in profitability due to changes in volume, market pricing, cost, manner in which an asset is used, laws and regulations, or in the business environment. Significant adverse changes in our business environment and estimated future cash flows could cause us to record additional impairment charges in future periods which could be material.

We amortize the cost of intangible assets on a straight-line basis over the period of expected benefit, which is equal to the period over which revenues are expected to be derived from such assets (weighted average amortization period of approximately eighteen and one-half years). The ranges for the amortization periods are generally as follows:


	Years
Developed product technology		20
Product rights		10
Patents		5
Contracts and other		5
Customer relationships		3

Product Revenue Recognition

At the time of sale, as further described below, we reduce sales and provide for estimated chargebacks, contractual allowances or customer rebates, product returns, customer credits and cash discounts. We base our estimates of required provisions and reserves for chargebacks, rebates and customer returns and credits on consideration of such factors as our historical experience estimated and actual customer inventory levels, the terms of customer rebate arrangements, and current contract sales terms with wholesalers and end-user customers, amount others. As further described below, due to the nature of our generic injectable products and their primary use in hospital and clinical settings with generally consistent demand, we believe that this historical data, in conjunction with periodic review of available third-party data, provides a reliable basis for such estimates. We regularly review information related to these estimates and adjust our provisions and reserves accordingly if, and when, actual experience differs from estimates. In 2009, we revised our methodology to estimate certain of our sales provisions to reflect the availability of new information. The methodology we used to estimate theses sales provisions was consistent across all periods presented.

Accruals for sales provisions are presented in our consolidated financial statements as a reduction of revenues and accounts receivable or, in the case of contractual allowances, in accrued liabilities. Our total sales provisions totaled $1,178.3 million in 2010, $1,478.5 million in 2009 and $490.3 million in the 2008 successor period and $731.7 million in the 2008 predecessor period (a total of $1,222.0 million in 2008), and related reserves totaled $139.1 million and $173.5 million at December 31, 2010 and 2009, respectively.

Chargebacks

Following industry practice, we typically sell our products to independent pharmaceutical wholesalers at wholesale list price. The wholesalers in turn sell our products to an end user, normally a hospital or alternative healthcare facility, at a lower contractual price previously established between the end user and us via a group purchasing organization, or GPO. GPOs enter into collective purchasing contracts with pharmaceutical suppliers to secure more favorable product pricing on behalf of their end-user members.

The determination of the estimated provision for chargebacks and the related reserve requires us to make significant estimates and judgments. The most significant estimates inherent in the measurement of the initial chargeback provision relate to the proportion of wholesale units that will ultimately be sold to an end-user with a lower-price contractual relationship with us, and the ultimate end-user contract selling price we will realize when those units are sold. We base our estimates of these factors on internal, product-specific sales and chargeback processing experience, current contract pricing, our expectation for future contract pricing changes and IMS data. In our monthly assessment of the adequacy of our recorded chargeback reserve, we consider these same factors in estimating the ending wholesale units in the distribution channel pending chargeback and the net proceeds we will realize from the wholesaler. The amount of product in the channel is comprised of product at the distributor and product that the distributor has sold to an end-user, but has yet to report as end user sales. Accordingly, in estimating the ending wholesale units in the distribution channel pending chargeback, we also must make assumptions about the time lag between the date the product is sold to the wholesaler and the date the wholesaler sells the product to the end-user customer, and between the sale date and the date that sale is reported to us enabling us to process the chargeback. Physical inventory in the channel is based on inventory data received from certain of our wholesalers; for others it is estimated based on evaluation of our monthly sales to our wholesalers and our knowledge of inventory turnover at our major wholesalers. We estimate end user sales made but not yet reported to us based on either actual chargebacks processed in the following month or the historical average number of days to process a chargeback from the date of the end user sale.

Our estimate of the chargeback provision and reserve could also be impacted by a number of market conditions that are beyond our control, including: competitive pricing, competitive products and changes impacting demand in both the distribution channel and at the level of the healthcare provider. We regularly review information related to these estimates and adjust our provisions and reserves accordingly if, and when, actual experience differs from our estimates.

Due to information constraints in the distribution channel, it has not been practical, and has not been necessary, for us to capture and quantify the impact of current versus prior year activity on the chargeback provision. Information constraints within the distribution channel primarily relate to our inability to track product through the channel on a unit or specific lot basis. In addition, for the most part, we do not receive information from our customers with respect to the level of their sales that are subject to chargeback. The lack of information on a specific lot basis precludes us from tracking actual chargeback activity to the period of its initial sale. As a result, we rely on internal data, external wholesaler and IMS data and management estimates in order to estimate the amount of inventory in the channel subject to future chargeback. We also review current year chargeback activity to determine whether changes in the provision relate to prior period sales; such changes have not been material to the consolidated statement of operations.

The provision for chargebacks is presented in our consolidated financial statements as a reduction of sales. Activity in the reserve for chargebacks for the periods included in the consolidated financial statements was as follows:


	Year Ended December 31,
	2010			2009			2008
	(in thousands)
Balance at beginning of period	$	129,002		$	143,265		$	100,413
Provision for chargebacks		1,026,974			1,341,571			1,122,109
Credits or checks issued to third parties		(1,066,493	)		(1,355,834	)		(1,079,257	)

Balance at end of period	$	89,483		$	129,002		$	143,265

For the period ended December 31, 2008, our chargeback provision totaled $447.1 million in the successor period and $675.0 million in the predecessor period (a total of $1,122.1 million in 2008). The balance of this reserve accounted was not impacted by purchase accounting.

Contractual Allowances, Fee for Service, Returns and Credits, Cash Discounts, Medicaid and Bad Debts

Contractual allowances, which generally consist of rebates or administrative fees, are offered to certain wholesale customers, GPOs and end-user customers consistent with pharmaceutical industry practices. Settlement of rebates and fees due to customers generally occurs between one to fifteen (15) months from the date of sale. We establish an estimated reserve for contractual allowances at the time of sale based on the historical relationship between sales and such allowances. Upon receipt of request for credit, we establish a specific liability for the fees or rebates due to the customer based on the specific terms of each agreement by adjusting our original estimate. Contractual allowances are reflected in the consolidated financial statements as a reduction of revenue and as a current accrued liability.

We establish a reserve for bad debts based on general and identified customer credit exposure. Our actual losses due to bad debts were less than $0.2 million in each of 2010, 2009 and 2008.

Activity in the reserve for other sales provisions for the periods included in the consolidated financial statements was as follows:


	Year Ended December 31,
	2010			2009			2008
	(in thousands)
Balance at beginning of period	$	44,436		$	33,206		$	24,554
Provisions		151,280			136,907			99,856
Credits or checks issued to third parties		(146,068	)		(125,677	)		(91,204	)

Balance at end of period	$	49,648		$	44,436		$	33,206

For the period ended December 31, 2008, our other sales provisions totaled $56.7 million in the successor period and $43.1 million in the predecessor period (a total of $99.8 million in 2008). The balance of this reserve account was not impacted by purchase accounting.

