Caraco generates $40.4 million and $268.2 million in third quarter, first nine months of Fiscal Year 2011

Caraco Pharmaceutical Laboratories, Ltd. generated net sales of $40.4 million and $268.2 million in the third quarter and first nine months of its Fiscal Year 2011, respectively, as compared to $52.0 million and $178.4 million, respectively, for the corresponding periods of our previous fiscal year ("Fiscal 2010") ended December 31, 2009. During the third quarter and first nine months of Fiscal 2011, sales of Caraco-owned products were $5.7 million and $16.7 million, respectively, as compared to $3.3 million and $18.9 million, respectively, during the corresponding periods of Fiscal 2010. The sales of distributed products during the third quarter and first nine months of Fiscal 2011 were $34.7 million and $251.5 million, respectively, as compared to $48.7 million and $159.5 million, respectively, during the corresponding periods of Fiscal 2010. Caraco earned a gross profit of $3.3 million and $22.4 million during the third quarter and first nine months of Fiscal 2011, respectively, as compared to earning a gross profit of $3.1 million and incurring a gross loss of $4.7 million, respectively, during the corresponding periods of Fiscal 2010. The Company incurred pre-tax losses of $4.8 million and $5.2 million, respectively, during the third quarter and first nine months of Fiscal 2011, as compared to incurring pre-tax losses of $4.9 and $8.8 million during the respective periods of Fiscal 2010. The Company recorded an income tax benefit of $1.8 million and $1.9 million, respectively, for the third quarter and first nine months of Fiscal 2011, as compared to recording income tax benefits of $1.9 million and $3.0 million during the corresponding periods of Fiscal 2010. Caraco incurred net losses of $3.0 million and $3.3 million, respectively, during the third quarter and first nine months of Fiscal 2011, as compared to incurring net losses of $3.0 million and $5.8 million, respectively, during the corresponding periods of Fiscal 2010. The Company generated cash from operations in the amount of $2.5 million during the first nine months of Fiscal 2011, as compared to generating cash from operations in the amount of $15.5 million during the corresponding period of Fiscal 2010.

The sales of distributed products were lower in the third quarter of Fiscal 2011, as compared to the corresponding period of Fiscal 2010, as Caraco had stopped shipping certain Paragraph IV products prior to the quarter. Sales from such products were included in the third quarter of Fiscal 2010. Net sales of distributed products increased during the first nine months of Fiscal 2011, as compared to the corresponding period of last year, primarily due to increased sales of Paragraph IV products, particularly sales of certain Paragraph IV products which were launched by the Company during the fourth quarter of Fiscal 2010 under the Distribution and Sale agreement with Sun Pharmaceutical Industries Limited ("Sun Pharma"). As previously discussed, the sales of such products at these levels were not expected to continue and have not occurred during the third quarter of Fiscal 2011 and are not expected to occur in future periods. The increase in the sales of Caraco-owned products during the third quarter was primarily due to an increase in the number of products being contract manufactured, including certain Caraco-owned products which were acquired as part of an asset purchase agreement, as previously disclosed. Sales of Caraco-owned products during the first nine months of Fiscal 2011 were lower than those during the corresponding period of Fiscal 2010 as Caraco has stopped marketing, effective June 25, 2009, the products which were being manufactured out of the Company's facilities on account of the FDA actions, as previously disclosed.

Selling, general and administrative ("SG&A") expenses during the third quarter and first nine months of Fiscal 2011 were $6.6 million and $20.4 million, respectively, as compared to $5.4 million and $15.9 million, respectively, during the corresponding periods of Fiscal 2010, representing increases of 22% and 28%, respectively. SG & A expenses were higher during the third quarter of Fiscal 2011 as compared to the corresponding period of Fiscal 2010 predominantly due to certain customer related adjustments recorded during the period. SG&A expenses were higher during the first nine months of Fiscal 2011 due to customer related adjustments and the recording of additional expenses primarily related to professional consultation fees pertaining to FDA issues and royalties on sales of certain Caraco-owned products which were acquired as part of an asset purchase agreement. SG&A expenses, as a percentage of net sales were 20% and 8%, respectively, for the third quarter and first nine months of Fiscal 2011, as compared to 10% and 9%, respectively, for the corresponding periods of Fiscal 2010. SG&A expenses, as a percentage of sales were high during the third quarter of Fiscal 2011 primarily due to lower net sales during the period.

