first horizon pharmaceutical corporation securities litigation 02-cv-2332-second amended

Case 1-02-cv-02332-JOF Document 114 Filed 04/20/2007 of 106

UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

IN RE FIRST HORIZONPHARMACEUTICAL CORPORATIONSECURITIES LITIGATION

CIVIL ACTION NO:1:02-CV-2332-JOF

PLAINTIFFS' SECOND CONSOLIDATED AMENDED CLASS ACTIONCOMPLAINT

Lead Plaintiffs, based upon personal knowledge as to themselves, their own

acts and the acts of their counsel, and the investigation undertaken by Plaintiffs'

counsel, allege the following facts. Plaintiffs' counsel's investigation included,

inter alia, a review and analysis of: (i) publicly available news articles and reports

concerning First Horizon Pharmaceutical Corporation ("First Horizon" or the

"Company") (n/k/a Sciele Pharmaceutical, Inc.), and its industry; (ii) securities

analyst reports issued by brokerage firms covering First Horizon and its industry;

(iii) First Horizon filings with the Securities and Exchange Commission ("SEC");

and (iv) press releases and other public statements issued by the Company.

Plaintiffs' counsel's investigation also included consultation with experts and

interviews of persons knowledgeable about the Company and its industry.

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NATURE OF THE ACTION

Plaintiffs bring this class action on behalf of all persons or entities (the

"Class") who purchased or otherwise acquired the securities of First Horizon from

April 24, 2002, to April 29, 2003, inclusive (the "Class Period"), including a

subclass consisting of all persons or entities who purchased First Horizon common

stock in a secondary offering , dated April 24, 2002, pursuant to or traceable to a

Registration Statement/Prospectus (the "Registration Statement") filed with the

SEC on or about March 5, 2002, and amended on or about March 26, 2002, April

17, 2002, and April 19, 2002 (the "Offering" and the "Offering Subclass")

2. Prior to, and continuing throughout the Class Period, Defendants

issued a series of false and misleading statements to investors, first inflating First

Horizon's revenues artificially, and then, when the inflation of such revenues could

no longer be maintained, disguising the reasons for the subsequent revenue decline.

3. More specifically, beginning in or about July 2001, Defendants

learned that a First Horizon competitor intended to introduce generic versions of

the Company's best selling product, Tanafed.

4. This occurred at the same time that First Horizon was negotiating the

purchase of the antihypertension medication, Sular. The Company intended to

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finance the purchase of Sular by means of the sale of First Horizon common stock

pursuant to a secondary offering.

5. In order to further the two-fold goal of: (a) flooding the wholesale

market with Tanafed to block the entrance into the market of anticipated generic

competitors, and (b) ensuring the success of the secondary offering at as a high a

price as possible, Defendants contrived a plan to improve artificially First

Horizon's financial performance by stuffing the wholesale distribution pipeline

with certain of its products, offering wholesalers unusual discounts, liberal return

policies, and/or extended payment terms as inducement to take additional product

above normal order quantities.

6. However, Defendants misled the marketplace about the reasons for

the Company's resulting growth and failed to disclose that the consequence of their

stuffing channels was the loss of future sales revenue that would materially reduce

net income and earnings in future quarters after the Offering had been completed.

7. By the second quarter 2002, after the Offering was completed, the

fallout from Defendants' efforts to stuff the wholesale channel began to appear in

the form of lost sales revenue from those products previously stuffed into the

wholesale pipeline. This was despite continued efforts to stuff wholesalers'

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inventory with additional product in the first half of 2002 and beyond, including

Sular.

8. Rather than reveal the true reasons for this lost revenue, Defendants

represented , in a July 2, 2002 announcement reducing earnings guidance, that

declines in revenue and earnings were due to a reduction in Tanafed and Prenate

sales as a result of substitution by knock-off products . This representation was

misleading and only partially true; while generic substitutes posed a greater threat

to the sale of Tanafed and Prenate, the real reason for the decline in revenues was

the oversupply of those products stuffed into the marketplace in anticipation of

such threat.

9. In response to the Company's July 2, 2002 announcement reducing

earnings guidance, First Horizon's stock dropped 81 % from over $14 per share to

$3.51 on volumes of 16.4 million shares traded, more than 30 times the daily

average. Analysts downgraded the stock, "blindsided by the magnitude of the

preannouncement" and management ' s "loss of credibility." See, 7/02/02 analyst

report issued by J.P. Morgan.

10. In order to maintain artificially the stock price of First Horizon, and to

disguise the reason for the decline in revenues, First Horizon reverted to its

practice of deliberately overselling its products to its wholesalers. In particular, the

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Company sold excess amounts of Tanafed and Prenate while knowing that the

Company was developing a replacement version that would render the product sold

obsolete and, thus, subject to return. In addition, the Company sold excess

amounts of Sular, so that trade inventory amounts increased to three times normal.

During this entire period, without disclosure to shareholders, First Horizon

materially changed its return policy, making it substantially easier for customers to

return the unwanted product that they had purchased.

11. On February 27, 2003, First Horizon announced that it was reducing

its earnings guidance due to depressed sales of Sular, Tanafed and other products,

higher than "anticipated" trade inventories, and increased product returns. In

response, First Horizon's stock dropped over 64% in a single day - - trading at only

$2.06 on February 28, 2003. The impact of Defendants' fraud on First Horizon's

stock price is depicted in the chart below:

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ti ^r

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announcing a further reduction in earnings guidance for first quarter 2003. In the

press release, the Company admitted that a significant contribution to the decline in

net revenue "was the Company's reductions of shipments of those products

(including Sular) for which the Company seeks to reduce the levels of trade

inventories and the Company's current decision to withdraw Tanafed Suspension

from the market earlier than planned...."

13. Following the April 29 disclosure, the price of First Horizon's stock

fell another 20% from a closing price of $3.39 per share on April 28, 2003, to close

at $2.70 per share on April 29, 2003. As a result of Defendants ' false and

misleading statements during the Class Period, Plaintiffs have incurred tremendous

losses.

JURISDICTION AND VENUE

14. Plaintiffs bring this action pursuant to Sections 11, 12(a)(2), and 15 of

the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77(k), 77(l)(2) and

77(o), and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the

"Exchange Act"), 15. U.S.C. §§ 78j (b), 78(n) and 78t(a), and Rule lOb-5

promulgated thereunder by the SEC.

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pursuant to Section 22 of the Securities Act, and 15 U.S.C. ' 77v, Section 27 of the

Exchange Act, 15 U.S.C. '78aa, and 28 U.S.C. ' 1331, as amended.

16. Venue is proper in this District pursuant to Section 22 of the

Securities Act and Section 27 of the Exchange Act, 15 U.S.C. § 77v and 15 U.S.C.

§ 78aa. Many of the acts and transactions giving rise to the violations of law

complained of herein, including the preparation and dissemination to the investing

public of false and misleading information, occurred in this District. Further, First

Horizon has its principal place of business in this District at 6195 Shiloh Road,

Alpharetta, Georgia 30005. In connection with the acts, conduct and other wrongs

complained of herein, Defendants, directly or indirectly, used the means and

instrumentalities of interstate commerce, including the United States mails and

interstate telephone communications , and the facilities of the NASDAQ National

Market ("NASDAQ"), a national securities exchange.

THE PARTIES

A. The Plaintiffs

17. Lead Plaintiff Thomas Sheahan purchased the securities of First

Horizon during the Class Period, as set forth in his certification already on file with

the Court.

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Horizon during the Class Period as set forth in his certification already on file with

the Court.

19. Lead Plaintiff Roy LaTourette, Jr. purchased the common stock of

First Horizon pursuant to the Registration Statement as set forth in his certification

already filed with the Court.

B. The Defendants

20. First Horizon is a specialty pharmaceutical company that markets and

sells brand name prescription products. The Company focuses on the treatment of

cardiovascular, obstetrical and gynecological, pediatric and gastroenterological

conditions and disorders. First Horizon's strategy is to acquire or license

pharmaceutical products that other companies do not actively market and that the

Company believes have high sales growth potential, are promotion-sensitive and

compliment existing products. In addition, the Company seeks to develop new

patentable formulations, use new delivery methods and seek new uses for existing

drugs. First Horizon also acquires businesses with complimentary products or

develop pipelines as well as late-stage development products consistent with the

Company's therapeutic focus.

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Board, Chief Executive Officer and President of First Horizon throughout the

entire Class Period. Defendants Shah left the Company under puzzling

circumstances shortly after the close of the Class Period. Just before the close of

business on February 12, 2003, Shah signed a new employment agreement with the

Company pursuant to which he was to receive $300,000 in annual salary.

However, On May 19, 2003, the Company issued a press release announcing the

resignation of Shah as Chairman of the Board, Chief Executive Officer and

President of First Horizon.

22. Defendant Shah was a signatory to the Company's Registration

Statement, the Company's Form 10-Qs during each quarter of 2002 and the

Company's 2002 Form 10-K. Shah also executed written certifications attesting to

the accuracy of the Company's Form 10-Qs for the second and third quarters of

2002, and the Company's 2002 Form 10-K.

23. Defendant Balaji Venkataraman ("Venkataraman") acted as Executive

Vice-President and Chief Operating Officer of First Horizon during the Class

Period until his resignation from the Company was announced on March 5, 2003,

near the end of the Class Period. Venkataraman resigned from the Company under

circumstances that were even stranger than the circumstances surrounding Shah's

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Case 1:02-cv-02332 -J F Document 114 Filed 04/20/2007 of 106

resignation. On February 12, 2003, Venkataraman signed a new employment

agreement with the Company pursuant to which he was to receive $193,000 in

annual salary. Just three weeks later, the Company issued a press release

announcing the resignation of Venkataraman as Executive Vice-President and

Chief Operating Officer, effective immediately. Pursuant to the terms of his

severance agreement with the Company, Venkataraman received his $193,000

salary for one year and a lump sum payment of $28,000. In addition to his salary

and the lump sum payment, the Company also agreed to pay Venkataraman

$75,000 upon his termination.

24. Defendant Venkataraman entered into an agreement with the

Company, which was undisclosed to the investing public until the Company issued

its Proxy Statement on April 14, 2003, in which he agreed to perform at least 80

hours of consulting services for the Company for the period following his

resignation up to and including April 30, 2003. During this period, while in

possession of material adverse non-public information, Venkataraman sold 51,190

shares of his First Horizon stock on April 16, 2003, for proceeds of $51,190 and

sold 150 ,000 shares of his First Horizon stock on April 21, 2003, for proceeds of

$450,000. The sale of 201,190 shares of First Horizon stock represented almost

one-third of his entire holdings, including exercisable stock options.

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Registration Statement and the Company's Form 10-Qs for each quarter in 2002.

Venkataraman also executed written certifications attesting to the accuracy of the

Company's Form 10-Qs for the second and third quarters of 2002.

26. Defendant Darrell Borne ("Borne") has been the Chief Financial

Officer of the Company since December 2002, and Treasurer and Secretary of the

Company since January 2003, and Executive Vice President since March 2006.

On February 12, 2003, Borne signed a new employment agreement with First

Horizon in which he was to receive $140,000 in annual salary. Borne is a

signatory to the Company's 2002 Form 10-K and the severance agreements entered

into between the Company and Shah and Venkataraman.

27. Defendant John N. Kapoor ("Kapoor") was a Director of First

Horizon from 1996 until his resignation in December 2006, and a signatory to the

Company's Registration Statement . On May 19, 2003, Kapoor became the non-

executive Chairman of the Board for First Horizon. Kapoor is the founder of

Kapoor-Pharma Investments , L.P., ("Kapoor-Phanna") the Company 's largest

shareholder with approximately 15% of First Horizon's outstanding common

stock. The managing general partner of Kapoor-Pharma is EJ Financial

Enterprises, Inc., where Kapoor serves as the President and sole stockholder. Shah

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Case 1:02-cv-02332- J F Document 114 Filed 04/20/2007 of 106

and Venkataraman also served as officers of EJ Financial Enterprises , Inc. prior to

the Class Period. According to Kapoor-Pharma's 2003 Proxy Statement, Kapoor

has the authority to vote and dispose of the shares owned by Kapoor-Pharma

Investments, and is therefore deemed the beneficial owner of those shares. As

Kapoor-Pharma admitted in its Form 10-K for the year ended December 31, 2002,

filed with the SEC on or about March 18, 2003, "Kapoor-Pharma Investments

holds significant control or influence over [First Horizon's] policies and acts."

28. Kapoor, and companies that he controls, have shown a consistent

disregard for compliance with securities laws and regulations . For example,

Kapoor is the controlling shareholder of another publicly traded pharmaceutical

company, beneficially owning over 38% of the stock of Akorn, Inc. ("Akorn")

Kapoor served as Akorn's Chief Executive Officer from March 2001 until his

resignation in December 2002, and has been the Chairman of the Board of Akorn

from May 1995 through the present. In April 2002, during Kapoor's tenure as

Chief Executive Officer, the SEC conducted an investigation of Akorn's financial

statements. As a result of the investigation, Akorn agreed to restate its financial

statements for 2000 and 2001 and entered into a proposed consent order with the

SEC, which found that Akorn violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B)

of the Exchange Act and Rules 12b-20, 13 a-1 and 13 a-13 promulgated thereunder.

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Additionally, Akorn restated its financial statements for the first two quarters of

2002 because of a transaction Akorn entered into with Kapoor in which Akorn

failed to recognize a $1.5 million beneficial conversion feature embedded in the

terms and conditions of convertible notes issued to Kapoor in 2001. Ultimately,

Akorn was delisted from NASDAQ for filing unaudited financial statements with

the SEC as well as being subject to SEC enforcement proceedings and FDA

investigations and fines.

