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

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

Commission File Number: 001-33609

SUCAMPO PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware		30-0520478
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)
4520 East-West Highway, Suite 300
Bethesda, MD 20814		(301) 961-3400
(Address of principal executive offices,		(Registrant’s telephone number,
including zip code)		including area 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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. Please see definition 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 þ		Non accelerated filer o		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 4, 2009, there were 15,654,258 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, 2009 and December 31, 2008			1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008			2
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2009			3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			34
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 3. Defaults Upon Senior Securities			35
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 5. Other Information
Item 6. Exhibits			36
SIGNATURES			37
INDEX TO EXHIBITS
			38
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1.		Condensed Consolidated Financial Statements (Unaudited)

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)

		September 30,				December 31,
		2009				2008
ASSETS:
Current assets:
Cash and cash equivalents		$	31,751			$	11,536
Investments, current			53,038				93,776
Product royalties receivable			9,368				9,725
Unbilled accounts receivable			828				4,373
Accounts receivable			1,350				878
Prepaid and income taxes receivable			—				133
Deferred tax assets, net			190				963
Prepaid expenses and other current assets			3,447				3,641
Total current assets			99,972				125,025
Investments, non-current			38,853				16,222
Property and equipment, net			2,357				2,275
Deferred tax assets, non-current			4,216				4,026
Other assets			4,339				3,246
Total assets		$	149,737			$	150,794
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable		$	2,122			$	1,433
Accrued expenses			9,414				9,764
Deferred revenue, current			13,499				15,599
Income taxes payable, net			313				—
Total current liabilities			25,348				26,796
Deferred revenue, non-current			10,217				8,061
Other liabilities			2,110				2,147
Total liabilities			37,675				37,004
Commitments (Note 6)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized at September 30, 2009 and December 31, 2008; no shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Class A common stock, $0.01 par value; 270,000,000 shares authorized at September 30, 2009 and December 31, 2008; 15,654,258 and 15,651,849 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			156				156
Class B common stock, $0.01 par value; 75,000,000 shares authorized at September 30, 2009 and December 31, 2008; 26,191,050 shares issued and outstanding at September 30, 2009 and December 31, 2008			262				262
Additional paid-in capital			98,516				98,243
Accumulated other comprehensive income			454				354
Retained earnings			12,674				14,775
Total stockholders’ equity			112,062				113,790
Total liabilities and stockholders’ equity		$	149,737			$	150,794

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

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
(In thousands, except per share data)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Revenues:
Research and development revenue		$	7,045			$	5,436			$	19,966			$	66,982
Product royalty revenue			9,367				7,718				27,227				24,699
Co-promotion revenue			1,266				1,185				3,406				3,643
Contract and collaboration revenue			153				142				451				425
Total revenues			17,831				14,481				51,050				95,749
Operating expenses:
Research and development			7,383				11,390				26,969				35,537
General and administrative			4,317				3,863				10,696				10,591
Selling and marketing			3,047				2,680				7,747				8,398
Milestone royalties — related parties			—				—				875				3,531
Product royalties — related parties			1,664				1,359				4,837				4,391
Total operating expenses			16,411				19,292				51,124				62,448
Income (loss) from operations			1,420				(4,811	)			(74	)			33,301
Non-operating income (expense):
Interest income			211				655				742				1,862
Other expense, net			(250	)			(15	)			(36	)			(16	)
Total non-operating income (expense), net			(39	)			640				706				1,846
Income (loss) before income taxes			1,381				(4,171	)			632				35,147
Income tax benefit (provision)			(1,469	)			1,745				(2,733	)			(7,192	)
Net income (loss)		$	(88	)		$	(2,426	)		$	(2,101	)		$	27,955
Net income (loss) per share:
Basic net income (loss) per share		$	—			$	(0.06	)		$	(0.05	)		$	0.67
Diluted net income (loss) per share		$	—			$	(0.06	)		$	(0.05	)		$	0.67
Weighted average common shares outstanding — basic			41,844				41,813				41,844				41,768
Weighted average common shares outstanding — diluted			41,844				41,813				41,844				42,022
Comprehensive income (loss):
Net income (loss)		$	(88	)		$	(2,426	)		$	(2,101	)		$	27,955
Other comprehensive income gain (loss):
Unrealized gain (loss) on investments, net of tax effect			20				374				(52	)			(1,082	)
Foreign currency translation			15				54				152				59
Comprehensive income (loss)		$	(53	)		$	(1,998	)		$	(2,001	)		$	26,932

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

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(In thousands, except share data)

																						Accumulated
		Class A								Class B								Additional				Other								Total
		Common Stock								Common Stock								Paid-In				Comprehensive				Retained				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Income				Earnings				Equity
Balance at December 31, 2008			15,651,849			$	156				26,191,050			$	262			$	98,243			$	354			$	14,775			$	113,790
Employee stock option expense			—				—				—				—				259				—				—				259
Stock issued under employee stock purchase plan			2,409				—				—				—				14				—				—				14
Foreign currency translation			—				—				—				—				—				152				—				152
Unrealized loss on investments, net of tax effect			—				—				—				—				—				(52	)			—				(52	)
Net loss			—				—				—				—				—				—				(2,101	)			(2,101	)
Balance at September 30, 2009			15,654,258			$	156				26,191,050			$	262			$	98,516			$	454			$	12,674			$	112,062