Shipping and Handling Fees and Costs

Shipping and handling fees billed to customers are recognized in revenues. Other shipping and handling costs are included in cost of sales.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated financial statements in the period that includes the legislative enactment date.

Deferred tax assets are evaluated for recoverability at each reporting date. A valuation allowance is established for deferred tax assets that are not considered more likely than not to be recoverable based on our expectation of future taxable income.

Our company is subject to tax audits in the numerous jurisdictions in which we operate. In the normal course of business, we are subject to challenges from the IRS and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The benefits of tax positions that are judged to be more likely than not of being sustained upon audit based on the technical merits of the tax position are recognized in the consolidated financial statements; positions that do not meet this threshold are not recognized. For tax positions that are at least more likely than not of being sustained upon audit, the largest amount of the benefit that is more likely than not of being sustained is recognized in the consolidated financial statements.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is also required in assessing the timing and amounts of deductible and taxable items, establishing reserves for uncertain tax positions and evaluating the recoverability of deferred tax assets.

Research and Development Costs

Research and development costs are expensed as incurred or as assets are consumed and consist of costs related to pre-production manufacturing scale-up activities and related salaries and other personnel-related expenses, operating costs of equipment and facilities, depreciation, raw material and production costs and professional services.

Equity-Based Compensation

Prior to the Merger and subsequent plan termination, our Predecessor accounted for the recognition of compensation cost for all share-based payments (including employee stock options) at fair value. Effective January 1, 2006, our Predecessor used a modified version of retrospective application to determine the fair value of stock options. As a result, stock-based employee compensation for options was recorded as an expense based on the fair value method and using the straight-line attribution method to recognize share-based compensation expense over the vesting period of the award.

To determine stock-based compensation, our Predecessor used the Black-Scholes option pricing model to estimate the fair value of options granted under share-based compensation plans. The Black-Scholes option pricing model requires us to estimate a variety of factors, including the applicable risk-free rate, the expected term of the option, the volatility of the common stock and the forfeiture rate. Compensation expense related to awards of restricted stock units is based upon the market price on the date of grant of the shares for which vested units may be exchanged.

Following the Merger, we terminated our stock-based compensation programs.

Fair Value of Financial Instruments

Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, borrowings under our credit facility, intercompany loans and currency and interest rate swap agreements, and our outstanding contingent value rights. Cash equivalents are stated at cost which approximates fair value. At December 31, 2010 and 2009, the carrying amounts of other items comprising current assets and current liabilities approximate fair value due to the short-term nature of these financial instruments. The interest rates on borrowings under the bank credit facility and intercompany loan agreements are revised periodically to reflect changes in market interest rates; as such, the carrying amounts of these obligations approximate fair value. Our currency and interest rate swap agreements and our outstanding contingent value rights are reflected in the accompanying consolidated financial statements at fair value.

Foreign Currency Translation

Local currencies are considered the functional currencies for the Company’s operations outside the United States. Assets and liabilities of foreign operations are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date with the related translation adjustments reported in stockholder’s equity as a component of accumulated other comprehensive income (loss).

Revenues and expenses are translated into U.S. dollars at average monthly exchange rates prevailing during the year. Foreign currency transaction gains and losses related to assets and liabilities that are denominated in a currency other than the functional currency are reported in the consolidated statements of operations in the period they occur.

Derivative Instruments and Hedging Activities

The Company records all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivative instruments are included in operations or deferred in accumulated other comprehensive income (loss), depending on whether a derivative is designated as, and is effective as, a hedge and on the type of hedging transaction. Changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive income (loss) until the underlying hedged transactions are recognized in operations, at which time any deferred hedging gains or losses are also recorded in operations. If a derivative instrument is designated as a fair value hedge, changes in the fair value of the instrument are reported in interest income and other, net in the consolidated statements of operations, and offset the change in fair value of the hedged assets, liabilities or firm commitments. The ineffective portion of an instrument’s change in fair value is immediately recognized in interest income and other, net. Instruments that do not meet the criteria for hedge accounting or for which the Company has not elected hedge accounting are marked to fair value each period with unrealized gains or losses reported in interest income and other, net.

RECENT ACCOUNTING PRONOUNCEMENTS

3. Merger with APP

On September 10, 2008, FKP Holdings completed the Merger, following which APP became a wholly-owned subsidiary of FKP Holdings. The results of APP’s operations have been included in the consolidated financial statements of FKP Holdings since September 10, 2008. APP is a fully-integrated pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products with a primary focus on the oncology, anti-infective, anesthetic/analgesic and critical care markets. APP manufactures a comprehensive range of dosage formulations, and its products are used in hospitals, long-term care facilities, alternate care sites and clinics within North America. The Merger is an important step in Fresenius’ growth strategy. Through the merger with APP, Fresenius gained entry to the U.S. pharmaceuticals market and achieved a leading position in the global I.V. generics industry. The North American platform also provides further growth opportunities for Fresenius’ existing product portfolio.

Effective with the Merger, each outstanding share of common stock of APP and certain stock options and restricted stock units of APP were converted into the right to receive $23.00 in cash, without interest, and one CVR issued by FKP Holdings and representing the right to receive a cash payment, without interest, of up to $6.00 determined in accordance with the terms of the CVR Agreement. The aggregate consideration paid in the Merger was $4,908.1 million (including assumed APP debt), comprised as follows (in millions):


Purchase of outstanding common stock (cash portion)	$	3,702.7
Buy-out of restricted stock units and stock options under stock compensation plans		27.7
Estimated fair value of CVRs		158.4
Direct acquisition costs		21.8

Fair value of consideration paid		3,910.6
Assumption of APP debt		997.5

Total aggregate consideration	$	4,908.1

The CVRs were issued on the acquisition date and are traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol “APCVZ.” The fair value of the CVRs at the date of the acquisition was estimated based on the average of their closing prices for the five trading days following the acquisition. Direct costs of the acquisition include investment banking fees, legal and accounting fees and other external costs directly related to the acquisition.

As the APP acquisition occurred prior to December 15, 2008, the acquisition was accounted for under the purchase method of accounting with the Company treated as the acquiring entity in accordance with the transition guidance in ASC 805-10-65. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is non-amortizing for financial statement purposes and is not tax deductible.

The following summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Net working capital and other assets	$	323.1
Property, plant and equipment		108.8
In-process research and development		365.7
Identifiable intangible assets		542.0
Deferred tax liability, net		(93.7	)
Long-term debt		(997.5	)
Goodwill		3,662.2

Total	$	3,910.6

The changes in goodwill from December 31, 2009 to December 31, 2010 are primarily due to filing of tax returns covering the acquisition period.

