Confirmation of OTC Warrant Transaction, effective July 25, 2006

 

 

To: 

New River Pharmaceuticals Inc. (“Counterparty”)

From: 

Trade Date:

July 19, 2006

Effective Date:

July 25, 2006 subject to cancellation of the OTC Warrant Transaction prior to 5:00 p.m. (New York City time) on such date by the Counterparty.

Warrant Style:

European

Warrant Type:

Call

Seller:

Counterparty

Buyer:

MLI

Shares:

Shares of common stock, $0.001 par value, of Counterparty (Security Symbol: “NRPH”).

Number of Warrants:

3,635,042

Daily Number of Warrants:

For any day, the Number of Warrants on such day divided by the remaining number of Expiration Dates (including such day) and rounded down to the nearest whole number, with the balance of the Number of Warrants exercised on the final Expiration Date.

Warrant Entitlement:

One (1) Share per Warrant

Strike Price:

$41.27

Premium:

$26,750,000

Premium Payment Date:

The Effective Date; provided no cancellation of the OTC Warrant Transaction has occurred prior to 5:00 p.m. (New York City time) on such date by the Counterparty.

Exchange:

The NASDAQ Global Market.

Related Exchange(s):

All Exchanges

Full Exchange Business Day:

A Scheduled Trading Day that has a scheduled closing time for its regular trading session at 4:00 p.m. (New York City time) or the then standard closing time for regular trading on the Exchange and is not a Disrupted Day.

Expiration Time:

11:59 p.m. (New York City time).

Expiration Dates:

The fifteen (15) consecutive Full Exchange Business Days beginning on and including October 30, 2013 each shall be an Expiration Date for a number of Warrants equal to the Daily Number of Warrants on such date.

Exercise Dates:

Each Expiration Date

Automatic Exercise:

Applicable; provided that Section 3.4(a) of the Equity Definitions shall apply to Cash Settlement and Net Physical Settlement; and provided further that, unless all Warrants have been previously exercised hereunder, a number of Warrants for each Expiration Date equal to the Daily Number of Warrants for such Expiration Date shall be deemed to be automatically exercised.

 Counterparty’s Telephone

 Number and Telex and/or

Facsimile Number and

 

 

Address:

Radford, Virginia 24141

Attention:

Clifton R. Herndon II

V.P., Finance and Controller

Telephone No.:

540 ###-###-####

Facsimile No.:

540 ###-###-####

Valuation Dates:

Each Exercise Date

Cash Settlement:

Applicable. If Counterparty elects to settle the Transaction by Cash Settlement, Counterparty represents and agrees:

(i) that on the date of the Cash Settlement election, neither the Counterparty nor any of its affiliates is in possession of any material non-public information with respect to the Counterparty or the Shares;

(ii) that the Counterparty is not, on the date of the Cash Settlement election, and will not be, on any day during the period from and including the first Expiration Date to and including the final Expiration Date, engaged in a distribution, as such term is used in Regulation M under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and

(iii) that, during the period from and including the first Expiration Date to and including the final Expiration Date, without the prior written consent of MLI, the Counterparty shall not, and shall cause its affiliates and affiliated purchasers (each as defined in Rule 10b-18 under the Exchange Act) not to, directly or indirectly (including, without limitation, by means of a derivative instrument) purchase, offer to purchase, place any bid or limit order that would effect a purchase of, or commence any tender offer relating to, any Shares (or equivalent interest, including a unit of beneficial interest in a trust or limited partnership or a depository share) or any security convertible into or exchangeable for the Shares.

Settlement Currency:

USD

Settlement Price:

For each Valuation Date, the Volume Weighted Average Price of the Shares (“VWAP”) calculated from 9:45 a.m. to 3:45 p.m., as observed on the Bloomberg “VAP” Page.

Cash Settlement Payment Date:

With respect to each Valuation Date, three (3) Currency Business Days after the final Valuation Date.

Settlement Method Election:

Applicable with respect to Cash Settlement or Net Physical Settlement only.