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

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

		Nine Months Ended September 30,
		2009				2008
Cash flows from operating activities:
Net income (loss)		$	(2,101	)		$	27,955
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			532				326
Deferred tax provision (benefit)			616				(4,312	)
Stock-based compensation			259				567
Amortization of premiums (accretion of discounts) on investments			898				(95	)
Unrealized gain on trading securities			(2,601	)			—
Unrealized loss on settlement rights on auction rate securities			2,352				—
Changes in operating assets and liabilities:
Accounts receivable			(472	)			493
Unbilled accounts receivable			3,545				1,219
Product royalties receivable			357				1,055
Prepaid and income taxes receivable and payable, net			441				3,224
Accounts payable			643				(415	)
Accrued expenses			(520	)			3,815
Deferred revenue			(483	)			4,893
Other assets and liabilities, net			(501	)			(114	)
Net cash provided by operating activities		$	2,965			$	38,611
Cash flows from investing activities:
Purchases of investments			(205,726	)			(135,584	)
Proceeds from the sales of investments			127,092				41,000
Maturities of investments			98,359				43,125
Purchases of property and equipment			(463	)			(342	)
Purchase of intangible assets			(2,915	)			—
Net cash provided by (used in) investing activities			16,347				(51,801	)
Cash flows from financing activities:
Proceeds from exercise of stock options			—				870
Excess tax benefits from share-based payments			—				155
Proceeds from employee stock purchase plan			14				—
Net cash provided by financing activities			14				1,025
Effect of exchange rates on cash and cash equivalents			889				(30	)
Net increase (decrease) in cash and cash equivalents			20,215				(12,195	)
Cash and cash equivalents at beginning of period			11,536				25,559
Cash and cash equivalents at end of period		$	31,751			$	13,364
Supplemental disclosure of non-cash investing and financing activities:
Purchase of intangible assets included in accrued expenses		$	500			$	—

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., or the Company, is an international 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. The Company is focused on developing prostones for the treatment of gastrointestinal, respiratory, vascular and central nervous system diseases and other disorders for which there are unmet or underserved medical needs and significant commercial potential.

In January 2006, the Company received marketing approval from the U.S. Food and Drug Administration, or FDA, for its first product, Amitiza^® (lubiprostone), to treat chronic idiopathic constipation, or CIC, in adults. In April 2008, the Company received a second marketing approval from the FDA for Amitiza to treat irritable bowel syndrome with constipation in adult women. Amitiza is being marketed and developed in the United States for gastrointestinal indications under a collaboration and license agreement with Takeda Pharmaceutical Company Limited, or Takeda. The Company is primarily responsible for development activities under the agreement. The Company and Takeda initiated commercial sales of Amitiza in the United States for the treatment of CIC in April 2006 and for the treatment of irritable bowel syndrome with constipation in May 2008 and they are currently developing Amitiza for the treatment of opioid-induced bowel dysfunction, or OBD.

In February 2009, the Company entered into a license, commercialization and supply agreement with Abbott Japan Co. Ltd., or Abbott, for lubiprostone in Japan. Under the terms of the agreement, Abbott received exclusive rights to commercialize lubiprostone in Japan for the treatment of CIC and received the right of first refusal to any additional indications for which lubiprostone is developed in Japan. The Company is primarily responsible for development activities under the agreement. Abbott is responsible for all commercialization expenses and efforts. The Company has retained the right to co-promote lubiprostone in Japan.

In April 2009, the Company entered into two agreements with R-Tech Ueno Ltd., or R-Tech, a Japanese manufacturing and research and development company, to acquire all patents and other intellectual property rights related to Rescula^® (unoprostone isopropyl) in the United States and Canada (Note 7). R-Tech is majority owned by the Company’s founders and one of the founders serves as the chair of R-Tech’s board of directors. Although Rescula eye drops were approved by the FDA for the treatment of open-angle glaucoma and ocular hypertension in 2000, Rescula is not currently marketed in the United States or Canada. The Company plans to re-launch Rescula in the United States for the treatment of open-angle glaucoma and ocular hypertension and to initiate clinical trials of Rescula for the treatment of dry age-related macular degeneration, or dry AMD, in 2010.

The Company’s founders, Drs. Ueno and Kuno, directly or indirectly own the majority holdings in the Company as well as in other companies that have significant contractual relationships with the Company as described more fully in Note 7. Dr. Ueno, who is married to Dr. Kuno, serves as the chairman of the board of directors, chief executive officer and chief scientific officer of the Company and Dr. Kuno serves as a director of the Company and the executive advisor of international business development.

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and the rules and regulations of the Securities and Exchange Commission, or 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, 2008 included in the Company’s Annual Report on Form 10-K. The financial information as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 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 the Company and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in the consolidated accounts.

SUCAMPO PHARMACEUTICALS, INC.

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

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

For the purpose of the condensed consolidated balance sheets and condensed consolidated statements of cash flows, cash equivalents include all highly liquid investments with an original maturity of 90 days or less at the time of purchase.