In September of 2009, the Board of Directors of FKP Holdings formally approved management’s plan to close the Barceloneta, Puerto Rico manufacturing facility and transfer production operations to existing Company plants in the United States. The closure was completed in the fourth quarter of 2010. The Company acquired the Barceloneta, Puerto Rico manufacturing facility in connection with the September 2008 acquisition of APP. Various plans to lower the Company’s overall manufacturing costs, including the closure of the Puerto Rico manufacturing facility along with the transfer of its production operations to existing Company plants in the United States, have been under consideration since the date of the acquisition and, accordingly, the decision to close this facility resulted in various adjustments to the estimated amounts assigned to certain assets acquired, liabilities assumed and residual goodwill in connection with the APP acquisition based on market valuations of the related assets and liabilities.

Because the Company continued to operate the Puerto Rico facility subsequent to the acquisition date, a portion of the adjustment to the carrying value of property and equipment (approximately $5.4 million) and the anticipated tax benefit (approximately $7.9 million) have been reflected in the consolidated statement of operations for the period ended December 31, 2009.

Approximately $365.7 million of the purchase price represents the estimated fair value of acquired in-process research and development (R&D) projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the 2008 successor period. The value assigned to the acquired in-process R&D was determined by project using a discounted cash flow model. The discount rates used take into consideration the stage of completion and the risks surrounding the successful development and commercialization of each of the acquired in-process R&D projects that were valued.

Identifiable intangible assets consist of developed product technology and are amortized using the straight-line method over the estimated useful life of the assets of 20 years. Refer to Note 7 to the consolidated financial statements – Goodwill and Other Intangibles.

4. Contingent Value Rights (CVR)

The CVRs do not represent equity, or voting securities of FKP Holdings, and they do not represent ownership interests in FKP Holdings. Holders of the CVRs are not entitled to any rights of a stockholder or other equity or voting securities of FKP Holdings, either at law or in equity. Similarly, holders of CVRs are not entitled to any dividends declared or paid with respect to any equity security of FK Holdings. A holder of a CVR is entitled only to those rights set forth in the CVR Indenture. Additionally, the right to receive amounts payable under the CVRs, if any, is subordinated to all senior obligations of FKP Holdings. The CVRs trade on NASDAQ under the symbol “APCVZ”.

Because an amount payable to the holders of CVRs must be settled in cash, the CVRs are classified as liabilities in the accompanying consolidated financial statements. The estimated fair value of the CVRs at the date of acquisition was included in the cost of the acquisition. The CVRs are recorded at fair value each reporting date in accordance with ASC 820 (Fair Value Measurements and Disclosures) based on the closing price of a CVR as reported by NASDAQ, and is not reflective of any payment required per the terms of the CVR Indenture. The change in the fair value of the CVRs for the reporting period is included in the statements of operations. At December 31, 2010 and 2009, the carrying value of the CVR liability was approximately $6.7 million and $49.0 million, respectively.

5. Adjusted EBITDA Calculation for Contingent Value Rights

Under the terms of the CVR Indenture, the amount, if any, payable in respect of each CVR on June 30, 2011 is determined based on Adjusted EBITDA. As a result, in addition to reporting financial results in accordance with generally accepted accounting principles, FKP Holdings also must calculate and present Adjusted EBITDA, which is a non-GAAP financial measure, for the cumulative period from January 1, 2008 to the current reporting date until the expiration of the CVR measurement period (December 31, 2010) and settlement of the CVRs.

Under the CVR Indenture, Adjusted EBITDA is measured without taking into account the Merger and assuming that APP would have remained a stand-alone company with its existing assets; it also excludes (i) costs, expenses, and revenue from sales outside the U.S. and Canada, and (ii) costs, expenses and revenue for sales of product not currently under development by APP at the time of the Merger.

Adjusted EBITDA, as defined in the CVR Indenture, consists of consolidated net income determined in accordance with U.S. GAAP plus:

•

interest expense, the provision for income taxes, and depreciation and amortization;

•

non-cash charges or losses resulting from (i) the sale or other disposal of assets; (ii) impairment charges or asset write-offs related to intangible assets, long-lived assets, and investments in debt and equity securities; (iii) losses from investments recorded using the equity method; and (iv) non-cash expenses relating to the vesting of warrants;

•

any extraordinary, unusual or non-recurring expenses or losses related to FKP Holdings’ acquisition of APP, and expenses (not to exceed $1 million in the aggregate) arising out of the spin-off of Abraxis BioScience from APP to APP’s stockholders on November 13, 2007;

•

any costs and expenses incurred in connection with any management equity plan;

•

any non-cash increase in expenses resulting from the revaluation of inventory, non-cash charges due to any change in accounting policy, or increased expenses due to purchase accounting associated with the Merger, including the issuance of the CVRs;

•

expenses with respect to liability or casualty events or business interruption only to the extent of any reasonably anticipated insurance recovery, and only to the extent that such recovery has not already been recorded in consolidated net income;

•

certain research and development expenses relating to the build-out of facilities and costs incurred to transfer production to or start-up any facilities not to exceed $35.9 million;

•

any deductions attributable to minority interests; and

•

any expenses or losses arising out of the consulting agreement among FKP Holdings, Dr. Soon-Shiong and Fresenius.

And less:

•

extraordinary and unusual or non-recurring cash gains;

•

non-cash gains;

•

gains on sales of fixed assets;

•

any net after-tax income from the early extinguishment of indebtedness or hedging obligations or other derivative instruments; and

•

all one-time gains from investments recorded using the equity method.

6. Goodwill and Other Intangibles

As of December 31, 2010 and 2009, goodwill had a carrying value of $ 3,662.2 million and $3,664.4 million, respectively. All of our intangible assets, other than goodwill, are subject to amortization. Changes in goodwill from December 31, 2009 to December 31, 2010 are primarily due to filing of tax returns covering the acquisition period.

The following table reflects the components of identifiable intangible assets, all of which have finite lives, as of December 31, 2010 and 2009:


	December 31, 2010				December 31, 2009				Category Amortization Period
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Category Amortization Period
	(in thousands)				(in thousands)
Developed product technology	$	489,000	$	56,378	$	489,000	$	31,928		20 years
Product rights		2,400		138		2,300		87		10 years
Patents		6,847		1,877		6,847		553		5 years
Contracts and other		43,500		19,932		45,500		11,641		5 years
Customer relationships		12,000		9,223		12,000		5,223		3 years

Total	$	553,747	$	87,548	$	555,647	$	49,432

We amortize all of our identifiable intangible assets with finite lives over their expected period of benefit using the straight-line method. In determining the appropriate amortization period and method for developed product technology, we considered, among other things, the nature of the products, the anticipated timing of cash flows and the relatively high barriers to entry for competition due to the complex development and manufacturing processes. In addition, the products all share in similar attributes in that they have a favorable risk profile (e.g., minimal side effects, adverse experiences, etc.) and are easy to administer to patients. Based on the risk profile and ease of use of the related products, we do not expect that new competing products will enter the market in the foreseeable future, and that the barriers to entry will help to protect the market positions of the products and preserve their useful lives. We have manufactured and sold many of our products for more than 20 years. Accordingly, as future cash flows with respect to these and our other products are expected to exceed 20 years, we have utilized the straight-line amortization method and a 20-year expected period of benefit. However, we cannot predict with certainty whether new competing products will enter the market, the timing of such competition or the Company’s ability to protect the market positions of its products and preserve their useful lives. In the event that we experience stronger or more rapid competition or other conditions that change the market positions of our products, we may need to accelerate the amortization of our developed product technology intangibles or recognize an impairment charge.

