UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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

For the transition period from      to

SUCAMPO PHARMACEUTICALS, INC.

Delaware		13-3929237
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)
4520 East-West Highway, Suite 300		(301) 961-3400
Bethesda, MD 20814		(Registrant’s telephone number,
(Address of principal executive offices,		including area code)
including zip code)

     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 þ  No o

     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):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(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 Exchange Act). Yes o   No þ

     As of November 13, 2008, there were 15,650,398 shares of the registrant’s class A common stock outstanding and 26,191,050 shares of the registrant’s class B common stock outstanding.

 

 

Sucampo Pharmaceuticals, Inc.

Form 10-Q Index

				Page
		Part I. FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements (unaudited)			1
		Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007			1
		Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2008 and 2007			2
		Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2008			3
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007			4
		Notes to Condensed Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
		Part II. OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 4.		Submission of Matters to a Vote of Security Holders			29
Item 6.		Exhibits			30
SIGNATURES					31
INDEX TO EXHIBITS					32

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

SUCAMPO PHARMACEUTICALS, INC.

(In thousands, except share data)

		September 30,				December 31,
		2008				2007
ASSETS:
Current assets:
Cash and cash equivalents		$	13,364			$	25,559
Investments, current			93,117				51,552
Product royalties receivable			7,611				8,667
Unbilled accounts receivable			4,664				5,883
Accounts receivable			1,076				1,525
Prepaid and income taxes receivable			119				1,922
Deferred tax assets, net			1,066				88
Prepaid expenses and other current assets			2,226				2,222
Total current assets			123,243				97,418
Investments, non-current			17,626				9,400
Property and equipment, net			2,283				2,265
Deferred tax assets — noncurrent, net			4,566				551
Other assets			401				393
Total assets		$	148,119			$	110,027
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable		$	2,959			$	3,313
Accrued expenses			12,491				8,730
Deferred revenue — current			6,379				1,062
Income taxes payable			1,420				—
Total current liabilities			23,249				13,105
Deferred revenue, net of current portion			8,202				8,626
Other liabilities			1,615				1,768
Total liabilities			33,066				23,499
Commitments (Note 7)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized at September 30, 2008 and December 31, 2007; no shares issued and outstanding at September 30, 2008 and December 31, 2007			—				—
Class A common stock, $0.01 par value; 270,000,000 shares authorized at September 30, 2008 and December 31, 2007; 15,650,398 and 15,538,518 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			156				155
Class B common stock, $0.01 par value; 75,000,000 shares authorized at September 30, 2008 and December 31, 2007; 26,191,050 shares issued and outstanding at September 30, 2008 and December 31, 2007			262				262
Additional paid-in capital			98,272				96,680
Accumulated other comprehensive loss			(1,416	)			(393	)
Retained earnings (accumulated deficit)			17,779				(10,176	)
Total stockholders’ equity			115,053				86,528
Total liabilities and stockholders’ equity		$	148,119			$	110,027

The accompanying notes are an integral part of these condensed consolidated financial statements.

SUCAMPO PHARMACEUTICALS, INC.

(In thousands, except per share data)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Revenues:
Research and development revenue		$	5,436			$	4,652			$	66,982			$	52,105
Product royalty revenue			7,718				6,998				24,699				18,869
Co-promotion revenue			1,185				1,051				3,643				3,318
Contract and collaboration revenue			142				151				425				454
Total revenues			14,481				12,852				95,749				74,746
Operating expenses:
Research and development			11,390				7,588				35,537				22,278
General and administrative			3,863				2,116				10,591				17,286
Selling and marketing			2,680				2,779				8,398				9,806
Milestone royalties — related parties			—				—				3,531				1,500
Product royalties — related parties			1,359				1,244				4,391				3,354
Total operating expenses			19,292				13,727				62,448				54,224
(Loss) income from operations			(4,811	)			(875	)			33,301				20,522
Non-operating income (expense):
Interest income			655				780				1,862				1,575
Other expense, net			(15	)			(228	)			(16	)			(192	)
Total non-operating income, net			640				552				1,846				1,383
(Loss) income before income taxes			(4,171	)			(323	)			35,147				21,905
Income tax benefit (provision)			1,745				(151	)			(7,192	)			(7,980	)
Net (loss) income		$	(2,426	)		$	(474	)		$	27,955			$	13,925
Net (loss) income per share:
Basic net (loss) income per share		$	(0.06	)		$	(0.01	)		$	0.67			$	0.38
Diluted net (loss) income per share		$	(0.06	)		$	(0.01	)		$	0.67			$	0.38
Weighted average common shares outstanding — basic			41,813				39,312				41,768				36,447
Weighted average common shares outstanding — diluted			41,813				39,312				42,022				36,835
Comprehensive income:
Net (loss) income		$	(2,426	)		$	(474	)		$	27,955			$	13,925
Other comprehensive (loss) income:
Unrealized gain (loss) on investments, net of tax effect			374				—				(1,082	)			—
Foreign currency translation			54				281				59				205
Comprehensive (loss) income		$	(1,998	)		$	(193	)		$	26,932			$	14,130

The accompanying notes are an integral part of these condensed consolidated financial statements.