29. Kapoor was also previously the Chairman and President of Lyphomed

Inc. ("Lyphomed"), a publicly traded company in which he owned more than 10%

of the stock. During his tenure as Chairman and President of Lyphomed, Kapoor

was sued in a class action alleging securities fraud in violation of the Exchange Act

that ultimately settled for $10.4 million. Subsequently, Fujisawa Pharmaceutical

Co. Ltd. also sued Kapoor for separate securities fraud and RICO violations that

was also settled, but the terms are not public and are subject to a confidentiality

agreement.

30. Defendants Shah, Venkataraman, Borne and Kapoor are hereinafter

referred to collectively as the "Individual Defendants." The Company and the

Individual Defendants are sometimes referred to collectively as the "Defendants."

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31. Defendant Jerry N. Ellis ("Ellis") has been a Director of First Horizon

since November 2000 and was a signatory to the Company's Registration

Statement. Ellis was a partner at Arthur Andersen and has also been a Director of

Akorn since 2001, during which time Akorn restated its financial results for 2000,

2001 and the first two quarters of 2002, and was delisted by the NASDAQ stock

market in June 2002 for filing unaudited financial statements with the SEC, as well

as being subject to SEC enforcement proceedings and FDA investigations and

fines, as detailed above.

32. Defendant Jon S. Saxe ("Saxe") has been a Director of First Horizon

since January 2000 and was a signatory to the Company's Registration Statement.

Saxe was President, Chief Executive Officer and a Director of Synergen, Inc.

("Synergen") from October 1989 to April 1993. During his tenure at Synergen, he

was a named party defendant in a class action alleging securities fraud under the

Exchange Act, which ultimately settled for $28 million.

33. Defendant Patrick J. Zenner ("Zenner") has been a Director of First

Horizon since May 2002 and was a signatory to the Company's Registration

Statement.

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Horizon since April 2000 and was a signatory to the Company's Registration

Statement. Lapalme is the Company's current Chairman of the Board of Directors.

35. Defendants Ellis, Saxe, Zenner and Lapalme are hereinafter referred

to collectively as the "Director Defendants."

36. Defendant Deutsche Bank Securities, Inc.; Banc of America

Securities , LLC; J. P. Morgan Securities , Inc.; Thomas Weisel Partners , LLC and

LaSalle Capital Markets (collectively, the "Underwriter Defendants") are full

service investment firms and sold First Horizon's stock presented in the Offering

on a firm commitment basis, a contractual agreement under which they agreed to

purchase 6.5 million shares offered for sale in the Offering for resale to the

investing public. In addition, the Underwriter Defendants exercised an option to

purchase an additional 975,000 shares in the Offering for resale to the investing

public.

37. By reason of their management positions and/or their membership on

the Company's Board of Directors, their ability to make public statements in the

name of the Company, and their stock ownership, the Individual Defendants were

controlling persons of the Company and had the power and influence, which they

exercised, to cause the Company to engage in the unlawful conduct alleged herein.

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In fact, the Company admitted in its 2002 Form 10-K that Kapoor-Pharma,

controlled by Kapoor, holds significant control or influence over First Horizon's

policies and acts.

38. Each Individual Defendant had access to the adverse non-public

information about the Company's business, finances, products, markets and

present and future business prospects, as particularized herein, by means of internal

corporate documents, conversations or connections with corporate officers or

employees, attendance at Company management and/or Board of Directors

meetings and committees thereof, and/or reports and other information provided to

each in connection therewith. Because of this access, each of these Defendants

actually knew or recklessly disregarded the adverse facts specified herein that were

being concealed.

CLASS ACTION ALLEGATIONS

39. Plaintiffs bring this action as a class action pursuant to Rules 23(a)

and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class, which

consists of all persons or entities who purchased First Horizon securities during the

Class Period, and on behalf of the Offering Subclass. Excluded from the Class and

Offering Subclass are Defendants, members of the immediate family of each of the

Individual Defendants, the Director Defendants, the Underwriter Defendants, any

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entity in which any Defendant has a controlling interest, and the legal affiliates,

representatives, heirs, controlling persons, successors, and predecessors in interest

or assigns of any such excluded party.

40. Because more than 34 million shares of the Company's common stock

were outstanding, and because the Company's common stock was actively traded

on the NASDAQ during the Class Period, the members of the Class are so

numerous that joinder of all members is impracticable. While the exact number of

Class members can only be determined by appropriate discovery, Plaintiffs believe

that Class members number at least in the hundreds or thousands and that they are

geographically dispersed.

41. Pursuant to the Registration Statement, the Company issued

approximately 7.475 million shares of its common stock in connection with the

Offering. Plaintiffs believe that there are thousands of Offering Subclass members

comprised of persons and entities that are geographically dispersed. This makes

joinder of each member of the Offering Subclass impracticable.

42. Plaintiffs' claims are typical of the claims of the members of the Class

and Offering Subclass, because Plaintiffs and all of the members of the Class and

Offering Subclass sustained damages arising out of Defendants' wrongful conduct

as alleged herein.

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members of the Class and Offering Subclass. Plaintiffs have retained counsel who

are experienced and competent in class action and securities litigation. Plaintiffs

have no interest that is contrary to or in conflict with those of the members of the

Class and Offering Subclass that they seek to represent.

44. A class action is superior to all other available methods for the fair

and efficient adjudication of this controversy, since joinder of all Class and

Offering Subclass members is impracticable. Furthermore, as the damages

suffered by individual members of the Class and Offering Subclass may be

relatively small, the expense and burden of individual litigation make it impossible

for the members of the Class and Offering Subclass individually to redress the

wrongs done to them. There will be no difficulty in the management of this action

as a class action.

45. Questions of law and fact common to the members of the Class and

Offering Subclass predominate over any questions that may affect only individual

members, in that Defendants have acted on grounds generally applicable to the

entire Class and Offering Subclass. Among the questions of law and fact common

to the Class and Offering Subclass are:

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alleged herein;

(b) Whether the Company's publicly disseminated releases and

statements during the Class Period omitted and/or misrepresented material facts,

and whether Defendants breached any duty to convey material facts or to correct

material facts previously disseminated;

(c) Whether Defendants participated in and pursued the common

course of conduct complained of,

(d) Whether Defendants acted knowingly or severely recklessly in

omitting and/or misrepresenting material facts;

(e) Whether the market prices of First Horizon's securities during

the Class Period were artificially inflated due to the material nondisclosures and/or

misrepresentations complained of herein; and

(f) Whether the members of the Class and Offering Subclass have

sustained damages and, if so, what is the appropriate measure of damages.

THE MANNER IN WHICH FIRST HORIZON PERPETRATED ITSFRAUD

46. First Horizon is a specialty pharmaceutical company that markets and

sells brand name prescription products. The Company sells its products to

pharmaceutical wholesalers (who in turn distribute to pharmacies), chain drug

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stores, other retail merchandisers and, on a limited basis, directly to pharmacies.

First Horizon' s sales to three major pharmaceutical wholesalers, McKesson

Corporation ("McKesson"), Cardinal Health, Inc. (and one of its divisions, Bindley

Western Industries) ("Cardinal"), and ArnerisourceBergen ("Am erisource")

(collectively the "Big Three" distributors) account for approximately 80% of the

Company's total sales revenues.

47. The Company focuses on four major product areas : (i) cardiovascular;

(ii) obstetrical and gynecological; (iii) pediatric; and (iv) gastroenterological. First

Horizon promotes and markets its products through the Company's nationwide

sales and marketing force that targets high-prescribing cardiologists, obstetricians

and gynecologists, and select primary care physicians. The Company's sales and

marketing force creates demand for the Company's products by targeting the

medical community that prescribes them . This demand generally is met, in the

first instance, from the inventories of pharmacies filling these prescriptions and

then, as needed, from the inventories of wholesalers that directly purchase and

stock First Horizon's products.

48. Depending upon the size of the wholesalers' inventories of particular

First Horizon products, measured in months on hand, there can be a substantial

disconnect between demand for the product, measured by the numbers of

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prescriptions written and actually filled for the product, and First Horizon's

revenues, which are primarily generated through sales to wholesalers. When

wholesaler inventory is dramatically inflated for a particular product, there may be

no sales by First Horizon for that product despite an increase in the rates by which

the product is prescribed and those prescriptions are filled.

49. Of equal, if not greater importance, the number of prescriptions

written does not bear a direct correlation to the amount of drugs that First Horizon

may sell, since customers have the option of filling such prescription with a

generic version of the product manufactured by a competitor.

50. With this information in hand, and as described in more detail below,

Defendants stuffed the wholesale inventory channels with product in order to meet

analyst earnings estimates and enhance the Company's ability to complete

successfully its Offering on April 24, 2002 (the first day of the Class Period).

Defendants' use of improper channel stuffing activities in order to meet publicly

announced sales estimates began prior to the Class Period.

51. According to a former Vice President of Marketing ("Marketing

V.P."), employed by First Horizon from May 2001 to May 2003, and a former

Vice President of Sales ("Sales V.P."), employed by First Horizon from May 2000

until December 2002, a strategic plan was devised starting in July 2001, during the

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Weekly Operating Committee meetings, by the "whole executive team" to stuff the

wholesale distribution pipeline with Tanafed as a part of an "anti-competitive"

strategy to stem the substitution rate of generic competitors to Tanafed. In order to

accomplish this goal, First Horizon would either give a discount to wholesalers of

up to 10%, or engage in "invoice dating," which would extend payment terms from

30 days to 60 days. At the time First Horizon began to stuff Tanafed into the

wholesale channel, the Company also started to develop Tanafed DP and DMX to

block shelf space of generic competitors, and thus knew that the Tanafed that it

was selling would become obsolete.

52. Specifically, the First Horizon executive team learned from various

sources in July and August 2001 that a generic substitute for Tanafed would be

hitting the market in the near future from "one of [its] distributors" in Puerto Rico

- Deliz Pharmaceuticals ("Deliz"). The Marketing V.P. stated that Deliz faxed a

"flier" promoting the Tanafed generic substitute to either Venkataraman or

Christopher Offen ("Offen"), First Horizon's Chief Commercial Officer, who then

presented the flier as a discussion point during the Company's Weekly Operating

Committee Meeting. Once the information came from Deliz, Kathy Lang

("Lang"), the Company's Director of Trade Relations, started contacting wholesale

distributors in an effort to seek out additional information. The Marketing V.P.

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said that, by September 2001, "we knew for sure the generics were going to hit the

market when we got a pricing sheet from Puerto Rico." A former Product

Manager ("Product Manager I") of First Horizon, employed by the Company from

January 2002 to July 2003, stated that around September 2001, the wholesale

pipeline report on Tanafed showed a supply of approximately 10 months, five

times the normal inventory of two months. Thus, First Horizon increased sales

during a period when wholesale inventories far exceeded their normal levels.

53. During this same time period, First Horizon was engaged in

negotiations with AstraZeneca UK Limited ("AstraZeneca") for the purchase of

the antihypertensive prescription medication Sular. The purchase of Sular

represented the most significant and expensive product acquisition in the

Company's history. In order to ensure that the Company would receive the private

financing required for the acquisition of Sular and to ensure the highest stock price

per share as possible to successfully complete the Offering, Defendants took

measures to meet and exceed analyst earnings expectations in both the fourth

quarter of 2001 and the first quarter of 2002, the anticipated closing date of the

Sular acquisition. First, as noted above, Defendants stuffed the wholesaler

channels with product during the second half of 2001. Second, according to the

Sales V.P. and another former Product Manager ("Product Manager II"), employed

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by First Horizon from January 2002 until July 2003, because First Horizon had met

its estimated earnings for the fourth quarter of 2001 by early December 2001, the

Company improperly shifted sales of Robinul that the Company had made in the

fourth quarter of 2001, transferring the revenue into the first quarter of 2002.

Third, according to Product Manager II, First Horizon stuffed the wholesale

channel during the first quarter of 2002, including its Prenate and Tanafed

products, so as to present the Company in a positive light immediately prior to the

Offering. Product Manager II said that the Company would not have met its

projections for this period had it not engaged in channel stuffing. These activities

ensured that First Horizon made its estimated earnings for the third and fourth

quarters of 2001 and, more importantly, for the first quarter of 2002.

54. On February 13, 2002, , Defendants issued a press release announcing

an agreement to purchase the Sular product line. The press release stated that First

Horizon obtained private financing to complete the acquisition:

In order to finance the acquisition, the Company intends to use itsavailable cash and has received a commitment for a six-month $152million senior secured credit facility, arranged through Deutsche BancAlex. Brown Inc., which also acted as financial advisor to FirstHorizon in connection with this transaction.

55. On April 19, 2002, First Horizon announced that it priced the offering

of 6,500,000 shares of its common stock at $21.75 per share for gross proceeds of

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$141,375,000 in order to repay the privately financed debt incurred in connection

with the Sular acquisition. In addition, the Underwriter Defendants were granted

the right to purchase an additional 975,000 shares to cover potential over-

allotments. The common stock was sold pursuant to the Registration Statement.

The Underwriter Defendants exercised their right to purchase these additional

975,000 shares.

FALSE AND MISLEADING STATEMENTS ISSUED AT THE TIME OFTHE PUBLIC OFFERING

56. The Class Period begins on April 24, 2002, the date of First Horizon's

Offering pursuant to the Registration Statement of 6,500,000 shares of common

stock, not including an underwriters over-allotment allocation of 975,000

additional shares. The Offering was priced at $21.75 per share.