During the year ended December 31, 2010 the Company recognized $1.4 million of impairment in contracts and other intangible assets related to the inability to obtain FDA approval for certain products. For the year ended December 31, 2009 and the period from July 2, 2008 through December 31, 2008 (successor period) and the period from January 1 through September 9, 2008 (predecessor period) no impairments related to intangible assets was recognized.

The Company follows the policy of capitalizing patent defense costs when it determines that such costs are recoverable from future product sales and a successful defense is probable. These costs are amortized over the remaining useful life of the patent. Patent defense costs are expensed as incurred until the criteria for capitalization are met, previously capitalized costs are written-off when it is determined that the likelihood of success is no longer considered probable.

Amortization expense on intangible assets attributable to operations for the years ended December 31, 2010 and 2009 was $38.7 million and $38.1 million, respectively. Amortization expense for the period from July 2, 2008 through December 31, 2008 (successor period) was $11.2 million and for the period from January 1 through September 9, 2008 (predecessor period) was $10.3 million, (a total of $21.5 million in 2008). At December 31, 2010, the weighted average expected life of intangibles was approximately 16.7 years. Total estimated amortization expense for our finite-lived intangible assets for the next five years is as follows:


	Estimated Amortization
	(in thousands)
2011	$	37,294
2012		34,517
2013		32,009
2014		25,494
2015		24,500

7. Acquisition of Assets

On November 13, 2009 the Company finalized an Asset Purchase Agreement with Catalent Pharma Solutions, LLC to acquire its Raleigh, North Carolina manufacturing facility as well as related production equipment and certain raw materials for $10.7 million. The acquisition was accounted for using the purchase method of accounting and no goodwill or intangible assets were recognized.

8. Long-Term Debt and Credit Facility

A summary of our external and intercompany debt (in thousands) is as follows:


	December 31, 2010			December 31, 2009
External debt
Senior Credit Facilities, with interest at variable rates based on LIBOR plus a margin. Term loan B2 and C2 are subject to a minimum rate
Term loan A2, due in semi-annual installments through September 10, 2013	$	391,000		$	462,500
Term loan B2, due in equal semi-annual installments with a final balloon payment on September 10, 2014		—			458,944
Term loan C2, due in equal semi-annual installments beginning June 10, 2010, with a final balloon payment on September 10, 2014		404,219			—
Target revolving credit facility loan, due at expiration of the facility on September 10, 2013		—			—

Total external debt		795,219			921,444
Current maturities of external debt		(127,475	)		(76,475	)

Long-term external debt	$	667,744		$	844,969

Internal debt
Intercompany Credit Facilities
Short-term unsecured intercompany loans payable to Fresenius Kabi AG, due in 30 to 60 days from date of issue, with interest at fixed rates	$	309,000		$	360,000
Secured senior intercompany loans payable to a financing subsidiary of Fresenius SE & Co. KGaA & CO. KGaA, with interest at variable rates based on LIBOR or EURIBOR plus a margin. Term loan B1 and C1 are subject to a minimum rate
Term loan A1, due in semi-annual installments through September 10, 2013		391,000			462,500
Term loan B1, due in equal semi-annual installments with a final balloon payment on September 10, 2014		—			657,742
Term loan C1, due in equal semi-annual installments with a final balloon payment on September 10, 2014		579,313			—
Euro currency term loan B1 (€195.5 million), due in equal semi-annual installments with a final balloon payment on September 10, 2014		—			265,791
Euro currency term loan C1 (€162.5 million), due in equal semi-annual installments with a final balloon payment on September 10, 2014		217,133			—
Unsecured intercompany loans payable to a financing subsidiary of Fresenius SE & Co. KGaA, due July 15, 2015, with interest at fixed rates
US dollar denominated		500,000			500,000
Euro currency denominated (€115.7 million)		154,589			166,668


	December 31, 2010			December 31, 2009
Unsecured intercompany loans payable to Fresenius Kabi AG, due September 10, 2014, with interest at fixed rates
US dollar denominated		722,826			722,826
Euro currency denominated loans payable (€33.0 million as of December 31, 2010 and €13 million as of December 31, 2009)		44,095			18,728

Total intercompany debt		2,917,956			3,033,204
Current maturities of intercompany debt		(441,302	)		(441,511	)

Long-term intercompany debt	$	2,476,654		$	2,591,693

Fresenius Merger – Credit Agreements

Post-Merger Activity

Subsequent to the period ended September 30, 2010, the Company replaced the outstanding target revolver with fixed rate unsecured intercompany notes with Fresenius Kabi AG which mature monthly.

There was no amount outstanding under the target revolver at December 31, 2010 and 2009. The following is the repayment schedule for Term Loans A2 and C2, the target revolver balance and the intercompany loans outstanding as of December 31, 2010 (in thousands):


	Term Loan A2		Term Loan C2		Target Revolver		Intercompany Fresenius		Total
2011	$	122,500	$	4,975	$	—	$	441,302	$	568,777
2012		150,000		4,975		—		159,802		314,777
2013		118,500		4,975		—		128,303		251,778
2014		—		389,294		—		1,533,958		1,923,252
2015		—		—		—		654,589		654,589

	$	391,000	$	404,219	$	—	$	2,917,953	$	3,713,173

9. Derivatives

Foreign Currency Contracts: Included in our intercompany borrowings are several Euro-denominated notes, including €195.5 million notes with a maturity in 2014 and a €115.7 million note with a maturity in 2015. In connection with these borrowings, we entered into intercompany foreign currency swap contracts in order to limit our exposure to changes in current exchange rates on the Euro-denominated notes principal balance. We have entered into foreign currency swaps with affiliates of Fresenius for the total of the Euro-denominated notes principal balance. These agreements mature at various dates through January 2012, and are not designated as hedging instruments for accounting purposes. During the year ended December 31, 2010, 2009 and the successor period in 2008, we recognized a foreign currency (loss)/gain of approximately ($31.9) million, $30.1 million and $4.0 million, respectively, in our other income (expense) related to the change in fair value of these swap agreements. These foreign currency (losses)/gains were offset by $32.6 million, ($26.2) million and ($8.2) million in currency gains/(losses) we recorded in 2010, 2009 and in the successor period in 2008, in order to adjust the carrying value of the Euro-denominated notes to reflect the year-end exchange rate.