Electing Party:

Counterparty

Settlement Method Election Date:

Ten (10) Business Days prior to the first Expiration Date.

Default Settlement Method:

Net Physical Settlement.

Net Physical Settlement:

In the event that the Counterparty elects to settle this Transaction by Net Physical Settlement, subject to “Conditions of Net Physical Settlement” below, Counterparty shall deliver to MLI on the Settlement Date a number of Shares (the “Delivered Shares”) equal to the Share Delivery Quantity, provided that in the event that the number of Shares calculated comprises any fractional Share, only whole Shares shall be delivered and an amount in cash equal to the value of such fractional share shall be payable by the Counterparty to MLI in lieu of such fractional Share.

Share Delivery Quantity:

For each Exercise Date, a number of Shares, as calculated by the Calculation Agent, equal to the Net Physical Settlement Amount for such Exercise Date divided by the Settlement Price on the Valuation Date in respect of such Settlement Date plus an amount in cash in lieu of any fractional shares (based on the Settlement Price).

Net Physical Settlement Amount:

For any Exercise Date, an amount equal to the product of (i) the Number of Warrants being exercised on the relevant Exercise Date, (ii) the Strike Price Differential for such Exercise Date and (iii) the Warrant Entitlement.

Strike Price Differential:

For any Valuation Date, (i) if the Settlement Price is greater than the Strike Price, an amount equal to the excess of such Settlement Price over the Strike Price for such Valuation Date or (ii) if such Settlement Price is less than or equal to the Strike Price, zero.

Settlement Date:

Settlement with respect to each Exercise Date shall occur on the third (3^rd) Full Exchange Business Day following the final Valuation Date, provided that MLI shall have to right to request by prior written notice to Counterparty a Settlement Date with respect to any Exercise Date and the related Share Delivery Quantity that is three (3) Full Exchange Business Days following such Exercise Date. Such request shall not unreasonably be denied.

Physical Settlement:

If, in connection with or six months following delivery of Shares hereunder, MLI notifies the Counterparty that MLI has reasonably determined after advice from counsel that there is a material risk that such Shares are subject to restrictions on transfer in the hands of MLI pursuant to the rules and regulations promulgated under the Securities Act of 1933, as amended (the “Securities Act”), then Counterparty shall either (i) deliver Shares that are covered by an effective registration statement of Counterparty for immediate resale by MLI or (ii) agree to deliver additional Shares so that the value of such Shares as determined by the Calculation Agent to reflect an appropriate liquidity discount, equals the value of the number of Shares that would otherwise be deliverable if such Shares were freely tradable upon receipt by MLI.

(A) If Counterparty elects to deliver Shares as described in above clause (i), then Counterparty shall

(a) afford MLI a reasonable opportunity to conduct a due diligence investigation with respect to Counterparty that is customary in scope for underwritten offerings of equity securities that yields a result reasonably satisfactory to MLI;

(b) promptly make available to MLI an effective registration statement for immediate resale (the “Registration Statement”) in form and content reasonably satisfactory to MLI and filed pursuant to Rule 415 under the Securities Act, and such prospectuses as MLI may reasonably request to comply with the applicable prospectus delivery requirements (the “Prospectus”) for the resale by MLI of such number of Shares as MLI shall reasonably specify in accordance with this paragraph, such Registration Statement to be effective and Prospectus to be current until the earliest of the date on which (1) all Delivered Shares have been sold by MLI, (2) MLI has advised Counterparty that it no longer requires that such Registration Statement be effective, (3) all remaining Delivered Shares could be sold by MLI without registration pursuant to Rule 144 promulgated under the Securities Act (the “Registration Period”) or (4) Counterparty has provided a legal opinion in form and substance satisfactory to MLI (with customary assumptions and exceptions) that the Shares issuable upon exercise of these Warrants will be freely tradable under the Securities Act upon delivery to MLI and not subject to any legend restricting transferability. It is understood that the Registration Statement and Prospectus may cover a number of Shares equal to the aggregate number of Shares (if any) reasonably estimated by MLI to be potentially deliverable by Counterparty in connection with Net Physical Settlement hereunder (not to exceed the Maximum Deliverable Share Amount) and shall be subject to the same suspension of sales during “blackout dates” as provided in the following paragraph; and

