The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes to the Condensed Combined and Consolidated Financial Statements, or Notes, included in Item 15 of this Annual Report. Except for the historical information contained herein the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein.

Words such as "expect", "anticipate", "intend", "believe", "may", "could", "project", "estimate" and similar words are used to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, including, but not limited to, the statements in "Business", "Legal Proceedings", "Management's Discussion and Analysis of Financial Condition and

Results of Operations", "Risk Factors" and other sections in this Annual Report, are not based on historical facts, but rather reflect our current expectations concerning future results and events. The forward-looking statements include statements about our strategy, the prospects of our technologies and research and development efforts, our plans to enter into more collaborative relationships, the prospects for clinical development of our product candidates, our prospects for revenue growth, anticipated financial results and the prospects for growth of our business. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements, including the risks outlined in the Risk Factors section and elsewhere in this report. You are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as may be required by law.

Overview

We are an emerging specialty pharmaceutical company that employs 18 people as of March 17, 2009 at our principal executive offices in Exeter, New Hampshire. Our business is the research, development, licensing and commercialization of pharmaceutical products utilizing our validated drug delivery platform technology. We have U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Our platform drug delivery technology enhances permeation and absorption of pharmaceutical molecules across the skin, nasal mucosa and eye through formulation development with proprietary molecules such as CPE-215. Our first product is Testim®, a gel for testosterone replacement therapy, which is a formulation of CPE-215 with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc. who is currently marketing the product in the United States, Europe and other countries. Our second product, Nasulintm, currently in Phase 2 clinical trials, is an intranasal spray formulation of CPE-215 with insulin.

We believe, based upon our experience with Testim and Nasulin, that our CPE-215 technology is a broad platform technology that has the ability to enhance significantly the permeation of a wide range of therapeutic molecules. To expand the development and commercialization of products using our CPE-215 drug delivery technology, we are pursuing strategic alliances with partners including large pharmaceutical, specialty pharmaceutical and biotechnology companies. The alliance opportunities may include co-development of products, in-licensing of therapeutic molecules, out-licensing of delivery technology or partnering late-stage candidates for commercialization.

Separation from Bentley

Our business was initially the drug delivery business of Bentley Pharmaceuticals, Inc. (referred to as "Bentley") which Bentley spun-off in June 2008 in connection with the sale of Bentley's remaining businesses. Shares of our stock were distributed to Bentley stockholders after the close of business on June 30, 2008 (the "Separation Date") by means of a stock dividend, a transaction that was taxable to Bentley and Bentley's stockholders (the "Separation"). Each Bentley stockholder of record on June 20, 2008, the record date, received on the Separation Date one CPEX share for every ten shares of Bentley common stock. Bentley has no ownership interest in CPEX subsequent to the Separation.

Our financial statements reflect the historical financial position, results of operations and cash flows of the business transferred to us from Bentley as part of the Separation. Our financial statements have been prepared and are presented as if we had been operating as a separate entity using the historical cost basis of the assets and liabilities of Bentley and including the historical operations of the business transferred to us from Bentley as part of the Separation. For each of the periods presented, we were fully integrated with Bentley and the accompanying financial statements reflect the application of certain estimates and allocations. Our statements of operations include all revenues and costs that are directly attributable to our business. In addition, certain expenses of Bentley have been allocated to us using various assumptions that, in the opinion of management, are reasonable. These expenses include an allocated share of executive compensation, public company costs and other administrative costs. The allocated costs totaled $4.4 million, $4.2 million and

$4.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. There have been no allocations of expenses charged to us since the Separation Date. The financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been a stand-alone company during the periods presented.

Consolidated Results of Operations

The following is a discussion of the results of our operations for the years ended December 31, 2008, 2007 and 2006. Included in the financial disclosures are direct costs associated with our business and certain allocated costs from Bentley related to executive compensation, public company costs and other administrative costs. As these costs only represent an allocation of the costs incurred by Bentley before the Separation, they are not necessarily indicative of the costs that would have been incurred if we were an independent public company in the periods presented. Inflation and changing prices have not had a significant impact on our revenues or loss from operations in the three years ended December 31, 2008.