Interest Rate Swaps: On November 3, 2008, we entered into four interest rate swap agreements with Fresenius for an aggregate notional principal amount of $900 million (the “2008” interest rate swaps”). These agreements require us to pay interest at an average fixed rate of 3.97% and entitle us to receive interest at a variable rate equal to three-month LIBOR, which is equal to the benchmark for the term A Loans being hedged, on the notional amount. The 2008 interest rate swaps expire in October 2011 and December 2013. During the third quarter of 2010, we entered into six additional interest rate swap agreements with Fresenius for an aggregate principal amount of $600 million (the “2010 interest rate swaps”). These swap agreements require us to pay interest at an average fixed rate of 2.16% and entitle us to receive interest at a variable rate equal to three-month LIBOR, subject to a minimum LIBOR, which is equal to the benchmark rate for the Term C Loan being hedged, on the notional amount. The 2010 interest rate swaps expire on September 10, 2014 and all interest rate swaps have been designated as hedges of our exposure to fluctuations in interest payments on outstanding variable rate borrowings due to changes in interest rates (a cash flow hedge).

The fair value of these interest rate swap agreements at December 31, 2010 and 2009 was a liability of $58.0 million and $53.2 million, respectively, and is included in long-term liabilities in our consolidated balance sheets. As noted, above the Company entered into the 2008 interest rate swaps with its Parent, who pushed down the interest rate swap agreements to the Company. From inception of the agreements to the time the 2008 interest rate swaps were transferred to the Company the Parent recognized $15.9 million in losses in other comprehensive income (loss). From the time the 2008 interest rate swap agreements were transferred to the Company through December 31, 2010, we recorded a deferred loss of $25.7 million, net of tax benefit of $16.4 million, in other comprehensive income (loss) and recognized $0.2 million in intercompany interest expense, which represented the amount of hedge ineffectiveness.

The fair value amounts in our consolidated balance sheet at December 31, 2010 and 2009, related to foreign currency forward and interest rate swap contracts were as follows:


	Asset Derivatives			Liability Derivatives
December 31, 2010 (In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign currency forward contracts-Interest (current)	Prepaid expense and other current assets	$	0.5	Other accrued expenses	$	0.6
Foreign currency forward contracts-Interest (non-current)	Other non-current assets, net		0.2	Other non-current liabilities		—
Foreign currency forward contracts-inventory (current)	Prepaid expense and other current assets		1.6	Other accrued expenses		—
Interest rate swap contracts (non-current)	Other non-current assets, net		—	Fair value of interest rate swaps with Parent and affiliates		58.0

Total		$	2.3		$	58.6


	Asset Derivatives			Liability Derivatives
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Foreign currency forward contracts (current)	Prepaid expense and other current assets	$	0.3	Other accrued expenses	$	1.8
Foreign currency forward contracts-inventory (current)	Prepaid expense and other current assets		—	Other accrued expenses		0.5
Foreign currency forward contracts (non-current)	Other non-current assets, net		5.7	Other non-current liabilities		1.3

Total		$	6.0		$	3.6


	Asset Derivatives			Liability Derivatives
December 31, 2009 (In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign currency forward contracts-Interest (current)	Prepaid expense and other current assets	$	2.7	Other accrued expenses	$	—
Foreign currency forward contracts-Interest (non-current)	Other non-current assets, net		2.3	Other non-current liabilities		—
Interest rate swap contracts (non-current)	Other non-current assets, net		—	Fair value of interest rate swaps with Parent and affiliates		53.2

Total		$	5.0		$	53.2


	Asset Derivatives			Liability Derivatives
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Foreign currency forward contracts (current)	Prepaid expense and other current assets	$	8.6	Other accrued expenses	$	—
Foreign currency forward contracts (non-current)	Other non-current assets, net		25.6	Other non-current liabilities		—

Total		$	34.2		$	—

The pretax derivative gains and losses in our consolidated statement of operations for the years ended December 31, 2010 and 2009 and the successor period in 2008, related to our foreign currency forward and interest rate swap contracts were as follows:

December 31, 2010


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative			Gain (Loss) on Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Income					Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
(In millions)	Amount			Location		Amount			Location		Amount
Foreign currency forward contracts-Interest	$	(4.9	)		Interest income and other, net	$	—			Interest income and other, net	$	—
Foreign currency forward contracts-Inventory		1.6			Cost of Sales		1.0			Cost of Sales		—
Interest rate swap contracts		(8.3	)		Interest income and other, net		(2.8	)		Interest income and other, net		0.7

Total	$	11.6				$	(1.8	)			$	0.7


Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Foreign currency forward contracts	Interest income and other, net	$	(31.9	)

December 31, 2009


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative		Gain (Loss) on Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Income				Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
(In millions)	Amount		Location		Amount		Location		Amount
Foreign currency forward contracts-Interest	$	5.0		Interest income and other, net	$	—		Interest income and other, net	$	—
Interest rate swap contracts		16.3		Interest income and other, net		—		Interest income and other, net		(0.2	)

Total	$	21.3			$	—			$	(0.2	)


Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Foreign currency forward contracts	Interest income and other, net	$	30.1

December 31, 2008


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative			Gain (Loss) on Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Income				Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
(In millions)	Amount			Location		Amount		Location		Amount
Foreign currency forward contracts-Interest	$	—			Interest income and other, net	$	—		Interest income and other, net	$	—
Interest rate swap contracts		(52.6	)		Interest income and other, net		—		Interest income and other, net		(0.8	)

Total	$	(52.6	)			$	—			$	(0.8	)


Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Foreign currency forward contracts	Interest income and other, net	$	4.0

10. Fair Value Measurements

Accounting guidance on fair value measurements sets a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value for certain financial assets and liabilities. The basis of the fair value measurement is categorized in three levels, in order of priority, as described below:


Level 1:		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:		Quoted prices in markets that are not active, or financial instruments for which all significant inputs are observable either directly or indirectly.

Level 3:		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable thus reflecting assumptions about the market participants.

In valuing assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculated the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable instruments. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

The following table sets forth the Company’s financial assets and liabilities as of December 31, 2010 that are measured at fair value on a recurring basis, segregated by level within the fair value hierarchy:


			Basis of Fair Value Measurement (in thousands)
	Balance at December 31, 2010		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets – fair value of foreign currency swaps	$	8,272	$	—	$	8,272	$	—

Liabilities:
Contingent value rights	$	6,693	$	6,693	$	—	$	—
Fair value of foreign currency swaps		4,142		—		4,142		—
Fair value of interest rate swaps		58,031		—		58,031		—

Total liabilities	$	68,866	$	6,693	$	62,173	$	—

11. Related Party Transactions

Related party balances and transactions as of December 31, 2010 and 2009, and for the periods ended December 31, 2010 and 2009 and the successor period in 2008, pertain to balances and transactions with Fresenius and its direct and indirectly owned subsidiaries. Related party activities for the predecessor period pertain to balances and transactions with New Abraxis. Below is a discussion of these transactions.

Transactions with Fresenius

In connection with the Merger and associated financing transactions, FKP Holdings and its subsidiaries entered into a number of intercompany loan agreements with subsidiaries of Fresenius, the Company’s parent, as described in Note 8 to the consolidated financial statements – Long-Term Debt and Credit Facility. At December 31, 2010 and December 31, 2009, the principal amount outstanding under these loans was $2,918.0 million and $3,033.2 million, respectively. Interest expense recognized on these intercompany loans for the years ended December 31, 2010 and 2009 and the successor period in 2008, was $218.8 million, $249.0 million and $66.7 million, respectively. Accrued interest of $45.0 million and $47.1 million was due on these intercompany loans at December 31, 2010 and 2009, respectively.