SUCAMPO PHARMACEUTICALS, INC.

(In thousands, except share data)

																						Accumulated				Retained
		Class A								Class B								Additional				Other				Earnings				Total
		Common Stock								Common Stock								Paid-In				Comprehensive				(Accumulated				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Loss				Deficit)				Equity
Balance at December 31, 2007			15,538,518			$	155				26,191,050			$	262			$	96,680			$	(393	)		$	(10,176	)		$	86,528
Stock issued upon exercise of stock options			111,880				1				—				—				869				—				—				870
Employee stock option expense, net of tax benefit			—				—				—				—				723				—				—				723
Foreign currency translation			—				—				—				—				—				59				—				59
Unrealized loss on investments, net of tax effect			—				—				—				—				—				(1,082	)			—				(1,082	)
Net income			—				—				—				—				—				—				27,955				27,955
Balance at September 30, 2008			15,650,398			$	156				26,191,050			$	262			$	98,272			$	(1,416	)		$	17,779			$	115,053

The accompanying notes are an integral part of these condensed consolidated financial statements.

SUCAMPO PHARMACEUTICALS, INC.

(In thousands)

		Nine Months Ended September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	27,955			$	13,925
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			326				153
Loss on disposal of property and equipment			—				63
Deferred tax (benefit) provision			(4,312	)			4,413
Stock-based compensation			567				6,144
Accretion of discounts on investments			(95	)			—
Changes in operating assets and liabilities:
Accounts receivable			493				(2,831	)
Unbilled accounts receivable			1,219				—
Product royalties receivable			1,055				(4,969	)
Prepaid and income taxes receivable and payable, net			3,224				(759	)
Accounts payable			(415	)			1,951
Accrued expenses			3,815				1,145
Deferred revenue			4,893				(11,376	)
Other assets and liabilities, net			(114	)			549
Net cash provided by operating activities			38,611				8,408
Cash flows from investing activities:
Purchases of investments			(135,584	)			(86,847	)
Proceeds from sales of investments			41,000				55,795
Maturities of investments			43,125				—
Purchases of property and equipment			(342	)			(2,128	)
Net cash used in investing activities			(51,801	)			(33,180	)
Cash flows from financing activities:
Proceeds from exercise of stock options			870				—
Excess tax benefits from share-based payments			155				—
Issuance of common stock, net of offering costs			—				31,341
Net cash provided by financing activities			1,025				31,341
Effect of exchange rates on cash and cash equivalents			(30	)			186
Net (decrease) increase in cash and cash equivalents			(12,195	)			6,755
Cash and cash equivalents at beginning of period			25,559				22,481
Cash and cash equivalents at end of period		$	13,364			$	29,236

The accompanying notes are an integral part of these condensed consolidated financial statements.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Business Organization and Basis of Presentation

Description of the Business

     Sucampo Pharmaceuticals, Inc. (Sucampo or the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of proprietary drugs based on prostones, a class of compounds derived from functional fatty acids that occur naturally in the human body. Sucampo is focused on developing prostones for the treatment of gastrointestinal, respiratory, vascular and central nervous system diseases and disorders.

     The Company is party to a collaboration and license agreement with Takeda Pharmaceutical Company Limited (Takeda) to jointly develop and commercialize AMITIZA^® (lubiprostone) for chronic idiopathic constipation, irritable bowel syndrome with constipation, opioid-induced bowel dysfunction and other gastrointestinal indications in the United States and Canada. In January 2006, the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for AMITIZA’s first indication to treat chronic idiopathic constipation in adults. Commercialization of AMITIZA began in April 2006 throughout the United States. On April 29, 2008, the Company received marketing approval from the FDA for AMITIZA to treat irritable bowel syndrome with constipation in women 18 years of age or older. Commercialization for this indication began in May 2008 throughout the United States. The Company is currently conducting Phase III pivotal clinical trials of AMITIZA for the treatment of opioid-induced bowel dysfunction.

     The Company’s founders own directly or indirectly the majority holdings in Sucampo as well as in other companies that have contractual relationships with Sucampo. One of the Company’s founders serves as the Chairman of the Board of Directors, Chief Executive Officer and Chief Scientific Officer of the Company.

     The Company’s international operations are conducted through its subsidiaries in the United Kingdom and Japan.

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2007, included in the Company’s Annual Report on Form 10-K. The financial information as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 is unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments or accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or for a full fiscal year.

     The condensed consolidated financial statements include the accounts of Sucampo and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in the consolidated accounts.

2. Summary of Significant Accounting Policies

Current and Non-Current Investments

     Current and non-current investments consist primarily of U.S. Treasury bills and notes and auction rate securities. The Company’s investments in these securities are classified as available-for-sale securities under Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115).