57. Explaining the Company's $32.6 million increase in net revenues in

2001 as compared to 2000, which resulted in a total of $69.3 million in revenues

for 2001, the Registration Statement's Results of Operations section stated:

The increase in sales for the year ended December 31, 2001 was

primarily due to increased unit sales of our key products Tanafed,

Robinul, Nitrolingual Pumpspray and Ponstel. According to IMS

Health's National Prescription Audit Plus data, total prescriptions of

Tanafed, Robinul and Robinul Forte and Ponstel increased 41.9%,

51.9% and 47.0%, respectively.

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Company's realigned sales force, correlating it to growth in its key products

through increased prescriptions:

We recently realigned our sales force into three specialty groups tooptimize productivity. We now have 68 professionals marketing toprimary care physicians and cardiologists, 99 professionals marketingto obstetricians and gynecologists, pediatricians andgastroenterologists and 11 professionals marketing to physicians atteaching hospitals. Prescription growth for our Robinul and RobinulForte, Tanafed and Ponstel products supports the effectiveness of ourpromotional strategy, as prescriptions of these products grew 51.9%,41.9% and 47.0%, respectively, from 2000 to 2001 according to IMSHealth's National Prescription Audit Plus data.

[Emphasis added].

59. The Registration Statement also disclosed that Tanafed had increased

from 22.3% of First Horizon's total sales in 2000 to 28.5% in 2001.

60. The Registration Statement was false and misleading for the following

reasons:

a. the Registration Statement failed to disclose that First Horizon, in

the fourth quarter of 2001, engaged in channel stuffing with respect to, inter alia,

its Tanafed line of drugs, and that there existed an oversupply among wholesalers

that was more than five times greater than normal;

b. the Registration Statement attributed the increase in sales to an

increase in the number of Tanafed prescriptions, even though the number of

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prescriptions bore only an indirect relationship to First Horizon's actual sales,

since prescriptions could be filled by generic competitors, and the increase in sales

was due to First Horizon's channel stuffing activities;

c. the Registration Statement did not disclose that that the sales force

realignment to which it referred would remove sales personnel from existing

products so that First Horizon could concentrate on sales of its new Sular product.

According to Product Manager I, First Horizon was "spending so much energy on

Sular, all other drug sales suffered;"

d. the Registration Statement failed to disclose that, on January 1,

2002, the Company had changed its product return policy from a twelve month

window (i.e., from six months prior to expiration date of the product to six months

subsequent to the expiration date of the product) to an eighteen month window

(i.e., from six months prior to the expiration date of the product to twelve months

subsequent to the expiration date of the product);

e. the Registration Statement failed to disclose that much of the sales

of Tanafed and Prenate consisted of product that would be obsolete when the

Company introduced new versions of that drug, which it intended to do, and that

such obsolete product would be returned to First Horizon; and

-28-


f. the Registration Statement failed to disclose that the Company had

shifted sales of its Robinul product from the fourth quarter of 2001 to the first

quarter of 2002.

61. On May 6, 2002, the Company issued a press release announcing first

quarter 2001 earnings. The press release correlated the Company's increased

revenues to growth in the number of prescriptions for the Company's key products,

stating in relevant part:

Prescription growth of our key products continues to drive revenue . ... Total prescriptions of Ponstel®, Robinul® and Robinul® Forte, andthe Tanafed ® line increased 46%, 28% and 4%, respectively, fromthe first quarter of 2001 to the first quarter of 2002. (Source: IMSHealth's National Prescription Audit P1usTM data.)

[Emphasis added].

62. On the following day, May 7, 2002, the Company filed its Form 10-Q

for the period ending March 31, 2002 (the "March 31, 2002 Form 10-Q") with the

SEC. As to net income, the March 31, 2002 Form 10-Q essentially repeated the

financial results for the first quarter of 2002 as disclosed in the May 6 press release

and during the conference call on the same day. In conjunction with its discussion

of quarterly financial results, the March 31, 2002 Form 10-Q also correlated the

increased revenue to increases in prescription growth for the Company's key

products:

-29-


Net Revenues. Net revenues increased $14.7 million or 118%, overthe quarter ended March 31, 2001, to $27.1 million for the quarterended March 31, 2002. Sales of continuing products (includingTanafed DM which we added to our Tanafed line in January 2002) forthe quarter ended March 31, 2002 increased 45% compared to thequarter ended March 31, 2001. The increase in sales of continuingproducts for the quarter ended March 31, 2002 compared to thequarter ended March 31, 2001 was primarily due to prescriptiongrowth in Robinul, Tanafed and Ponstel in 2002 . According to IMSHealth's National Prescription Audit Plus data, total prescriptions ofour Ponstel product increased 46%, Robinul and Robinul Forteproducts increased 28% and our Tanafed products increased 4%.

[Emphasis added].

63. The March 31, 2002 Form 10-Q was false and misleading for the

following reasons:

a. Defendants failed to disclose that First Horizon, in the first quarter

of 2002, engaged in channel stuffing with respect to, inter alia, its Tanafed line of

drugs, and that there existed an oversupply among wholesalers that was at least

five times greater than normal;

b. Defendants attributed the increase in sales to an increase in the

number of Tanafed prescriptions, even though the number of prescriptions bore

only an indirect relationship to First Horizon's actual sales, since prescriptions

could be filled by generic competitors, and the increase in sales was due to First

Horizon's channel stuffing activities;

-30-

Company had changed its product return policy from a twelve month window (i.e.,

from six months prior to expiration date of the product to six months subsequent to

the expiration date of the product) to an eighteen month window (i.e., from six

months prior to the expiration date of the product to twelve months subsequent to

the expiration date of the product);

d. Defendants failed to disclose that much of the sales of Tanafed and

Prenate consisted of product that would be obsolete when the Company introduced

new versions of that drug, which it intended to do, and that such obsolete product

would be returned to First Horizon;

e. Defendants failed to disclose that the Company had shifted sales of

its Robinul product from the fourth quarter of 2001 to the first quarter of 2002; and

f. Defendants did not disclose that the Company had removed sales

personnel from existing products so that First Horizon could concentrate on sales

of its new Sular product.

64. On July 2, 2002, First Horizon issued a press release announcing the

reduction in its expected earnings for the second quarter 2002 and the reduction in

its earnings guidance for the remainder of the year. According to the press release,

-31-


there were two reasons for the decline in the Company's expected revenue, income

and earnings:

First Horizon reported that the primary contributing factor for theshortfall resulted from greater than expected erosion of sales in thesecond quarter of its Tanafed Suspension (pediatric liquid cold &allergy product) and Prenate GT (prescription prenatal vitamin)products to knock-off products . Another contributing factor for theshortfall was the distraction arising out of the realignment of the salesforce , which was completed in the second quarter of 2002.

[Emphasis added].

65. The market' s reaction to First Horizon 's announcement was quick and

significant . First Horizon' s stock price plummeted by 81% or by $14.74 to $3.51,

on volume of 16.4 million shares, about 30 times the daily average.

66. During an earnings conference call that same day, July 2, Shah stated,

among other things, that "[t]wo major factors" contributed to First Horizon's

earnings shortfalls in the second quarter. According to Shah:

The primary contributor was significant erosion of sales in the secondquarter of Tanafed Suspension and Prenate GT, due to substitution byknock-offs of these products .... The knockoffs had margin of impactuntil the second quarter ....

The second contributing factor was the distraction that rose due to therealignment of our sales force , which was completed in the secondquarter of 2002.... This distraction is over, and our sales force arefocused on building the company's key products.... [A]s we havediscussed in the past, the realignment is an integral part of our growthplan. These temporary distractions are behind us now, and our salesforce has completely familiarized themselves with their territories and

-32-

Venkataraman reiterated:

The shortfall is primarily due to the erosion of Tanafed and PrenateGT sales, involving the knock-off issues addressed by Mahendra[Shah]. Our second half guidance incorporates a lowering of revenuefor these two products.

[Emphasis added].

67. Later in the conference call, another questioner asks about the $14

million reduction in expected revenues for the second half of the year, seeking

confirmation that "the 14 million is just Tanafed and [Prenate] GT."

Venkataraman agrees, "Right."

68. When Venkataraman was asked what had changed in the second

quarter of 2002, "because the products [Tanafed and Prenate] were going so well,

right up until th[at] quarter," Venkataraman states that no new competitors had

entered into the market. Rather, the Company "did not see the erosion kicking up .

.. in terms of weekly prescriptions . That's what we did not see in terms of the

trends going into the second quarter." Responding to a follow-up question

regarding whether the revenue decline was really due to erosion from knock-offs

or "just a lack of attention by your sales force to these products, given the

realignment," Venkataraman stated:

- 33 -


All of the products that we had in our portfolio have continued togrow through the realignment . So if the question was did we continueto grow Prenate GT week over week through the realignment, we did.So to respond to your question, the substitution rates increased moreat the pharmacy level than our ability to grow the product, because wehave shown that, as in the example of Prenate GT, we have grown theproducts all the way through April and May.

[Emphasis added.]

69. These statements were false and misleading for the following reasons:










c. Defendants failed to disclose that, on January 1, 2002, the




-34-













70. In addition, these statements were false because First Horizon knew

that at least one new competitor had entered the market; indeed, the entry of such

competitor was so significant that it was one of the primary catalysts for First

Horizon 's channel stuffing.

71. Also, during the July 2 earnings conference call, Venkataraman raised

the issue of a possible write-off of Tanafed inventory in conjunction with the

Company's earnings guidance for the second half of 2002:

The guidance for the second half of 2002 is as follows. Revenuesbetween $60 and $65 million, EPS between 20 and 22 cents. This

-35-

exten si on .

[Emphasis added].

72. In follow-up, a questioner asked about the $5 million charge for the

"new formulation of Tanafed," Venkataraman responds:

We currently have Tanafed in our warehouse and in the trade. If welaunch a product that is going to replace it, in order to maximize thelaunch of that line extension, we may write off the inventory in thetrade and we may write off the inventory on hand. So that is thereason we have a one-time $5 million charge, up to $5 million.We've estimated those numbers based on the data we have, and that'show we've provided that. And it says, if we launch it, we may takethat write off up to $5 million.

73. Venkataraman was asked again about the Company's inventory

adjustments relating to Tanafed. The Q & A highlights Venkataraman ' s attempt to

deflect the issue in furtherance of Defendants' scheme:

ROBERT OLE (ph), FRANKLIN STREET PARTNERS: Thank you.I just needed a little bit more clarification on the inventory . It lookslike at the end of Q1, your total inventory was 11 . 4 million, and thenabout -- I don ' t know, some big chunk of that was Sular , so if youtake away Sular , it gives you about 5 . 2 million inventory for thenon-Sular inventory , and you 're talking about writing down $5million worth . And at your 15 percent cost of goods, $5 million writedown would imply sales of $30 to $35. So some of this doesn'tconnect to me ...

BALAJI VENKATARAMAN: Robert (ph).

-36-

BALAJI VENKATARAMAN: Robert (ph), when you buy back,when you impair inventory , when you buy back inventory fromwholesalers , you're not buying back at the cost of goods sold , you'rebuying back at ...

ROBERT OLE (ph): Their cost, right . Got you. So then ...

BALAJI VENKATARAMAN: So what we did is ...

ROBERT OLE (ph): If they hold -- so still, if they hold two months

of inventory, which is normal, then you're saying that -- I mean, they

think that's a $30 million a year product, and that doesn't make senseeither.

BALAJI VENKATARAMAN: What we did is we took the inventorythat we currently have on hand for samples and product . And we tookan estimated value -- we took a fairly conservative estimated value ofwhat we thought would be inventory at the wholesalers , and thenessentially combined the two, and arriving at the $ 5 million.

MAHENDRA SHAH: We said up to $5 million.

BALAJI VENKATARAMAN: Up to $ 5 million.

MAHENDRA SHAH: And it depends upon the launch time. When

we launch the new product.

ROBERT OLE (ph): So theoretically , they'll be ordering none now.

BALAJI VENKATARAMAN: That is correct.

[Emphasis added.]

-37-

given for the earnings shortfall. Indeed, a July 2, 2002 analyst report issued by

Corey Davis at J. P. Morgan explained "wholesaler inventory stocking" in the first

quarter that was "now being taken out of subsequent quarters" was a likely reason

for the Company's enormous "disconnect" between promised and actual financial

results. The J. P. Morgan analyst report downgraded the stock and revealed that

they did not see "any appreciation [in First Horizon's stock price] soon due to the

loss of [management 's] credibility."

75. Nevertheless, First Horizon continued to disguise the true reasons for

its second quarter results . On August 5, 2002, First Horizon announced in a press

release that its second quarter results were in line with its previously revised

earnings guidance. Commenting on the results, Shah stated:

The Company reported greater than expected erosion of sales in thesecond quarter of its Tanafed Suspension and Prenate GT productsdue to increased competition from knock-off products resulting inpharmacists substituting such knock-off products for the Company'sproducts. Another factor that contributed to the shortfall was thedistraction arising from the realignment of the sales force that wascompleted in the second quarter .

[Emphasis added].

76. In an earnings conference call that same day, August 5, Shah again

misrepresented the nature of First Horizon's faltering revenues:

-38-

Case 1:02-cv-02332-J F Document 114 Filed 04/20/2007 of 106

The primary contributing factor for revenues and earnings in the

second quarter was due to the greater than expected erosion of salessupport of suspension in Prenate projects due to increased substitutionby pharmacies of knockoff products .

[Emphasis added].

