MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
BLAKE M. HARPER (115756)
HENRY ROSEN (156963)
TOR GRONBORG (179109)
MICHAEL L. SCHRAG (185832)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

WOLF HALDENSTEIN ADLER
FREEMAN & HERZ, LLP
FRANCIS M. GREGOREK (144785)
BETSY C. MANIFOLD (182450)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/338-4599

DONOVAN MILLER, LLP
MICHAEL D. DONOVAN
1608 Walnut Street
Suite 1400A
Philadelphia, PA 19103
Telephone: 215/732-6020
Attorneys for Plaintiffs

[Additional counsel appear on signature page.]

SCOTT ROTHSTEIN, STUART GOLLOMP and JEFF BEDARD, On Behalf of Themselves and All Others Similarly Situated,

Plaintiffs,

vs.

DURA PHARMACEUTICALS, INC., CAM L. GARNER, JAMES W. NEWMAN, CHARLES W. PRETTYMAN, WALTER F. SPATH, JAMES C. BLAIR, JULIA R. BROWN, JOSEPH C. COOK, JR., MITCHELL R. WOODBURY, and MERRILL LYNCH & CO., INC./MERRILL LYNCH, PIERCE FENNER & SMITH, INC.,

______________________________________

No.

CLASS ACTION

COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934

Summary

1. This is an action on behalf of purchasers of Dura Pharmaceuticals, Inc. ("Dura") stock between 4/15/97-2/24/98. Defendants made false and misleading statements about Dura's supposedly well-trained and highly effective sales force, strong sales of Dura's Ceclor CD, Keftab, Nasarel/Nasalide, Rondec and Dura-Vent products, and the successful development of its new Spiros drug delivery system while forecasting its commercial release in late 98/early 99 and $150 million in sales by 2000, strong growth in Ceclor CD sales in 98 to $50-$55 million, 98 earnings per share ("EPS") of $1.15-$1.45, 99 EPS of $1.90-$2.05 and 30%-50% EPS growth for Dura during 98-2000. These representations artificially inflated Dura's stock to a Class Period high of $53 in 10/97. Capitalizing on this, Dura and its related Spiros Development Corp. II entity raised $375 million in badly needed capital from public investors, Dura used its stock to repurchase the shares of the Spiros Development Corp. entity and to attempt to acquire Scandipharm, Inc. for $93-$139 million of Dura stock, while the Dura insiders named as defendants sold 390,374 shares of their Dura stock at as high as $49.31 for $16.8 million in illegal insider-trading proceeds -- unloading 82% of the Dura stock they actually owned. On 2/24/98, Dura revealed that, due to weak sales of Ceclor CD, Keftab, Nasarel/Nasalide, Rondec and Dura-Vent, its 1stQ 98 and 98 results would be much worse than earlier forecast. Dura's stock collapsed by $18-3/8 -- almost 46% in one day -- to $20-3/4. As Dura revealed further sales and EPS shortfalls during 98 and a 4thQ 98 loss, excessive inventories of Ceclor and that its Spiros drug delivery system could not be approved by the FDA due to electro-mechanical defects and chemistry, manufacturing and control problems, its stock fell to as low as $8.

2. After Dura went public in 92, it pursued a business strategy as a marketer of niche pharmaceutical drugs. Because Dura did not have the resources or ability to develop its own new drugs, it purchased, from large companies like Eli Lilly, Abbott Labs, Procter & Gamble, Bausch & Lomb, Squibb, Bristol-Meyers, etc., marketing rights for drugs they had developed but which did not have a sufficiently large market potential to be meaningful to them. Because the drugs Dura was purchasing the rights to sell had only limited market potential, in order for Dura to continue to show strong revenue and EPS growth, it had to keep buying the marketing rights to more drugs, thus expanding the portfolio of drugs it sold. Because the large companies Dura was purchasing drug marketing rights from would not accept Dura's stock as payment, it was absolutely indispensable to Dura's business strategy of reporting growing revenues and EPS by adding new drugs to its portfolio that Dura continually raised large amounts of new capital -- which it could do only by keeping its stock price high so it could sell equity securities to the public at high prices. Because of the apparent success of Dura's business, it was able to complete four public equity offerings during 94 and 96, raising $385 million in new capital. During this time period, Dura's stock was a tremendous performer and, by the end of 96, had increased to $47-7/8 from $6-$7 in 95, as shown below:

3. By 95, Dura's management realized that due to Dura's increasing size, its ability to continue to show strong revenue and EPS growth solely by acquiring the marketing rights to niche drugs was becoming increasingly difficult. They knew that in order for Dura to continue to show the kind of EPS growth necessary to support a strong performance by its stock, Dura had to begin to develop proprietary drug products. However, if Dura began to spend millions on research and development for new drug products, this would adversely affect its reported EPS, as such expenditures had to be immediately expensed, i.e., charged against current earnings. To avoid this, Dura adopted an "off balance sheet" research and development financing technique, creating Spiros Development Corp. ("Spiros I"), to pay Dura's research and development costs on its Spiros drug delivery system and thus avoid having those costs expensed against Dura's current period revenues. However, in order to induce investors to finance Spiros I, it was necessary for Dura to also grant them warrants to purchase 2.2 million shares of Dura stock at $19.47. Dura also had to reserve to itself an option to purchase Spiros I stock in exchange for Dura stock. While this financing method protected Dura's current results from research and development charges, it exacerbated the pressure on Dura's insiders to keep Dura's stock at high levels, as Dura would have to use its stock to repurchase the Spiros I technology and would have to continue to raise large additional amounts of capital through follow-on Spiros-type development vehicles which would require it to provide investors warrants to purchase Dura stock.

4. During 96, Dura acquired the rights to market two antibiotics -- Ceclor CD and Keftab -- from Roche. Initially it told investors these drugs had substantial market potential. Later Dura said they were selling very well -- better than expected -- and it expected they would provide sufficient revenue and EPS growth to allow Dura to continue to show strong 97-98 revenue and EPS growth, while Dura completed the Spiros albuterol drug testing and new drug application ("NDA") process with the FDA, such that Spiros albuterol would be approved for marketing in late 98 or early 99.

5. According to Dura, its Spiros drug delivery system, which would be utilized first to deliver albuterol and later other medications to persons with respiratory problems such as asthma, had advantages over existing inhalers which were dependent upon the ability of the user to successfully coordinate use of the inhaler and inhale the medication, something persons with respiratory distress had difficulty doing. The Spiros system supposedly utilized a dry powder mechanically driven dosing mechanism that provided uniform dosing regardless of the ability of the patient to coordinate the operation of the inhaler and inhale. By late 96, Dura was representing to the investment community that it was making substantial and successful progress in developing Spiros albuterol and that Ceclor CD sales were extraordinarily strong.

6. However, after reaching its all-time high of $47-7/8 on 12/31/96, Dura stock declined sharply, falling to $27-7/8 on 4/14/97, due to concerns over the ability of Ceclor CD/Keftab to continue to drive Dura's EPS growth and the ability of Dura to successfully introduce Spiros albuterol by late 98 or early 99. This decline created tremendous problems for Dura's executives. By early 97 they were already taking steps to complete a major equity offering in the next several months for Dura to provide desperately needed working capital. They also knew that during 97, Spiros I would exhaust its resources and Dura would have to exercise its option to repurchase Spiros I stock with Dura stock and finance a new follow-on Spiros Development Corp. II entity ("Spiros II") to continue to pay for the ongoing development of Spiros albuterol, which would require a public offering of securities including warrants to buy Dura stock. Dura was also planning an acquisition of Scandipharm, Inc. for Dura stock. In addition, the value of Dura insiders' existing stock options to purchase thousands of shares of Dura stock at $29.63-$37.63 per share had been completely wiped out by the 97 stock decline, while the value of their other lower priced options had been severely diminished. Finally, the 97 cash bonuses of Dura's top executives -- which could amount to 100% of their base salaries -- were dependent upon Dura meeting internally set 97 EPS targets and Dura's stock price performance during 97. For all of these reasons, it was imperative to Dura's insiders that they drive Dura's stock up much higher during 97 to enable Dura to accomplish a huge equity offering to raise desperately needed capital, to exercise its option to purchase Spiros I stock by issuing as few Dura shares as possible, to successfully complete a public offering of Spiros II securities, to restore the value of their stock options, so that they could unload hundreds of thousands of shares of the Dura stock they owned, pocketing millions in insider-trading proceeds before the stock collapsed, and so that they would be paid large cash bonuses based on Dura's 97 EPS and a strong 97 stock performance.

7. As Dura's stock price sank to as low as $27-7/8 in 4/97, the Individual Defendants repriced thousands of their $37.63 per share options lower -- to just $25 per share -- as follows: Garner 150,000 options, Newman 40,000 options, Brown 40,000 options, Prettyman 35,000 options, Spath 40,000 options, Woodbury 30,000 options -- so that they could personally profit by driving Dura stock to higher, artificially inflated levels. In 4/97, defendants also commenced a concerted publicity campaign to persuade investors that Dura's portfolio of older (non-proprietary) drug products was still selling very well, that its highly efficient and capable sales force was successfully marketing all of Dura's products, that Ceclor CD and Keftab were selling even better than anticipated and that Dura was successfully completing the development and clinical trials of Spiros albuterol so that it would likely reach the market by late 98/early 99, generating $150 million in revenue for Dura by 2000.