     The available-for-sale securities are accounted for at fair market value and unrealized gains and losses on these securities, if any, are included in accumulated other comprehensive loss in stockholders’ equity. The fair value of the securities is measured in accordance with SFAS No. 157, “Fair Value Measurements” (SFAS 157), which was adopted by the Company on January 1, 2008. SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition and disclosure purposes under generally accepted accounting principles. The Company assesses the recoverability of its available-for-sale securities and, if impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. Other-than-temporary impairments are included in the condensed consolidated statement of operations and comprehensive (loss) income. Any future fluctuation in fair value related to these instruments that the Company deems to be temporary, including any recoveries of previous write-downs, will be recorded to other comprehensive income.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

     The adoption of SFAS 157 did not materially affect the Company’s financial condition, its results of operations, or its cash flows. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. See additional disclosures related to the determination of the fair value of the Company’s investments (see Note 4).

     The Company also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (SFAS 159), which permits entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis, on January 1, 2008. The adoption of SFAS 159 did not materially affect the Company’s financial condition, results of operations, or cash flows as the Company has not elected to account for any assets or liabilities at fair value on an instrument-by-instrument basis.

Certain Risks, Concentrations and Uncertainties

     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents, restricted cash, investments and receivables. The Company places its cash and cash equivalents, restricted cash and investments with highly rated financial institutions. At September 30, 2008 and December 31, 2007, the Company had approximately $98.1 million and $85.9 million, respectively, of cash and cash equivalents, restricted cash and investments in excess of government insured limits. The Company’s uninsured cash, cash equivalents and investments as of September 30, 2008 consist primarily of $70.8 million of T-bills and notes and $18.9 million of money market funds guaranteed under the U.S. Treasury’s Temporary Guarantee Program. The Company has not experienced any losses on these accounts related to amounts in excess of insured limits.

     At September 30, 2008, the Company holds $21.0 million of investments in auction rate securities at fair value and has recorded a cumulative unrealized loss of $1.9 million, or $1.2 million net of tax effect, as of September 30, 2008 related to these investments. This unrealized loss was recorded as other comprehensive loss during the nine months ended September 30, 2008.

     On October 16, 2008, the Company accepted the settlement rights offered by the Company’s broker under a settlement agreement between the broker and the SEC and various state regulatory authorities. The settlement rights allow the Company to redeem auction rate securities at par within a specified period. Based on this settlement, the Company received $3.4 million on November 3, 2008, representing the par value of its tax-exempt auction rate securities and has the right to request the redemption of the remaining auction rate securities at par value of an additional $19.4 million within, the two-year period starting June 30, 2010. As the settlement was accepted subsequent to September 30, 2008, the Company’s consolidated financial statements as of September 30, 2008 do not reflect any contingent gains, valuation adjustments or any other amounts relating to the settlement rights. The Company has, however, classified auction rate securities as current and non-current investments as of September 30, 2008 based on the expected redemption dates. The Company does not anticipate having to sell these securities in order to operate its business before the expected redemption dates.

     The Company’s product, AMITIZA, and other candidates under development require approval from the FDA or other international regulatory agencies prior to commercial sales. For those product candidates that have not yet been approved by the FDA, or international regulatory agencies, there can be no assurance the products will receive the necessary approval. If the Company is denied approval or approval is delayed, it may have a material adverse impact on the Company.

     The Company’s product, AMITIZA, competes in a rapidly changing, highly competitive market, which is characterized by advances in scientific discovery, changes in customer requirements, evolving regulatory requirements and developing industry standards. Any failure by the Company to anticipate or to respond adequately to scientific developments in its industry, changes in customer requirements or changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of products or services could have a material adverse effect on the Company’s business, operating results and future cash flows.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

     The Company’s expected activities may necessitate significant uses of working capital. The Company’s working capital requirements will depend on many factors, including the successful sales of AMITIZA, research and development efforts to develop new products, payments received under contractual agreements with other parties, the status of competitive products and market acceptance of the Company’s new products by physicians and patients. The Company plans to continue financing operations with product royalty revenue as well as with cash received from milestones and other revenue related to its joint collaboration and license agreement and the supplemental agreement entered into with Takeda (see Note 9).

     The Company depends significantly upon the collaboration with Takeda and the Company’s activities may be affected if this relationship is disrupted. Revenues from Takeda accounted for more than 99% of the Company’s total revenues for the three months ended September 30, 2008 and 2007 and the nine months ended September 30, 2008 and 2007. Accounts receivable, unbilled accounts receivable and product royalties receivable from Takeda accounted for 98% and 99% of the Company’s accounts receivable, unbilled accounts receivable and product royalties receivable at September 30, 2008 and December 31, 2007, respectively (see Note 9).

     The Company has an exclusive supply arrangement with R-Tech Ueno, Ltd (R-Tech), an affiliate, to provide it with commercial and clinical supplies of its product and product candidates. R-Tech also provides certain preclinical and other research and development services. Any difficulties or delays in performing the services under these arrangements may cause the Company to lose revenues, delay research and development activities or otherwise disrupt the Company’s operations (see Note 8).

     The Company has previously entered into a restated license agreement with Sucampo AG (SAG) to grant the Company a royalty-bearing, exclusive, worldwide license to develop prostone compounds, including AMITIZA and cobiprostone. SAG is a Swiss-patent holding company and an affiliate. The Company’s success depends, in part, on SAG’s ability to obtain and maintain proprietary protection for the intellectual property rights relating to the prostone technology and products (see Note 8).