77. On August 16, 2002, the Company filed its Form 10-Q/A for the

period ending June 30, 2002 (the "June 30, 2002 Form 10-Q") with the SEC.

Addressing the Company's Results of Operations, the June 30, 2002 Form 10-Q

stated, in part, that:

The Company experienced erosion of sales of its Tanafed and Prenateproducts during the quarter ended June 30, 2002 due to increasedcompetition from knock-off products resulting_ fromrom pharmacists'substituting such knock-off products for the Company's products . Netrevenues for the 2002 quarter were also adversely affected bydistraction arising from the realignment of the Company's sales forcethat was completed during the second quarter. The Company expectsto experience continued erosion of sales of Tanafed and Prenate dueto competition from knock-off products . Subject to completion of theCompany's development project for Tanafed, the Company plans tolaunch a line extension of Tanafed later during 2002 to seek tomitigate future pharmacists' substitutions for Tanafed. In addition, theCompany is implementing a strategic education program to mitigatepharmacists' substitutions for Prenate.

[Emphasis added].

78. These statements were false and misleading for the following reasons:



-39-





















-40-



79. With respect to the previously announced potential $5 million

Tanafed inventory write-off, the June 30, 2002 Form 10-Q reiterated that:

If the Company is successful in completing and introducing the lineextension to Tanafed which the Company currently has underdevelopment, the Company anticipates that it may incur a expenseestimated at $5 million associated with the launch of the Tanafed lineto buy back Tanafed products held for sale by wholesalers andpharmacists.

80. In a press release issued on September 23, 2002, announcing First

Horizon's line extensions of its Tanafed products, the Company stated, among

other things:

We believe that Tanafed DP(TM) and Tanafed DMX (TM) have the

potential to mitigate pharmacy substitution issues that impacted our

second quarter results . The timing of this launch is crucial, as we

were recently made aware of a knock off product to our Tanafed

DM(TM) entering the market.

[Emphasis added].

81. The statement set forth above was materially false for the following

reasons:



-41 -





















-42-



82. First Horizon's September 23 press release also confirmed that its

"previously announced one-time charge of approximately $5 million related to the

discontinuance of Tanafed® and Tanafed DM(TM) [would] be recorded in the

third quarter."

DEFENDANTS' SUBSEQUENT FRAUD

83. First Horizon's problems did not cease with the second quarter.

Having invested so greatly in the success of Sular, the Company soon discovered

that the market for such product were far less than anticipated. Again, the

Company resorted to deliberately oversupplying the wholesale market to maintain

its revenue figures. Trade inventories for Sular increased from 3.6 months to 6

months by November 2002.

84. Nevertheless, on November 6, 2002, with regard to trade inventories

of Sular, Shah told the marketplace that "Sular had excess inventories when we

bought it and we're slowly pulling those inventories down ...."

85. On November 12, 2002, the Company filed its Form 10-Q for the

period ending September 30, 2002 (the "September 30, 2002 Form 10-Q") with the

- 43 -


SEC. Explaining the decline in net revenues through the third quarter 2002 over

the same period in 2001, the September 30, 2002 Form 10-Q stated that:

The Company has experienced erosion of sales of its Tanafed andPrenate products during the nine months ended September 30, 2002due to increased competition from knock-off products resulting frompharmacists' substituting such knock-off products for the Company'sproducts .

[Emphasis added].

86. The statements set forth in paragraphs 81 and 82 were false and

misleading. With respect to the first two quarters of 2002, the 10-Q was false and

misleading for the following reasons:










-44-















87. In addition , Defendants admitted , in a conference call on February 27,

2003, that Shah's statement that First Horizon was "pulling down" Sular

inventories was false in light of the fact that such inventories were actually

increasing.

-45-

Horizon issued a press release announcing its earnings guidance for the first two

quarters of 2003 and for full year 2003. In that release, the Company stated that,

for the first quarter of 2003, it expected earnings per share to be $.11 - $.12. The

Company stated that, for the year, earnings would be $.55 to $.60 per share.

89. With respect to Sular, Shah stated: "We believe we have stemmed the

Sular prescription decline and have stabilized the brand. We believe that new

prescription growth will be a good metric to measure our success." Shah went on

to state:

As a result of the sales force realignment into two focused specialty sales groupsand the sales force expansion in April 2002, we were able to accelerateprescription growth in the third quarter of 2002 for most of our key brands due toour increased focus on key products and targeted physicians. We expect thismomentum to continue in 2003.

90. This disclosure was false and misleading. The release failed to

disclose that any "stabilization" of the Sular "brand" was not due to increased

prescriptions but to First Horizon's deliberate oversupply of the drug to

wholesalers. The release failed to disclose that trade inventories for Sular

increased from 3.6 months to 6 months by November 2002.

91. Further, the release was false and misleading because:

-46-





b. The release failed failed to disclose that, on January 1, 2002, the






c. The release failed to disclose that much of the sales of Tanafed and



would be returned to First Horizon; and

d. The release did not disclose that the the Company had removed

sales personnel from existing product's so that First Horizon could concentrate on

sales of its new Sular product.

-47-


92. On the February 27, 2003 conference call, Defendants announced that

the Company was revising its first quarter earnings guidance downward yet again

from that given on December 5, 2002 due to: (i) fewer than expected total

prescriptions of Sular compounded by higher than anticipated levels of trade

inventories; (ii) lower than expected performance of Tanafed DP in the first quarter

2003; and (iii) increased rates of decline in total prescriptions of the Company's

non-promoted products and increased returns of these products. The Company

stated that it expects net revenues to be between $20 million and $25 million and

earnings per share to range from a loss of $.03 per share to a profit of $.02 per

share, significantly below the figures announced in December 2002..

93. The market reacted swiftly. The Company's stock price dropped from

a close of $5.80 per share on February 27, 2003 to close at $2.06 on February 28,

2003, a drop of over 64% in a single day.

94. On February 28, 2003, Deutsche Bank issued an analyst report, stating

that it: continue[d] to be perplexed by [First Horizon's] disclosures, especially as it

relates to Sular inventory, as this is the third time in the past seven months that

management has suggested a significant imbalance between trade inventory and

end market demand for this product, while supposedly working down inventory.

-48-

and Offen resigned, effective immediately. The Company did not disclose to the

investing public until the Company issued its Proxy Statement on April 14, 2003,

that Venkataraman had agreed to perform at least 80 hours of consulting services

for the Company up to and including April 30, 2003. This is significant because

Venkataraman sold over 200,000 shares of his First Horizon stock (approximately

a third of his holdings including exercisable options) during April 2003, just prior

to the announcement on April 29, 2003 that the Company's earnings would be

substantially below its earnings guidance announced on February 27, 2003.

96. On March 18, 2003, the Company filed its Form 10-K for the annual

period ending December 31, 2002 (the "2002 Form 10-K") with the SEC. In the

"overview" section, the 2002 Form 10-K stated that, among other things, "during

2002, we experienced erosion of sales of our Prenate GT and Tanafed brands due

to competition from knock-off products." In the "Results from Operations"

section , the 2002 Form 10-K reiterated that statement:

We experienced erosion of sales of our Tanafed Suspension andTanafed DM line of products during 2002 due to increasedcompetition from knock-off products resulting from pharmacistssubstituting such knock-off products for prescriptions of our TanafedSuspension and Tanafed DM line of products....

We acquired the Prenate line in August 2001, introduced Prenate GTin September 2001 and experienced erosion of sales of the products

-49-


included in our Prenate line during 2002 due to increased competition

from knock-off products resulting in pharmacists substituting such

knock-off products for prescriptions of our Prenate line of products.

[Emphasis added].

97. These representations were repeated in the "Risks Related to Our

Business" section of the 2002 Form 10-K:

Sales of Prenate GT have been adversely affected by theintroduction of competitive products.Commencing during the second quarter of 2002, we experiencedsignificant erosion of Prenate GT sales due to increased substitution ofknock-off products by pharmacies filling prescriptions for PrenateGT. This substitution caused us to report lower than expected netrevenues and net income during the second quarter....

Sales of our Tanafed products have been adversely affected by theintroduction of competitive products.Commencing in the second quarter of 2002, we experiencedsignificant erosion of sales of Tanafed Suspension and Tanafed DMdue to increased substitution of knock-off products by pharmaciesfilling prescriptions for Tanafed Suspension and Tanafed DM. Thissubstitution caused us to report lower than expected net revenues andnet income during the second quarter ....

We face generic and other competition that could lower pricesand unit sales.Sular competes with products that are generic to other calciumchannel blockers. Nitrolingual Pumpspray competes with a generictablet product. Companies introduced knock-off products to ourPrenate GT product which has caused a significant sales erosionparticularly in the second quarter of 2002 , and in 2002, twocompanies introduced products that compete with Tanafed Suspensionand Tanafed DM which caused significant sales erosion primarily inthe second quarter of 2002 ....

-50-


[Emphasis added].

98. These statements were false for the following reasons:


















-51-








of its new Sular product. set forth in paragraph 61.

99. Also in the section titled "Risks Related to Our Business," the 2002

Form 10-K stated, among other things:

Unexpected increases in 2002 year-end quantities of Sular onhand with wholesalers may adversely affect sales of Sular during2003.We learned in mid-December 2002 that wholesalers had increasedtrade levels of Sular significantly in October 2002 and November2002, presumably in anticipation of future price increases. Thisunexpected spike in the level of trade inventories and the lower thanexpected total prescription performance of Sular resulted in a higherlevel of trade inventories than targeted_ by us . We have developed aplan to manage the trade inventory level of Sular, we expect that thehigh level of Sular inventory in the trade will adversely affect ouroperating results in the first quarter of 2003 and possibly insubsequent periods.

A small number of customers account for a large portion of oursales and the loss of one of them, or changes in their purchasingpatterns, could result in reduced sales.We sell most of our products to a small number of wholesale drugdistributors. For the year ended December 31, 2002, sales toMcKesson Corporation, Cardinal Health Inc., (including the Bindley

-52-


Western Division) and AmerisourceBergen Corporation represented23%, 23%, and 31% , respectively , of our total sales. The smallnumber of wholesale drug distributors , consolidation in this industryor financial difficulties of these distributors could result in thecombination or elimination of warehouses , which could temporarilyincrease returns of our products or, as a result of distributors reducinginventory levels, delay the purchase of our products .

[Emphasis added].

100. The Company also stated in its "Results of Operations" section in the

2002 10-K that:

We continue to manage the levels of trade inventories of Sular.Wholesalers who purchase our products increased the levels of tradeinventories significantly in October and November of 2002,presumably in anticipation of future price increases . We plan toreduce our shipments of Sular and thereby seek to reduce the levels oftrade inventories of Sular in the first quarter of 2003.

[Emphasis added].

101. This statement was false; trade inventories had risen to six months

by the beginning of November 2002. This rise was not due to unexpected events

in the fourth quarter of 2002, but to events that preceded such quarter.

102. On April 29, 2003 (the last day of the Class Period), the Company

announced estimated revenues of $11-13 million for the first quarter of 2003, well

below the $20-25 million Defendants had led investors to expect just two months

earlier. This time, according to the Company, the decline in net revenues was as a

result of the Company's plan to reduce inventories at the wholesaler level for a

-53-


number of its products, the Company's decision to withdraw Tanafed Suspension

from the market earlier than expected, and the purportedly new decision to

withdraw Tanafed DM from the market. This reduced revenues by an estimated

$3.4 million in the first quarter of 2003 due to the associated increase in the

Company's estimate of future product returns. Again, the market reacted quickly.

First Horizon's stock price dropped from a close of $3.39 per share on April 28,

2003 to close at $2.70 per share on April 29, 2003, a loss of over 20%.

103. The Class Period ends on April 29, 2003, when First Horizon issued a

press release announcing reduced earnings for the first quarter of 2003. As

essentially admitted by the Company, the revenue reductions were primarily due to

reduced product shipments as a result of inflated wholesaler inventories:

The Company stated that it expects to report first quarter 2003 netrevenues of between $11 million and $13 million. Significantlycontributing to the decline in net revenues was the Company'sreductions of shipments of those products (including Sular) for whichthe Company seeks to reduce the levels of trade inventories and theCompany's current decision to withdraw Tanafed Suspension fromthe market earlier than previously planned and the new decision towithdraw Tanafed DM from the market. While the withdrawal ofthese Tanafed products reduces net revenues an estimated $3.4 millionin the first quarter of 2003 due to the associated increase in theCompany's estimate of future product returns , the Company believesthe withdrawal will in the long term improve the Company's ability tosell Tanafed DP and DMX....

[Emphasis added].

-54-


104. As a result of the materially false and misleading financial statements

issued by First Horizon during the Class Period, Plaintiffs, the Class and the

Offering Subclass purchased their First Horizon securities at artificially inflated

prices and were damaged thereby.

GAAP VIOLATIONS

105. First Horizon violated GAAP through its aggressive and improper

accounting practices throughout the Class Period. Specifically, these manipulative

accounting devices involved improper revenue recognition practices and improper

valuation of the Company's inventory, resulting in the overstatement of reported

revenues, income and earnings throughout the Class Period as well as the inflation

of the price of its securities.