(c) Counterparty will enter into a registration rights agreement with MLI in form and substance reasonably acceptable to MLI, which agreement will contain among other things, customary representations and warranties and indemnification, restrictions on sales during “blackout dates” as provided for in the registration rights agreement (the “Registration Rights Agreement”) entered into between Counterparty and the Initial Purchaser in connection with Counterparty’s 3.5% Convertible Subordinated Notes due 2013 (the “Convertible Notes”), provide for delivery of comfort letters and opinions of counsel and other rights relating to the registration of a number of Shares equal to the number of Delivered Shares and other Shares deliverable hereunder up to the Maximum Deliverable Share Amount.

(d) Counterparty shall promptly pay to MLI a $0.03 per Share fee with all Shares delivered in connection with Net Physical Settlement pursuant to a Registration Statement.

(a) Counterparty shall afford MLI and any potential institutional purchaser of any Shares identified by MLI a reasonable opportunity to conduct a due diligence investigation with respect to Counterparty that is customary in scope for private placements of equity securities subject to execution of any customary confidentiality agreements;

(b) Counterparty shall enter into an agreement (a “Private Placement Agreement”) with MLI on commercially reasonable terms in connection with the private placement of such Shares by Counterparty to MLI or an affiliate and the private resale of such shares by MLI or such affiliate, substantially similar to private placement purchase agreements customary for private placements of equity securities, in form and substance commercially reasonably satisfactory to MLI and Counterparty, which Private Placement Agreement shall include provisions relating to the indemnification of, and contribution in connection with the liability of, MLI and its affiliates, shall provide for the payment by Counterparty of all expenses in connection with such resale, including all reasonable and documented fees and expenses of counsel for MLI, shall contain representations, warranties and agreements of Counterparty reasonably necessary or advisable to establish and maintain the availability of an exemption from the registration requirements of the Securities Act for such resales, and shall use reasonable best efforts to provide for the delivery of accountants’ “comfort letters” to MLI or such affiliate with respect to the financial statements and certain financial information contained in or incorporated by reference into the offering memorandum prepared for the resale of such Shares;

(c) MLI shall sell the Delivered Shares in a commercially reasonable manner until the amount received by MLI for the sale of the Shares (the “Proceeds Amount”) is equal to the Net Physical Settlement Amount. Any remaining Delivered Shares shall be returned to Counterparty. If the Proceeds Amount is less than the Net Physical Settlement Amount, Counterparty shall promptly deliver upon notice from MLI additional Shares to MLI until the dollar amount from the sale of such Shares by MLI equals the difference between the Net Physical Settlement Amount and the Proceeds Amount. In no event shall Counterparty be required to deliver to MLI a number of Shares greater than the Maximum Deliverable Share Amount.

(iv) In the event Counterparty fails to comply with any of the conditions set forth in “Conditions to Net Physical Settlement” herein, Counterparty shall settle the Transaction through Cash Settlement; provided, however, that notwithstanding the foregoing, if either (a) Counterparty does not provide for the sale of the Shares under the Registration Statement as provided in the Registration Rights Agreement, (b) some Shares cannot be registered under the Registration Statement due to Rule 415(a)(4) under the Securities Act, or (c) some or all of the Delivered Shares cannot be used to close out stock loans in the shares of Counterparty entered into to establish or maintain short positions by MLI in connection with this Transaction without a prospectus being required by applicable law to be delivered to such lender, then Counterparty may deliver unregistered or registered Shares. In the case of clauses (a) or (b) above, the value of any unregistered Shares so delivered shall be discounted to reflect their market value (calculated in a commercially reasonable manner). In the case of clause (c) above, the value of any such Delivered Shares shall reflect the cost (calculated in a commercially reasonable manner) to MLI of trading Shares in order to close out its hedge position if any, in all cases for purposes of calculating the Delivered Shares. In no event shall Counterparty be required to top-up the delivery in cash.