Deferred Revenue

     Deferred revenue represents payments received or receivables for licensing fees, option fees, consulting, research and development contracts and related cost sharing and supply agreements that are deferred until revenue can be recognized under the Company’s revenue recognition policy. Deferred revenue is classified as current if management believes the Company will be able to recognize the deferred amount as revenue within 12 months of the balance sheet date. During the second quarter of 2008, the Company agreed to receive quarterly prepayments from Takeda for its research and development expenses under the agreements with Takeda. As of September 30, 2008, approximately $1.9 million of deferred revenue relates to these prepayments (see Note 6).

Reclassifications

     Certain amounts in the previously issued financial statements have been reclassified to conform with the current presentation. The Company reclassified expenses that have been previously included within general and administrative expenses to research and development expenses. Such expenses primarily include salaries and other employee benefits of personnel who oversee the research and development process, and allocated depreciation and rent expenses and insurance costs. The Company also reclassified allocated depreciation and rent expenses and insurance costs from general and administrative expenses to selling and marketing expenses. During the three months ended September 30, 2007, the Company reclassified $828,000 and $84,000 of general and administrative expenses to research and development expenses and selling and marketing expenses, respectively. During the nine months ended September 30, 2007, the Company reclassified approximately $2.2 million and $154,000 of general and administrative expenses to research and development expenses and selling and marketing expenses, respectively.

Cumulative Out-of-Period Adjustment

     The Company recorded a cumulative adjustment of approximately $148,000 during the nine months ended September 30, 2008 to recognize additional research and development expenses that have not been recorded in prior periods. The error resulted from incorrect accounting for investigator services for the Phase IIb study of lubiprostone for adult chronic idiopathic constipation initiated in Japan in the fourth quarter of 2007. The effect of this adjustment on the consolidated financial statements was not material for the year ended December 31, 2007 or for the period in which it was recorded, as the adjustment consisted of insignificant amounts related to each of these periods.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Changes in Estimate

     In June 2006, a joint committee comprised of representatives of the Company and Takeda (the Joint Commercialization Committee) granted approval for the Company and Takeda to begin three studies related to funding arrangements discussed in the collaboration and license agreement and its supplement. The Company accounts for these three required deliverables as a single unit of accounting for revenue recognition purposes. Effective April 1, 2008, as a result of lower-than-expected patient enrollment in one of the studies, the Joint Commercialization Committee approved an increase in funding for patient recruitment. Additionally, the Company concluded that the estimated completion of these trials would be extended from June 2009 to December 2009. As such, the Company determined that the recognition period for associated research and development revenue should be extended. The related research and development revenue is limited to the lesser of the actual cumulative reimbursable costs incurred or the cumulative straight-line amount of revenue recognized over the estimated performance period. As a result of the extended completion date and an increase of total expected reimbursable costs, the Company deferred approximately $1.9 million and $3.6 million in research and development revenue for the three and nine months ended September 30, 2008, respectively. The Company expects to recognize the deferred revenue of $3.6 million in 2009. Under the provision of SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154), the Company will recognize this as a change in estimate on a prospective basis from April 1, 2008.

     During the three months ended September 30, 2008, as additional historic information became available, the Company refined its estimated rebates, discounts and other expenses deducted from Takeda’s gross sales in order to calculate Takeda’s net sales and product royalties due from Takeda to the Company. As a result of this, the Company recorded a reduction to its product royalty revenues of $644,000 during the three months ended September 30, 2008.

     The above changes in estimate have the following impact on net income and basic and diluted net income per share for the three and nine months ended September 30, 2008:

		Three Months Ended				Nine Months Ended
(In thousands, except per share data)		September 30, 2008				September 30, 2008
Decrease in revenue and income before income taxes		$	(2,570	)		$	(4,263	)
Impact on basic net (loss) income per share			(0.03	)			(0.02	)
Impact on diluted net (loss) income per share			(0.03	)			(0.02	)

Recent Accounting Pronouncements

     In June 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3), which provides guidance to research and development companies on how to account for the nonrefundable portion of an advance payment made for research and development activities. The Company adopted EITF 07-3 as of January 1, 2008 and there was no material impact upon its adoption.

     In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51” (SFAS 160). SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 will be applied to acquisitions that close in years beginning after December 15, 2008. Early adoption is not permitted. SFAS 141R and SFAS 160 will not have any impact on the Company’s future consolidated financial statements unless it undertakes an acquisition in the future.

     In December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1). The consensus prohibits the equity method of accounting for collaborative arrangements under Accounting Principles Board No. 18, “The Equity Method of Accounting for Investments in Common Stock", unless a legal entity exists. Payments between the collaborative partners will be evaluated and reported in the income statement based on applicable GAAP. Absent specific GAAP, the participants to the arrangement will apply other existing GAAP by analogy or apply a reasonable and rational accounting policy consistently. The guidance in EITF 07-1 is effective for periods that begin after December 15, 2008 and will apply to arrangements in existence as of the effective date. The effect of the new consensus will be accounted for as a change in accounting principle through retrospective application. EITF 07-1 will not have any impact on the consolidated financial statements upon adoption.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

     In February 2008, the FASB agreed to delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 with respect to its financial assets and liabilities as of January 1, 2008 and does not expect that the adoption of SFAS 157 for its nonfinancial assets and liabilities will have a significant impact on its financial position or results from operations.

