Summary of CPEX PHARMACEUTICALS, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with all financial and non-financial information appearing elsewhere in this report and with our consolidated and combined financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission on March 25, 2009, referred to as the 2008 Form 10-K. 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 due to competitive factors and other risks discussed in the Form 10-K under Item 1A,"Risk Factors".
Overview
We are an emerging specialty pharmaceutical company in the business of 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 technology that facilitates the absorption of drugs. Our platform drug delivery technology enhances permeation and absorption of pharmaceutical molecules across the skin, nasal mucosa and eye through development of proprietary formulations with molecules such as CPE-215®. Our first product is Testim®, a gel for testosterone replacement therapy, which is a formulation of our technology with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc., who is currently marketing it in the United States, Europe and other countries. Our second product, Nasulintm, currently in Phase 2 clinical trials, is an intranasal spray formulation of insulin with our permeation enhancement technology. In addition, Serenity Pharmaceuticals, Inc., our licensing and development partner, has completed an end of Phase 2 meeting with the FDA relating to the development of an undisclosed urology drug delivered using our intranasal technology.
We believe, based upon our experience with Testim and Nasulin, that our technology is a broad platform technology that has the ability to significantly enhance the permeation of a wide range of therapeutic molecules. To expand the development and commercialization of products using our 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
On June 12, 2008, the Board of Directors of Bentley Pharmaceuticals, Inc. ("Bentley") approved the spin-off of its drug delivery business into CPEX Pharmaceuticals, Inc. ("CPEX"). Shares of CPEX were distributed to Bentley stockholders after the close of business on June 30, 2008 by means of a stock dividend, which we refer to as the Separation. Each Bentley stockholder of record on June 20, 2008 received one CPEX share for every ten shares of Bentley common stock it owned. Bentley retained no ownership interest in CPEX subsequent to the Separation.
We have incurred legal, tax and other strategic consulting costs specifically associated with the Separation. These costs, which are reported as Separation costs within operating expenses in the Condensed Consolidated and Combined Statements of Operations, totaled $1.6 million and $2.5 million for the three and six months ended June 30, 2008, respectively. No separation costs have been incurred by CPEX subsequent to the Separation. Nasulin Clinical Program
Ongoing Clinical Trials
We are currently conducting a Phase 2a clinical trial of Nasulin, our intranasal insulin candidate, in patients with Type 2 diabetes. This study will randomize 90 patients who are currently being treated with basal, or long-acting, insulin and oral anti-diabetes agents. As of August 7, 2009, we have randomized 115 patients in the study. This study is designed to assess the efficacy and safety of Nasulin versus a placebo over a 6-week treatment period and is being conducted at multiple centers in the U.S with additional sites planned to be initiated in the Ukraine. We expect to complete this trial early next year under our current operating plan.
During the second quarter of 2009 we initiated and completed enrollment in a single-site Phase 1 study in healthy volunteers to determine the pharmacokinetic parameters of various formulation strengths of Nasulin. Data analysis for this study, which enrolled 24 patients, is ongoing and it is our intent to submit these results for presentation at upcoming scientific meetings .

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Planned Clinical Trials
Following the completion of the ongoing Phase 2a study described above, we expect to initiate a Phase 2b study to assess the safety and efficacy of Nasulin in patients with Type 2 diabetes. In this trial, which is designed to randomize 220 patients, we will measure the patients' change in HbA1c, or average glucose control over the previous three to four months, after initiating Nasulin into their treatment regiment. This trial is expected to be completed in mid-2011. Upon completion of this trial we expect to request an end of Phase 2 meeting with the U.S. Food and Drug Administration, which we expect to be held in late-2011.
RESULTS OF OPERATIONS:
The following is a discussion of the results of our operations for the three and six months ended June 30, 2009 and 2008. Included in the financial disclosures for the three and six months ended June 30, 2008 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 during the periods presented.
For the three months ended June 30, 2009 and 2008:

                                      Three Months Ended
                                           June 30,               Increase (Decrease)
    (unaudited, in thousands)          2009          2008            $              %
    Royalties and other revenue     $    4,473     $  3,948     $        525          13 %

    Operating expenses:
    General and administrative           2,163        1,344              819          61 %
    Research and development             3,394        2,632              762          29 %
    Separation costs                         -        1,565           (1,565 )      (100 )%
    Depreciation and amortization          164          171               (7 )         4 %