Current and Non-current Investments

Current and non-current investments consist primarily of U.S. Treasury bills and notes, U.S. government agencies securities, municipal and corporate bonds and auction rate securities, or ARS. The Company classifies its investments into current and non-current based on their maturities and management’s reasonable expectation to realize these investments in cash. The Company classifies all of its investments, except ARS, as available for sale securities and reports unrealized gains or losses, net of related tax effects, in other comprehensive income. Pursuant to the Company’s acceptance of settlement rights for its investments in ARS in October 2008, the Company classifies its investments in ARS as trading securities and records gains or losses resulting from the changes in fair values of its ARS and related settlement rights in other income (expense), net. The fair value of the settlement rights related to ARS is recorded as non-current other assets. The fair value of the settlement rights has been derived from the par value of the Company’s investment in ARS and the fair value of ARS as of the recognition date, since the settlement rights obligate the broker to redeem the ARS at par value.

Fair Value

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, current and non-current investments, receivables, accounts payable and accrued expenses, approximate their fair values based on their short maturities, independent valuations or internal assessments.

Revenue Recognition

The Company’s revenues are derived primarily from collaboration and license agreements and include up-front payments, development milestone payments, reimbursements of development and co-promotion costs and product royalties.

The Company evaluated the multiple deliverables within the collaboration and license agreements in accordance with the guidance of multiple deliverables to determine whether the delivered elements that are the obligation of the Company have value to other parties to the agreement on a stand-alone basis and whether objective reliable evidence of fair value of the undelivered items exists. Deliverables that meet these criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accounted for as a single unit of accounting. The appropriate recognition of revenue is then applied to each separate unit of accounting. The Company’s deliverables under the Takeda and Abbott agreements are more fully described in Note 8.

The Company applies a time-based model of revenue recognition for cash flows associated with research and development deliverables under the Takeda collaboration and license agreement. Under this model, cash flow streams related to each unit of accounting are recognized as revenue over the estimated performance period. Upon receipt of cash payments, revenue is recognized to the extent the accumulated service time, if any, has occurred. The remainder is deferred and recognized as revenue ratably over the remaining estimated performance period. A change in the period of time expected to complete the deliverable is accounted for as a change in estimate on a prospective basis. Revenue is limited to amounts that are nonrefundable and that the other party to the agreement is contractually obligated to pay to the Company.

The Company applies a proportional-performance model using the percentage-of-completion method of revenue recognition for cash flows associated with research and development deliverables under the Abbott license, commercialization and supply agreement. Since the Company has previous research and development experience and the expected cost to complete the development can be reasonably estimated, the Company believes a proportional-performance methodology of revenue recognition is appropriate. Under this method, revenue in any period is recognized as a percentage of the total actual cost expended relative to the total estimated costs required to satisfy the performance obligations under the arrangement related to the development. Revenue recognized is limited to the amounts that are non-refundable and that the other party to the agreement is contractually obligated to pay to the Company.

SUCAMPO PHARMACEUTICALS, INC.

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

The Company recognizes reimbursable research and development costs under the Takeda agreement as research and development revenue using a time-based model over the estimated performance period. The research and development revenue for these obligations is limited to the lesser of the actual reimbursable costs incurred or the straight-line amount of revenue recognized over the estimated performance period. Revenues are recognized for reimbursable costs only if those costs can be reasonably determined. Research and development costs are not reimbursable under the Abbott agreement.

Under the Takeda agreement, royalties are based on net sales of licensed products and are recorded on the accrual basis when earned in accordance with contractual terms when third-party results are reliably measurable, collectability is reasonably assured and all other revenue recognition criteria are met. Under the Abbott agreement, should Amitiza be commercialized in Japan, the Company will purchase and assume title to inventories of Amitiza and recognize revenues from the sales of such product when earned.

Contract revenue related to development and consulting activities is also accounted for under the time-based model.

The Company considers its participation in the joint committees under the collaboration agreements as separate deliverables under the contracts and recognizes the fair value of such participation as revenue over the period of the participation per the terms of the contracts.

The Company has determined that it is acting as a principal under both the Takeda and Abbott agreements and, as such, records revenue on a gross basis in the condensed consolidated statements of operations and comprehensive income (loss).

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, cash equivalents and restricted cash with highly rated financial institutions and invests its excess cash in highly rated investments. As of September 30, 2009 and December 31, 2008, approximately $68.3 million, or 55.2%, and $62.2 million, or 51.1%, respectively, of the Company’s cash, cash equivalents, restricted cash and investments was issued or insured by the federal government or government agencies. The Company has not experienced any losses on these accounts related to amounts in excess of insured limits.

The settlement rights between the Company and UBS AG, or the ARS Broker, obligate the ARS Broker to purchase the remaining ARS at a par value of $10.0 million during a two-year period beginning June 30, 2010 if the Company exercises its related settlement rights. The Company does not anticipate needing to sell the remaining ARS before June 30, 2010.

The Company’s products and product candidates under development require approval from the FDA or other international regulatory agencies prior to commercial sales. For those product candidates or indications 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 products, Amitiza and Rescula, compete 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 or timely 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 could have a material adverse effect on the Company’s business, operating results and future cash flows.

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 and Rescula, research and development efforts to develop new products or indications, 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 its existing cash and investments as well as with product royalty revenue and cash received from milestones and other revenue related to its joint collaboration, license and supply agreements.

SUCAMPO PHARMACEUTICALS, INC.