3. Earnings per Share

     Basic net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average class A and B common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average common shares and potential dilutive common shares outstanding, except when their inclusion would be anti-dilutive.

     The computation of net income per share for the three and nine months ended September 30, 2008 and 2007 is shown below:

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except per share data)		2008				2007				2008				2007
Basic net (loss) income per share:
Net (loss) income		$	(2,426	)		$	(474	)		$	27,955			$	13,925
Weighted average class A and B common shares outstanding			41,813				37,252				41,768				35,753
Conversion of series A preferred stock to class A common shares outstanding			—				2,060				—				694
			41,813				39,312				41,768				36,447
Basic net (loss) income per share		$	(0.06	)		$	(0.01	)		$	0.67			$	0.38
Diluted net (loss) income per share:
Net (loss) income		$	(2,426	)		$	(474	)		$	27,955			$	13,925
Weighted average class A and B common shares outstanding for diluted net income per share			41,813				39,312				41,768				36,447
Assumed exercise of stock options under the treasury stock method			—				—				254				388
			41,813				39,312				42,022				36,835
Diluted net (loss) income per share		$	(0.06	)		$	(0.01	)		$	0.67			$	0.38

     The potentially dilutive securities used in the calculations of diluted historical net income per share as of the nine months ended September 30, 2008 and 2007 are as follows:

		September 30,
(In thousands)		2008				2007
Employee stock options			381				641
Non-employee stock options			450				510

     Potentially dilutive securities representing approximately 407,000 and nil shares of common stock for the three months ended September 30, 2008 and 2007, respectively, were excluded from the computation of diluted earnings per share for the periods because their effect would have been anti-dilutive.

4. Current and Non-Current Investments

     At September 30, 2008 and December 31, 2007, current and non-current available-for-sale investments consisted of the following securities:

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

		September 30, 2008
						Unrealized				Unrealized
(In thousands)		Cost				Gains				Losses				Fair Value
Current:
U.S. Treasury bills and notes		$	70,716			$	115			$	—			$	70,831
Auction rate securities			3,475				—				(104	)			3,371
Money market funds			18,915				—				—				18,915
Total		$	93,106			$	115			$	(104	)		$	93,117
Non-current:
Auction rate securities		$	19,400			$	—			$	(1,774	)		$	17,626

		December 31, 2007
						Unrealized				Unrealized
(In thousands)		Cost				Gains				Losses				Fair Value
Current:
Auction rate securities		$	51,500			$	—			$	—			$	51,500
Money market funds			52				—				—				52
Total		$	51,552			$	—			$	—			$	51,552
Non-current:
Auction rate securities		$	9,400			$	—			$	—			$	9,400

     The Company’s assets measured at fair value on a recurring basis, which are subject to the disclosure requirements of SFAS 157, at September 30, 2008 were as follows:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable				Total as of
		Identical Assets				Observable Inputs				Inputs				September 30,
(In thousands)		(Level 1)				(Level 2)				(Level 3)				2008
U.S. Treasury bills and notes		$	70,831			$	—			$	—			$	70,831
Auction rate securities			—				—				20,997				20,997
Other available-for-sale securities			18,915				—				—				18,915
Total assets measured at fair value		$	89,746			$	—			$	20,997			$	110,743

     Based on market conditions, the Company changed its valuation methodology for auction rate securities to a valuation method that includes market and income approaches during the first quarter of 2008. Accordingly, these securities changed from Level 1 to Level 3 within SFAS 157’s valuation hierarchy at the time of the Company’s initial adoption of SFAS 157 at January 1, 2008. The Level 2 securities consist of the auction rate securities that were redeemed at par during 2008. The following table presents the Company’s assets measured at fair value on a recurring basis using significant observable inputs (Level 2) and significant unobservable inputs (Level 3) as defined in SFAS 157 during the nine months ended September 30, 2008:

		Auction Rate
(In thousands)		Securities
Balance at January 1, 2008		$	9,400
Transfers to Level 2			(3,900	)
Transfers to Level 3			51,500
Total gains (losses) (realized or unrealized):
Included in earnings			—
Included in other comprehensive loss			(1,878	)
Purchases			5,100
Settlements			(39,225	)
Balance at September 30, 2008		$	20,997

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

5. Accrued Expenses

     Accrued expenses consist of the following:

		September 30,				December 31,
(In thousands)		2008				2007
Research and development costs		$	7,717			$	4,422
Selling and marketing costs			352				384
Employee compensation			1,589				1,867
Legal service fees			268				226
Product royalty liability — related party			1,706				1,536
Other accrued expenses			859				295
		$	12,491			$	8,730

6. Deferred Revenue

     Total deferred revenue consists of the following:

		September 30,				December 31,
(In thousands)		2008				2007
Deferred revenue — current		$	6,379			$	1,062
Deferred revenue, net of current portion			8,202				8,626
		$	14,581			$	9,688

     During the second quarter of 2008, the Company agreed to receive quarterly prepayments from Takeda for its research and development expenses under the agreements with Takeda. As of September 30, 2008, approximately $1.9 million of deferred revenue relates to these prepayments. As a result of the change in estimate (see Note 2) resulting from an extended completion date and an increase of total expected reimbursable costs of certain clinical studies, the Company deferred approximately $3.6 million in research and development revenue as of September 30, 2008.