The Company has recorded payables related to inventory purchases from Fresenius subsidiaries of $13.1 million and $9.9 million as of December 31, 2010 and 2009, respectively. Related intercompany charges included in cost of goods sold were $78.4 million and $28.5 million for the twelve months ended December 31, 2010 and 2009, respectively.

In December 2008, the Company entered into a $2.5 million, 5 year licensing agreement with a subsidiary of Fresenius related to certain oncology products. The capitalized product rights are included in intangible assets.

On December 29, 2008, FKP Holdings received two short-term notes totaling $33.8 million ($26.1 million and $7.7 million, respectively) from Fresenius in exchange for a short-term cash deposit. The $26.1 million and $7.7 million notes receivable became due and payable on January 2, 2009 and January 8, 2009, respectively. The interest rates on the notes receivable were 2.1% and 1.0% respectively, and were set based on the lender country’s LIBOR rate plus 0.5%. These two loans were repaid at maturity.

Transactions with New Abraxis

In connection with the November 13, 2007 separation, APP entered into a number of agreements that govern its relationship with New Abraxis for a period of time after the separation. These agreements were entered into while New Abraxis was still a wholly owned subsidiary of Old Abraxis. These agreements include (i) a tax allocation agreement, (ii) a dual officer agreement, (iii) an employee matters agreement, (iv) a transition services agreement, (v) a manufacturing agreement, and (vi) various real estate leases. New Abraxis ceased to be a related party as of September 10, 2008, the Merger date with Fresenius. The following is a description of these agreements to the extent not terminated prior to the date hereof.

Tax Allocation Agreement

The tax allocation agreement allocates the liability for taxes. Under the tax allocation agreement, APP is responsible for and has agreed to indemnify New Abraxis against all tax liabilities to the extent they relate to APP’s hospital-based products business, and New Abraxis is responsible for and has agreed to indemnify APP against all tax liabilities to the extent they relate to New Abraxis’ proprietary products business. The tax allocation agreement also provides the extent to which, and the circumstances under which, the parties would be liable if the distribution were not to constitute a tax-free distribution under Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code. In general, New Abraxis would be required to indemnify APP for any taxes resulting from a failure of the distribution to so qualify, unless such failure results solely from APP’s specified acts.

Manufacturing Agreement

APP entered into a manufacturing agreement with New Abraxis, through its wholly-owned subsidiary, APP Pharmaceuticals, LLC (“New APP LLC”), for the manufacture of Abraxane^® and certain of New Abraxis’ pipeline products by New APP LLC at APP’s Melrose Park and Grand Island manufacturing facilities. Under the terms of the manufacturing agreement, New Abraxis will perform certain manufacturing activities with respect to Abraxane^® or other pipeline products, principally related to the formulation and compounding of the active pharmaceutical ingredients in such products, and New APP LLC will undertake the remainder of the manufacturing processes. As part of the manufacturing services, New APP LLC will also provide New Abraxis with training related to proper manufacturing practices and other related training, assistance with quality assurance and control and information technology support related to manufacturing operations. With regard to the Melrose Park and Grand Island facilities, New APP LLC will be responsible for obtaining and maintaining necessary approvals to manufacture Abraxane^® or other pipeline products in compliance with the regulatory requirements applicable to the jurisdictions in which such products are sold, subject to the right to receive reimbursement from New Abraxis for the costs of such approvals in certain circumstances. New Abraxis will be responsible for obtaining and maintaining the remainder of the regulatory approvals required to sell and distribute Abraxane^® both in the United States and in other jurisdictions, and New Abraxis will be responsible for the final release of the product for sale at the completion of the manufacturing process.

In the manufacturing agreement, New APP LLC agreed with New Abraxis to cap the manufacturing growth of Abraxane^® and other pipeline products that New APP LLC is required to manufacture under the agreement over the term of the agreement. Further, in the event of capacity constraints at the Melrose Park or Grand Island facilities, the manufacturing agreement provides that the available capacity will be prorated between New Abraxis and New APP LLC according to the parties’ then current use of New APP LLC’s manufacturing capacity. While the manufacturing agreement allows New Abraxis to override these proration provisions, New Abraxis may only do so by paying New APP LLC additional fees under the manufacturing agreement. The fee New Abraxis would be required to pay New APP LLC to override the proration provisions of the manufacturing agreement is equal to the profit lost by New APP LLC as a result of New Abraxis’ election to override the proration provisions.

New Abraxis will pay New APP LLC a customary margin on its manufacturing costs. In addition, during each of the first three years of the manufacturing agreement, New Abraxis will pay New APP LLC a facility management fee equal to $3 million. The amount of this fee may be offset to the extent New APP employees are transferred to New Abraxis; such offset would be based upon the amount of compensation paid to such transferred employees. The term of the manufacturing agreement will end on December 31, 2011, which will be automatically extended for one year if either New APP LLC exercises its right to extend the lease on New Abraxis’ Melrose Park manufacturing facility for an additional year or New Abraxis exercises its right to extend the lease for New APP LLC’s Grand Island manufacturing facility for an additional year. (See “—Real Estate Leases” below).

The manufacturing agreement includes customary confidentiality provisions pursuant to which New Abraxis and New APP LLC will keep confidential all confidential information of the other party, subject to certain exceptions.

In addition, the manufacturing agreement contains the following indemnification provisions. New Abraxis will indemnify New APP LLC, its affiliates and its officers, directors, employees and agents (which are referred to as the “APP indemnified parties”) from any damages incurred by or assessed against them resulting from a third-party claim caused by or alleged to be caused by (i) New Abraxis’ failure to perform its obligations under the manufacturing agreement; (ii) any product liability claim arising from the

negligence, fraud or intentional misconduct of New Abraxis or any of its affiliates or any product liability claim arising from its manufacturing obligations (or any failure or deficiency in New Abraxis’ manufacturing obligations) under the manufacturing agreement; (iii) any claim that the manufacture, use or sale of Abraxane^® or New Abraxis pipeline products infringes a patent or any other proprietary right of a third party; or (iv) any recall, product liability claim or other third-party claim not arising from the gross negligence or bad faith of, or intentional misconduct or intentional breach of the manufacturing agreement by, the APP indemnified parties. New Abraxis will also indemnify the APP indemnified parties for liabilities that they become subject to as a result of their activities under the manufacturing agreement and for which they are not responsible under the terms of the manufacturing agreement. New APP LLC will indemnify New Abraxis, and its affiliates, and their respective officers, directors, employees and agents from any damages incurred or assessed against them resulting from a third-party claim caused by or alleged to be caused by (i) New APP LLC’s gross negligence, bad faith, intentional misconduct or intentional failure to perform its obligations under the manufacturing agreement; and (ii) any product liability claim arising from the gross negligence or bad faith of, or intentional misconduct or intentional breach of the manufacturing agreement by, New APP LLC or its affiliates. The APP indemnified parties will not have any liability for monetary damages to New Abraxis or its affiliates or third parties in connection with the manufacturing agreement for damages in excess of $100 million in the aggregate, except to the extent that the damages are the result of (i) one of New APP LLC’s executive officers in bad faith affirmatively instructing their employees to intentionally breach New APP LLC’s obligation to manufacture Abraxane^® or pipeline products under the manufacturing agreement or (ii) any intentional failure by New APP LLC, in bad faith, to cure any material breach of its obligation to manufacture Abraxane^® or pipeline products under the manufacturing agreement following notice of this breach.