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

Revenues from one unrelated party, Takeda, accounted for 80% and 99%, of the Company’s total revenues for the three months ended September 30, 2009 and 2008, respectively, and 85% and 100% for the nine months ended September 30, 2009 and 2008, respectively. Accounts receivable, unbilled accounts receivable and product royalties receivable from Takeda accounted for 96% and 97% of the Company’s total accounts receivable, unbilled accounts receivable and product royalties receivable at September 30, 2009 and December 31, 2008, respectively. Revenues from another unrelated party, Abbott, accounted for 20% of the Company’s total revenues for the three months ended September 30, 2009 and 15% for the nine months ended September 30, 2009. There was no corresponding revenue for 2008. The Company depends significantly upon the collaborations with Takeda and Abbott and its activities may be impacted if these relationships are disrupted (Note 8).

The Company has an exclusive supply arrangement with R-Tech 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 (Note 7).

The Company has previously entered into a restated license agreement with Sucampo AG, or SAG, to grant the Company a royalty-bearing, exclusive, worldwide license to develop prostone compounds, including Amitiza. SAG is a Swiss-patent holding company and an entity wholly-owned by the Company’s founders. 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 (Note 7).

Recent Accounting Pronouncements

In December 2007, the FASB issued authoritative guidance for collaborative arrangements which prohibits the equity method of accounting for collaboration agreements unless a legal entity exists. According to this guidance, payments between the collaborative partners are 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 is effective for periods that begin after December 15, 2008 and applies to arrangements in existence as of the effective date. The effect of the new consensus shall be accounted for as a change in accounting principle through retrospective application. The Company adopted the provisions of this guidance effective January 1, 2009 and such adoption did not have a material impact on the condensed consolidated financial statements.

In February 2008, the FASB issued authoritative guidance which delayed the effective date of the guidance for fair value measurements for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. This statement partially deferred the effective date to fiscal years beginning after November 15, 2008. The Company adopted the provisions of this guidance effective January 1, 2009 and such adoption did not have a material impact on the condensed consolidated financial statements.

In October 2008, the FASB issued authoritative guidance that clarifies the application for fair value measurements in a market that is not active. This guidance addresses how management should consider measuring fair value when relevant observable data does not exist. This guidance also addresses how observable market information in a market that is not active should be considered when measuring fair value, as well as how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate. The application of this guidance did not have a material impact on the condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance which affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. This guidance addresses estimating fair value when the volume and level of market activity for an asset or liability have significantly decreased and determining whether a transaction was orderly. It became effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This guidance applies to all fair value measurements when appropriate. The Company adopted the guidance effective April 1, 2009 and such adoption did not have a material impact on the condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance for subsequent events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The subsequent events sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occur after the balance sheet date. The Company adopted the provisions of this guidance effective April 2009 and such adoption did not have a material impact on the condensed consolidated financial statements.

SUCAMPO PHARMACEUTICALS, INC.

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

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities, or VIEs. The elimination of the concept of qualifying special-purpose entities, or QSPEs, removes the exception from applying the consolidation guidance within this amendment. This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company is continuing to evaluate the impact that this amendment would have on its financial condition and results of operation upon adoption.

In June 2009, the FASB also issued the FASB Accounting Standards Codification, or Codification. The Codification has become the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and has no effect on these condensed consolidated financial statements, other than to modify certain disclosures regarding the accounting policies followed by the Company.

In September 2009, the FASB issued an amendment to the authoritative guidance which addresses how revenues should be allocated among products and services in multiple-deliverable revenue arrangements. The guidance establishes a hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence (VSOE) at the highest level, third-party evidence of VSOE at the intermediate level, and management’s best estimate at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance. It also significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. This guidance will be effective prospectively for agreements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is continuing to evaluate the impact that this amendment would have on its financial condition and results of operation upon adoption.

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. Diluted net loss per share, when applicable, is computed by dividing net loss by the weighted average common shares outstanding without the impact of potential dilutive common shares outstanding because they would have an anti-dilutive impact on diluted net loss per share.

SUCAMPO PHARMACEUTICALS, INC.

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

The computation of net income (loss) per share for the three and nine months ended September 30, 2009 and 2008 is shown below:

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands, except per share data)		2009				2008				2009				2008
Basic net income (loss) per share:
Net income (loss)		$	(88	)		$	(2,426	)		$	(2,101	)		$	27,955
Weighted average class A and B common shares outstanding			41,844				41,813				41,844				41,768
Basic net income (loss) per share		$	—			$	(0.06	)		$	(0.05	)		$	0.67
Diluted net income (loss) per share:
Net income (loss)		$	(88	)		$	(2,426	)		$	(2,101	)		$	27,955
Weighted average class A and B common shares outstanding for diluted net income per share			41,844				41,813				41,844				41,768
Assumed exercise of stock options under the treasury stock method			—				—				—				254
			41,844				41,813				41,844				42,022
Diluted net income (loss) per share		$	—			$	(0.06	)		$	(0.05	)		$	0.67

For the periods listed above, the potentially dilutive securities used in the calculations of diluted historical net income (loss) per share as of September 30, 2009 and 2008 are as follows:

		September 30,
(In thousands)		2009				2008
Employee stock options			—				381
Non-employee stock options			—				450

For the periods listed above, the following securities were excluded from the computation of diluted net income (loss) per share as their effect would be anti-dilutive as of September 30, 2009 and 2008:

		September 30,
(In thousands)		2009				2008
Employee stock options			778				407
Non-employee stock options			450				—

SUCAMPO PHARMACEUTICALS, INC.