7. Commitments

Operating Leases

     The Company leases office space in the United States, United Kingdom and Japan under operating leases through 2017. Total future minimum, non-cancelable lease payments under operating leases, which do not include future sublease receipts of $299,000, are as follows as of September 30, 2008:

(In thousands)
2008		$	402
2009			1,520
2010			1,049
2011			938
2012			963
2013 and thereafter			4,243
Total minimum lease payments		$	9,115

     Rent expense for all operating leases was $296,000 and $288,000 for the three months ended September 30, 2008 and 2007, respectively, and $874,000 and $751,000 for the nine months ended September 30, 2008 and 2007, respectively.

Research and Development Costs

     The Company routinely enters into agreements with clinical research organizations (CROs), to oversee clinical research and development studies provided on an outsourced basis and assist in other research and development activities. The Company generally is not contractually obligated to pay the third party if the service or reports are not provided. Total future estimated costs under these agreements as of September 30, 2008 were approximately $14.3 million.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

8. Related Party Transactions

R-Tech Ueno, Ltd.

     The Company is a party to multiple exclusive clinical and commercial supply agreements with R-Tech, whereby R-Tech manufactures and supplies AMITIZA and other prostone compounds for Sucampo. Also, R-Tech sells commercial supplies of AMITIZA directly to Takeda, which are not recorded in the books of Sucampo.

     The following table summarizes the Company’s transactions with R-Tech towards these services:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
(In thousands)
Clinical supplies		$	38			$	1,357			$	553			$	2,899
Other research and development services			62				67				111				85
		$	100			$	1,424			$	664			$	2,984

     The following table summarizes the amounts included in deferred revenue resulting from the deferral of upfront payments relating to the exclusive supply agreements with R-Tech:

		September 30,				December 31,
		2008				2007
(In thousands)
Deferred revenue — current		$	419			$	419
Deferred revenue, net of current portion			6,549				6,862
		$	6,968			$	7,281

     The Company recognized approximately $105,000 of previously deferred revenue relating to its agreements with R-Tech for the three months ended September 30, 2008 and 2007 and approximately $314,000 for the nine months ended September 30, 2008 and 2007, which was recorded as contract and collaboration revenue in the condensed consolidated statements of operations and comprehensive (loss) income.

Sucampo AG License Agreements

     During the three months ended March 31, 2008, the Company submitted a Marketing Authorization Application (MAA) for lubiprostone, 24 micrograms, for the indication of chronic idiopathic constipation in adults in nine European countries using the decentralized procedure. The submission of the MAA triggered the obligation on the part of the Company under the license agreement with SAG to make a $1.0 million payment to SAG. The Company recorded the expense as milestone royalties — related parties in the first quarter of 2008 and paid the milestone in the fourth quarter of 2008.

     The Company expensed approximately $1.4 million and $1.2 million in product royalties — related parties under the license agreement with SAG for the three months ended September 30, 2008 and 2007, respectively, and approximately $4.4 million and $3.4 million for the nine months ended September 30, 2008 and 2007, respectively, based on current AMITIZA sales.

9. Collaboration and License Agreements with Takeda

     On October 29, 2004, the Company entered into a 16-year collaboration and license agreement with Takeda to exclusively co-develop, commercialize and sell products that contain lubiprostone for gastroenterology indications in the United States and Canada. On February 1, 2006, the Company entered into a supplemental agreement with Takeda, which amended the responsibilities of both the Company and Takeda for the co-promotion of AMITIZA and clarified the responsibilities and funding arrangements for other marketing services to be performed by both parties. Payments to the Company under these agreements include a non-refundable up-front payment, non-refundable development and commercial milestone payments, reimbursement of certain development and co-promotion costs and product royalties.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

     The Company has received a total of $150.0 million in up-front and development milestone payments through September 30, 2008 under these agreements. In June 2007, the Company submitted the supplemental new drug application (sNDA) to the FDA for irritable bowel syndrome with constipation and received a $30.0 million milestone from Takeda that was recognized as revenue in the second quarter of 2007. The Company received a $50.0 million milestone from Takeda as a result of the FDA’s approval on April 29, 2008 of the sNDA for irritable bowel syndrome with constipation in women 18 years of age and older and recognized the payment as research and development revenue in the second quarter of 2008. Subject to future development and commercial milestones, the Company is potentially entitled to receive up to $10.0 million in additional development milestone payments and up to $50.0 million in commercial milestone payments, under the collaboration and license agreements with Takeda, although there can be no assurance that the Company will receive any such payments.