Real Estate Leases

Following the distribution, New Abraxis owns the manufacturing facility located on Ruby Street, Melrose Park, Illinois, and the research and development and the warehouse facility, both located in the same building on N. Cornell Avenue, Melrose Park, Illinois. APP owns the manufacturing facility located in Grand Island, New York. Following the distribution, the parties entered into a series of lease agreements to facilitate continued production of their respective pharmaceutical products while a manufacturing transition plan is being implemented. Under the terms of the lease agreements, New Abraxis leases the Ruby Street facility, consisting of approximately 122,000 square feet of office, warehouse and pharmaceutical manufacturing space, to APP. The initial term of the lease expires on December 31, 2011 and may be renewed at New Abraxis’ option for one additional year if APP is manufacturing a certain level of its products at the Ruby Street facility in the period prior to the expiration of the lease. During the term of the lease, New Abraxis will have access to the Ruby Street facility to perform certain elements of the manufacturing processes of Abraxane^® and other nab™ technology product candidates under the manufacturing agreement as well as, under certain circumstances, to provide contract manufacturing services to third parties. See “Manufacturing Agreement” above. In order to provide sufficient warehouse space to APP during the term of the Ruby Street lease, New Abraxis also leased the Cornell Warehouse facility, consisting of approximately 71,000 square feet of warehouse space, to APP. The initial term of the lease runs until December 31, 2011, and may be renewed at APP’s option for one additional year if the lease for the Ruby Street manufacturing facility is extended. New Abraxis also leased the Cornell R&D facility, consisting of approximately 48,000 square feet of research and development space, to APP. The initial term of the lease runs until December 31, 2010 and may be terminated upon twelve months written notice from and after January 1, 2009. This lease has no option to extend the term of the lease.

New Abraxis leased a portion of APP’s Grand Island facility, consisting of approximately 5,700 square feet of pharmaceutical manufacturing space, to allow New Abraxis to perform its obligations under the manufacturing agreement. The initial term of the lease runs until December 31, 2011, and may be renewed at New Abraxis’ option for one additional year if New Abraxis has not received regulatory approvals from the European Medicines Agency (or “EMEA”), the European equivalent to the FDA, to manufacture Abraxane^® in at least two facilities (not including our Grand Island facility) by June 30, 2011.

Related party transactions relating to these agreements during the predecessor period are summarized in the following table:


	Predecessor January 1 through September 9, 2008
Transition service income	$	275
Facility management fees		2,075
Net rental expense		(1,912	)
Margins on the manufacture and distribution of Abraxane^®		1,490

12. Accrued Liabilities

Accrued liabilities consisted of the following at December 31, 2010 and December 31, 2009:


	December 31, 2010		December 31, 2009
	(in thousands)
Sales and marketing	$	37,520	$	28,099
Payroll and employee benefits		11,672		17,935
Legal and insurance		2,056		2,252
Accrued interest		5,624		7,600
Other		2,219		1,434

	$	59,091	$	57,320

13. Leases and Commitments

We have entered into various operating lease agreements for warehouses, office space, automobiles, communications equipment, information technology equipment and software, and office equipment. Rental expense amounted to $7.1 million in 2010, $5.9 million in 2009, $1.8 million in the successor period and $4.0 million in the predecessor period in 2008 (total of $5.8 million in 2008). Rental expense is recognized on a straight-line basis.

As of December 31, 2010, total future annual minimum lease payments related to non-cancelable operating leases, are as follows:


Year	Total Amount
	(in thousands)
2011	$	7,236
2012		3,559
2013		2,873
2014		2,551
2015		2,028
2016 and thereafter		7,646

	$	25,893

14. Employee Benefit Plan

APP sponsors a 401(k) defined-contribution plan, or 401(k) Plan, covering substantially all eligible employees. Employee contributions to the 401(k) Plan are voluntary. APP makes a qualified non-elective contribution to this plan in an amount equal to 3% of all eligible employees’ compensation, regardless of participation in the plan, with such employer contributions vesting immediately. Participants’ contributions are limited to their annual tax deferred contribution limit as allowed by the Internal Revenue Service. APP’s total matching contributions to the 401(k) Plan were $3.0 million in 2010, $2.8 million in 2009, $0.8 million in the 2008 successor period and $1.6 million in the 2008 predecessor period (a total of $2.4 million in 2008). APP may contribute additional amounts to the 401(k) Plan at its discretion, however APP has never made a discretionary contribution to the 401(k) Plan.

15. Stockholder’s Equity

For accounting purposes, the September 10, 2008 Merger with Fresenius resulted in the cancellation of all outstanding shares of APP. In connection with its establishment, FKP Holdings issued 1,000 shares of its common stock to its direct parent, Fresenius Kabi AG.

Common Stock Voting Rights

The holders of both our common stock and that of our Predecessor are entitled to one vote for each share held of record upon such matters and in such manner as may be provided by law.

Dividends

As part of the separation and distribution, APP distributed on a pro rata basis to holders of record of its common stock on November 13, 2007 one share of New Abraxis common stock for every four shares of APP common stock held on that date, or 39.9 million common stock shares. Other than the distribution of shares of New Abraxis, APP never paid a dividend on any class of stock.

Under the terms of its various debt agreements, FKP Holdings has restrictions on paying cash dividends in the future. The CVR holders have no rights to dividends.

Treasury Stock

All treasury shares held by our Predecessor were cancelled as part of the separation and distribution of New Abraxis on November 13, 2007.

16. Stock Options

Effective with the Merger, all outstanding “in the money” stock options and restricted stock units of APP were accelerated and became immediately 100% vested and were exercised in accordance with the terms of the Merger Agreement. “In the money” stock options were stock options with an exercise price less than the cash consideration of $23.00 plus the maximum CVR payment. In exchange, the holders received common shares, which were converted into the right to receive $23.00 in cash without interest, and one Contingent Value Right (“CVR”), issued by FKP Holdings and representing the right to receive a cash payment without interest of up to $6.00, as determined in accordance with the terms of the CVR Indenture. All “out of the money” stock options, which were stock options with an exercise price more than the combination of the Merger cash consideration of $23.00 plus the maximum CVR payment, were cancelled upon the closing of the Merger. As a result, all APP stock-based incentive plans were terminated as of the Merger date of September 10, 2008.