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

4. Current and Non-Current Investments

At September 30, 2009 and December 31, 2008, current and non-current available-for-sale investments consisted of the following securities:

		September 30, 2009
						Unrealized				Unrealized
(In thousands)		Cost				Gains				Losses				Fair Value
Current:
U.S. Treasury bills and notes		$	2,999			$	—			$	—			$	2,999
U.S. commercial paper			750				—				—				750
U.S. government securities			22,980				20				(1	)			22,999
Municipal securities			24,979				2				(8	)			24,973
Certificates of deposits			750				—				(1	)			749
Money market funds			568				—				—				568
Total		$	53,026			$	22			$	(10	)		$	53,038
Non-current:
U.S. government securities		$	9,721			$	13			$	(3	)		$	9,731
Municipal securities			1,817				1				(3	)			1,815
Certificates of deposits			1,000				—				(2	)			998
Corporate bonds			16,858				28				—				16,886
Auction rate securities			10,000				—				(577	)			9,423
Total		$	39,396			$	42			$	(585	)		$	38,853

		December 31, 2008
						Unrealized				Unrealized
(In thousands)		Cost				Gains				Losses				Fair Value
Current:
U.S. Treasury bills and notes		$	42,620			$	130							$	42,750
Money market funds			51,026				—								51,026
Total		$	93,646			$	130			$	—			$	93,776
Non-current:
Auction rate securities		$	19,400			$	—			$	(3,178	)		$	16,222

The Company records unrealized gains and losses resulting from changes in the fair value of the auction rate securities and related settlement rights within other income (loss).

SUCAMPO PHARMACEUTICALS, INC.

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

The Company’s assets measured at fair value on a recurring basis, which are subject to the fair value disclosure requirements, are as follows:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in				Significant
		Active Markets				Other				Significant
		for identical				Observable				Unobservable
September 30, 2009		Assets				Inputs				Inputs
(In thousands)		(Level 1)				(Level 2)				(Level 3)				Total
U.S. Treasury bills and notes		$	2,999			$	—			$	—			$	2,999
U.S. government securities			32,730				—				—				32,730
U.S. commercial paper			—				750				—				750
Corporate bonds			16,886				—				—				16,886
Municipal securities			26,788				—				—				26,788
Auction rate securities			—				—				9,423				9,423
Settlement rights for auction rate securities*			—				—				466				466
Money market funds			568				—				—				568
Certificates of deposits			—				1,747				—				1,747
Total assets measured at fair value		$	79,971			$	2,497			$	9,889			$	92,357

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in				Significant
		Active Markets				Other				Significant
		for Identical				Observable				Unobservable
December 31, 2008		Assets				Inputs				Inputs
(In thousands)		(Level 1)				(Level 2)				(Level 3)				Total
U.S. Treasury bills and notes		$	42,750			$	—			$	—			$	42,750
Auction rate securities			—				—				16,222				16,222
Settlement rights for auction rate securities*			—				—				2,818				2,818
Money market funds			51,026				—				—				51,026
Total assets measured at fair value		$	93,776			$	—			$	19,040			$	112,816

The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in the fair value measurement statement during the nine months ended September 30, 2009:

		Auction Rate
		Securities and
		Related
		Settlement
(In thousands)		Rights
Balance at December 31, 2008		$	19,040
Total net unrealized gains included in earnings			249
Redemptions			(9,400	)
Balance at September 30, 2009		$	9,889

SUCAMPO PHARMACEUTICALS, INC.

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

5. Accrued Expenses

Accrued expenses consisted of the following as of:

		September 30,				December 31,
(In thousands)		2009				2008
Research and development costs		$	4,617			$	7,086
Employee compensation			897				1,748
Selling and marketing costs			778				346
Product royalty liability-related party			1,663				—
Other accrued expenses			1,459				584
Total		$	9,414			$	9,764

The accrued selling and marketing expenses include $696,000 in costs incurred upon the Company’s withdrawal of certain European marketing applications in the third quarter of 2009. These expenses were recorded during the three months ended September 30, 2009 and consist mainly of adverse commitments to purchase initial stock of lubiprostone in respect to its previously anticipated European commercial launch.

6. Commitments

Operating Leases

The Company leases office space in the United States, the United Kingdom and Japan under operating leases ranging through 2017. Total future minimum, non-cancelable lease payments under operating leases, which do not include future sub-lease receipts of approximately $97,000, were as follows as of September 30, 2009:

(In thousands)
2009 (October-December)		$	370
2010			1,204
2011			1,006
2012			963
2013			992
2014 and thereafter			3,297
Total minimum lease payments		$	7,832

Rent expense for all operating leases was $322,000 and $296,000 for the three months ended September 30, 2009 and 2008, respectively, and $965,000 and $874,000 for the nine months ended September 30, 2009 and 2008, respectively.

Research and Development Costs

The Company routinely enters into agreements with third-party clinical research organizations, or CROs, to oversee clinical research and development studies provided on an outsourced basis. The Company is not generally contractually obligated to pay the CRO if the service or reports are not provided. Total future estimated costs through 2013 under these agreements as of September 30, 2009 were approximately $9.8 million.

7. Related Party Transactions

R-Tech Ueno, Ltd.

The Company is a party to multiple exclusive license and supply agreements with R-Tech covering various compounds and territories. The Company’s founders, directly or indirectly, own a majority of the stock of R-Tech and one of the founders is the chairman of the board of directors of R-Tech.