     The following table summarizes the cash streams and related collaboration and research and development revenue recognized under the collaboration and license agreements with Takeda for the nine months ended September 30, 2008:

										Revenue				Change in
						Cash Received				Recognized				Accounts
						for the				for the				Receivable
		Amount				Nine Months				Nine Months				for the Nine				Amount
		Deferred at				Ended				Ended				Months Ended				Deferred at
		December 31,				September 30,				September 30,				September 30,				September 30,
(In thousands)		2007				2008				2008				2008				2008
Collaboration revenue:
Up-front payment associated with the Company’s obligation to participate in joint committees with Takeda		$	1,911			$	—			$	110			$	—			$	1,801
Research and development revenue:
Development milestones		$	—			$	50,000			$	50,000			$	—			$	—
Reimbursement of research and development expenses			—				24,653				16,982				(2,191	)			5,480
Total		$	—			$	74,653			$	66,982			$	(2,191	)		$	5,480
Product royalty revenue		$	—			$	25,755			$	24,699			$	(1,056	)		$	—

										Revenue
						Cash Received				Recognized
						for the				for the
		Accounts				Nine Months				Nine Months				Accounts				Amount
		Receivable at				Ended				Ended				Receivable at				Deferred at
		December 31,				September 30,				September 30,				September 30,				September 30,
(In thousands)		2007*				2008				2008				2008*				2008
Research and development revenue:
Development milestones		$	—			$	50,000			$	50,000			$	—			$	—
Reimbursement of research and development expenses		$	6,887			$	24,653			$	16,982			$	4,696			$	5,480
Product royalty revenue		$	8,667			$	25,755			$	24,699			$	7,611			$	—
Co-promotion revenue		$	360			$	3,212			$	3,643			$	791			$	—

     In connection with the Company’s MAA filing for lubiprostone in Europe, the Company agreed with Takeda to make a one-time payment of approximately $1.8 million, which will permit the Company to use in Europe, the Middle East and Africa certain data and information developed under the Takeda Agreement relating to the use of lubiprostone to treat chronic idiopathic constipation. The Company recognized this payment as a research and development expense in the first quarter of 2008.

10. Stock Option Plan

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

     The following table summarizes the employee stock option activity for the nine months ended September 30, 2008 under the Company’s 2001 Incentive Plan:

						Weighted				Weighted
						Average				Average Remaining				Aggregate
						Exercise Price				Contractual				Intrinsic
(In thousands, except share and per share data)		Shares				Per Share				Term (Years)				Value
Options outstanding, December 31, 2007			640,900			$	10.24
Options exercised			(51,880	)			10.00
Options forfeited			(34,850	)			10.00
Options expired			(48,750	)			10.00
Options outstanding, September 30, 2008			505,420				10.30				6.07			$	—
Options exercisable, September 30, 2008			490,545				10.31				6.02			$	—

     The following table summarizes the employee stock option activity for the nine months ended September 30, 2008 under the Company’s 2006 Incentive Plan:

						Weighted				Weighted
						Average				Average Remaining				Aggregate
						Exercise Price				Contractual				Intrinsic
(In thousands, except share and per share data)		Shares				Per Share				Term (Years)				Value
Options outstanding, December 31, 2007			267,500			$	14.44
Options granted			44,000				9.66
Options forfeited			(17,250	)			14.12
Options expired			(11,750	)			14.12
Options outstanding, September 30, 2008			282,500				13.87				8.27			$	—
Options exercisable, September 30, 2008			60,750				14.47				7.96			$	—

     The weighted average grant date fair value of options granted during the nine months ended September 30, 2008 and the year ended December 31, 2007 were $5.25 and $7.19, respectively. As of September 30, 2008, approximately $1.2 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards are expected to be recognized over a weighted average period of 2.35 years.

     The following table summarizes the non-employee stock option activity for the nine months ended September 30, 2008 under the Company’s 2001 Incentive Plan:

						Weighted				Weighted
						Average				Average Remaining				Aggregate
						Exercise Price				Contractual				Intrinsic
(In thousands, except share and per share data)		Shares				Per Share				Term (Years)				Value
Options outstanding, December 31, 2007			510,000			$	5.85
Options exercised			(60,000	)			5.85
Options outstanding, September 30, 2008			450,000				5.85				6.58			$	1,206
Options exercisable, September 30, 2008			450,000				5.85				6.58			$	1,206

11. Income Taxes

     For the three months ended September 30, 2008 and 2007, the Company’s consolidated effective tax rate was 41.8% and 46.6%, respectively. For the nine months ended September 30, 2008 and 2007, the Company’s consolidated annualized effective tax rate was 20.5% and 36.4%, respectively. As a result of the FDA approval of the sNDA in April 2008 for irritable bowel syndrome with constipation and the related impact on projected income in 2008 and future years based on the $50.0 million milestone payment and expected product royalties, the Company believes that its U.S. deferred tax assets will likely be realized. Accordingly, the tax provision recorded during the nine months ended September 30, 2008 reflects a discrete release of U.S. deferred tax asset valuation allowances of $4.8 million and a reduction in the projected 2008 effective tax rate applied to the 2008 pre-tax income for the nine months ended September 30, 2008.

