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 2008 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 which is currently marketing it in the United States, Europe and other countries. Our second product, Nasulintm, currently in Phase 2 clinical trials, is a proprietary intranasal spray formulation of insulin with our permeation enhancement technology. In addition, Serenity Pharmaceuticals, Inc., our licensing and development partner, has commenced enrollment in a Phase 3 clinical trial for an undisclosed urology drug delivered using CPEX's 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 approved the spin-off of its drug delivery business into 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 $2.5 million for the nine months ended September 30, 2008. No separation costs have been incurred by CPEX subsequent to the Separation.
Nasulin Clinical Program
The following is a list of studies for which data analysis was recently completed:
• BNT INS-US-0100-PK006: A Randomized, Single Site, Single Blind 6-Way Crossover Study of Intranasal Insulin and Humalog in Patients with Type 2 Diabetes Mellitus to Determine Optimum Dose Timing. We completed this Phase 1 study in subjects with Type 2 diabetes over a period of 6 months in the U.S. A total of 13 patients participated in this study. Final data demonstrated that the preferred timing of intranasal insulin administration with Nasulin is at the start or immediately following a meal.

• BNT INS-US-0100-PK008: A Single Site, 3 Cohort Study to Determine the Optimal Methodology of Nasulin (BNT-INS-0100) in Normal Non-Smoking Subjects. We completed this Phase 1 study in healthy volunteers over a period of 1 month in the U.S. A total of 24 healthy volunteers participated in this study. Final data demonstrated that when dosing two sprays of

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Nasulin, delivering the second administration in the same nostril results in higher systemic exposure than delivery in the other nostril. The data also demonstrated that intrasubject variability is comparable to injectable insulins.

Ongoing Clinical Trials
• NasulinTM-US-0100-CPEX011: We are currently conducting a Phase 2a clinical trial of Nasulin, our intranasal insulin candidate, in patients with Type 2 diabetes. This study is designed to randomize 90 patients who are currently being treated with basal, or long-acting, insulin and oral anti-diabetes agents. 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. Recently, we made amendments to the study protocol which have resulted in an increased enrollment rate. In October 2009, the Company determined that it had screened enough patients to randomize the target of 90 patients and as a result stopped enrolling new patients. As of November 9, 2009, we have randomized 72 patients in the study and we expect to complete randomization in late-November 2009. Although we previously announced plans to initiate sites in the Ukraine, due to the increase in the enrollment rate in the U.S., such additional sites were not initiated. We expect to complete this study early next year under our current operating plan.

• CPEX INS-US-0100-PK012: Earlier this year we initiated and completed enrollment in this single-site Phase 1 study, in 24 healthy volunteers, to determine the pharmacokinetic parameters of various formulation strengths of Nasulin. The results were presented as a poster at the 2009 Annual Diabetes Technology Meeting and demonstrated that as the dose of Nasulin increased, the maximum concentrations of insulin in the blood (Cmax) and overall exposure to insulin over time (AUC) increased proportionally. This finding supports the use of six reliable doses for future clinical studies and will enable dose titration according to individual patient postprandial glucose reductions and risk of hypoglycemia.

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. We expect to design this trial 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 regimen. This trial is expected to be completed in the second half of 2011. Upon completion of this trial we expect to request an end of Phase 2 meeting with the U.S. Food and Drug Administration. Other Clinical Developments
Following the completion of an End-of-Phase-2 meeting earlier this year, Serenity Pharmaceuticals, our licensing and development partner, recently began recruiting patients in multiple Phase 3 clinical trials with their undisclosed urology drug delivered using CPEX's intranasal technology for the treatment of nocturia. These randomized, double blind, placebo controlled studies are being conducted at multiple sites in the United States.
RESULTS OF OPERATIONS:
The following is a discussion of the results of our operations for the three and nine months ended September 30, 2009 and 2008. Included in the financial disclosures for the three and nine months ended September 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.