8. Dura was to issue its 96 Annual Report and report its 1stQ 97 results in mid-4/97. Because of the very poor performance of Dura's stock since 1/97, it was imperative that Dura issue a very positive Annual Report and also report very strong 1stQ 97 results, exceeding anticipated levels. Thus, on 4/15/97, Dura issued a very positive 96 Annual Report and reported better-than-expected 1stQ 97 EPS. Dura represented to investors that Dura's "highly motivated sales people have proven sales records . . . coupled with extensive product and sales training [that] differentiates them from their competition" and that they were able to "achieve significant penetration with a relatively small sales force." Dura also represented that "it continues to execute its strategy of developing its proprietary Spiros dry powder drug delivery technology," had completed the design of its Spiros albuterol drug delivery system and the patient dosing studies necessary for filing an NDA with the FDA and the "Spiros system is compact, durable and reusable" and "the greater ease-of-use and convenience of Spiros, combined with its effectiveness in delivering the intended dose to the patient, should translate into more regular and efficient use." Dura also told investors that its "expert scientific team has developed precision technology for the formulation, blending, milling and filing of a variety of drugs for delivery in Spiros," that Dura's "newly constructed manufacturing facility [is] designed to meet rigorous GMP requirements" and "the facility will have the capacity to produce commercial-scale quantities of material." Finally, when Dura reported better-than-expected 1stQ 97 EPS, it said it was "very pleased" with the results and the year "is off to a great start," as Dura was "happy with the strong progress made in selling our new respiratory antibiotic, Ceclor® CD." As a result, Dura forecast 30%-50% EPS growth over the next three to five years and 98 EPS of $1.15-$1.27. They also assured investors that the Spiros product was mechanically effective, sound and durable and that Dura had completed a state-of the-art manufacturing facility to produce Spiros albuterol in large quantities as soon as FDA approval was obtained. Dura's stock soared from $27-7/8 on 4/14/97 to $34 on 4/15/97.

9. In 5/97, Dura announced the acquisition of Nasarel/Nasalide, forecasting that it would add $24-$30 million in 98 revenue and $.20 in 98 EPS for Dura, with 99 revenues of over $35 million. In early 6/97, Dura assured investors that Phase III human clinical trials of Spiros albuterol had been completed and that the results gathered would result in FDA approval of the drug. As a result of these assurances, defendants were successful in pushing Dura's stock up to artificially inflated levels as high as $44 by 6/20/97 -- a 63% increase in two months.

10. On 7/15/97, Dura reported better-than-expected 2ndQ 97 results. Dura executives were again extremely bullish, assuring investors that "we are pleased" with the results, which were due to Ceclor being "well received," to Keftab "responding favorably to . . . promotional efforts" and that Dura "was benefiting from our more experienced and expanded sales force." Dura also represented it had "completed [the Spiros] clinical trials necessary for NDA" and was "on track" to file the Spiros NDA. Dura raised its 98 EPS forecasts to $1.35-$1.42, while continuing to forecast 30%-50% EPS growth over the next three to five years. As these positive statements artificially inflated Dura stock, in 5/97-7/97, the Individual Defendants sold off 188,626 shares of their Dura stock, pocketing $7.3 million in illegal insider-trading proceeds. Then, in late 7/97, Dura, with the help of Merrill Lynch, completed a huge equity offering selling $287.5 million in convertible debentures -- the largest equity offering in Dura's history!

11. Having completed Dura's convertible debenture offering and their first round of insider selling, the defendants now moved to the next stage of their scheme, i.e., to re-acquire the Spiros I stock (and technology) for Dura stock and take Spiros II public to raise more capital. In 9/97-10/97, Dura appeared at investment conferences and told the assembled analysts, money and portfolio managers, institutional investors, brokers and stock traders that:

Dura's highly trained and efficient sales force was effectively marketing Dura's Ceclor CD, Keftab and Rondec products. Dura's existing sales force was adequate in size to market Dura's existing product line, including its Ceclor CD drug. The reason for the tremendous sales success of Ceclor CD was the effectiveness of Dura's sales force.

Dura was expanding the size of its national sales force not due to any deficiencies in current operations but in anticipation of the launch of Spiros albuterol so that when that product was launched in late 98 or early 99, Dura would have in place a larger, well-trained sales force to help market that new product.

Dura's Ceclor CD drug had been a tremendous success, with sales significantly above Dura's expectations, which sales were enabling Dura to report revenues and EPS above forecasted levels. Ceclor CD was consistently gaining market share and prescriptions, and because of this would achieve strong sales growth during 98/99, well above 97 levels, and thus drive continuing revenue and EPS growth for Dura until Spiros albuterol was introduced.