Revenue Recognition and Returns

106. On March 28, 2002, Defendants filed the Company's Form 10-K for

the year ended December 31, 2001 with the SEC ("the 2001 Form 10-K"), which

was incorporated by reference in the Registration Statement. The 2001 Form 10-K

reported net revenue and net income of $69,290,000 and $10,723,000,

respectively, for the year. As set forth in the 2001 Form 10-K, the Company

represented that its product return policy was as follows:

Product Returns. The Company's customers generally may returnproduct from six months prior to the expiration date of the product

-55-


until six months after expiration . In accordance with Statement ofFinancial Accounting Standards ("SFAS") No. 48 , "RevenueRecognition When Right of Return Exists," a provision for theseestimated returns is recorded at the time of sale and is periodicallyadjusted to reflect actual experience. These costs are recorded as areduction to sales.

[Emphasis added].

107. The reported net revenue and net income of $69,290,000 and

$10,723,000, respectively, was materially false and misleading because it was

based upon the false inclusion of material sums of revenue derived through

channel stuffing that, as discussed herein, were not properly recognizable.

108. The 2001 Form 10-K was also materially false and misleading

because it concealed the fact that the Company had initiated a new liberalized

product return policy that was not publicly disclosed until November 12, 2002,

when First Horizon filed its Form 10-Q for the quarter ended September 30, 2002

with the SEC.

109. On November 12, 2002, First Horizon filed its Form 10-Q for the

quarterly period ended September 30, 2002 with the SEC ("the September 30,

2002 Form 10-Q"). This document, which revealed the truth regarding the

Company's return policy, stated:

Beginning January 1, 2002, the Company's return policy was revisedto allow product returns for products within an eighteen-monthwindow from six months prior to the expiration date and up to twelve

-56-

[Emphasis added].

110. This liberalized return policy was concealed from the investing public

because disclosure of the fact that the Company had effected a 50% increase in the

time permitted to return products would have raised questions regarding the

necessity to materially increase the reserve for product returns, which according to

the Company's 2001 Form 10-K were "deducted from. . .gross sales to determine. .

net revenues."'

111. The change in the Company's return policy constituted a material

change in accounting principles that was required by GAAP to have been disclosed

in the notes to First Horizon's December 31, 2001 financial statements and First

Horizon 's March 31, 2002 financial statements.

112. The GAAP provision contained in FASB Statement No. 48 , Revenue

Recognition When Right of Return Exists ("FASB Statement No. 48") defines

"guaranteed sales" as "arrangements in which customers buy products for resale

with the right to return products." It provides (in paragraph 6):

1 "Management is required to estimate the level of sales which will ultimatelybe returned pursuant to our return policy, and record a related reserve at the time ofsale. These amounts are deducted from our gross sales to determine our netrevenues." (the 2001 Form 10-K)

-57-


If an enterprise sells its product but gives the buyer the right to return

the product, revenue from the sales transaction shall be recognized attime of sale only if all of the following conditions are met:

a. The seller's price to the buyer is substantially fixedor determinable at the date of sale;

b. The buyer has paid the seller, or the buyer isobligated to pay the seller and the obligation is notcontingent on resale of the product;

c. The buyer's obligation to the seller would not bechanged in the event of theft or physicaldestruction or damage of the product;

d. The buyer acquiring the product for resale haseconomic substance apart from that provided bythe seller;

e. The seller does not have significant obligations forfuture performance to directly bring about resale ofthe product by the buyer; and

f. The amount of future returns can be reasonabestimated

(Emphasis added).

113. Elaborating on item "f' above, FASB Statement No. 48 states (in

paragraph 8) that:

The ability to make a reasonable estimate of the amount of futurereturns depends on many factors and circumstances that will varyfrom one case to the next. However, the following factors may impairthe ability to make a reasonable estimate:

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a. The susceptibility of the product to significantexternal factors, such as technologicalobsolescence or changes in demand,

b. Relatively long periods in which a particularproduct may be returned,

c. Absence of historical experience with similar typesof sales of similar products , or inability to applysuch experience because of changingcircumstances, for example, changes in the sellingenterprise's marketing policies or relationshipswith its customers; and

d. Absence of a large volume of relativelyhomogeneous transactions.

The existence of one or more of the above factors, in light of thesignificance of other factors, may not be sufficient to prevent makinga reasonable estimate; likewise, other factors may preclude areasonable estimate .

(Emphasis added).

114. On December 3, 1999, the SEC issued its Staff Accounting Bulletin

No. 101, Revenue Recognition in Financial Statements ("SAB 101"), setting forth

the SEC views concerning the "other factors" referred to above as follows:

Facts: Paragraph 8 of Statement 48 lists a number of factors that mayimpair the ability to make a reasonable estimate of product returns insales transactions when a right of return exists. The paragraphconcludes by stating "other factors may preclude a reasonableestimate."

Question: What "other factors," in addition to those listed inparagraph 8 of Statement 48, has the staff identified that may preclude

-59-

Interpretive Response: The staff believes that the following additionalfactors, among others, may affect or preclude the ability to makereasonable and reliable estimates of product returns:

(1) significant increases in or excess levels of inventoryin a distribution channel (sometimes referred to as"channel stuffing"),

(2) lack of "visibility" into or the inability to determineor observe the levels of inventory in a distributionchannel and the current level of sales to end users,

(3) expected introductions of new products that mayresult in the technological obsolescence of and largerthan expected returns of current products ,

(4) the significance of a particular distributor to theregistrant's (or a reporting segment's) business, sales andmarketing,

(5) the newness of a product,

(6) the introduction of competitors' products withsuperior technology or greater expected marketacceptance, and other factors that affect market demandand changing trends in that demand for the registrant'sproducts. Registrants and their auditors should carefullyanalyze all factors, including trends in historical data,that may affect registrants' ability to make reasonableand reliable estimates of product returns.

The staff reminds registrants that if a transaction fails to meet all ofthe conditions of paragraphs 6 and 8 in Statement 48, no revenue maybe recognized until those conditions are subsequently met or thereturn privilege has substantially expired, whichever occurs first.

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not appropriate.

(Emphasis added).

115. Regulation S-X [17 C.F.R. § 210.4-01(a)( 1)] states that financial

statements filed with the SEC that are not prepared in conformity with GAAP are

presumed to be misleading and inaccurate. The failure to make disclosures that

were required to have been made rendered the Company's financial statements

non-compliant with GAAP and, therefore , presumptively misleading and

inaccurate.

116. As discussed above, First Horizon stuffed its distribution channel with

excess levels of inventory in connection with Tanafed and Prenate. Alternatively,

even if the Company was unaware that the channels were stuffed at the wholesaler

level, the amount of First Horizon's future returns could not be reasonably

estimated because Defendants were unable to accurately observe and assess the

current level of sales to end users and were unable to evaluate new product

introductions and competitors' activities that could adversely impact sales and

increase returns of its key products. Therefore, in observance of all of the above

specified GAAP provisions, from the onset of its channel stuffing that commenced

at the latest in September 2001, First Horizon was prohibited from recognizing

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revenue at the time of sale and was required to wait until the return privilege had

substantially expired to recognize revenue.

117. In contravention of GAAP, First Horizon sold material quantities of

products on a guaranteed sales basis and concomitantly recognized material

amounts of revenue on such sales despite the fact that, in all instances, the amount

of future returns could not be reasonably estimated by First Horizon.

118. First Horizon's financial statements that were disseminated to the

investing public during the Class Period were misleading, inaccurate and did not

provide accurate and reliable information concerning First Horizon's financial

performance because, as a result of the channel stuffing and liberalized return

policy as discussed above , they were not prepared in conformity with GAAP. In

this regard, the Company' s representations that the reported revenue and earnings

of First Horizon were in compliance with GAAP2 were materially false and

"These financial statements are the responsibility of the Company'smanagement....Management believes the Company's revenue recognition criteriaare consistent with the guidance provided by SAB No. 101." (the 2001 Form 10-K)

"The accompanying unaudited interim financial statements reflect alladjustments (consisting solely of normal recurring adjustments) whichmanagement considers necessary for fair presentation of the financial position,results of operations and cash flows of the Company for the interim periods."(September 30, 2001 Form 10-Q)

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misleading because such revenue and earnings included material amounts arising

from guaranteed sales that were not properly recognizable as revenue.

Overvaluation of Inventory

119. The 2001 Form 10-K represented the value of the Company's

inventory and samples as of December 31, 2001, to be $4,363,000 and $827,000,

respectively, while stating:

Inventories consist of purchased pharmaceutical products and arestated at the lower of cost or market. Cost is determined using thefirst-in, first-out method, and market is considered to be net realizablevalue.

...

Samples primarily consist of product samples used in the sales andmarketing efforts of the Company's products.

120. The GAAP provision set forth in Accounting Research Bulletin No.

43 ("ARB No. 43") provides that "[t]he primary basis of accounting for inventory

is cost." However, ARB No. 43 also provides that:

A departure from the cost basis of pricing the inventory is requiredwhen the utility of the goods is no longer as great as the cost. Wherethere is evidence that the utility of goods, in their disposal in theordinary course of business, will be less than cost, whether due tophysical deterioration, obsolescence, changes in price levels, or othercauses, the difference should be recognized as a loss of the currentperiod. This is generally accomplished by stating such goods at alower level commonly designated as market.

- 63 -

compliance with this GAAP ("products and are stated at the lower of cost or

market") evidencing knowledge of the applicable accounting requirements.

Despite the fact that Defendants were aware of the planned obsolescence of the

Company's Tanafed and Prenate products, the imminent return of products from

the stuffed wholesale channels and the competition from generic and knock-off

products that rendered the Company's inventory of products substantially

unsaleable (and the Company's supply of samples substantially unusable), the

Individual Defendants failed to cause the Company's December 31, 2001 financial

statements to reflect an adequate reserve for these items.

122. The Company was ultimately compelled to recognize a portion of

these losses3 at the end of 2002. As disclosed in the 2002 Form 10-K that was

filed with the SEC on or about March 18, 2003:

Cost of revenues for 2002 were $24.0 million and was comprised ofcost of revenues from product sales of $22.1 million as increased byan allowance for obsolete inventory for existing Tanafed Suspensionand Prenate GT inventory totaling $1.9 million... Costs of revenues forthe year ended December 31, 2001 of $10.4 million do not include acomparable allowance for obsolete inventory.

3 "...at June 30, 2003, the Company had an allowance for excess and obsoleteinventory of $4.6 million compared to $2.8 million at December 31, 2002." SeeFirst Horizon's June 30, 2003 Form 10-Q filed with the SEC on August 13, 2003.

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2002 2001(In millions)

Cost of revenues fromproduct sales

Charge for Prenate GTobsolescence

Charge for TanafedSuspension obsolescence

$22.1 $10.4

7

1.2

Total cost of revenues

[Emphasis added].

$24.0 $10.4

123. On May 18, 1989, the SEC issued its Securities Act Release No. 6835

that stated, in relevant part:

The MD&A requirements are intended to provide, in one section of afiling, material historical and prospective textual disclosure enablinginvestors and other users to assess the financial condition and resultsof operations of the registrant, with particular emphasis on theregistrant's prospects for the future. As the Concept Release states:

The Commission has long recognized the need for a narrativeexplanation of the financial statements, because a numericalpresentation and brief accompanying footnotes alone may beinsufficient for an investor to judge the quality of earnings and thelikelihood that past performance is indicative of future performance.MD&A is intended to give the investor an opportunity to look at thecompany through the eyes of management by providing both a shortand long-term analysis of the business of the company. The Item asksmanagement to discuss the dynamics of the business and to analyzethe financials.

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As the Commission has stated, "[i]t is the responsibility ofmanagement to identify and address those key variables and otherqualitative and quantitative factors which are peculiar to andnecessary for an understanding and evaluation of the individualcompany."

124. SAB 101 reaffirmed these SEC mandates , noting that:

Management's Discussion and Analysis (MD&A) requires adiscussion of liquidity, capital resources, results of operations andother information necessary to an understanding of a registrant'sfinancial condition, changes in financial condition and results ofoperations. This includes unusual or infrequent transactions, knowntrends or uncertainties that have had, or might reasonably be expectedto have, a favorable or unfavorable material effect on revenue,operating income or net income and the relationship between revenueand the costs of the revenue. Changes in revenue should not beevaluated solely in terms of volume and price changes, but should alsoinclude an analysis of the reasons and factors contributing to theincrease or decrease. The Commission stated in Financial ReportingRelease (FRR) 36 that MD&A should "give investors an opportunityto look at the registrant through the eyes of management by providinga historical and prospective analysis of the registrant's financialcondition and results of operations, with a particular emphasis on theregistrant's prospects for the future." Examples of such revenuetransactions or events that the staff has asked to be disclosed anddiscussed in accordance with FRR 36 are. . .Changing trends in...asales channel or separate class of customer that could be expected tohave a significant effect on future sales or sales returns...

[Emphasis added].

125. The information that was required to be disclosed pursuant to the

mandates of GAAP and the SEC as particularized above were readily available

because this information was accumulated by the Company as detailed above.

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Accordingly, Defendants knew or recklessly disregarded and failed to disclose the

fact that their channel stuffing could be expected to have a significant adverse

effect on both future sales and sales returns . Moreover, Defendants caused the

Company's December 31, 2001, financial statements to fraudulently:

a. recognize revenue on guaranteed "channel-stuffing" sales asdiscussed herein;

b. conceal the fact that the Company's product return policy hadbeen materially liberalized;

c. understate the reserve for product returns by no less than $7.2million;

d. understate the allowance for excess and obsolete inventory byno less than $4.6 million;

e. understate the allowance for obsolete sample inventory by noless than $0.6 million; and

f. conceal the fact that Defendants overstated intangible assets byno less than $2.7 million and concomitantly established a bogus$2.7 million reserve as detailed below.