Fiscal Year Ended December 31, 2008 Compared To Fiscal Year Ended December 31, 2007

                                          Year Ended
                                         December 31,            Increase (Decrease)
                                       2008         2007            $              %
                                                       (In thousands)

     Royalties and other revenue     $ 15,574     $ 11,127     $     4,447           40 %
     Operating expenses:
     General and administrative         6,493        5,206           1,287           25 %
     Research and development           9,119        9,646            (527 )         (5 )%
     Separation costs                   2,502        1,010           1,492          148 %
     Depreciation and amortization        682          752             (70 )         (9 )%

     Total operating expenses          18,796       16,614           2,182           13 %

     Loss from operations              (3,222 )     (5,487 )         2,265          (41 )%
     Other, net                           307          559            (252 )        (45 )%

     Net loss                        $ (2,915 )   $ (4,928 )   $     2,013          (41 )%

Royalties and other revenue increased 40% to $15.6 million in 2008 from $11.1 million in 2007 due primarily to increased royalties earned on sales of Testim. For the year ended December 31, 2008, Testim prescriptions were reported to have grown approximately 27% compared to the same period in 2007. In addition, it is also reported that Testim's market share of the testosterone replacement gel market in December 2008 had increased to more than 22% versus approximately 21% in December 2007. The long-term prospects for Testim sales are subject to resolutions of our patent infringement suit against Upsher-Smith, which has made an ANDA filing for a generic version of Testim, as described above in "Legal Proceedings". Clinical and other revenue was $513,000 in 2008 which includes revenue from our development and license agreement with Serenity Pharmaceuticals, Inc. which we signed in 2008 and for which there is no comparable revenue in 2007.

General and administrative costs increased 25% to $6.5 million in 2008 compared to $5.2 million in 2007, primarily due to a non-cash charge of approximately $980,000 resulting from the modification of equity awards associated with the spin-off from Bentley.

Research and development expenses consist primarily of costs associated with the development of Nasulin, our lead product candidate. These costs include costs of clinical trials, manufacturing supplies and other development materials, compensation and related benefits for research and development personnel, costs for consultants, and various overhead costs. Research and development costs are expensed as incurred. Research and development costs decreased to $9.1 million in 2008 compared to $9.6 million in 2007 due

mostly to the timing of our pre-clinical and clinical activities. Spending on clinical trials was $1.5 million in 2008 compared to $2.1 million in 2007.

We expect our research and development costs to increase in 2009 to between $15 million and $18 million. We have initiated a Phase 2a trial in the U.S. and our expectation is to initiate an additional Phase 2 trial in the U.S. in 2010 while continuing the development of products in our pipeline. Additional expenses for the full development of Nasulin cannot be estimated at this time. The risks and uncertainties associated with the planning and execution of a clinical development program includes, among other things, uncertainties about results that at any time could require us to abandon or greatly modify the program. Accordingly, we cannot estimate the period in which material net cash inflows from Nasulin might commence, if ever.

Separation costs, consisting of legal, tax and other strategic consulting costs specifically related to the separation from Bentley explained above, were $2.5 million in 2008 compared to $1.0 million in 2007. No additional separation costs have been incurred since the Separation Date and we do not expect to incur any additional separation costs in the future.

Fiscal Year Ended December 31, 2007 Compared To Fiscal Year Ended December 31, 2006

                                          Year Ended
                                         December 31,            Increase (Decrease)
                                       2007         2006            $              %
                                                       (In thousands)

     Royalties and other revenue     $ 11,127     $  8,366     $     2,761           33 %
     Operating expenses:
     General and administrative         5,206        4,651             555           12 %
     Research and development           9,646        7,881           1,765           22 %
     Separation costs                   1,010            -           1,010          100 %
     Depreciation and amortization        752          679              73           11 %

     Total operating expenses:         16,614       13,211           3,403           26 %

     Loss from operations              (5,487 )     (4,845 )          (642 )        (13 )%
     Other, net                           559          683            (124 )        (18 )%

     Net loss                        $ (4,928 )   $ (4,162 )   $      (766 )        (18 )%

Royalties and other revenues increased 33% from $8.4 million in 2006 to $11.1 million in 2007 from increased royalties earned on sales of Testim. Testim's market share increased from 19% in 2006 to 21% in 2007. In 2006, Testim royalties included a one-time increase of approximately $0.5 million due to a change in estimate which, based on historical experience, allowed us to reasonably estimate future product returns on sales of Testim.

Total operating expenses increased 26% from $13.2 million in 2006 to $16.6 million in 2007, primarily from research and development expenses and separation costs.

• Research and development expenses increased $1.8 million or 22% to $9.6 million in 2007, primarily from increased costs to support our Nasulin clinical program and an increase in compensation and benefit costs.

• The year ended December 31, 2007 included costs incurred for legal, tax and other strategic consulting specifically associated with the spin-off from Bentley. These separation costs totaled $1.0 million in the year ended December 31, 2007.