Settlement by Counterparty:

Notwithstanding anything herein or in the Agreement to the contrary, the number of Shares that may be delivered at settlement by Counterparty shall not exceed 4,543,803 at any time (“Maximum Deliverable Share Amount”), as adjusted by MLI to account for any subdivision, stock-split, reclassification or similar dilutive event with respect to the Shares.

Counterparty represents and warrants that the number of Available Shares as of the Trade Date is greater than the Maximum Deliverable Share Amount. Counterparty covenants and agrees that Counterparty shall not take any action of corporate governance or otherwise to reduce the number of Available Shares below the Maximum Deliverable Share.

For this purpose, “Available Shares” means the number of Shares Counterparty currently has authorized (but not issued and outstanding) less the maximum number of Shares that may be required to be issued by Counterparty in connection with stock options, convertibles, and other commitments of Counterparty that may require the issuance or delivery of Shares in connection therewith.

Extraordinary Dividends:

Any and all dividends paid by the Issuer.

Method of Adjustment:

Calculation Agent Adjustment 

Consequences of Merger Events:

(a) Share-for-Share: Cancellation and Payment (Calculation Agent Determination)

Tender Offer:

Applicable

Consequences of Tender Offers:

(a) Share-for-Share: Modified Calculation Agent Adjustment

or Delisting:

Cancellation and Payment (Calculation Agent Determination) (subject to satisfaction by payment or delivery of Shares or cash as set forth in “Early Termination” below)

Determining Party:

MLI

Change in Law:

Applicable

Failure to Deliver:

Not Applicable

Insolvency Filing:

Applicable

Hedging Disruption Event:

Applicable

Increased Cost of Hedging:

Not Applicable

Loss of Stock Borrow:

Applicable

Maximum Stock Loan Rate:

3.00%

Increased Cost of Stock Borrow:

Applicable

Initial Stock Loan Rate:

0.40%

Hedging Party:

MLI

Determining Party:

MLI

Non-Reliance:

Applicable

Hedging Activities:

Applicable

Additional Acknowledgments:

Applicable

Additional Agreements:

If due to the occurrence of an Extraordinary Event or otherwise Counterparty would be obligated to pay cash to MLI pursuant to the terms of this Agreement for any reason without having had the right (other than pursuant to this paragraph) to elect to deliver Shares in satisfaction of such payment obligation, then Counterparty may elect to deliver to MLI a number of Shares (whether registered or unregistered) having a cash value equal to the amount of such payment obligation (such number of Shares to be delivered to be determined by the Calculation Agent acting in a commercially reasonable manner to determine the number of Shares that could be sold by MLI over a reasonable period of time to realize the cash equivalent of such payment obligation taking into account any applicable discount (determined in a commercially reasonable manner) to reflect any restrictions on transfer as well as the market value of the Shares). Further, if Counterparty is delivering Shares as a result of a Merger Event, the Settlement Date will be immediately prior to the effective time of the Merger Event and the Shares will be deemed delivered at such time such that MLI will be a holder of the Shares prior to such effective time. Settlement relating to any delivery of Shares pursuant to this paragraph shall occur within a reasonable period of time. The number of Shares delivered pursuant to this paragraph shall not exceed the Maximum Deliverable Share Amount and shall be subject to the provisions under “Early Termination” hereof regarding Proceeds Amount.

Early Termination:

Notwithstanding any provision to the contrary, upon the designation of an Early Termination Date hereunder, Counterparty’s payment obligation in respect of this Transaction as determined in accordance with Second Method and Loss (the “Transaction Early Termination Amount”) may, at the option of Counterparty, be satisfied by the delivery of a number of Shares equal to the Transaction Early Termination Amount divided by the Termination Price (“Early Termination Stock Settlement”); provided, however, that Counterparty must notify MLI of its election of Early Termination Stock Settlement by the close of business on the day that is two Exchange Business Days following the day that the notice designating the Early Termination Date is effective. “Termination Price” means the closing price per Share on the Exchange on the Early Termination Date.