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

12. Uncommitted Line of Credit

     On March 5, 2008, the Company entered into a line of credit providing for uncommitted borrowings of up to $30.0 million. The lender has no obligation to make advances under this line of credit but may do so in its sole discretion. The line of credit is collateralized by our current and non-current investments. Advances made under this line of credit will bear an interest rate based on LIBOR plus a predetermined percentage based on the amount of the advance and other conditions. Borrowings under this line of credit are due upon the demand of the lender and the lender can make a repayment demand at its sole option at any time for any or no reason. As of September 30, 2008, the Company had not drawn down any funds under this line of credit.

13. Segment Reporting

     The Company has determined that it has three reportable geographic segments based on the Company’s method of internal reporting, which disaggregates business by geographic location. These segments are the United States, Europe and Japan. The Company evaluates the performance of these segments based on income (loss) from operations, as well as other factors, including the progress of its research and development activities. The reportable segments have historically derived their revenue from joint collaboration and strategic alliance agreements. Transactions between the segments consist primarily of intercompany loans and the provision of research and development services. Following is a summary of financial information by reportable geographic segment.

														Intercompany
(In thousands)		United States				Europe				Japan				Eliminations				Consolidated
Three Months Ended September 30, 2008
Research and development revenue		$	5,436			$	—			$	—			$	—			$	5,436
Product royalty revenue			7,718				—				—				—				7,718
Co-promotion revenue			1,185				—				—				—				1,185
Contract and collaboration revenue			142				—				213				(213	)			142
Total revenues			14,481				—				213				(213	)			14,481
Depreciation and amortization			110				1				3				—				114
Other operating expenses			17,819				469				1,100				(210	)			19,178
Loss from operations			(3,448	)			(470	)			(890	)			(3	)			(4,811	)
Interest income			678				1				2				(26	)			655
Other non-operating expense, net			(6	)			(17	)			(21	)			29				(15	)
Loss before income taxes		$	(2,776	)		$	(486	)		$	(909	)		$	—			$	(4,171	)
Capital expenditures		$	5			$	35			$	—			$	—			$	40
Three Months Ended September 30, 2007
Research and development revenue		$	4,652			$	—			$	—			$	—			$	4,652
Product royalty revenue			6,998				—				—				—				6,998
Co-promotion revenue			1,051				—				—				—				1,051
Contract and collaboration revenue			142				—				219				(210	)			151
Total revenues			12,843				—				219				(210	)			12,852
Depreciation and amortization			85				1				7				—				93
Other operating expenses			12,587				520				737				(210	)			13,634
Income (loss) from operations			171				(521	)			(525	)			—				(875	)
Interest income			782				—				3				(5	)			780
Other non-operating income (expense), net			(69	)			(16	)			(148	)			5				(228	)
Income (loss) before income taxes		$	884			$	(537	)		$	(670	)		$	—			$	(323	)
Capital expenditures		$	788			$	—			$	—			$	—			$	788

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

														Intercompany
(In thousands)		United States				Europe				Japan				Eliminations				Consolidated
Nine Months Ended September 30, 2008
Research and development revenue		$	66,982			$	—			$	—			$	—			$	66,982
Product royalty revenue			24,699				—				—				—				24,699
Co-promotion revenue			3,643				—				—				—				3,643
Contract and collaboration revenue			425				—				630				(630	)			425
Total revenues			95,749				—				630				(630	)			95,749
Depreciation and amortization			318				1				7				—				326
Other operating expenses			55,324				2,891				4,537				(630	)			62,122
Income (loss) from operations			40,107				(2,892	)			(3,914	)			—				33,301
Interest income			1,924				6				5				(73	)			1,862
Other non-operating (expense) income, net			(39	)			(30	)			(20	)			73				(16	)
Income (loss) before income taxes		$	41,992			$	(2,916	)		$	(3,929	)		$	—			$	35,147
Capital expenditures		$	304			$	35			$	3			$	—			$	342
Nine Months Ended September 30, 2007
Research and development revenue		$	52,105			$	—			$	—			$	—			$	52,105
Product royalty revenue			18,869				—				—				—				18,869
Co-promotion revenue			3,318				—				—				—				3,318
Contract and collaboration revenue			424				—				660				(630	)			454
Total revenues			74,716				—				660				(630	)			74,746
Depreciation and amortization			143				1				9				—				153
Other operating expenses			52,201				829				1,671				(630	)			54,071
Income (loss) from operations			22,372				(830	)			(1,020	)			—				20,522
Interest income			1,573				—				7				(5	)			1,575
Other non-operating income (expense), net			(64	)			(25	)			(108	)			5				(192	)
Income (loss) before income taxes		$	23,881			$	(855	)		$	(1,121	)		$	—			$	21,905
Capital expenditures		$	2,128			$	—			$	—			$	—			$	2,128
As of September 30, 2008
Property and equipment, net		$	2,167			$	32			$	84			$	—			$	2,283
Identifiable assets		$	158,420			$	2,160			$	5,364			$	(17,825	)		$	148,119
As of December 31, 2007
Property and equipment, net		$	2,182			$	—			$	83			$	—			$	2,265
Identifiable assets		$	114,490			$	2,381			$	1,987			$	(8,831	)		$	110,027