Dura's Keftab drug, which had experienced declining sales prior to being sold to Dura by Lilly, had now stabilized and, in fact, sales of this drug were increasing and contributing to Dura's growing revenues and EPS.

Dura's new Nasalide spray products were being very well received, with sales above Dura's original expectations. Sales of Nasalide spray products were increasing and Dura anticipated this product would be a strong contributor to revenue and EPS growth in 98. Dura expected its Nasalide spray products to contribute at least $.20 EPS growth in 98.

Dura's Rondec and Dura-Vent products were continuing to sell well. These product lines were profitable and were expected to continue to positively contribute to Dura's results in 98/99.

Dura's Spiros albuterol was moving successfully toward commercialization. Dura had successfully completed the final design, engineering and development of the product, which testing showed was effective, durable and easy to use, delivering reliable dosing. Dura had successfully completed Phase III clinical human trials for the product and, based on the foregoing, anticipated FDA approval to market the product in late 98 or early 99.

Dura had completed or virtually completed a state-of-the-art manufacturing facility for Spiros albuterol and its expert scientific team had resolved all issues necessary for the chemical mixing and manufacture of the product so that Dura would have in place this state-of-the-art manufacturing facility ready to produce large amounts of Spiros albuterol as soon as FDA approval was obtained.

Dura expected Spiros albuterol to generate 2000 revenues of at least $150 million, providing a significant boost to Dura's EPS in 2000, 98 Ceclor CD sales of at least $50 million, 30%-50% EPS growth over the next three to five years, and 98 and 99 EPS of $1.35-$1.45 and $1.90, respectively.

12. In 10/97, Dura reported its 3rdQ 97 results -- reporting EPS that exceeded the levels being forecast by and for Dura. Dura assured investors that "we are pleased with Dura's sales performance" and its "pharmaceutical sales growth" was "principally attributed to the impact of . . . Ceclor CD . . . and Nasarel" and the "expansion of [Dura's] sales force." In 11/97, when Dura filed its NDA for Spiros albuterol, it said the filing "represent[ed] a significant advancement in the execution of our strategy." Dura forecast 98 Ceclor sales of $50+ million, 98 EPS of $1.33-$1.45, 99 EPS of $1.95-$2.05 and a three to five year EPS growth of 30%-50%. Dura stock hit its all-time high of $53 on 10/14/97, as Dura announced it would exercise its option to purchase the Spiros I technology, was arranging a public offering of Spiros II and that Dura was going to acquire Scandipharm, Inc. for $93-$139 million in Dura stock.

13. During 11/97-1/98, Dura's insiders unloaded another 201,748 shares of their Dura stock, pocketing another $9.4 million in insider-trading proceeds. On 12/17/97, Dura exercised its option to buy out the Spiros I stock in exchange for 896,606 shares of Dura stock and the Spiros II public offering was completed, selling 5.5 million units at $16 per unit for $88 million -- with each unit including a warrant to purchase Dura stock. Thus, between 4/97 and 1/98 Dura raised $287.5 million in new capital by selling equity securities, issued 896,606 shares of its common stock valued at $48.74 per share to repurchase Spiros I stock, agreed to acquire Scandipharm, Inc. for $93-$139 million in Dura stock and raised $88 million in new capital for Spiros II to fund the continuing development of its Spiros albuterol product, while Dura's top insiders unloaded 390,374 shares of Dura stock -- 82% of their holdings -- pocketing $16.8 million in illegal insider-trading proceeds.

14. On 1/20/98, Dura reported strong, better-than-expected 4thQ 97 results. Dura presented these results in a very positive light representing to investors that the surge in pharmaceutical sales was "due largely to product acquisitions and the increased productivity of the Company's experienced sales force" and that "[d]uring the past year we significantly strengthened both the pharmaceutical product marketing and the Spiros development arms of our business." Dura continued to forecast 98 Ceclor sales of $50+ million, that Spiros would receive FDA approval in late 98/early 99, 30%-50% EPS growth in the next three to five years and 99 EPS of $1.90-$2.05. However, analysts noted that the prescription rate and market share of Ceclor CD had flattened and Dura's revenues were below forecasted levels. Dura's stock began to fall from $46-1/2 on 1/20/98 to $36-$37 by mid-2/98. However, during this time Dura continually reassured investors that the fundamentals of Dura's business remained on track and reiterated its prior 99 EPS forecasts. Thus, Dura's stock continued to trade at artificially inflated levels.