A number of Shares calculated as being due in respect of any Early Termination Stock Settlement will be deliverable on the third Exchange Business Day following the date that notice pursuant to Section 6(d)(i) of the Agreement specifying the number of Shares deliverable is effective. Section 6(d)(i) of the Agreement is hereby amended by adding the following words after the word “paid” in the fifth line thereof: “or any delivery is to be made, as applicable.”

On or prior to the Early Termination Date (if Early Termination Stock Settlement is elected), if so requested by MLI upon advice of counsel, Counterparty shall enter into a registration rights agreement with MLI in form and substance reasonably acceptable to MLI which agreement will contain among other things, customary representations and warranties and indemnification, restrictions on sales during “blackout dates” as provided for in the Registration Rights Agreement and shall satisfy the conditions contained therein and Counterparty shall file and diligently pursue to effectiveness a Registration Statement pursuant to Rule 415 under the Securities Act. If and when such Registration Statement shall have been declared effective by the Securities and Exchange Commission, Counterparty shall have made available to MLI such Prospectuses as MLI may reasonably request to comply with the applicable prospectus delivery requirements for the resale by MLI of such number of Shares as MLI shall specify (or, if greater, the number of Shares that Counterparty shall specify). Such Registration Statement shall be effective and Prospectus shall be current until the earliest of the date on which (i) all Shares delivered by Counterparty in connection with an Early Termination Date, (ii) MLI has advised Counterparty that it no longer requires that such Registration Statement be effective or (iii) all remaining Shares could be sold by MLI without registration pursuant to Rule 144 promulgated under the Securities Act (the “Termination Registration Period”). It is understood that the Registration Statement and Prospectus will cover a number of Shares equal to the number of Shares plus the aggregate number of Shares (if any) reasonably estimated by MLI to be potentially deliverable by Counterparty in connection with Early Termination Stock Settlement hereunder, but in no event exceeding the Maximum Deliverable Share Amount. On each day during the Registration Period Counterparty shall represent that each of its filings under the Securities Act, the Exchange Act or other applicable securities laws that are required to be filed have been filed and that, as of the respective dates thereof and as of the date of this representation, they do not contain any untrue statement of a material fact or omission of a material fact required to be stated therein or necessary to make the statements made, in the light of the circumstances under which they were made, not misleading.

If Counterparty does not deliver Shares subject to an effective Registration Statement as set forth above, Counterparty may deliver unregistered Shares in an amount determined by MLI based upon MLI’s commercially reasonable judgment of the market value of such Shares. In no event shall Counterparty be required to deliver to MLI a number of Shares greater than the Maximum Deliverable Share Amount.

Compliance With Securities Laws:

Counterparty represents and agrees that it has complied, and will comply, in connection with this Transaction and all related or contemporaneous sales and purchases of Shares, with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder, including, without limitation, Rule 10b-5 and 13e and Regulation M under the Exchange Act.

Each party acknowledges that the offer and sale of the Transaction to it is intended to be exempt from registration under the Securities Act by virtue of Section 4(2) thereof. Accordingly, Counterparty represents and warrants to MLI that (i) it has the financial ability to bear the economic risk of its investment in the Transaction and is able to bear a total loss of its investment, (ii) it is an “accredited investor” as that term is defined in Regulation D as promulgated under the Securities Act and (iii) the disposition of the Transaction is restricted under this Confirmation, the Securities Act and state securities laws.

Counterparty further represents and warrants that:

(a) Counterparty is not entering into this Transaction to create actual or apparent trading activity in the Shares (or any security convertible into or exchangeable for Shares) or to raise or depress or otherwise manipulate the price of the Shares (or any security convertible into or exchangeable for Shares);

(b) Counterparty represents and acknowledges that as of the date hereof and without limiting the generality of Section 13.1 of the Equity Definitions, MLI is not making any representations or warranties with respect to the treatment of the Transaction under FASB Statements 149 or 150, EITF Issue No. 00-19 (or any successor issue statements) or under FASB’s Liabilities & Equity Project.