Prior to the Merger, APP sponsored the following stock compensation plans:

1997 Stock Option Plan

Under the 1997 Stock Option Plan, or the 1997 Plan, options to purchase shares of APP common stock were granted to certain employees and the directors with an exercise price equal to the estimated fair market value of APP’s common stock on the date of grant. The 1997 Plan stock options were vested upon completion of APP’s initial public offering in December 2001.

2001 Stock Incentive Plan

The 2001 Stock Incentive Plan, or the 2001 Plan, provided for the grant of incentive stock options and restricted stock to APP’s employees, including officers and employee directors, non-qualified stock options to employees, directors and consultants and other types of awards. Except as determined by APP’s compensation committee, the number of shares reserved for issuance increased annually on the first day of each fiscal year by an amount equal to the lesser of a) 6,000,000 shares, b) 5% of the total number of shares outstanding as of that date or c) a number of shares as determined by APP’s Board of Directors.

The compensation committee of APP’s Board of Directors administered the 2001 Plan and had the authority to determine the terms and conditions of awards, including the types of awards, the number of shares subject to each award, the vesting schedule of the awards and the selection of the grantees. The exercise price of all options granted under the 2001 Plan was determined by the compensation committee of APP’s Board of Directors, but in no event could this price be less than the fair market value of APP’s common stock on the date of grant.

2001 Non-Employee Director Stock Option Program

The 2001 Non-Employee Director Stock Option Program, or the 2001 Program, was adopted as part, and is subject to the terms and conditions, of the 2001 Plan. The 2001 Program established a program for the automatic grant of awards to APP’s non-employee directors at the time that they initially joined the board, and at each annual meeting of the stockholders at which they were elected.

Restricted Stock

Upon vesting, each restricted unit entitled the holder to one share of APP’s common stock. Compensation expense related to restricted stock grants was based upon the market price of APP’s common stock on the date of grant and was charged to operations on a straight-line basis over the applicable vesting period. Restricted stock units granted generally vested ratably over a four year period.

Restricted Unit Plan

In connection with the separation with Abraxis Bioscience, APP assumed the restricted units previously granted to its employees under the American BioScience Restricted Unit Plan II. Those awards became governed under the APP Pharmaceuticals, Inc. Restricted Stock Unit Plan (the “RSU Plan”). Shares of APP’s common stock were issuable upon the vesting of these units. The units issued under the RSU Plan vested one-half on April 18, 2008 (which was the second anniversary of the closing of the merger between Old Abraxis, then known as American Pharmaceutical Partners, and American BioScience). The balance of the shares were scheduled to vest on April 18, 2010, but were accelerated in connection with the Merger. The restricted stock units entitled their holders to receive a number of APP’s shares of common stock on each vesting date determined by taking the value of the vested portion of the award divided by APP’s average trading price over the three days prior to vesting; except that if the average trading price of APP’s stock was less than $14.47, then the notional price was divided by $14.47. The maximum number of APP’s shares that could be issued under this restricted unit plan was 345,542 shares.

Pursuant to an agreement between Old Abraxis and RSU Plan LLC (“RSU LLC”), RSU LLC agreed that prior to the date on which restricted stock units issued pursuant to the RSU Plan became vested, RSU LLC would deliver, or cause to be delivered, to APP the number of its shares of common stock or cash (or a combination thereof) in an amount sufficient to satisfy APP’s obligations relative to vested restricted units under the RSU Plan. APP was required to satisfy its obligations under the RSU Plan by paying to the participant’s cash and/or shares of its common stock in the same proportion as was delivered by the RSU LLC. The intention of this agreement was to have RSU LLC satisfy APP’s obligations under the RSU Plan so that there would not be any further dilution to APP’s stockholders as a result of APP’s assumption of certain awards under the American BioScience Restricted Unit Plan II. Effective with the Merger, all outstanding RSU’s of APP became immediately vested, were exercised and were exchanged for APP common shares, which were converted into the right to receive $23.00 in cash, without interest, and one Contingent Value Right (“CVR”).

At September 10, 2008, 373,279 restricted shares were outstanding under our 2001 Stock Incentive Plan with a weighted average per share market value of $12.82. All of these restricted shares were vested effective with the Merger. At December 31, 2007 487,397 restricted shares were outstanding with a weighted average per share market value of $12.56. During the successor period 94,754 restricted shares vested with a weighted average per share market value of $11.71 and 19,364 restricted shares were forfeited with a weighted average per share market value of $11.99. There were no unvested restricted shares outstanding at December 31, 2008.

Stock based compensation costs for RSU awards were $0 million in the 2008 successor period and $3.1 million in the 2008 predecessor period (a total of $3.1 million in 2008).

Employee Stock Purchase Plan

Under the 2001 Employee Stock Purchase Plan, or the ESPP, eligible employees could contribute up to 10% of their base earnings toward the semi-annual purchase and issuance of APP common stock. The employees’ purchase price was equal to the lesser of 85% of the fair market value of the stock on the first business day of the offer period, or 85% of the fair market value of the stock on the last business day of the semi-annual purchase period. Employees could purchase no more than 625 shares of APP’s common stock within any given purchase period. The ESPP provided for annual increases in the number of shares of APP’s common stock issuable under the ESPP equal to the lesser of: a) 3,000,000 shares; b) a number of shares equal to 2% of the total number of shares outstanding; or c) a number of shares as determined by APP’s Board of Directors. On August 7, 2007, in connection with the separation of Old Abraxis’ proprietary products business, Old Abraxis’ Compensation Committee indefinitely suspended the ESPP from and after completion of the purchase period that ended on July 31, 2007.

Stock Options

Prior to the Merger, APP recognized compensation cost for all share-based payments, including employee stock options, at fair value. Our Predecessor utilized the straight-line attribution method to recognize share-based compensation expense over the vesting period of the award. Options granted generally expired ten years from the grant date and vested ratably over a four-year period.

The fair values of options granted during the 2008 predecessor period were determined using the Black-Scholes option pricing model, which incorporates various assumptions. The risk-free rate of interest for the average contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is zero as APP had not and did not anticipate paying any dividends. The expected term of awards granted is based upon the historical exercise patterns of the participants in APP’s plans and the expected volatility is based on the historical volatility of APP’s stock over the expected term of the award. The weighted average estimated values of employee stock option grants and rights granted under APP’s employee stock purchase plan as well as the weighted average assumptions that were used in calculating such values during the periods were based on estimates at the date of grant as follows:


	January 1 through September 9, 2008
Stock Options
Risk-free rate		4.1	%
Dividend yield		—
Expected life in years		5
Volatility		55	%
Fair value of options granted	$	459,315
Weighted average grant date fair value of options granted	$	6.12
Employee Stock Purchase Plan
Risk-free rate		—
Dividend yield		—
Expected life in years		—
Volatility		—

Additional information with respect to APP’s stock option activity for the 2008 period through the date of the Merger is as follows:

Options Outstanding

Exercisable Options

Shares

Weighted
Average Exercise
Price

Shares

Weighted
Average Exercise
Price

Outstanding at December 31, 2007

3,107,716

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Fresenius Kabi Pharmaceuticals Holding, Inc. 10-K