Item 2. Acquisition or Disposition of Assets.



On March 7, 2002, we announced that we had entered into an agreement
with Eli Lilly and Company dated February 18, 2002 to acquire,
through our wholly owned subsidiary, NeoSan Pharmaceuticals Inc., the U.S.
rights and related intangibles associated with the Darvon and Darvocet branded
product lines for up to $211.4 million, payable at closing. The completion of
this transaction is subject to regulatory review of our recent filing with
respect to the acquisition under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as well as our obtaining permanent debt financing.


The Darvon and Darvocet products are prescribed for the treatment of
mild to moderate pain. The acquired products include Darvon (propoxyphene
hydrochloride), Darvocet-N (propoxyphene napsylate and acetaminophen) and
Darvon-N (propoxyphene napsylate). We are acquiring the Darvon and Darvocet
brands because we believe they have high customer recognition in the pain
management therapeutic class, an area where we currently have products under
development. Our goal is to increase the value of these brands by actively
marketing and promoting them and repositioning them through the development of
line extensions. We believe that these brands will respond positively to the
marketing and promotional support that we intend to provide. Specifically, we
intend to enhance the value of the Darvon and Darvocet brands by:


- actively promoting the Darvon and Darvocet brands with our sales
force;


- increasing our sales force from 20 to 50 people;


- creating incentives for this sales force to generate new
prescriptions for Darvon and Darvocet;


- working with respected physicians at leading pain clinics to develop
pain-management guidelines that specify the use of the Darvon and
Darvocet products;


- targeting our brand promotion towards high-prescribing physicians;
and


- developing, marketing and promoting improved products and line
extensions with improved product, delivery, and therapeutic
characteristics and potential regulatory and patent exclusivity.


These product lines have been sold in the U.S. for over 25 years, with
the initial marketing of Darvon beginning in 1957. Darvon lost its patent
exclusivity in 1973 and Darvon-N and Darvocet-N in 1985. The first generic
version of Darvon was introduced in 1973, and by 1985 numerous generic products
were being marketed for substitution for Darvon and Darvocet. We believe that
Eli Lilly ceased actively promoting these brands in approximately 1993.


Product Market.


Darvon and Darvocet compete primarily in the pain management market,
especially with products indicated for the management of mild to moderate pain.
According to Scott-Levin data, the size of the U.S. pain management market has
grown to approximately $16 billion in 2001, from $6.4 billion in 1995. The
Darvon and Darvocet products compete with a large number of other branded and
generic products generally used to treat mild to moderate pain, including Ultram
and other non-steroidal anti- inflammatory drugs, or NSAIDs, such as ibuprofen.
We believe these products comprise approximately 50% of the total U.S. pain
management market.


Each of the Darvon and Darvocet products currently faces competition
from generic products, and two of the world's largest manufacturers of generic
products, Teva Pharmaceutical Industries Ltd. and Mylan Laboratories Inc.,
manufacture generic substitutes to the Darvon and Darvocet products. These
generic substitutes are sold at significantly lower prices than Darvon or
Darvocet, due to the significantly lower costs associated with them. While
precise data on generic substitution is not available, we believe a vast
majority of the prescriptions written for Darvon and Darvocet are filled with
generic propoxyphene products.


Product Line Strategy.


This acquisition will provide us with a significant position in the
pain management therapeutic class, which is one of our targeted therapeutic
classes. Our goal is to increase the value of these brands by actively marketing
and promoting them and repositioning them through the development of line
extensions.


Specifically, we seek to enhance the value of Darvon and Darvocet by
increasing the size of our contract sales force from approximately 20 to 50
people and creating sales incentives with respect to these products.
Additionally, we intend to individually target high-prescribing physicians in an
effort to boost sales of Darvon and Darvocet. We also plan to work with
respected physicians at leading pain clinics to develop pain-management
guidelines that specify the use of our Darvon and Darvocet products. These
clinics provide guidelines to primary-care physicians for the proper management
and selection of products to treat pain.


We plan to develop improved products and line extensions with improved
product, delivery, and therapeutic characteristics and potential regulatory and
patent exclusivity. For example, we are considering the development of a liquid
form of Darvocet, a formulation of these products that could be taken twice a
day, and some products that would combine propoxyphene, the active ingredient in
Darvon and Darvocet, with a non-steroidal anti-inflammatory drug.