Agreement Regarding Shares:

Counterparty agrees that, in respect of any Shares delivered to MLI, such Shares shall be, upon such delivery, duly and validly authorized, issued and outstanding, fully paid and non-assessable and subject to no adverse claims of any other party. The issuance of such Shares does not and will not require the consent, approval, authorization, registration or qualification of any government authority, except such as shall have been obtained on or before the delivery date of any Shares or in connection with any Registration Statement filed with respect to any Shares.

Bankruptcy Rights:

In the event of Counterparty’s bankruptcy, MLI’s rights in connection with this Transaction shall not exceed those rights held by common shareholders. For the avoidance of doubt, the parties acknowledge and agree that MLI’s rights with respect to any other claim arising from this Transaction prior to Counterparty’s bankruptcy shall remain in full force and effect and shall not be otherwise abridged or modified in connection herewith.

Transfer:

Counterparty may transfer its rights and delegate its obligations under this Transaction in accordance with Section 7 of the Master Agreement. MLI may assign its rights and delegate its obligations hereunder, in whole or in part, to any other person (an “Assignee”) without the prior consent of the Counterparty, effective (the “Transfer Effective Date”) upon delivery to Counterparty of an executed acceptance and assumption by the Assignee (an “Assumption”) of the transferred obligations of MLI under this Transaction (the “Transferred Obligations”). Notwithstanding any other provision in this Confirmation to the contrary requiring or allowing MLI to purchase, sell, receive or deliver any Shares or other securities to or from Counterparty, MLI may designate any of its affiliates to purchase, sell, receive or deliver such Shares or other securities and otherwise to perform MLI’s obligations in respect of this Transaction and any such designee may assume such obligations. MLI shall be discharged of its obligations to Counterparty to the extent of any such performance.

Regulation:

MLI is regulated by The Securities and Futures Authority Limited.

Indemnity:

Seller agrees to indemnify MLI, its Affiliates and their respective directors, officers, agents and controlling parties (each such person being an “Indemnified Party”) from and against any and all losses, claims, damages and liabilities, joint and several, to which such Indemnified Party may become subject because of a breach of any representation or covenant hereunder, in the Agreement or any other Agreement relating to the Agreement or Transaction and will reimburse Indemnified Party for all reasonable expenses (including reasonable legal fees and expenses) as they are incurred in connection with the investigation of, preparation for, or defense of, any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party thereto. Seller will not be liable under the foregoing Indemnity provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court to have resulted from MLI’s gross negligence or willful misconduct.

(a)

Counterparty hereby represents and warrants to MLI, on each day from the Trade Date to and including the earlier of (i) August 19, 2006, and (ii) the date by which MLI is able to initially complete a hedge of its position created by this Transaction, that:

(1)

it will not, and will not permit any person or entity subject to its control to, bid for or purchase Shares during such period except as disclosed in the Offering Memorandum relating to the Convertible Notes; and

(2)

it has publicly disclosed all material information necessary for it to be able to purchase or sell Shares in compliance with applicable federal securities laws and that it has publicly disclosed all material information with respect to its condition (financial or otherwise).

(b)

No collateral shall be required by either party for any reason in connection with this Transaction.

(c)

MLI shall not be entitled to exercise any Warrant hereunder and Automatic Exercise shall not apply with respect to any Warrant to the extent (but only to the extent) that the receipt of any Shares upon the exercise of such Warrant would result in MLI, or its ultimate parent entity becoming, directly or indirectly, the beneficial owner (as such term is defined for purposes of Section 13(d) of the Exchange Act) at any time of more than 8.0 percent of the class of the Counterparty’s outstanding equity securities that is comprised of the Shares (an “Excess Share Owner”).

1.

MLPFS will be responsible for the operational aspects of the Transactions effected through it, such as record keeping, reporting, and confirming Transactions to Counterparty and MLI;

2.