The net loss increased from $4.2 million in 2006 to $4.9 million in 2007, due to increased operating expenses primarily increased research and development expenses and separation costs. These increases were partially offset by increased Testim royalty revenues.

Liquidity and Capital Resources

Overview

We had approximately $15.2 million in cash and cash equivalents at December 31, 2008, which, along with Testim royalties, we believe will be sufficient to fund our operations and our cash requirements for at least the next twelve months. Our cash includes balances maintained in commercial bank accounts, amounts invested in overnight sweep investments and cash deposits in money market accounts. Although cost estimates and timing of our trials are subject to change, we expect research and development expenses for 2009 to range between $15 million and $18 million. There can be no assurance that changes in our research and development plans or other events affecting our revenues or operating expenses will not result in the earlier depletion of our funds. However, we will continue to explore alternative sources for financing our business activities. In appropriate situations, which will be strategically determined, we may seek funding from other sources, including, but not limited to, contribution by others to joint ventures and other collaborative or licensing arrangements for the development, testing, manufacturing and marketing of Nasulin and other products currently under development.

Summary Cash Flow Information


                                                          December 31,
                                              2008            2007             2006
                                                         (In thousands)

    Summary Financial Position
    Cash and cash equivalents               $ 15,211     $        21,659     $ 10,752
    Accounts receivable                        4,445               3,245        2,262
    Total assets                              26,473              32,397       21,226
    Accounts payable and accrued expenses      2,630               3,221        2,140
    Working capital                           17,609              22,365       11,608
    Total stockholders' equity                23,843              29,151       19,052




                                                             December 31,
                                                    2008         2007         2006

     Summary of Sources and (Uses) of Cash:
     Operating activities                         $   (553 )   $ (2,186 )   $ (1,256 )
     Investing activities                             (307 )       (430 )     (1,409 )
     Purchases of property, plant and equipment       (307 )       (303 )       (826 )
     Additions to intangible assets                      -         (157 )       (583 )
     Financing activities                           (5,588 )     13,523       (6,900 )

Sources and Uses of Cash

Operating Activities

Net cash used in operating activities was $553,000 for the year ended December 31, 2008 largely resulting from the net loss of $2.9 million, an increase in accounts receivable of $1.2 million and a reduction in accounts payable and accrued expenses of $591,000, which were partially offset by non-cash share-based compensation of $3.2 million and depreciation and amortization of $682,000. Net cash used in 2007 was $2.2 million resulting from the net loss of $4.9 million and an increase in accounts receivable of $1.0 million, which were partially offset by non-cash share-based compensation expense of $1.5 million, an increase in accounts payable and accrued expenses of $1.1 million and depreciation and amortization expenses of $752,000. Net cash used in 2006 was $1.3 million resulting from the net loss of $4.2 million partially offset by non-cash share-based compensation expense of $1.3 million, depreciation and amortization of $679,000 and decreases in accounts receivable of $603,000 and in prepaid expenses and other current assets of $384,000.

Investing Activities

Net cash used in investing activities was $307,000 for the year ended December 31, 2008 due to the purchase of necessary equipment to scale-up our manufacturing capabilities. Net cash used in the twelve months ended December 31, 2007 was $430,000, which includes $303,000 for laboratory expansion and equipment and $157,000 for costs to acquire intellectual property rights. We expect to invest approximately $800,000 in capital expenditures in 2009, primarily for research and development equipment. Net cash used in the twelve months ended December 31, 2006 was $1.4 million, which includes $826,000 related to machinery and equipment purchased for research and development activities and $583,000 for costs to acquire intellectual property rights.

Financing Activities

Net cash used by financing activities was $5.6 million for the year ended December 31, 2008 due largely to the change in Bentley's net investment in our business of $7.3 million, which was partially offset by proceeds of $1.7 million from the exercise of stock options. Financing activities for 2007 and 2006 reflect the net change in Bentley's net investment in our business, consisting primarily of the funding of our net loss and other operating and investing activities for CPEX. Additionally, the change in Bentley's net investment included a cash transfer of $5.5 million to us from Bentley.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

Certain of our accounting policies are particularly important to the portrayal of our financial position, results of operations and cash flows and require the application of significant judgment by our management. As a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Our critical accounting policies and estimates include:

Revenue recognition and accounts receivable

We earn royalty revenues on Auxilium's sales of Testim, which incorporates our CPE-215 permeation enhancement technology. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores. Revenue is recognized when products are shipped or services are performed. At the time revenue is recognized, estimates for revenue deductions are recorded, including discounts, rebates and product returns. Estimates related to revenue deductions are predominately based on historical experience.