    Total operating expenses:            5,721        5,712                9           - %

    Loss from operations                (1,248 )     (1,764 )            516          29 %

    Other, net                              44           77              (33 )       (43 )%

    Net loss                        $   (1,204 )   $ (1,687 )   $        483          29 %

Royalties and other revenues increased 13% to $4.5 million for the three months ended June 30, 2009 from $3.9 million for the three months ended June 30, 2008, primarily due to increased royalties earned on sales of Testim. This growth is due to continued increases in prescriptions for Testim and to its increased market share of the testosterone replacement gel market. Our royalty income is subject to several risks, including potential competition from generic products. See Liquidity and Capital Resources - Liquidity Risk for further discussion. Royalties and other revenue for the three months ended June 30, 2008 includes $277,000 related to a development license agreement with Serenity Pharmaceuticals, Inc. for which there is no comparable revenue in 2009.
General and administrative expenses increased 61% to $2.2 million for the three months ended June 30, 2009 from $1.3 million for the three months ended June 30, 2008, primarily due to higher legal costs. The increase in legal costs relates primarily to our patent infringement suit against Upsher-Smith Laboratories described in Commitments, contingencies and concentrations in the accompanying Notes to the Unaudited Condensed Consolidated and Combined Financial Statements.
Research and development expenses increased 29% to $3.4 million for the three months ended June 30, 2009, from $2.6 million for the three months ended June 30, 2008, primarily due to increased clinical trial expenses related to the ongoing Nasulin clinical trials. This increase in costs was partially offset by decreased employee-related expenses. Although cost estimates and timing of our trials are subject to change and fluctuation from quarter to quarter, we expect research and development expenses for 2009 to range between $14.0 million and $17.0 million.
Operating expenses for the three months ended June 30, 2008 include $1.6 million in separation costs. We have not incurred any separation costs subsequent to our spin-off from Bentley in June 2008.

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For the six months ended June 30, 2009 and 2008:

                                       Six Months Ended
                                           June 30,              Increase (Decrease)
     (unaudited, in thousands)         2009         2008            $              %
     Royalties and other revenue     $  8,484     $  7,398     $      1,086          15 %

     Operating expenses:
     General and administrative         3,934        2,449            1,485          61 %
     Research and development           5,993        4,528            1,465          32 %
     Separation costs                       -        2,502           (2,502 )      (100 )%
     Depreciation and amortization        330          343              (13 )        (4 )%

     Total operating expenses:         10,257        9,822              435           4 %

     Loss from operations              (1,773 )     (2,424 )            651          27 %

     Other, net                           101          223             (122 )        55 %

     Net loss                        $ (1,672 )   $ (2,201 )   $        529          24 %

Royalties and other revenues increased 15% to $8.5 million for the six months ended June 30, 2009 from $7.4 million for the six months ended June 30, 2008, primarily due to increased royalties earned on sales of Testim. This growth is due to continued increases in prescriptions for Testim and to its increased market share of the testosterone replacement gel market. Royalty income is subject to several risks, including potential competition from generic products. See Liquidity and Capital Resources - Liquidity Risk for further discussion. Royalties and other revenue for the six months ended June 30, 2008 includes $427,000 related to a development license agreement with Serenity Pharmaceuticals, Inc. for which there is no comparable revenue in 2009.
General and administrative expenses increased 61% to $3.9 million for the six months ended June 30, 2009 from $2.4 million for the six months ended June 30, 2008 primarily due to patent infringement and general legal costs, which increased $986,000, as well as $205,000 in increased non-cash stock-based compensation expense and $324,000 in increased professional service fees, including accounting and strategic planning expenses, compared to the same period last year. The legal costs relate to our patent infringement suit against Upsher-Smith Laboratories described in Commitments, contingencies and concentrations in the accompanying Notes to the Unaudited Condensed Consolidated and Combined Financial Statements.
Research and development expenses increased 32% to $6.0 million for the six months ended June 30, 2009, from $4.5 million for the six months ended June 30, 2008. Clinical trial expenses increased $1.8 million, primarily due to the ongoing Phase 1 and 2 Nasulin clinical trials, partially offset by a decrease of $523,000 in employee-related expenses.
Operating expenses for the six months ended June 30, 2008 include $2.5 million in separation costs.