Defendants Report Fictitious Revenue from a Bogus Reserve

126. The term "cookie jar reserves" refers to "inflated or wholly improper

reserves posted to provide a cushion against earnings shortfalls in later periods,

when those reserves can be drawn into income ." SEC Accounting and Auditing

Enforcement Release No. 1393 (May 15, 2001). As detailed below, the Company

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established a "cookie jar" reserve in connection with First Horizon's acquisition of

the drug Cognex in order to be able to utilize this reserve during the Class Period.

127. On August 10, 2000, the Company filed its Form 10-Q for the

quarterly period ended June 30, 2000 with the SEC ("the June 30, 2000 Form 10-

Q"). The June 30, 2000 Form 10-Q stated with regard to the Company's

acquisition of Cognex:

On June 22, 2000 the Company acquired exclusive rights to market,distribute and sell the drug Cognex and a new unapproved version ofCognex called Cognex CR, in the U.S. and other countries for$3,500,000 in cash.. .The purchase price was preliminarily allocatedamong the fair values of tangible and intangible assets and liabilitiesassumed, the majority of which is being amortized over 20 years...The Company purchased Cognex on June 22, 2000 for $3,500,000 incash and assumed liabilities for returned products shipped by theseller prior to the acquisition .

[Emphasis added].

128. On May 14, 2001, the Company's Form 10-Q for the quarterly period

ended March 31, 2001 was filed with the SEC ("the March 31, 2001 Form 10-Q").

The March 31, 2001 Form 10-Q contained comparative balance sheets that

reflected net intangible assets of $25,942,480 as of March 31, 2001, as compared

to net intangible assets of $23,150,025 as of December 31, 2000. No reason was

given for the $2.7 million increase in the Company's intangible assets.

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129. Unbeknownst to the investment community and as later revealed after

the end of the Class Period, the increase in intangible assets was due to the fact that

Defendants had altered the Company's original (June 2000) accounting for the

acquisition of Cognex, so that First Horizon's books and records falsely reflected

the acquisition of an additional $2.7 million of intangible assets and the assumption

of an additional $2.7 million of liabilities for the return of products shipped by the

seller prior to the acquisition . This inflated the Company's assets by $2.7 million

and concomitantly established a bogus reserve in the same amount.

130. Defendants utilized the reserve during the Class Period in the third

quarter of 2002 ending September 30, 2002. On November 12, 2002, First

Horizon filed its Form 10-Q for the quarterly period ended September 30, 2002

with the SEC ("the September 30, 2002 Form 10-Q"). The September 30, 2002

Form 10-Q stated : "During the quarter ended September 30, 2002 the Company

determined that the established reserves for Ponstel and Cognex were in excess of

the currently expected returns" and, therefore, "reduced the liability and increased

net revenues by $2.6 million. " [Emphasis added].

131. Because the reserve which the Company reduced by $2.6 million had

been created in March 2001 through an adjustment of the Company' s accounting

in connection with its acquisition of Cognex without any impact on earnings, the

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adjustment to reverse these reserves should have been similarly made without any

impact on earnings (i.e. through a $2.6 million reduction to intangible assets and a

corresponding $2.6 million reduction to the liability for the return of products).

132. By characterizing the excessive reserve as revenue instead of properly

reversing the improper journal entry that created the bogus reserve without any

impact on the Company's income statement, the Company improperly recognized

$2.6 million of revenue and overstated intangible assets (Cognex licensing rights)

by the same amount . The failure to write down the $2.6 million of overstated

intangible assets (Cognex licensing rights) served to improperly understate

expenses, thereby materially overstating reported earnings. The improper

accounting effectively overstated income for the quarter by $5.2 million by

overstating revenue by $2.6 million while at the same time understating expenses

by $2.6 million.

133. However, the write-off of the improperly inflated intangible assets

was improperly deferred until the second quarter of 2003, when the Company took

a charge to earnings, stating that:

The Company estimated the fair market value of the Cognex assetsand based on the estimated fair market value, it was determined thatthe carrying value of the Cognex licensing rights was in excess of thefair value, and an impairment charge of $4.2 million was recorded forthe second quarter of 2003.

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134. The fact that First Horizon paid $3.5 million for the "Cognex assets"

(which included inventory and other assets in addition to the license rights),

indicates that the Cognex license rights (which had been amortized each quarter

beginning in June 2000 and thereby reduced in value) could not have been valued

at $4.2 million as of June 30, 2003 in the absence of fraud.

SCIENTER ALLEGATIONS

135. Defendants acted with scienter in that Defendants knew or recklessly

disregarded that the public documents and statements issued or disseminated in the

name of the Company were materially false and misleading, knew or recklessly

disregarded that such statements or documents would be issued or disseminated to

the investing public, and knowingly or recklessly and substantially participated or

acquiesced in the issuance or dissemination of such documents or documents as

primary violators of the federal securities laws. Defendants, by virtue of their

receipt of information reflecting the facts regarding First Horizon, their control

over, and receipt of First Horizon's allegedly materially misleading misstatements,

and their associations with the Company that made them privy to confidential

proprietary information concerning First Horizon, participated in the fraud as

alleged herein.

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carefully monitors its marketing efforts, product sales and wholesaler inventories

on an ongoing basis. The Company receives information on how many total

prescriptions are written for each of its products, the number of new prescriptions

that are written for each of its products and, at the pharmacy level, the total number

of dispensed prescriptions for each of its products. In this way, the Company can

compare the total amount of prescriptions written with the total amount of

prescriptions dispensed to determine which and how much of its product were

being substituted by pharmacists with competitors' generic or knock-off products.

First Horizon also receives daily sales reports on how much of each of its products

have been purchased by wholesalers and, at least on a monthly basis, reports on the

amount of product in inventory at the wholesaler level.

137. A former First Horizon Vice President of Sales ("Sales V.P."),

employed by the Company from May 2000 until December 2002, stated that First

Horizon utilized an internal Daily Sales Recap that reported the products shipped

to wholesalers. This report listed the sales by product line, further broken down by

the strength of each product within the product line, in three categories: (1) today's

activity; (2) period to date; and (3) year to date. Each category listed the number

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of products shipped, sales and profit. According to the Sales V.P., this report was

circulated to all First Horizon senior executives - "the officers had `em every day."

138. The Company utilized MAS 90 Accounting Software to track daily

sales, among other things. According to the Sales V.P., "[a]ll sales were invoiced

daily. Every day, we could see what went out the back door to the wholesalers."

The existence of this software was confirmed by a Former Vice President of

Marketing ("Marketing V.P."), employed by First Horizon from May 2001 to May

2003. The Marketing V.P. reported to Offen, who in turn reported to

Venkataraman. Using the MAS 90 accounting software, the Marketing V.P. said

that sales could be tracked "hour by hour if you want."

139. The MAS 90 Accounting Software also was used by the Company's

finance department to monitor wholesaler returns. According to the Sales V.P.,

"the Daily Sales Sheet showed what went out and returns, by volume and product."

The Sales V.P. stated that Lang "handled returns from wholesalers." This was

confirmed by a former Regional Sales Manager ("Regional Sales Manager") for

First Horizon, employed by the Company from March 1998 to October 2002, who

stated that the key people who dealt with the wholesalers were Venkataraman,

Offen and Lang.

- 73 -

products from IMS Health, an organization that collects and resells drug

wholesalers' inventory data and information from pharmacies regarding the

numbers of prescriptions filled for each drug as well as the number of prescriptions

written for each drug. A former District Sales Manager ("District Sales

Manager"), employed by First Horizon from August 2000 through February 2002,

explained that drug wholesalers and pharmacies sell their information to IMS

Health, who then sells it on a monthly, and possibly weekly, basis to drug

companies such as First Horizon.

141. First Horizon also tracked total prescriptions ("TRX") and new

prescriptions ("NRX") weekly from IMS Health, and compared those figures to its

"back-door sales," or shipments made to wholesalers. First Horizon also received

information reflecting the total amount of each of its products dispensed at the

pharmacy level. This information was received electronically from IMS Health

and distributed within First Horizon on an on-going basis, including to

Venkataraman and Offen.

142. As Venkataraman explained during a July 2, 2002 earnings

conference call, the Company tracked weekly prescriptions and pharmacy sales:

[T]he way we track our prescriptions of our product is not only- weget two separate audits from IMS. We get the provider audit, the

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provider prescription audits, which is what physicians write. It's anOK audit, it gives you fairly good idea of what the physician iswriting, and we track the IMS- the dispense audits, which is whatmost people get on a weekly basis. So that's how we track ourbusiness. We have both- we have both those audits to compare whatis being written relative to what is being dispensed. So we know ifwe're growing our brand and we're getting a larger percentage of itcannibalized or eroded by knockoffs, or we're not growing the brandand we're getting greater - and we're getting some erosion.

143. The Sales V.P. explained that these IMS reports were provided first to

him, and then to other senior level executives including the Individual Defendants.

Thus, First Horizon would get reports on the movement of all of First Horizon's

products as well as the generic drugs and knock-offs that competed with them.

The Company would then use that information in a number of ways. For example,

there was a "pipeline" report available to management that Lang would generate

monthly from the IMS Health inventory data supplied by First Horizon 's major

wholesalers, including the "Big Three" distributors.

144. The pipeline report listed the number of units of First Horizon's

products on hand at the wholesaler level at the end of a month, broken down by

product and wholesaler. The report also listed the wholesalers' average monthly

demand for each of the Company's products and the average number of months of

supply of each product in the wholesalers' inventory. The existence of the pipeline

report was confirmed by Product Manager I as well as the District Sales Manager.

- 75 -

report, the Trade Relations Group, and more specifically Lang, would contact the

Big Three distributors on a more frequent basis to check on the amount of physical

inventory the distributors had of each First Horizon product. Thus, based on

Lang's discussions with wholesalers and the monthly pipeline report she generated,

First Horizon's product managers and executives knew precisely how much

inventory wholesalers possessed at any given time.

146. In addition to receiving these reports, the Marketing V.P. stated that

each week, the First Horizon "executive team" (consisting of all vice-president

level employees and above) met to discuss the ongoing business of the Company in

a Weekly Operating Committee meeting. The meeting took place in the

Company's board conference room at corporate headquarters. The Weekly

Operating Committee meetings were regularly attended by the Marketing V.P.,

Venkataraman, Shah, and Offen. Certain "director-level" employees were also

"permanent members," including Lang, Scott Wilson, the Director of Managed

Care, Alan Roberts, the Director of Business Regulation, and Ralph Jordan, the

Director of Legal Affairs. Other director-level employees also would attend the

meetings, depending on the topic. While the agenda for the meetings changed on a

weekly basis, and no specific reports were prepared for the meeting , a regular

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feature was Lang's distribution and presentation of the pipeline report at the first

meeting immediately after each report was generated. The numbers listed in the

pipeline report were then discussed. In this way, Defendants kept a constant watch

on the Company' s sales and marketing efforts at the wholesaler, pharmacy, and

physician levels, as well as the inventory levels of the Company's key wholesalers.

147. Based on these reports the Individual Defendants each actually knew,

or were reckless in not knowing, the exact amount of the Company's products that

were being demanded by physicians and/or patients and how that demand

compared with similar , generic or knock-off products , as well as the amount that

wholesalers had on hand in inventory. Facts critical to First Horizon's core

operations (such as the lagging sales, channel stuffing and a large increase in the

number of returned products) are so apparent that their knowledge may be

attributed to the Company and the Individual Defendants. Moreover, the fact that

the sales of certain products (such as Tanafed and Prenate) constituted a significant

source of income to First Horizon establishes a strong inference that the

Defendants knew or were reckless in not discovering additional facts available to

them that directly affected that source of income.

148. Furthermore, Defendants had the motive and opportunity to perpetrate

the fraudulent scheme and course of business described herein in order to raise

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additional capital from investors through the Offering which provided the

Company with proceeds in excess of $150 million, and allowed the Company to

retire over $130 million worth of debt.

149. Maintaining First Horizon's high stock price and the illusion of its

earnings and operations success was critical to Defendants' scheme to enable First

Horizon to grow itself through a program of acquisitions by procuring private

financing and tapping into the public marketplace to pay for these acquisitions,

such as the acquisition of the drug Sular, as discussed herein.

150. Furthermore, had Defendants revealed the truth about the Company's

financial condition, the Company would have fallen out of compliance with the

financial covenants of its senior bank credit agreement ("Credit Agreement")

Similarly, had Defendants disclosed the Company's true financial condition prior

to the Offering, the Company would not have been able to raise sufficient capital to

pay back the costly interim financing used to purchase Sular.

151. In addition to the Company's motive to pay off its debt, Company

executives also had an executive compensation program whereby First Horizon

executives were given the opportunity to earn annual incentive payments and long

term incentive compensation based upon the volume of sales, operating income

and the price of the Company 's securities.

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152. First Horizon ' s lucrative executive compensation structure during the

Class Period consisted of three primary components: (i) base salary; (ii) annual

incentives; and (iii) long-term incentives. Annual incentives were determined by

the following: the position held by the executive to whom the bonus was paid; total

compensation paid by comparable companies to similarly situated executives; the

performance of the executive; the development of the Company as measured by

the Company's growth in revenues, increases in doctors prescribing the

Company's products and increases in the number of sales representatives; and the

perceived increase in the value of the Company's business . Overall, annual

incentives, such as bonuses, payable in cash, were tied to the achievement of

performance goals established by the Board of Directors. Long-term incentives

comprised the largest portion of the total compensation package for executive

officers and included thirteen long-term stock-based incentive awards that

rewarded executive officers increased sales, net revenue earnings and, ultimately

high share prices.