Acquisition Terms.


We will pay a purchase price of $211.4 million in cash for the rights
in the U.S. to these products and Eli Lilly's existing inventory of these
products. This amount will be reduced in the event that net sales by Eli Lilly
of Darvon and Darvocet products from February 1, 2002 until the day before
closing are greater than target net sales for that period calculated at a
monthly rate of $4.167 million. If actual net sales during that period exceed
the target, then the purchase price will be reduced by 90% of the excess amount.
The purchase price will further be reduced by up to $18 million if net sales of
the Darvon and Darvocet products during a 12-month measurement period are less
than targeted levels. The measurement period will be any 12 months, as selected
by Eli Lilly, ending on any calendar month end from December 31, 2002 until the
month end following the first anniversary of the closing -- that is, March 31,
2003 if the acquisition is completed in March 2002. If net sales are less than
$50 million during the 12-month measurement period, the purchase price will be
reduced incrementally by $0.9 million for each $250,000 that actual sales are
below $50 million. The maximum amount of this post-closing reduction is $18
million. The amount of this reduction is to be paid by Eli Lilly to us following
confirmation of the amount of net sales during the measurement period. In
addition, we have agreed to pay Eli Lilly royalties upon sales of our future
developed improvements to the Darvon and Darvocet products or other products
containing the active ingredient propoxyphene and any other pharmaceutical
products sold under the name Darvon, Darvocet or certain other defined
trademarks. We will pay a royalty on sales of each of these future products
during each calendar quarter for a ten-year period beginning upon the product's
commercial introduction, provided that the total net sales of all of these
future products, combined with the total net sales of the current Darvon and
Darvocet products, exceed $15.8 million in the applicable calendar quarter. We
will not owe any royalties on the sales of the Darvon and Darvocet products
themselves that we acquire from Eli Lilly.


Supply of Product.


Under a manufacturing agreement that we have entered into with Eli
Lilly at the time we signed the acquisition agreement, Eli Lilly has agreed upon
closing to supply a specified percentage of our requirements from and after
closing for the 12 Darvon and Darvocet product presentations (form and dosage)
currently being sold by Eli Lilly. The supply agreement will extend through
December 31, 2004. Upon the satisfaction of certain conditions, we may extend
the agreement for an additional six months, during which Eli Lilly will use
commercially reasonable efforts to supply NeoSan with a full calendar year's
supply of products during the extension period, subject to certain maximum and
minimum quantities. Under this agreement, we have agreed to order the
manufacture of certain minimum amounts of Darvon and Darvocet products and
certain minimum percentages of our requirements: 60% of our requirements in the
first year, 50% in the second year, and 40% in the third year. Also under this
agreement, the supply obligation of Eli Lilly is subject to a maximum amount of
the Darvon and Darvocet products over the life of the contract. We anticipate
that this maximum supply obligation of Eli Lilly is sufficient to cover all of
our supply needs through the end of 2005. We will purchase these products
manufactured by Eli Lilly for a fixed unit cost, subject to a percentage
increase on each January 1 (beginning on January 1, 2003) plus any increase in
Eli Lilly's cost of raw materials during that year. However, the purchase price
for these products will be no less than Eli Lilly's standard cost of
manufacturing, which includes raw materials, direct labor, and plant overhead
attributable to the Darvon and Darvocet products. Prior to expiration of this
agreement, we intend to have FDA approval permitting the transfer of the
manufacturing of these products to our manufacturing facilities, one or more
third-party manufacturing facilities, or a combination of these facilities. This
approval, however, could require much more time and it is possible that we never
receive it.


Historical Revenues.


The Darvon and Darvocet product lines had net sales of $62.9 million in
2001, compared to $56.5 million in 2000 and $49.5 million in 1999. Average
monthly net sales of Darvon and Darvocet were $4.1 million in 1999, $4.7 million
in 2000 and $5.2 million in 2001. However, net sales of these products were $3.4
million in January 2002, $3.9 million in December 2001 and $3.1 million in
November 2001. We believe that the levels of net sales in 1999 and 2000 are more
indicative of future sales levels than the elevated sales levels in 2001 or the
reduced sales levels during the three months ended January 31, 2002. Although we
have focused on the longer-term trends in evaluating the acquisition of these
product lines, this decrease in monthly sales may not be temporary and sales
levels may never return to the range existing in 1999 and 2000. If sales
continue at these recent levels, annual product sales of Darvon and Darvocet
will be less than $42 million, or 33.9% less than the amount shown in our pro
forma financial statements appearing elsewhere in this report. Any prolonged
decrease in sales of these products or the failure to return to the sales levels
existing in 1999 and 2000 will have a material adverse effect on our business,
results of operations and financial condition.