The following paragraphs describe the agreements entered into in 2009:

On February 23, 2009, the Company entered into an Exclusive Manufacturing and Supply Agreement, under which it granted R-Tech the exclusive right to manufacture and supply lubiprostone to meet its commercial and clinical requirements in Asia, Australia and New Zealand. In consideration, R-Tech made an up-front payment of $250,000 to the Company and is obligated to make milestone payments of $500,000 upon regulatory approval of lubiprostone in Japan and $250,000 upon the commercial launch of lubiprostone in Japan.

SUCAMPO PHARMACEUTICALS, INC.

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

On April 23, 2009, the Company entered into two agreements with R-Tech to acquire rights to Rescula in the United States and Canada. Under the terms of the agreements, the Company holds the exclusive rights to commercialize Rescula in the United States and Canada for the treatment of glaucoma and ocular hypertension and any new indication developed by the Company, and has the right of first refusal to commercialize in the United States and Canada any additional indications for which unoprostone isopropyl is developed by R-Tech. The Company is solely responsible for the development, as well as regulatory and commercialization activities and expenses, for Rescula in the United States and Canada and R-Tech is exclusively responsible for the supply of Rescula to the Company within the United States and Canada.

Under the terms of the April 2009 agreements, the Company made an upfront payment of $3.0 million and is required to make up to $5.5 million in additional milestone payments to R-Tech based on the achievement of specified development and commercialization goals. The first milestone payment of $500,000 is payable upon the re-launch of Rescula for the treatment of glaucoma and is considered probable of occurring; therefore, this amount is included in accrued expenses and recorded as part of the initial cost of the acquired assets. The Company allocated the acquisition cost between an intangible asset of $3.4 million and a non-current prepaid inventory of $85,000 as of September 30, 2009, both of which are reflected in other non-current assets in the accompanying condensed consolidated balance sheet. The Company is amortizing the $3.4 million intangible asset over the 10-year life of the license agreement, which the Company believes approximates the useful life of the underlying rights and data. Amortization expense of $142,000 for the nine months ended September 30, 2009 is recorded in research and development expenses in the accompanying condensed consolidated statement of operations and comprehensive income (loss). The annual estimated amortization expense of these intangible assets is approximately $342,000 through April 2019.

The Company recorded the following expenses under all of its agreements with R-Tech:

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2009				2008				2009				2008
Clinical supplies		$	720			$	38			$	2,341			$	553
Other research and development services			7				62				3,046				111
		$	727			$	100			$	5,387			$	664

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,
(In thousands)		2009				2008
Deferred revenue, current		$	431			$	419
Deferred revenue, non-current			6,354				6,444
		$	6,785			$	6,863

The Company recognized approximately $105,000 of revenue relating to its agreements with R-Tech for each of the three months ended September 30, 2009 and 2008 and approximately $314,000 for each of the nine months ended September 30, 2009 and 2008, which was recorded as contract and collaboration revenue in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

SUCAMPO PHARMACEUTICALS, INC.

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

Sucampo AG License Agreements

In February 2009, the Company entered into an addendum to the Amended and Restated Patent Access Agreement originally entered between the Company and SAG on June 30, 2006. The Company’s founders directly or indirectly own all of the stock of SAG. Under the addendum, the patent and know-how royalties Sucampo Japan is obligated to pay to SAG were reduced with respect to sales of lubiprostone in Asia, Australia and New Zealand as follows:

	•		the patent royalty on net sales, due until the expiration of the last patent covering lubiprostone that existed at the time of the Company’s initial public offering, was reduced from 4.5% to 2.2%;
	•		the patent royalty on net sales, due thereafter until all other patents covering lubiprostone have expired in the relevant country, was reduced from 2.25% to 1.1%; and
	•		the know-how royalty on net sales, due until the fifteenth anniversary of the first commercial sale of lubiprostone, was reduced from 2.0% to 1.0%.

The Company expensed approximately $1.7 million and $1.4 million in product royalties - related parties under the license agreement with SAG for the three months ended September 30, 2009 and 2008, respectively, and approximately $4.8 million and $4.4 million for the nine months ended September 30, 2009 and 2008, respectively, reflecting 3.2% of Amitiza net sales in the U.S. during each of these periods.

The Company is also required to pay additional milestone payments to SAG, including 5% of milestone payments received under any sublicensing agreements for the in-licensed compounds.

In February 2009, the Company entered into a Technology Assignment and License Agreement with R-Tech and SAG, under which the parties agreed that R-Tech and SAG would share joint ownership of eight U.S. patents and patent applications, and several related international patents and patent applications, which had previously been filed by R-Tech. These patents relate to specific prostone compounds and formulations and to methods for producing prostone compounds. The parties also agreed that R-Tech and SAG would share joint ownership of know-how and other inventions previously created by R-Tech relating to prostones. R-Tech and SAG cross-licensed to each other, on a worldwide, royalty-free, perpetual, exclusive basis, their respective rights in these patents, patent applications, know-how and other inventions. R-Tech’s right to utilize the licensed intellectual property is limited to uses in connection with research, development and commercialization of Rescula, and three other prostone compounds it is currently developing. SAG’s right to utilize the licensed intellectual property is limited to uses in connection with research, development and commercialization of all other prostone compounds. SAG’s rights under this agreement are in turn licensed to the Company under the existing patent license arrangements. None of the parties made any monetary payments to the other parties under this agreement.