153. In 2001, Shah received $247,917 in salary, $250,000 in bonus

compensation and was granted stock options to purchase 472,500 shares of the

Company's common stock. In 2002, Shah received $278,750 in salary and

$42,000 in bonus compensation.

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154. In 2001, Venkataraman received $148,787 in salary, $75,000 in bonus

compensation and was granted stock options to purchase 262,500 shares of the

Company's common stock. In 2002, Venkataraman received $183,542 in salary

and $28,000 in bonus compensation.

155. Accordingly, Shah , Venkataraman and Borne were under tremendous

pressure to keep reported sales, overall financial results and the Company's stock

price as high as possible in order to receive their executive compensation. The

possibility of not receiving such compensation provided ample motive to inflate

the Company's volume growth and financial results and to engage in numerous

GAAP violations.

156. Furthermore, Shah and Venkataraman entered into severance

agreements when resigning from the Company, which contained the following

provision:

Employee hereby covenants and agrees that he will no voluntarily

assist, support, or cooperate with, directly or indirectly, any entity or

person alleging or pursuing any claim, administrative charge, or cause

of action against the Company, including without limitation, by

providing testimony or other information, audio or video recordings,

or documents, except under compulsion of law.

157. This provision reflects the Company's attempt to prevent any person

with knowledge about its illegal activities from revealing so to the investing public.

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The inclusion of such a provision during the pendency of this litigation raises a

strong inference that Defendants acted with the requisite scienter.

158. In addition, according to Product Manager II, the Company kept two

sets of financial records, a clear indication that Defendants knew or were severely

reckless in not knowing that the financial results reported to the public were false

and misleading when issued.

159. Furthermore, had Defendants revealed the truth about the Company's

financial condition, the Company would have falled out of compliance with the

financial covenants of its senior bank credit agreement ("Credit Agreement").

Similarly, had Defendants disclosed the Company's true financial condition prior to

the Offering, the Company would not have been able to raise sufficient capital to

pay back the costly interim financing used to purchase Sular.

160. In addition to the Company's motive to pay off its debt, Company

executives also had a unique executive compensation program that gave its

executives the opportunity to earn annual incentive payments and long term

incentive compensation that encouraged executives to increase the volume of sales,

operating income and the price of the Company's securities at all costs. This

unusual compensation scheme gave First Horizon's executives - including Shah,

Venkataraman and Borne - a lucrative and direct economic motivation to

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manipulate First Horizon's 2002 and 2003 sales performance and reported profits

and to artificially inflate the Company's stock price during 2002 and 2003.

161. First Horizon's lucrative executive compensation structure during the

Class Period consisted of three primary components: (i) base salary; (ii) annual

incentives; and (iii) long-term incentives. Annual incentives were determined by

the position held by the executive to whom the bonus was paid, total compensation

paid by comparable companies to similarly situated executives, the performance of

the executive, the development of the Company as measured by the Company's

growth in revenues, increases in doctors prescribing the Company's products and

increases in the number of sales representatives, and the perceived increase in the

value of the Company's business . Overall, annual incentives , such as bonuses,

payable in cash, were tied to the achievement of performance goals established by

the Board of Directors. Long-term incentives comprised the largest portion of the

total compensation package for executive officers and included thirteen long-term

stock-based incentive awards that rewarded executive officers increased sales, net

revenue earnings and, ultimately high share prices.

162. Thus, during the Class Period, had Defendants told the truth about

First Horizon's financial performance, the Company's executives faced a real threat

of receiving no annual incentive or long-term incentive compensation.

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pressure to keep reported sales up, to keep reported financial results up, and to

prop up First Horizon's share price, or receive only paltry compensation in 2002.

This tremendous threat provided ample motive to these Defendants to keep volume

growth and financial results up, to improperly recognize revenue and to prop up

First Horizon's share price.

164. The Company' s severance agreements entered into with Shah,

Venkataraman, Offen and William Campbell (another member of the Company's

senior management) also raise a strong inference of scienter.

165. Shah, Venkataraman and Offen signed new employment agreements

with the Company on February 12, 2003. Similarly, Campbell signed a new

employment agreement with the Company on February 13, 2003.

166. Three weeks later , on March 3, 2003, Campbell resigned . Two days

later, on March 5, 2003, Offen and Venkataraman resigned. Each received

substantial compensation pursuant to the severance agreements signed with the

Company. Campbell received half his annual salary of $115,000 and a lump sum

payment of $19,000. Offen received his annual salary of $177,000 and a lump sum

payment of $2,000. Venkataraman received his annual salary of $193,000 and a

lump sum payment of $28,000, along with an additional $75,000.

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167. On May 19, 2003, Shah resigned from the Company . Pursuant to his

severance agreement with the Company, Shah received twice his annual salary of

$300,0000, or $600,000 and a lump sum payment of $84,000.

168. Each of the severance agreements signed by Shah, Venkataraman,

Offen and Campbell was signed by Borne and contained the same following

provision: Employee hereby covenants and agrees that he will no voluntarily assist,

support, or cooperate with, directly or indirectly, any entity or person alleging or

pursuing any claim, administrative charge, or cause of action against the Company,

including without limitation, by providing testimony or other information, audio or

video recordings, or documents, except under compulsion of law.

169. This provision clearly indicates that the Company had something to

conceal and the inclusion of such a provision during the pendency of this litigation

raises a strong inference that Defendants acted with the requisite scienter.

170. In addition, according to Product Manager II, the Company kept two

sets of financial records, a clear indication that Defendants acted with scienter.

APPLICABILITY OF THE FRAUD ON THE MARKET DOCTRINE ANDTHE PRESUMPTION OF RELIANCE

171. Plaintiffs will rely, in part, upon the presumption of reliance

established by the fraud-on-the-market doctrine in that, among other things:

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(a) Defendants made public misrepresentations or failed to disclose

facts during the Class Period;

(b) The omissions and misrepresentations were material;

(c) First Horizon securities traded in an efficient market;

(d) The misrepresentations alleged would tend to induce a

reasonable investor to misjudge the value of the Company' s securities; and

(e) Plaintiffs and the other members of the Class purchased First

Horizon securities between the time Defendants misrepresented or failed to

disclose material facts and the time the true facts were disclosed, without

knowledge of the misrepresented or omitted facts.

172. At all relevant times, the market for First Horizon securities was an

efficient market for the following reasons, among others:

(a) First Horizon securities were listed and actively traded during

the Class Period on the NASDAQ exchange, an open , highly efficient and

automated market. The average daily volume of the First Horizon's common stock

during the Class Period was 775,686 shares based on information from the Yahoo

Finance website. The total number of shares traded during the Class Period was

196,248,600 shares.

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filings, including its Forms 10-K, Forms 10-Q and related press releases, with the

SEC. Additionally, First Horizon met the eligibility requirements for filing a SEC

Form S-1 Registration Statement and in fact filed such a statement on March 5,

2003.

(c) First Horizon was followed by analysts from major brokerages

including Deutsche Bank, J.P. Morgan, Leerink Swann & Co., Thomas Weisel

Partners, UBS Warburg and Lazard Freres. The reports of these analysts were

redistributed to the brokerages' sales force, their customers, and the public at large;

and

(d) First Horizon regularly communicated with public investors via

established market communication mechanisms, including the Company's website,

regular disseminations of press releases on the major news wire services, and other

wide-ranging public disclosures, such as communications with the financial press

and other similar reporting services.

173. As a result, the markets for First Horizon securities digested current

information regarding the Company from the publicly available sources described

above and reflected such information in the prices of First Horizon's securities. As

would be expected where a security is traded in an efficient market, material news

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concerning First Horizon's business had an immediate effect on the market price of

First Horizon's securities, as evidenced by the rapid decline in the market price in

the immediate aftermath of First Horizon's corrective disclosures as described

herein. Under these circumstances , all purchasers of First Horizon' s securities

during the Class Period suffered similar injury due to the fact that the price of First

Horizon securities was artificially inflated throughout the Class Period. At the

times they purchased or otherwise acquired First Horizon's securities, Plaintiffs

and other members of the Class were without knowledge of the facts concerning

the wrongful conduct alleged herein and could not reasonably have discovered

those facts. As a result, the presumption of reliance applies. Plaintiffs will also

rely, in part, upon the presumption of reliance established by a material omission.

LOSS CAUSATION/ECONOMIC LOSS

174. During the Class Period, as detailed herein, Defendants engaged in a

scheme to deceive the market and a course of conduct that artificially inflated First

Horizon's stock price and operated as a fraud or deceit on Class Period purchasers

or acquirers of First Horizon stock.

175. During the Class Period, as detailed herein, Defendants engaged in a

scheme to deceive the market and a course of conduct that artificially inflated First

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Horizon's stock price and operated as a fraud or deceit on Class Period purchasers

or acquirers of First Horizon stock.

176. Defendants failed to disclose to the marketplace that, in order to

achieve First Horizon's reported financial performance and meet analyst earnings

and revenue expectations during the Class Period, Defendants inflated the

Company's results by a variety of means, including the wide-spread practice of

channel stuffing.

177. Defendants' conduct created the short-term illusion that demand

during the Class Period was higher than it actually was. The effect of Defendants'

conduct was to increase revenues and earnings in quarters during the class period

to levels that were unsustainable, to the detriment of subsequent quarters.

178. Defendants' conduct caused and maintained the artificial inflation in

First Horizon's stock price throughout the Class Period and until the truth was

revealed to the market. Defendants' false and misleading statements had the

intended effect and caused First Horizon stock to trade at artificially inflated levels,

first for the period during which First Horizon engaged in its public offering, and

then again during the latter part of the Class Period.

179. With respect to the first part of the Class Period, by the end of the

second quarter of 2002, First Horizon was no longer to sustain the volume levels

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that it had achieved as a result of its improper activities. In the second quarter of

2002, its operating income declined, and it was unable to meet its prior earnings

guidance . This decline in financial performance was not merely connected to

Defendants' prior oversupply of products, but was the direct and proximate result

thereof. Given the excess supply inventoried by First Horizon's customers,

Defendants could not maintain First Horizon's prior financial performance.

180. On July 2, 2002, Defendants disclosed that the Company's operating

income had declined, and that First Horizon would not meet its previously

estimated earnings guidance for 2002..

181. Asa result of its partial revelation of the truth, First Horizon's stock

dropped 81% during a single day on record trading volume of 16,445,100 shares.

At the close of business on July 1, 2002, First Horizon's stock price was $18.24

per share . At the close of business on July 2, 2002, one day after Defendants'

disclosures, First Horizon's stock price fell to $3.51.

182. The 81% decline in First Horizon's stock price on July 2, 2002 was a

direct result of the nature and extent of Defendants' fraud being partially revealed

to investors and the market. The timing and magnitude of First Horizon's stock

price declines negate any inference that the loss suffered by Lead Plaintiffs and

other Class members was caused by changed market conditions, macroeconomic or

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industry factors or Company-specific facts unrelated to Defendants' fraudulent

conduct.

183. The economic loss, i.e., damages, suffered by Lead Plaintiffs and

other Class members was a direct result of Defendants' fraudulent scheme to

inflate artificially First Horizon's stock price. The subsequent significant decline

in the value of First Horizon's stock was a direct and proximate result of

Defendants' disclosure that demand for First Horizon products had declined from

the inflated levels during the Class Period, and that prior revenue and earnings

levels were unsustainable and would be lower in the future. This decline was the

direct and proximate result of Defendants fraudulent activities, the effect of which

was to inflate earnings and revenue in prior periods at the expense of subsequent

periods.

184. The full extent of Defendants' conduct was not revealed until April

29, 2003. On that day, the Company announced estimated revenues of $11-13

million for the first quarter of 2003, well below the $20-25 million Defendants had

led investors to expect just two months earlier as a result of the Company's plan to

reduce inventories at the wholesaler level for a number of its products, the

Company's decision to withdraw Tanafed Suspension from the market earlier than

expected, and the purportedly new decision to withdraw Tanafed DM from the

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April 28, 2003 to close at $2.70 per share on April 29, 2003, a loss of over 20%.

185. The 20% decline in First Horizon's stock price on April 29, 2004 was

a direct result of the nature and extent of Defendants' fraud being revealed to

investors and the market. The timing and magnitude of First Horizon's stock price

declines negate any inference that the loss suffered by Lead Plaintiffs and other

Class members was caused by changed market conditions, macroeconomic or

industry factors or Company-specific facts unrelated to Defendants' fraudulent

conduct.

186. As a result of their purchases of First Horizon stock during the Class

Period, Lead Plaintiffs and other members of the Class suffered economic loss, i.e.,

damages under the federal securities laws.

NO SAFE HARBOR

187. The statutory safe harbor provided for forward-looking statements

under certain circumstances does not apply to any of the allegedly false statements

pleaded in this complaint. The specific statements pleaded herein were not

identified as "forward-looking statements" when made. Nor was it stated with

respect to any of the statements forming the basis of this complaint that actual

results "could differ materially from those projected." To the extent there were

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any forward-looking statements, there were no meaningful cautionary statements

identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements.

188. Alternatively, to the extent that the statutory safe harbor does apply to

any forward-looking statements pleaded herein, Defendants are liable for those

false forward-looking statements because at the time each of those forward-looking

was made the particular speaker knew that the particular forward-looking

statement was false, and/or the forward-looking statement was authorized and/or

approved by an executive officer of First Horizon who knew that those statements

were false when made.