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For the three months ended September 30, 2009 and 2008:

                                      Three Months Ended
                                         September 30,            Increase (Decrease)
    (unaudited, in thousands)         2009           2008            $              %
    Royalties and other revenue     $   4,951      $  3,945     $     1,006           26 %

    Operating expenses:
    General and administrative          2,340         2,574            (234 )         (9 )%
    Research and development            3,332         2,249           1,083           48 %
    Depreciation and amortization         175           171               4            2 %

    Total operating expenses:           5,847         4,994             853           17 %

    Loss from operations                 (896 )      (1,049 )           153           15 %

    Other, net                             24            43             (19 )        (44 )%

    Net loss                        $    (872 )    $ (1,006 )   $       134           13 %

Royalties and other revenues increased 26% to $5.0 million for the three months ended September 30, 2009, from $3.9 million for the three months ended September 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. It has been reported that prescriptions for Testim increased 17% during the third quarter of 2009 compared to the same period in 2008. Our royalty income is subject to several risks, including potential competition from generic products. See Liquidity and Capital Resources - Liquidity Risk for further discussion.
General and administrative expenses decreased 9% to $2.3 million for the three months ended September 30, 2009, from $2.6 million for the three months ended September 30, 2008, largely due to a decrease in share-based compensation expense. General and administrative expense for the three months ended September 30, 2008 includes an $838,000 non-cash charge resulting from the modification of equity awards associated with the Separation. Employee-related expenses and professional fees also decreased during the three months ended September 30, 2009 compared to the same period last year. Partially offsetting these decreases was an increase in legal costs primarily due 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 48% to $3.3 million for the three months ended September 30, 2009, from $2.2 million for the three months ended September 30, 2008, primarily due to increased clinical trial expenses related to the ongoing Nasulin clinical trials. This increase was partially offset by decreased share-based compensation expense. Research and development expense for the three months ended September 30, 2008 includes a $232,000 non-cash charge resulting from the modification of equity awards associated with the Separation. 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 $13.0 million and $15.0 million.
For the nine months ended September 30, 2009 and 2008:

                                       Nine Months Ended
                                         September 30,            Increase (Decrease)
     (unaudited, in thousands)         2009          2008            $              %
     Royalties and other revenue     $  13,435     $ 11,343     $      2,092          18 %

     Operating expenses:
     General and administrative          6,276        5,023            1,253          25 %
     Research and development            9,324        6,778            2,546          38 %
     Separation costs                        -        2,502           (2,502 )      (100 )%
     Depreciation and amortization         505          514               (9 )        (2 )%

     Total operating expenses:          16,105       14,817            1,288           9 %

     Loss from operations               (2,670 )     (3,474 )            804          23 %

     Other, net                            126          266             (140 )       (53 )%

     Net loss                        $  (2,544 )   $ (3,208 )   $        664          21 %

Royalties and other revenues increased 18% to $13.4 million for the nine months ended September 30, 2009, from $11.3 million for the nine months ended September 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 nine months ended September 30, 2008 includes $444,000

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related to a development license agreement with Serenity Pharmaceuticals, Inc. for which there is no comparable revenue in 2009.
General and administrative expenses increased 25% to $6.3 million for the nine months ended September 30, 2009, from $5.0 million for the nine months ended September 30, 2008, primarily due to patent infringement and general legal costs, which increased $1.9 million. 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. This increase was partially offset by a $678,000 reduction in share-based compensation expense due to the non-cash charge, in 2008, resulting from the modification of equity awards associated with the Separation.
Research and development expenses increased 38% to $9.3 million for the nine months ended September 30, 2009, from $6.8 million for the nine months ended September 30, 2008. Clinical trial expenses increased $3.4 million, primarily due to the ongoing Phase 1 and 2 Nasulin clinical trials, partially offset by a decrease of $740,000 in employee-related expenses, including a $455,000 reduction in share-based compensation expense related to the Separation.
Operating expenses for the nine months ended September 30, 2008 include $2.5 million in separation costs.