Acquisition Financing.


We are currently seeking senior secured and senior subordinated debt
financing of an aggregate of $350 million to fund the acquisition of these
product lines, to repay indebtedness outstanding under our existing loan
agreement, to terminate our tax retention operating lease and purchase the
underlying properties, and pay related fees and expenses. Our obligation to
complete the acquisition of these product lines is contingent on obtaining this
financing.


Our proposed senior secured credit facilities consist of a $75.0
million five-year revolving credit facility and a $100 million five-year term
loan facility. As proposed, the term loan facility will amortize over the full
five-year term, with amortization of $5.0 million, $15.0 million, $20.0 million,
$25.0 million and $35.0 million, respectively, in years one through five of the
facility. The revolving credit facility is not tied to a borrowing base. Our
proposed senior credit facilities provide for variable interest rates based on
LIBOR or base rate, at our option. Such facilities will be guaranteed by all of
our domestic subsidiaries and secured by a security interest on substantially
all of our domestic assets, all of the stock of our domestic subsidiaries and
65% of the stock of our material foreign subsidiaries directly owned by us or
one of our domestic subsidiaries. The proposed senior credit facilities will
require the payment of certain commitment fees based on the unused portion of
the revolving credit facility. Under the terms of the credit agreement for the
proposed senior credit facilities, we will be required to comply with various
covenants including, but not limited to, those pertaining to maintenance of
certain financial ratios and incurrence of additional indebtedness. The proposed
senior credit facilities may be optionally prepaid at any time without a
premium.


Our proposed issuance of senior subordinated debt will consist of $175
million of senior subordinated notes due 2010. The notes will have a fixed
interest rate to be established prior to the closing of the acquisition of
Darvon and Darvocet. The notes will be guaranteed on a subordinated basis by all
of our existing domestic subsidiaries and all of our future domestic
subsidiaries of which we and/or our subsidiaries own 80% or more of the equity
interests. The notes will not be secured. For the first three years, up to 35%
of the notes will be redeemable with the proceeds of qualified sales of equity
at a premium redemption price. On or after the fourth anniversary of the
issuance of these notes, all or any portion of the notes will be redeemable at a
premium redemption price. Under the terms of the proposed indenture for the
notes, we would be required to comply with various covenants including, but not
limited to, a covenant relating to incurrence of additional indebtedness.


Additional Information.


The financial statements for the Darvon and Darvocet product lines
included in this report do not include the full financial statements required by
Rule 3-05 of Regulation S-X. The Darvon and Darvocet product lines did not
represent a stand-alone entity prior to our acquisition. No separate, audited
financial statements of the Darvon and Darvocet product lines had been prepared
prior to our acquisition, and Eli Lilly did not maintain the distinct and
separate accounts necessary to present full financial statements for the
respective product line. As a result, it is impracticable for us to provide full
audited financial statements for the Darvon and Darvocet product lines,
including balance sheets and statements of cash flows, or other information
regarding operating, investing and financing cash flows.


This report contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including the statements
pertaining to whether we will obtain permanent financing and complete the
acquisition of the Darvon and Darvocet product lines. These statements involve
risks and uncertainties pertaining to our ability to successfully obtain
permanent financing and complete the acquisition, including adverse changes in
the markets for senior secured loans and senior subordinated notes that are
beyond our control, obtaining anticipated ratings for our proposed senior credit
facility and senior subordinated notes from appropriate rating agencies, and
other factors that may be beyond our control. In addition, our acquisition
agreement with Eli Lilly provides that Eli Lilly may terminate the agreement if
we do not complete the acquisition of the Darvon and Darvocet product lines by
March 15, 2002. We believe there is substantial risk that we will not be able to
arrange necessary permanent financing prior to March 15, 2002 to permit us to
complete the acquisition by that date.


We undertake no obligation to update the forward-looking statements we
have included in this report, other than to report the completion of the
acquisition of the Darvon and Darvocet product lines if we complete the
transaction.



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