DISTRIBUTION AND INVENTORY MANAGEMENT SERVICES AGREEMENT

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Exhibit 10.40

DISTRIBUTION AND INVENTORY MANAGEMENT SERVICES AGREEMENT

        This Distribution and Inventory Management Services Agreement (" Agreement ") is entered into as of January 1, 2005 (the "Effective Date") by and between First Horizon Pharmaceuticals, a Delaware corporation with its principal place of business located at 6195 Shiloh Road, Alpharetta, Georgia 30005 (First Horizon), and Cardinal Health* with its principal place of business located at 7000 Cardinal Place, Dublin, Ohio 43017 ("Cardinal Health").

RECITALS

        WHEREAS, currently First Horizon sells Products (as defined below) to Cardinal Health and Cardinal Health purchases Products from First Horizon for resale distribution; and

        WHEREAS, Cardinal Health is willing to provide certain Base Services as well as additional services to First Horizon as needed and agreed upon by both parties.

        NOW THEREFORE, in consideration of the foregoing, the mutual representations, warranties and covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE 1
Definitions

        1.1.  " Aggregate Inventory " means, at any given time, the total of Products in units that Cardinal Health has on hand at all of its storage and/or distribution facilities and that Cardinal Health has on order from First Horizon.

        1.2.  " Base Services " means the valuable services that Cardinal Health provides to its Customers on a daily basis that significantly benefit First Horizon.

        1.3.  " Confidential Information " means the confidential information described in Section 4.2.

        1.4.  " Average Weekly Movement " means, at any given time, the total quantity of Products in units (by NDC number) sold by Cardinal Health to Customers [***].

        1.5.  " Customers " means the purchaser of Products from Cardinal Health in the United States.

        1.6.  " Customary Practice " means, at any given time, the average of the total quantity of Products (by NDC number) sold by Cardinal Health to Customers over the immediate preceding three (3) months.

        1.7.  " Inventory and Sales Reports " means the reports described in Sections 2.21 (D).

        1.8.  " On Hand Inventory " means Product in Cardinal Health's individual distribution centers.

        1.9.  " On Order Inventory " means Cardinal Health's unfilled orders of Product from First Horizon.

        1.10 " Products " means all current and future FDA approved pharmaceutical products, bearing First Horizon's label and packaging, which First Horizon sells to wholesale customers in the United States. (see current price list).

ARTICLE 2
Purchasing and Inventory

2.1.

Base Distribution and Inventory Management Services. —Cardinal Health agrees to provide the following "Base Services" to First Horizon for the fee structure identified on Schedule A:

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Sophisticated ordering technology

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Daily consolidated deliveries to providers

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Emergency shipments to providers 24/7/365

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Consolidated accounts receivable management

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Contract and Chargeback administration

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Returns

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Customer Service support

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Adequate working inventories to meet customer needs

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Licensed, environmentally controlled, PDMA compliant, secure facilities

        2.2    Additional Distribution and Inventory Management Services. —In addition to the "Base Services" and at no additional expense to First Horizon Cardinal Health agrees to provide to First Horizon the following Distribution and Inventory Management Services:

        A.     Inventory Levels. During the term of this Agreement, Cardinal Health shall maintain in its stock, at all times, Product(s) sufficient to supply the demand of Customers; provided, however, such stock of any given Product shall not be less than [***] , nor more than [***] , of Cardinal Health's expected sales for that Product to its Customers as determined by its Customary Practice. Cardinal Health shall have no obligation to maintain the minimum Inventory Level of a particular Product if such Product is unavailable from FHPC.

        B.     Purchase Requirement. Cardinal Health, including Cardinal Trading Company, agrees to purchase [***] directly from First Horizon. Cardinal Health agrees to make no transfers of Products to its Trading Company unless agreed upon by First Horizon.

In any event and subject to section 2.5 Purchase Limits, Cardinal Health including its Cardinal Trading Company shall at all times maintain the Inventory Levels set forth in section 2.2A Inventory Levels

        C.     Product Availability. Cardinal Health will work with First Horizon to minimize product shortages and maximize product availability by agreeing to the following:

        a.     Cardinal Health will institute an automated balancing system on First Horizon Products in order to optimize the use of existing inventories across the entire Cardinal Health network, including brokerage. This will be done using parameters agreed upon by Cardinal Health and First Horizon.

        b.     During backorder situations and limited product availability and upon First Horizon's request, Cardinal Health will implement more frequent order and receiving cycles to help reduce inventory requirements.