8. Collaboration and License Agreements

Abbott license and commercialization and supply agreement

In February 2009, the Company entered into an exclusive 15-year license, commercialization and supply agreement with Abbott to develop and commercialize lubiprostone for the treatment of CIC in Japan. Additionally, the agreement grants Abbott the right of first refusal to any additional indications for which lubiprostone is developed in Japan under all relevant patents, know-how and trademarks.

The collaboration efforts under the agreement are governed by two committees consisting of an equal number of representatives from both parties. The joint commercialization and steering committee oversee commercialization-related activities and resolves any conflicts arising from a joint development committee, which oversee the development-related activities in Japan.

The Company is required to fund and complete all the development work including additional clinical studies required to obtain regulatory approval for the treatment of CIC in Japan. The Company owns all the rights covered under the regulatory filings.

Abbott is required to fund and undertake all commercialization efforts including pre-launch and post-launch marketing, promotion and distribution. Abbott is required to maintain the number of sales staff and the estimated level of annual net sales based on the commercialization plan to be developed and approved by the joint commercialization and steering committee described above. The Company has retained the right to co-promote the product in Japan and is responsible for the cost of co-promotion.

Under the terms of the agreement, payments to the Company include a non-refundable upfront payment and non-refundable development and commercial milestone payments based on achieving specified development, regulatory and sales goals. Following marketing authorization and pricing approval, Abbott will purchase the finished product from the Company for distribution in Japan at agreed upon prices. Based on the terms of the agreement, the Company received an upfront payment of $10.0 million upon execution of the agreement in February 2009. In May 2009, the Company achieved the first development milestone when it initiated the phase 3 clinical trial for lubiprostone for the treatment of CIC in Japan and received a $7.5 million milestone payment from Abbott. The Company is recognizing these payments as research and development revenue under a proportional-performance model using the percentage-of-completion method of revenue recognition. There can be no assurances that the Company will receive additional development or commercial milestone payments under this agreement.

SUCAMPO PHARMACEUTICALS, INC.

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

The following table summarizes the cash streams and related revenue recognized or deferred under the license, commercialization and supply agreement with Abbott for the nine months ended September 30, 2009:

						Cash Received				Revenue				Foreign Currency
		Amount				for the Nine				Recognized for the				Effects for the				Amount
		Deferred at				Months Ended				Nine Months Ended				Nine Months Ended				Deferred at
		December 31,				September 30,				September 30,				September 30,				September 30,
(In thousands)		2008				2009				2009				2009				2009
Collaboration revenue:
Up-front payment associated with the Company’s obligation to participate in joint committees		$	—			$	677			$	27			$	(19	)		$	669
Research and development revenue:
Up-front payment		$	—			$	9,323			$	4,058			$	(40	)		$	5,305
Development milestone payment			—				7,500				3,369				(262	)		$	4,393
Total		$	—			$	16,823			$	7,427			$	(302	)		$	9,698

Takeda commercialization and license agreement

In October 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.

The Company has received a total of $150.0 million in up-front and development milestone payments through September 30, 2009 under these agreements. Subject to future development and commercial milestones, the Company is potentially entitled to receive additional development milestone and 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.

SUCAMPO PHARMACEUTICALS, INC.

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

The following table summarizes the cash streams and related revenue recognized or deferred under the collaboration and license agreements with Takeda for the nine months ended September 30, 2009:

						Cash Received				Revenue				Change in Accounts
		Amount				for the Nine				Recognized for the				Receivable for the				Amount
		Deferred at				Months Ended				Nine Months Ended				Nine Months Ended				Deferred at
		December 31,				September 30,				September 30,				September 30,				September 30,
(In thousands)		2008				2009				2009				2009*				2009
Collaboration revenue:
Up-front payment associated with the Company’s obligation to participate in joint committees		$	1,764			$	—			$	111			$	—			$	1,653
Research and development revenue:
Reimbursement of research and development expenses		$	14,755			$	6,272			$	12,539			$	(3,578	)		$	4,910
Product royalty revenue		$	—			$	27,584			$	27,227			$	(357	)		$	—
Co-promotion revenue		$	—			$	2,972			$	3,406			$	434			$	—

In May 2009, the Company issued a press release expressing its disappointment with the level of U.S. Amitiza sales being generated by Takeda and noted that it intended to exercise its rights to pursue a performance audit under its contract with Takeda. The Company has subsequently initiated certain audit procedures and continues to analyze Takeda’s performance.

9. Stock Option Plan

The following table summarizes the employee stock option activity for the nine months ended September 30, 2009 under the Company’s 2001 Incentive Plan:

										Weighted Average
						Weighted Average				Remaining
						Exercise Price Per				Contractual Term				Aggregate
		Shares				Share				(Years)				Intrinsic Value
Options outstanding, December 31, 2008			455,600			$	10.34
Options forfeited			(850	)			10.00
Options expired			(96,050	)			10.00
Options outstanding, September 30, 2009			358,700				10.43				4.45			$	—
Options exercisable, September 30, 2009			358,700				10.43				4.45			$	—

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, 2009 under the Company’s 2006 Incentive Plan:

										Weighted Average
						Weighted Average				Remaining
						Exercise Price Per				Contractual Term				Aggregate
		Shares				Share				(Years)				Intrinsic Value
Options outstanding, December 31, 2008			275,000			$	13.86
Options granted			167,000				5.37
Options forfeited			(38,950	)			13.07
Options expired			(32,250	)			14.12
Options outstanding, September 30, 2009			370,800				10.19				7.95			$	—
Options exercisable, September 30, 2009			88,000				14.42				6.50			$	—

The weighted average grant date fair value of options granted during the nine months ended September 30, 2009 and the year ended December 31, 2008 were $2.77 and $5.88, respectively. As of September 30, 2009, approximately $978,000 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 3.18 years.