15. The positive statements about Dura's business during the Class Period were false or misleading when issued. The true but concealed facts were:

(a) Dura was encountering serious and persistent problems with its sales force which was inadequately trained, suffering from very high turnover and was insufficient in number and skill to adequately market Dura's drug products, including Ceclor CD, Keftab, Rondec and Nasalide spray;

(b) Dura's new Precise System, which was to control Dura's inventories and sales efforts, was consistently malfunctioning and could not be fixed. As a result of, inter alia, defective Palm Tops, Dura had lost control of its inventories and could not even accurately compute its quarterly inventories, resulting in inaccurate financial data, inaccurate FDA reporting, and an inability to monitor Dura's sales force or accurately report individual sales;

(c) Due to the problems with Dura's Precise System, its sales force and intense competition from other drug products, sales of Ceclor CD, Keftab, Rondec and Nasalide spray into the wholesale distribution channel were well below Dura's internal expectations and the levels necessary to enable Dura to meet the revenue and EPS forecasts being made by and for Dura in 98/99;

(d) In order to cover up the sales shortfalls referred to in the prior paragraph, Dura was engaging in a subterfuge to artificially inflate its revenue and EPS by shipping excessive amounts of Ceclor CD to wholesalers, coupled with secret promises to protect them financially from carrying this excessive inventory. As a result, Ceclor CD inventories in the distribution channel exceeded over five months' supply, greatly in excess of the normal one month's supply for drug products in the wholesale distribution channel. As a result of this practice, Dura's Ceclor CD sales during each of the quarters of 97 were artificially inflated and Dura's insiders knew by "borrowing" millions of dollars of sales of Ceclor CD from future periods that, once this practice stopped, Dura's sales of Ceclor CD would fall sharply and 98 sales of Ceclor CD would be well below the 97 levels;

(e) Dura's Keftab product was encountering very poor and declining sales and was losing money;

(f) Sales of Dura's Nasalide spray products were also poor and well below expectations and, as a result, the Nasalide product line would not contribute positively to Dura's EPS in 98;

(g) Dura's Rondec and Dura-Vent product lines were suffering very poor sales, declining so rapidly and performing so poorly that Dura would not be able to recover its remaining investment in Rondec from those sales;

(h) Dura had falsified and inflated its 1stQ, 2ndQ, 3rdQ and 4thQ 97 EPS by failing to take required write-downs on the carrying value of its investment in the Rondec product line, which were required because the sales of that product line had so declined and were so poor that Dura could not recover its remaining investment in Rondec;

(i) It was all but certain that Dura's new drug application for Spiros albuterol would be rejected by the FDA and Dura would be required to completely redo its Phase III clinical human trials and that the product would be delayed in reaching the market, if it ever reached the market, by over a year for the following reasons:

(i) During Dura's final design and engineering of the product, it encountered significant electro-mechanical problems with the inhaler, which caused it not to function with sufficient reliability. One problem was that a light which came on to indicate that the medication dose had been successfully delivered operated erratically and did not consistently turn on due to a defect in a printed circuit board in the product;

(ii) The second defect was that the small battery-operated motor in the product to drive a fan to push the medication dose into the patient did not reliably turn on upon inhalation as it was supposed to; and

(iii) Dura was unable to fix these problems prior to commencing Phase III clinical trials. Dura had conducted its Phase III clinical trials with versions of the Spiros albuterol device which had these defects. After the clinical trials were completed, Dura modified the design and operation of the inhaler in an attempt to eliminate these two defects. Dura knew this invalidated the Phase III clinical trials and was so informed by the FDA during meetings Dura had with the FDA during the Spiros albuterol NDA submission and review process;

(j) The attempted modifications of the Spiros albuterol inhaler to eliminate the electro-mechanical reliability problems set forth above were insufficient and even the revised or improved inhaler continued to suffer from these electro-mechanical reliability problems;

(k) Dura's new, supposedly state-of-the-art Spiros albuterol manufacturing facility was not up to FDA standards in that there were manufacturing, control and chemistry deficiencies in the proposed Spiros albuterol production process that made approval of the product very unlikely;

(l) As a result of the foregoing negative conditions adversely impacting Dura's business, Dura and the Individual Defendants actually knew that the forecasts being made by and for Dura of 30%-50% EPS growth in 98-2000, 98 Ceclor CD sales in excess of $50 million, Spiros albuterol approval and introduction in late 98/early 99 and 98-99 EPS of $1.15-$1.45 and $1.90-$2.05, respectively, were false when made because those results could not and would not be achieved.