COUNT I

[Against Defendant First Horizon, Individual Defendants, DirectorDefendants and Underwriter Defendants For Violations of Section 11 of the

Securities Act]

189. This Count is brought pursuant to Section 11 of the Securities Act, 15

U.S.C. § 77k, on behalf of the Offering Subclass, against all Defendants (other

than Defendant Borne) and is being brought by Plaintiff Roy LaTourette, Jr.

190. The Registration Statement for the Offering was inaccurate and

misleading, contained untrue statements of material facts, omitted to state other

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facts necessary to make the statements made not misleading, and concealed and

failed adequately to disclose material facts as described above.

191. First Horizon is the registrant for the Offering. All Defendants named

herein were responsible for the contents and dissemination of the Registration

Statement and the Prospectus.

192. As issuer of the shares , First Horizon is strictly liable to Plaintiff and

the Offering Subclass for the misstatements and omissions.

193. None of the Defendants named herein made a reasonable investigation

or possessed reasonable grounds for the belief that the statements contained in the

Registration Statement were true and without omissions of any material facts and

were not misleading.

194. Defendants issued, caused to be issued and participated in the

issuance of materially false and misleading written statements to the investing

public that were contained in the Registration Statement, which misrepresented or

failed to disclose, inter alia, the facts set forth above. By reasons of the conduct

herein alleged, each Defendant violated, and/or controlled a person who violated,

Section 11 of the Securities Act.

195. Plaintiff acquired First Horizon shares pursuant to or traceable to the

Registration Statement.

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value of First Horizon shares has declined substantially subsequent to and due to

Defendants' violations.

197. At the times they purchased First Horizon shares, Plaintiff and other

members of the Offering Subclass were without knowledge of the facts concerning

the wrongful conduct alleged herein and could not have reasonably discovered

those facts prior to April 24, 2002. Less than two years elapsed from the time that

Plaintiff discovered or reasonably could have discovered the facts upon which this

action is based to the time that Plaintiff filed this action. Less than five years

elapsed between the time that the securities upon which this Count is brought were

bona fide offered to the public and the time Plaintiff filed this action.

COUNT II[Against Defendant First Horizon For Violations Of

Section 12(a)(2) Of The Securities Act]

198. This Count is brought by Plaintiff Roy LaTourette, Jr. against

Defendant First Horizon pursuant to Section 12(a)(2) of the Securities Act on

behalf of all members of the Offering Subclass that purchased First Horizon shares

pursuant to the Offering.

199. First Horizon was a seller and an offeror of the shares offered

pursuant to the Registration Statement.

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facts, omitted to state other facts necessary to make the statements made not

misleading, and concealed and failed to disclose material facts. Defendants'

actions of solicitation included participating in the preparation of the false and

misleading Registration Statement.

201. First Horizon owed to the purchasers of First Horizon shares,

including Plaintiff and other Offering Subclass members, the duty to make a

reasonable and diligent investigation of the statements contained in the

Registration Statement, ensure that such statements were true and ensure that there

was no omission of material fact required to be stated in order to make the

statements contained therein not misleading.

202. Plaintiff and other members of the Offering Subclass purchased or

otherwise acquired First Horizon shares pursuant to the defective Registration

Statement. Plaintiff did not know, or in the exercise of reasonable diligence could

not have known, of the untruths and omissions contained in the Registration

Statement.

203. Plaintiff, individually and representatively, hereby offers to tender to

Defendant those securities which Plaintiff and other Offering Subclass members

continue to own, on behalf of all members of the Offering Subclass who continue

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to own such securities, in return for the consideration paid for those securities

together with interest thereon. Offering Subclass members who have sold their

First Horizon shares are entitled to rescissory damages.

204. By reason of the conduct alleged herein, First Horizon violated,

and/or controlled a person who violated, Section 12(a)(2) of the Securities Act.

Accordingly, Plaintiff and members of the Offering Subclass who hold First

Horizon shares purchased in the Offering have the right to rescind and recover the

consideration paid for their First Horizon shares and hereby elect to rescind and

tender their First Horizon shares to First Horizon sued herein. Plaintiff and the

Offering Subclass members who have sold their First Horizon shares are entitled to

rescissory damages.

205. Less than five years elapsed between the time that the securities upon

which this Count is brought were sold to the public and the time of the filing of this

action. Less than two years elapsed from the time when Plaintiff discovered or

reasonably could have discovered the facts upon which this Count is based to the

time of the filing of this action.

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COUNT III[Against the Individual Defendants (Other Than Defendant Borne) For

Violations of Section 15 of the Securities Act]

206. This Count is brought pursuant to Section 15 of the Securities Act

against the Individual Defendants (other than Defendant Borne) by Plaintiff Roy

LaTourette, Jr.

207. Each of these Defendants was a control person of First Horizon by

virtue of their position as directors and/or senior officers of First Horizon. These

Defendants each had a series of direct and/or indirect business and/or personal

relationships with other directors and/or officers and/or major shareholders of First

Horizon.

208. Each of these Defendants was a culpable participant in the violations

of Sections 11 and 12(a)(2) of the Securities Act alleged in Counts I and II above,

based on their having signed the Registration Statement and having otherwise

participated in the process that allowed the Offering to be successfully completed.

COUNT IVFor Violations Of Section 10(b) Of The

Exchange Act And Rule 10b-5 Promulgated ThereunderAgainst Defendants First Horizon and the Individual Defendants

209. Plaintiffs repeat and reallege the allegations set forth above as though

fully set forth herein.

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210. During the Class Period, First Horizon and the Individual Defendants,

and each of them, carried out a plan, scheme and course of conduct that was

intended to and, throughout the Class Period, did: (i) deceive the investing public,

including Plaintiffs and other Class members, as alleged herein ; (ii) artificially

inflate and maintain the market price of First Horizon securities; and (iii) cause

Plaintiffs and other members of the Class to purchase First Horizon securities at

artificially inflated prices. In furtherance of this unlawful scheme, plan and course

of conduct, Defendants took the actions set forth herein.

211. These Defendants: (a) employed devices, schemes, and artifices to

defraud; (b) made untrue statements of material fact and/or omitted to state

material facts necessary to make the statements not misleading; and (c) engaged in

acts, practices and a course of business that operated as a fraud and deceit upon the

purchasers of the Company' s securities in an effort to maintain artificially high

market prices for First Horizon securities in violation of Section 10(b) of the

Exchange Act and Rule IOb-5. These Defendants are sued as primary participants

in the wrongful and illegal conduct charged herein.

212. In addition to the duties of full disclosure imposed on these

Defendants as a result of their making of affirmative statements and reports, or

participation in the making of affirmative statements and reports to the investing

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public, they each had a duty to disseminate truthful information promptly that

would be material to investors in compliance with the integrated disclosure

provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et

seq.) and S-K (17 C.F.R. § 229.10 et seq.) and other SEC regulations, including

accurate and truthful information with respect to the Company's operations,

financial condition and performance so that the market prices of the Company's

publicly traded securities would be based on truthful, complete and accurate

information.

213. First Horizon and these Defendants, individually and in concert,

directly and indirectly, by the use of the mails or other means or instrumentalities

of interstate commerce, engaged and participated in a continuous course of conduct

to conceal adverse material information about the business, business practices,

performance, operations and future prospects of First Horizon as specified herein.

These Defendants employed devices, schemes and artifices to defraud while in

possession of material adverse non-public information and engaged in acts,

practices, and a course of conduct as alleged herein in an effort to assure investors

of First Horizon's value and performance and substantial growth. This included

the making of, or the participation in the making of, untrue statements of material

facts and omitting to state material facts necessary in order to make the statements

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made about First Horizon and its business, operations and future prospects in the

light of the circumstances under which they were made, not misleading, as set forth

more particularly herein, and engaging in transactions, practices and a course of

business that operated as a fraud and deceit upon the purchasers of First Horizon

securities during the Class Period.

214. The Individual Defendants' primary liability, and controlling person

liability, arises from the following facts: (i) each of the Individual Defendants was

a high-level executive and/or Director at the Company during the Class Period; (ii)

each of the Individual Defendants, by virtue of his responsibilities and activities as

a senior executive officer and/or Director of the Company, was privy to and

participated in the creation, development and reporting of the Company's internal

budgets, plans, projections and/or reports; (iii) these Defendants enjoyed

significant personal contact and familiarity with each other and were advised of

and had access to other members of the Company's management team, internal

reports, and other data and information about the Company's financial condition

and performance at all relevant times; and (iv) these Defendants were aware of the

Company's dissemination of information to the investing public that they knew or

recklessly disregarded was materially false and misleading.

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omissions of material facts set forth herein, or acted with reckless disregard for the

truth in that they failed to ascertain and to disclose such facts, even though such

facts were readily available to them. Such Defendants' material misrepresentations

and/or omissions were done knowingly or recklessly and for the purpose and effect

of concealing First Horizon's operating condition, business practices and future

business prospects from the investing public and supporting the artificially inflated

price of its securities. As demonstrated by their overstatements and misstatements

of the Company's financial condition and performance throughout the Class

Period, these Defendants, if they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such

knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

216. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market

price of First Horizon's securities was artificially inflated during the Class Period.

Unaware of the fact that the market price of First Horizon's shares was artificially

inflated, and relying directly or indirectly on the false and misleading statements

made by these Defendants, or upon the integrity of the market in which the

-lol-


securities trade, and/or on the absence of material adverse information that was

known to or recklessly disregarded by these Defendants but not disclosed in public

statements during the Class Period, Plaintiffs and the other members of the Class

acquired First Horizon securities during the Class Period at artificially high prices

and were damaged thereby.

217. At the time of said misrepresentations and omissions , Plaintiffs and

other members of the Class were unaware of their falsity, and believed them to be

true. Had Plaintiffs and the other members of the Class known of the true

performance, business practices, future prospects and intrinsic value of First

Horizon, which were not disclosed by these Defendants, Plaintiffs and other

members of the Class would not have purchased or otherwise acquired their First

Horizon securities during the Class Period, or, if they had acquired such securities

during the Class Period, they would not have done so at the artificially inflated

prices that they paid.

218. By virtue of the foregoing, these Defendants each violated Section

10(b) of the Exchange Act and Rule IOb-5 promulgated thereunder.

219. As a direct and proximate result of Defendants ' wrongful conduct,

Plaintiffs and the other members of the Class suffered damages in connection with

their purchases of the Company's securities during the Class Period.

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220. Plaintiffs repeat and reallege the allegations set forth above as if set

forth fully herein.

221. The Individual Defendants were and acted as controlling persons of

First Horizon within the meaning of Section 20(a) of the Exchange Act as alleged

herein. By virtue of their high-level positions with the Company, participation in

and/or awareness of the Company's operations and/or intimate knowledge of the

Company's actual performance, and/or stock holdings, these Defendants had the

power to influence and control and did influence and control, directly or indirectly,

the decision-making of the Company, including the content and dissemination of

the various statements that Plaintiffs contend are false and misleading. Each of

these Defendants was provided with or had access to copies of the Company's

reports, press releases, public filings and other statements alleged by Plaintiffs to

be misleading prior to and/or shortly after these statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be

corrected.

222. In addition, each of the Individual Defendants had direct involvement

in the day-to-day operations of the Company and, therefore, is presumed to have

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had the power to control or influence the particular transactions giving rise to the

securities violations as alleged herein, and exercised the same.

223. As set forth above, First Horizon and these Defendants each violated

Section 10 (b) and Rule I Ob-5 by their acts and omissions as alleged in this

Complaint. By virtue of their controlling positions, the Individual Defendants are

liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate

result of these Defendants' wrongful conduct, Plaintiffs and other members of the

Class suffered damages in connection with their purchases of the Company's

securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs , on behalf of themselves , the Class, and the

Offering Subclass pray for judgment as follows:

A. declaring this action to be a class action pursuant to Rule 23(a) and

(b)(3) of the Federal Rules of Civil Procedure;

B. awarding Plaintiffs, members of the Class and members of the

Offering Subclass damages together with interest thereon;

C. awarding Plaintiffs and the Offering Subclass rescission on Count II

to the extent they still hold First Horizon shares, or if sold, awarding

rescissory damages in accordance with Section 12(a)(2) of the

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Securities Act;

D. awarding Plaintiff, members of the Class and members of the Offering

Subclass their costs and expenses of this litigation, including

reasonable attorneys' fees, accountants' fees and experts' fees and

other costs and disbursements; and

E. awarding Plaintiffs, members of the Class and members of the

Offering Subclass such other and further relief as may be just and

proper under the circumstances.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Respectfully submitted this 20th day of April, 2007.

CHITWOOD HARLEY HARNES LLP

/s/ Martin D . ChitwoodMartin D. ChitwoodGeorgia Bar No. 124950

John F. Harnes

Admittedpro hac vice

Meryl W. Edelstein

Georgia Bar No. 238919

2300 Promenade II

1230 Peachtree Street, N.E.Atlanta, GA 30309Tel: (404 ) 873-3900Fax: (404) 876-4476

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CERTIFICATE OF SERVICE

I hereby certify that I have served a copy of the foregoing "Second Amended

Complaint" upon the following counsel of record via the Court's electronic filing

system:

Scott Hilsenscott [email protected] & BIRD, LLP1201 W. Peachtree StreetOne Atlantic CenterAtlanta , GA 30309

John P . Brumbaughpbrumbaugh@kslaw. comKING & SPALDING, LLP1280 Peachtree StreetAtlanta , GA 30309

This 20th day of April 2007.

/s/ Martin D. ChitwoodMartin D. Chitwood (Ga. State Bar No. 124950)Chitwood Harley Harnes [email protected]

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first horizon pharmaceutical corporation securities litigation 02-cv-2332-second amended

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