The following table summarizes the non-employee stock option activity for the nine months ended September 30, 2009 under the Company’s 2001 Incentive Plan:

										Weighted Average
						Weighted Average				Remaining
						Exercise Price Per				Contractual Term				Aggregate
		Shares				Share				(Years)				Intrinsic Value
Options outstanding, December 31, 2008			450,000			$	5.85
Options outstanding, September 30, 2009			450,000				5.85				5.58			$	—
Options exercisable, September 30, 2009			450,000				5.85				5.58			$	—

No non-employee stock options were exercised, forfeited or expired during the nine months ended September 30, 2009.

Employee Stock Purchase Plan

Under the 2006 Employee Stock Purchase Plan, or ESPP, a total of 2,409 shares of class A common stock were purchased during the nine months ended September 30, 2009. The ESPP is non-compensatory and is intended to qualify as an Employee Stock Purchase Plan as defined in Section 423 of the Internal Revenue Code of 1986 and in accordance with GAAP guidance that requires estimates in the fair value of share-based payment awards on the date of the grant using an option-pricing model and recognizing the expense over the required service periods in the accompanying condensed consolidated statement of operations and comprehensive income (loss). The Company received $13,801 upon purchase of shares under the ESPP for the nine months ended September 30, 2009.

10. Income Taxes

For the three months ended September 30, 2009, the Company recorded a tax provision of $1.5 million and a tax benefit of $1.7 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009 and 2008, the Company recorded a tax provision of $2.7 million and $7.2 million, respectively. The tax provision for the three and nine months ended September 30, 2009 primarily pertained to taxable income generated by the Company’s U.S. and Asian subsidiaries. The Company’s other subsidiary based in Europe incurred a pre-tax loss for the nine months ended September 30, 2009, for which no tax benefit was recognized. The tax provision recorded for the nine months ended September 30, 2008 was primarily due to a discrete release of U.S. deferred tax asset valuation allowances and a reduction in the projected effective tax rate for 2008 based on an increase in projected milestone and product royalty revenue.

SUCAMPO PHARMACEUTICALS, INC.

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

The Company has estimated its annual effective tax rate for the full fiscal year 2009 and 2008 and applied that rate to its income before income taxes in determining its income tax provision for the interim periods. There is no tax benefit recognized on the net operating losses incurred in the foreign jurisdictions due to the lack of evidence supporting the Company’s ability to use these losses in the future.

Uncertain Tax Positions

The Company applies the FASB’s guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions.

The Company had an outstanding non-current income tax liability of $713,622 for uncertain tax positions as of September 30, 2009. The amount represented the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company’s condensed consolidated financial statements, and is reflected in other liabilities in the accompanying condensed consolidated balance sheets. The liability for uncertain tax positions as of September 30, 2009 mainly pertained to the Company’s interpretation of nexus in certain states related to revenue sourcing for state income tax purposes.

The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company has identified no uncertain tax position for which it is reasonably possible that the total amount of liability for unrecognized tax benefits will significantly increase or decrease within 12 months, except for recurring accruals on existing uncertain tax positions.

SUCAMPO PHARMACEUTICALS, INC.

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

11. Segment Reporting

The Company has determined that it has three reportable segments based on the Company’s method of internal reporting, which disaggregates business by geographic location. These segments are the Americas, Europe and Asia. 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 loans and the provision of research and development services. Following is a summary of financial information by reportable geographic segment.

														Intercompany
(In thousands)		Americas				Europe				Asia				Eliminations				Consolidated
Three Months Ended September 30, 2009
Research and development revenue		$	3,562			$	—			$	3,483			$	—			$	7,045
Product royalty revenue			9,367				—				—				—				9,367
Co-promotion revenue			1,266				—				—				—				1,266
Contract and collaboration revenue			141				—				282				(270	)			153
Total revenues			14,336				—				3,765				(270	)			17,831
Research and development expenses			3,040				459				3,884				—				7,383
Depreciation and amortization			213				3				7				—				223
Other operating expenses			7,790				1,029				256				(270	)			8,805
Income (loss) from operations			3,293				(1,491	)			(382	)			—				1,420
Interest income			277				—				2				(68	)			211
Other non-operating expense, net			(17	)			(22	)			(279	)			68				(250	)
Income (loss) before income taxes		$	3,553			$	(1,513	)		$	(659	)		$	—			$	1,381
Capital expenditures		$	64			$	—			$	87			$	—			$	151
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
Research and development expenses			10,217				330				843				—				11,390
Depreciation and amortization			110				1				3				—				114
Other operating expenses			7,602				139				257				(210	)			7,788
Income (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	)
Income (loss) before income taxes		$	(2,776	)		$	(486	)		$	(909	)		$	—			$	(4,171	)
Capital expenditures		$	5			$	35			$	—			$	—			$	40