16. On 2/24/98, after the close of trading, Dura shocked the market by revealing that it expected much lower than forecast 98 revenues and 98 EPS -- at least $.50-$.55 lower than the $1.40-$1.45 being forecast -- due to, inter alia, slower Ceclor CD and Nasarel/Nasalide sales and the immediate need to vastly increase the size of Dura's sales force from 270 to over 450 to try to boost sales of existing products. Investors were stunned. Even though the Dow Jones average went up 87.7 points on 2/25/98, Dura's stock collapsed from $39-1/8 on 2/24 to $20-3/4 on 2/25 an 18-3/8-point, 47% one-day decline on incredible volume of 32 million shares -- the largest one-day price decline on the largest one-day trading volume in Dura's history. Analysts slashed the 98 EPS forecasts for Dura to less than $.95 -- meaning Dura's 98 EPS would decline from its 97 EPS of $.99. Analysts were also furious over having been lied to. Alex. Brown analyst Ryan wrote:

Management credibility has been severely damaged by this announcement, particularly in light of recent investor conference presentations exuding confidence on the Company's fundamentals . . . .

Our confidence in management and their credibility with us has been greatly diminished. As recently as one month ago, we reviewed our model with the Company line by line and were guided to higher Ceclor CD estimates.

17. As 98 unfolded, Dura's business performed miserably. Sales of Ceclor CD fell sharply to only about $30 million as Dura admitted the distribution channel was clogged with many months of excess inventory! Dura also revealed that sales of Keftab, Nasalide and Dura-Vent were very disappointing and that sales of its Rondec product had plummeted so much that by mid-98 Dura had to create DJ Pharma, Inc. to take these drugs off its hands so it could avoid reporting large losses for those products. Dura also admitted that its sales force was inadequate and disorganized and was plagued by very high turnover, which contributed to Dura's poor sales. By 9/98, forecasts of Dura's 98 and 99 EPS were cut to $.53 and $.71 -- large declines from Dura's 97 EPS of $.99. Dura's CEO admitted there was

[e]xcessive inventory of its top-selling antibiotic Ceclor-CD to start the year. . . . [I]t took five months to work through the inventory.

Analyst Ryan wrote:

The Company attributed the shortfall to several factors -- low productivity from the newly expanded salesforce, the continued work-off of wholesaler inventory levels, and weak sales from nonproprietary products.

. . . [M]anagement continues to hurt its credibility . . . .

There was excessive inventory buildup in Ceclor CD among wholesalers in late 1997, and the Company asserts that this hurt 1998 sales. Management believes that the buildup has decreased, with inventory levels now down to one month's supply (versus five months earlier in the year) . . . .

DLJ analyst Kulju wrote:

Based on lower than expected factory sales for both Ceclor CD and Naserel [sic] product lines . . . Dura has decided to continue to bleed down still bloated wholesaler inventories . . . to more normalized levels.

Analyst Flynn wrote:

Needless to say, for a company that once thrived on producing earnings at or above consensus, the repeated reduction in earnings guidance has been very damaging both to the company's stock price, and to confidence that management can produce acceptable results in the future.

Early this year, an important contributor to lowered guidance was the build up in wholesaler inventory which needed to be reduced . . . . This reduction clearly cost sales this year . . . .

Then, on 11/4/98, Dura revealed the FDA had found Spiros albuterol was not approvable due to electro-mechanical reliability issues and chemistry, manufacturing and control concerns, but claimed that the FDA "raised no issues on the clinical data with the inhaler filed in the NDA demonstrating therapeutic comparability of Albuterol Spiros(tm) with Ventolin® (albuterol) MDI using standard lung function measures." But just a few days later, the FDA issued a "notice of violation" to Dura stating Dura's press release sent a message that "'misleadingly minimizes the fact that Dura must conduct a completely new clinical data [study],'" and demanded Dura immediately cease distribution of materials containing these claims. Dura immediately removed the offending press release from its Website and has admitted Spiros albuterol will be delayed by at least a year as completely new Phase III clinical trials are required. On 12/22/98, Dura disclosed that if the DJ Pharma financing was not completed by the end of 98, Dura would have to take a charge resulting in a reduction of EPS for the quarter and the year by approximately $.08-$.12 per share. As a result, Dura would also record a one-time charge of approximately $28 million to write down the carrying value of the Rondec product line. The price action of Dura stock from its 92 IPO through 12/98 is set forth below:

//

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18. Public investors who purchased Dura stock at prices inflated by the false representations about the successful development and a late 98/early 99 launch of Spiros albuterol, the effectiveness of Dura's sales force, continuing strong sales of Dura's non-proprietary products, very strong sales of Ceclor CD and its forecasts of strong EPS growth in 98-99, and thus paid as high as $53 for Dura's stock during the Class Period, have suffered millions in damage. However, Dura and Dura's insiders who knew the truth did not fare nearly so poorly. Before the startling revelations of 2/24/98, and Dura's stock price collapsed, Dura raised over $375 million in desperately needed new capital and the Individual Defendants unloaded 390,374 shares of their Dura stock at artificially inflated prices as high as $49.31, pocketing over $16.8 million in illegal insider-trading proceeds! This illegal insider selling is summarized below:

% of

Shares Holdings Total

Defendants Sold Sold Proceeds

Blair 4,141 100% $ 188,158

Brown 39,383 94% $1,583,590

Cook 40,000 43% $1,780,950

Garner 154,623 92% $6,456,801

Newman 52,227 77% $2,390,417

Prettyman 15,000 100% $ 728,100

Spath 50,000 100% $2,076,500

Woodbury 35,000 100% $1,603,280

Totals: 390,374 82% $16,807,797

19. Instead of the strong 98 EPS growth forecast during the Class Period, Dura's 98 EPS fell sharply and it will suffer a 4thQ 98 loss! Dura's dismal financial performance is set forth below:

1996

03/31 06/30 09/30 12/31 Year

Revenues $18,590 $18,800 $25,920 $40,810 $104,210

Net income $ 4,060 $ 4,610 $ 5,810 $ 9,860 $ 24,340

EPS $.13 $.14 $.15 $.24 $.68

1997

03/31 06/30 09/30 12/31 * Year *

Revenues $40,890 $43,630 $43,340 $53,460 $181,320

Net income $ 8,790 $ 9,280 $11,200 $18,000 $ 47,400

EPS $.19 $.20 $.24 $.37 $.99

1998

03/31 06/30 09/30 12/31

Revenues $48,770 $51,940 $43,360 [4thQ loss]

Net income $ 7,160 $ 8,180 $ 2,420

EPS $.16 $.18 $.05

* Excludes one-time charges of $137.6 million in 4thQ 97 related to the Spiros development program. Including the charges, Dura suffered a loss of $2.57 and $1.93 for the quarter and year ended 12/31/97.

20. The chart below shows how the defendants took advantage of their false and misleading statements and Dura's artificially inflated stock price and that, when compared to an index of similar stocks, Dura's stock was inflated and declined due to company-specific events and not market or industry forces:

21. The claims asserted herein arise under §§10(b) and 20(a) of the 1934 Act and Rule 10b-5. Jurisdiction is conferred by §27 of the 1934 Act. Venue is proper pursuant to §27 of the 1934 Act.

Plaintiffs

22. (a) Scott Rothstein purchased 300 shares of Dura common stock on 8/25/97 at $36-3/16 per share and was damaged thereby.

(b) Stuart Gollomp purchased 200 shares of Dura common stock on 2/2/98 at $36-11/16 per share and was damaged thereby.

(c) Jeff Bedard purchased 500 shares of Dura common stock on 2/20/98 at $36.625 per share, 90 shares on 2/25/98 at $23.875 per share, 410 shares on 4/3/98 at $25 per share and 150 shares on 6/25/98 at $21.875 per share, and was damaged thereby.

Defendants

23. Dura is headquartered in San Diego. Dura's common stock traded in an efficient market on the NASDAQ National Market System. As of the beginning of the Class Period, Dura's products included:

Allergy, Cough and Cold

Dura-Vent® -- Tablets

Dura-Vent/DA® -- Tablets

Rondec® -- Oral drops

Rondec® -- Syrup

Rondec® -- TR tablet

Rondec® -- Tablet

Rondec® -- DM oral drops

Rondec® -- DM syrup

Rondec® -- Chewable tablets

Antibiotics

Keftab® -- Tablets

Ceclor® -- CD tablets

24. (a) Cam L. Garner ("Garner") was President, Chief Executive and Operating Officer and Chairman of Dura. He sold 154,623 shares of his Dura stock based on inside information, pocketing over $6.4 million in illegal insider-trading proceeds, 92% of the Dura stock he actually owned.

(b) James W. Newman ("Newman") was Sen. VP-Finance & Administration and CFO of Dura. He sold 52,227 shares of his Dura stock based on inside information, pocketing over $2.3 million in illegal insider-trading proceeds, 77% of the Dura stock he actually owned.

(c) Charles W. Prettyman ("Prettyman") was Sen. VP-Development and Regulatory Affairs of Dura. He sold 15,000 shares of his Dura stock based on inside information, pocketing over $728,000 in illegal insider-trading proceeds, 100% of the Dura stock he actually owned.

(d) Walter F. Spath ("Spath") was Sen. VP-Sales & Marketing of Dura. He sold 50,000 shares of his Dura stock based on inside information, pocketing over $2 million in illegal-insider trading proceeds, 100% of the Dura stock he actually owned.