Accounts receivable are recorded at their net realizable value as products are shipped or services are performed. Receivable balances are reported net of an estimated allowance for uncollectible accounts. Estimated uncollectible receivables are based on the amount and status of past due accounts, contractual terms with customers, the credit worthiness of customers and the history of our uncollectible accounts.

Intellectual property costs

Costs incurred in connection with acquiring licenses, patents and other proprietary rights are capitalized. Capitalized costs are amortized on a straight-line basis for periods not exceeding 15 years from the dates of acquisition. Carrying values of such assets are reviewed at least annually by comparing the carrying amounts to their estimated undiscounted cash flows and adjustments are made for any diminution in value.

Research and development costs

Research and development expenses consist primarily of costs associated with our clinical trials, manufacturing supplies and other development materials, compensation and related benefits for research and development personnel, costs for consultants, and various overhead costs. Research and development costs are expensed as incurred consistent with SFAS No. 2, Accounting for Research and Development Costs. Our clinical trial costs, which are reflected in research and development expenses, result from obligations under contracts with vendors, consultants, and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in cash flows which are not consistent with the periods in which materials or services are provided. These costs are capitalized upon payment and expensed according to the progress of each trial as measured by patient progression and the timing of various aspects of the trial. The progress of the trials is obtained through discussions with internal personnel as well as outside service providers. Determining the timing and level of services performed often requires judgment.

Share-based compensation

Certain former Bentley employees who became our employees following the separation from Bentley held equity compensation awards from Bentley. Share-based compensation expense for our business was allocated based on Bentley's consolidated expense related to our employees and certain allocated share-based compensation expense allocated from Bentley. Such expense was accounted for in accordance with the fair value recognition provisions of SFAS No. 123 (R), Share-Based Payment, which we adopted on January 1, 2006. Under the fair value recognition provisions of SFAS No. 123 (R), share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of equity awards at the grant date requires judgment. We estimate the grant date fair value of stock options using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions including: (1) Expected life - the expected life (estimated period of time outstanding) of options granted is estimated based on historical exercise behaviors; (2) Volatility - the volatility of the Company's stock is calculated on the grant date of each equity award using daily price observations over a period of time commensurate with the expected life of the award; (3) Risk-free rate - the risk-free interest rate is based on the yield curve of U.S. Treasury securities in effect at the date of the grant, having a duration commensurate with the estimated life of the award; and (4) Dividends - as we have not declared dividends, and we do not expect to declare dividends in the future, we include an annual dividend rate of 0% when calculating the grant date fair value of equity awards. Because share-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. SFAS No. 123 (R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. We recognized share-based compensation under the accelerated expense attribution method pursuant to FASB Interpretation No. 28 for all options previously accounted for under APB Opinion No. 25, however, we have elected to recognize share-based compensation attributable to equity awards granted subsequent to December 31, 2005 under the straight-line method which is an alternative allowed for under SFAS No. 123 (Revised). Had we elected to recognize compensation expense for new equity awards under the accelerated expense attribution method, recognition of the related compensation expense would be front-loaded in the requisite service period as opposed to being recognized evenly over the period.

SFAS No. 123 (R) requires a company to calculate the pool of excess tax benefits, or APIC Pool, available to absorb tax deficiencies recognized subsequent to adopting the accounting standard, as if we had adopted SFAS No. 123, as originally issued, at its effective date in 1995. There are two allowable methods to calculate the hypothetical APIC Pool: (1) the "long form" method as set forth in SFAS No. 123 (Revised) or (2) the "short form" method as set forth in FASB Staff Position No. 123(R)-3. We have elected to use the long form method under which we track each award on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such award. We then compared the fair value expense to the tax deduction received for each grant and aggregated the benefits and deficiencies to establish its hypothetical APIC Pool.

Due to the adoption of SFAS No. 123 (R), some exercises of share-based awards result in tax deductions in excess of previously recorded benefits based on the option value at the time of grant, which are referred to as windfall tax benefits for us. We recognize windfall tax benefits associated with the exercise of stock options directly to shareholders' equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from windfall tax benefits occurring from January 1, 2006 onward.

Provision for income taxes

We have provided for current and deferred U.S. federal, state and foreign income taxes for the current and all prior periods presented. Current and deferred income taxes have been provided with respect to jurisdictions where our . . .