Total R&D expenses incurred for the third quarter and first nine months of Fiscal 2011 were $1.7 million and $7.8 million, respectively, as compared to $2.8 million and $8.3 million, respectively, during the corresponding periods of Fiscal 2010. R&D expenses during the first nine months of Fiscal 2010 were reduced by the reimbursement of certain product litigation costs as part of a settlement agreement, as previously disclosed. R&D expenses continue to be further decreased since the Company ceased manufacturing operations, as the Company has focused primarily on FDA remediation.

Caraco filed two ANDAs relating to two products with the FDA during the first nine months of Fiscal 2011. These products have been developed in partnership with other product development and manufacturing companies, including an affiliate of Sun Pharma. The total number of ANDAs pending approval by the FDA as of December 31, 2010 was 33 (including four tentative approvals) relating to 29 products. Out of the 33 ANDAs pending approval, 31 (including four tentative approvals) are out of our Michigan facilities and the remaining two are from our partners' facilities.

The Company has been actively working with cGMP consultants towards the resumption of manufacturing activities at its facilities. These consultants were appointed by the Company in accordance with the previously disclosed Consent Decree of Condemnation, Forfeiture, and Permanent Injunction, which the Company entered into with the FDA on September 29, 2009. In evaluating and discussing with the cGMP experts the remediation steps completed to date and those yet to be completed, the Company has determined that it will not be able to begin the manufacture and distribution of products by the end of Fiscal Year 2011. As previously disclosed, and as always is the case in matters such as these, there is no assurance that the steps taken will be successful or result in resolution of the FDA compliance issues.

The Company intends to continue to augment the loss of sales of manufactured products by the sale of Caraco owned products manufactured at sites other than those of Caraco and through sales of distributed products, which are not impacted by the aforementioned actions of the FDA. The Company has transferred certain Caraco-owned products to additional manufacturing sites of Sun Pharma and its affiliates, allowing the Company to regain revenues from those products. The Company has filed with the FDA supplements to ANDAs, for its approval, for additional products to be transferred, however, there is no assurance that such approvals will be granted.

As previously disclosed, on December 3, 2010 the Company received a proposal (the "Proposal") from Sun Pharma and Sun Pharma Global, Inc. ("Sun Global") for a going private transaction by which Sun Pharma and Sun Global, and/or one or more of their affiliates, would acquire all of the outstanding shares of the Company's common stock not held by Sun Pharma and Sun Global for $4.75 in cash per share.   Subsequently, the Company's Board of Directors authorized the Independent Committee of the Board to: (1) consider the Proposal including, but not limited to, reviewing (a) whether going private is appropriate for Caraco at this time is advisable or is inadvisable and should be rejected, (b) possible alternatives to the Proposal or opportunities which may be more advantageous to Caraco, and (c) the merits of the Proposal; (2) if deemed advisable, enter into discussions and negotiations with respect to the terms of the Proposal, including the proposed per share purchase price, with Sun Pharma and Sun Global and their advisors; and (3) make recommendations to the Board of Directors and as applicable, to the stockholders as to the Independent Committee's findings. The Independent Committee has also retained William Blair & Company as an independent financial advisor, and Carrington Coleman as independent legal counsel, to assist it in evaluating the Proposal.

As previously disclosed, the Company's two distribution agreements with Sun Pharmaceutical Industries Ltd. have been extended until January 28, 2012, but will each terminate following these extensions. During the first six months of calendar 2011, the Company and Sun Pharma will discuss a transition plan to transition the marketing of the products covered by the respective agreements to Sun Pharma and/or its wholly-owned affiliates. Thereafter, if the parties have reached an understanding with respect to the transition plan, the parties will implement the transition plan so that upon termination of the agreements Sun Pharma and its affiliates will commence marketing of the products. If the parties have not agreed on a transition plan prior to January 28, 2012, the agreements will still terminate on that date.