        D.     Inventory and Sales Reports. Cardinal Health shall prepare inventory reports detailing the status of its Aggregate Inventory of Products and movement of Products by NDC number (" Inventory and Sales Reports ") and, for the duration of this Agreement, provide First Horizon with such Inventory Reports (852's) daily and Sales Reports (867's) monthly. All such Inventory and Sales Reports shall be transmitted in EDI format pursuant to Section 2.2.1 (E) and shall include such information as reasonably requested by First Horizon, including but not limited to the following:

        a.     On Hand Inventory level by distribution center for All Distribution Centers; and

        b.     On Order Inventory level by distribution center for All Distribution Centers; and

        c.     Sales out by distribution center for All Distribution Centers

        d.     Morgue Reports, upon request, by distribution center for All Distribution Centers

        Cardinal Health may, due to contractual requirements, be required to block certain data in the 867's that discloses customer identity. This may include customer name and DEA number, and any other data that would identify a customer. In no event will Cardinal Health be required to provide

customer identifying information to First Horizon in the event it is contractually prohibited from doing so.

        E.     EDI. Cardinal Health's Inventory and Sales Reports shall be transmitted to First Horizon in an EDI 852 and EDI 867 format respectively.

        Within thirty (30) days after entering into this Agreement, the parties shall examine and test the capability of their respective EDI systems and complete implementation of a mutually agreeable system whereby transfers of information can be made effectively on a consistent basis. In the event that critical internal support systems and electronic communication links including EDI, are not available for five (5) consecutive business days, the parties will cooperate to promptly implement substitute procedures to document the information customarily sent by EDI and prevent interruptions to each other's business.

        F.      Customer Monitoring. During the term of this Agreement but no later than forty-five (45) days from the execution date, Cardinal Health will implement processes and procedures to monitor Cardinal Health's customer ("Customer") order patterns. Within thirty (45) days of execution of this Agreement, Cardinal Health and First Horizon will agree upon parameters whereby Cardinal Health shall monitor [***] by Customers. Cardinal Health shall promptly notify First Horizon of any Customer activity that meets these parameters. Cardinal will take appropriate action which could include any following: [***] .

        H.     Events Management. Cardinal Health will provide First Horizon with "Events Management" which will include but not limited to: material changes in market conditions; material loss or gain of business by Cardinal Health or Customer; new Customers, lost Customers, and any other information that it is aware of that would materially affect Product movement.

        I.      New Product Support. Cardinal Health will provide support for future First Horizon new Product launches. Support will consist of the following:

        a.     DC Stocking initial quantities of new Product at the Cardinal Health distribution centers in an amount reasonably determined by Cardinal Health and First Horizon to meet anticipated demand for such Product.

        b.     Automatic distribution, for qualifying times, through Cardinal Health's First Script Program of such Product to participating or targeted pharmacies

        c.     Any other activities that the parties may mutually agree upon.

        J.      EFT Payments: Beginning January 1, 2005, Cardinal Health shall remit all payments including credits to First Horizon's account by 820 EFT transmissions. In the event Cardinal Health is unable to transmit the required payment at the time payment is due as a result of system failures or error, Cardinal Health shall promptly notify the First Horizon Finance Department for instructions on remitting payment. Terms will be adjusted for EFT Payments to [***] .

        K.     Shortages: Cardinal shall notify First Horizon of any shortages in Product within ten (10) days of receipt of shipment. First Horizon will conduct an investigation in order to verify the amount and weight of Products actually shipped to Cardinal Health. Upon completion of the investigation, First Horizon will notify Cardinal Health of the results and provide documentation to support such findings.

        L.     Deductions Resolution: Cardinal may take deductions it determines are necessary or appropriate provided however, Cardinal Health will notify First Horizon of any deductions in a timely manner and will delay taking such deductions for up to [***] ( [***] ) days from the date of notification to give the parties the opportunity to meet and discuss the deductions. Cardinal Health will use its best efforts to resolve any deductions during this [***] ( [***] ) day period.

        2.3    Post Price Increase Buy In Allocations. First Horizon may elect to provide Cardinal Health, at its sole discretion, allocations of Product at the old price of Product prior to a price increase. The economic benefit realized by Cardinal Health for such purchase will be included in the calculation of the Service Fee as set forth in Attachment A, Service Fee Credits.

        2.4    Inspections. Upon reasonable prior notice and during normal business hours, Cardinal Health shall allow permanent employees of First Horizon to enter into each of Cardinal Health's facilities to inspect Cardinal Health's books and records relating solely to inventory and supply of Products (including relevant electronic information), and inspect and take physical counts of inventory, not more than once during each consecutive twelve (12) month period of this Agreement to ensure compliance with this Agreement, and to assist Cardinal Health in keeping such inventory clean, complete and moving to minimize returned Products. In no event shall any inspection relate to any transaction or event that occurred more than twelve (12) months prior to the date of such inspection.

        2.5    Purchase Limits. First Horizon agrees to ship all Cardinal Health purchase orders in full subject to the limits set forth in section 2.2A and Product availa