Unless MLI is a “major U.S. institutional investor,” as defined in Rule 15a-6 of the Exchange Act, neither Counterparty not MLI will contact the other without the direct involvement of MLPFS;

3.

MLPFS’s sole role under this Agreement and with respect to any Transaction is as an agent of Counterparty and MLI on a disclosed basis and MLPFS shall have no responsibility or liability to Counterparty or MLI hereunder except for gross negligence or willful misconduct in the performance of its duties as agent. MLPFS is authorized to act as agent for MLI, but only to the extent expressly required to satisfy the requirements of Rule 15a-6 under the Exchange Act in respect of the Options described hereunder. MLPFS shall have no authority to act as agent for Counterparty generally or with respect to transactions or other matters governed by this Agreement, except to the extent expressly required to satisfy the requirements of Rule 15a-6 or in accordance with express instructions from Counterparty.

(I)

Payer Representations. For the purpose of Section 3(e) of the Agreement, each party represents to the other party that it is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii), or 6(e) of the Agreement) to be made by it to the other party under the Agreement. In making this representation, each party may rely on (i) the accuracy of any representations made by the other party pursuant to Section 3(f) of the Agreement, (ii) the satisfaction of the agreement contained in Section 4(a)(i) or 4(a)(iii) of the Agreement, and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of the Agreement, and (iii) the satisfaction of the agreement of the other party contained in Section 4(d) of the Agreement; provided that it will not be a breach of this representation where reliance is placed on clause (ii) above and the other party does not deliver a form or document under Section 4(a)(iii) of the Agreement by reason of material prejudice to its legal or commercial position.

(II)

Payee Representations. For the purpose of Section 3(f) of the Agreement, each party makes the following representations to the other party:

(i)

MLI represents that it is a corporation organized under the laws of England and Wales.

(ii)

Counterparty represents that it is a corporation incorporated in the Commonwealth of Virginia.

(a)

Tax forms, documents or certificates to be delivered are:

(b)

Other documents to be delivered:

Address:

Merrill Lynch International

Merrill Lynch Financial Centre

2 King Edward Street

London EC1A 1HQ

Attention:

Manager, Fixed Income Settlements

Facsimile No.:

44 ###-###-####

Telephone No.:

44 ###-###-####

Address:

New River Pharmaceuticals Inc.

1881 Grove Avenue

Radford, Virginia 24141

Attention:

Clifton R. Herndon II

V.P., Finance and Controller

Telephone No.:

540 ###-###-####

Facsimile No.:

540 ###-###-####

Address:

Merrill Lynch, Pierce, Fenner & Smith Incorporated

222 Broadway, 16^th Floor

New York, New York 10038

Attention:

Litigation Department

(a)

The parties acknowledge and agree that there are no other representations, agreements or other undertakings of the parties in relation to this Transaction, except as set forth in this Confirmation.

(i)

this Transaction to be a “securities contract” as defined in Section 741(7) of Title 11 of the United States Code (the “Bankruptcy Code”), qualifying for the protections under Section 555 of the Bankruptcy Code;

(ii)

a party’s right to liquidate this Transaction and to exercise any other remedies upon the occurrence of any Event of Default under the Agreement with respect to the other party to constitute a “contractual right” as defined in the Bankruptcy Code;

(iii)

all payments for, under or in connection with this Transaction, all payments for the Shares and the transfer of such Shares to constitute “settlement payments” as defined in the Bankruptcy Code.

(c)

The parties acknowledge and agree that in the event of an Early Termination Date as a result of an Event of Default, the amount payable under the Agreement will be a cash amount calculated as described therein and that any delivery specified in this Transaction will no longer be required.

Very truly yours,

By:

 /s/

 Fran Jacobson

Name:

By:

 /s/ 

Title:

By:

 /s/

 Rhonda Garguito

Name:

 Rhonda Garguito

MERRILL LYNCH & CO., INC.

By:

 Patricia Kropiewnicki

 Name: Patricia Kropiewnicki

 Title: Designated Secretary

 Date: July 19, 2006