(e) Mitchell R. Woodbury ("Woodbury") was Sen. VP/General Counsel of Dura. He sold 35,000 shares of his Dura stock based on inside information, pocketing over $1.6 million in illegal insider-trading proceeds, 100% of the Dura stock he actually owned.

(f) James C. Blair ("Blair") was a director of Dura. He sold 4,141 shares of his Dura stock based on inside information, pocketing over $188,000 in illegal insider-trading proceeds, 100% of the Dura stock he actually owned.

(g) Julia R. Brown ("Brown") was a Sen. VP-Business Development and Planning of Dura. She sold 39,383 shares of her Dura stock based on inside information, pocketing over $1.5 million in illegal insider-trading proceeds, 94% of the Dura stock she actually owned.

(h) Joseph C. Cook, Jr. ("Cook") was a director of Dura. He sold 40,000 shares of his Dura stock based on inside information, pocketing over $1.7 million in illegal insider-trading proceeds, 43% of the Dura stock he actually owned.

(i) The defendants named in ¶24(a)-(h) are the "Individual Defendants," and are each liable for the false statements pleaded in ¶¶51, 52, 64, 76, 93 and 106, as they were "group-published" information. The defendants named in ¶¶23 and 24(a)-(h) are the "Dura Defendants."

25. Garner, by reason of his position with Dura was a controlling person of Dura. Dura controlled each of the Individual Defendants. These controlling persons are liable under §20(a) of the 1934 Act.

26. Merrill Lynch & Co., Inc./Merrill Lynch, Pierce Fenner & Smith, Inc. ("Merrill Lynch") is an investment banker. Merrill Lynch got Dura as an investment banking client away from another investment banker in 95 and completed the following stock offerings for Dura in 95-96:

Date Shares Proceeds

8/95 4,500,000 $ 53.8 million

5/96 5,900,000 $150.5 million

11/96 4,800,000 $152.4 million

Merrill Lynch received millions of dollars out of the proceeds from these offerings for helping pull them off. Dura was a prized client of Merrill Lynch and Merrill Lynch very much wanted to keep Dura as a client due to the huge profits Merrill Lynch stood to get from public or private offerings of Dura or Spiros. Merrill Lynch also helped Dura arrange the first Spiros I financing, which was privately placed. Merrill Lynch served as lead underwriter of Dura's $287.5 million equity offering in 7/97 and the $88 million Spiros II equity offering in 12/97, again receiving millions, and issued false research reports on Dura during the Class Period as part of the scheme.

Scheme

27. Each defendant is liable for making false statements or for failing to disclose adverse facts while selling Dura stock and for participating in a scheme which operated as a fraud or deceit on purchasers of Dura stock. Each defendant knowingly made false and misleading statements or participated in a fraudulent scheme and course of business that operated as a fraud on purchasers of Dura stock and damaged class members or sold Dura stock while concealing material adverse information.

Knowledge

28. Garner, Prettyman, Spath, Woodbury and Brown were the top executives of Dura. They ran Dura as "hands-on" managers, dealing with important issues facing Dura's business, i.e., sales of its Ceclor CD/Keftab, Rondec, Nasalide/Nasarel and Dura-Vent products, the development of its new Spiros albuterol product, Dura's investment in Rondec and the development and expansion of its sales force and its new Precise System for inventory and sales control.

29. Because increased sales of Ceclor CD/Keftab, Rondec, Nasalide/Nasarel and Dura-Vent products, the successful development of and substantial sales of Dura's Spiros albuterol product, the continued successful growth of its sales force and continuing strong sales of Dura's core products were indispensable elements to Dura meeting its internally budgeted and publicly disseminated 98 and 99 revenue and EPS forecasts, defendants constantly monitored each of these key factors affecting Dura's business.

30. Because of their top executive positions with Dura and involvement in the day-to-day management of its business, each Individual Defendant actually knew from internal corporate documents and conversations with other corporate officers and employees and their attendance at management and Board meetings, the adverse non-public information about the poor sales of Dura's Ceclor CD/Keftab, Rondec, Nasalide/Nasarel and Dura-Vent products, the serious problems in the development of Dura's Spiros albuterol product, the complete malfunctioning of Dura's Precise System, Dura's falsification of its reported 1stQ, 2ndQ, 3rdQ and 4thQ 97 EPS and Dura's deteriorating revenue and EPS prospects. Thus, each Dura Defendant actually knew or recklessly disregarded that the public statements about Dura pleaded at ¶¶51-61, 64-73, 76-84, 86-91, 93-100, 102-103 and 106-119 were false or misleading when made.

31. The Dura Defendants closely monitored the performance of Dura's business via reports which Dura's Finance Department (under Newman) generated on a weekly and monthly basis. There were "order reports" and "backlog reports" that summarized orders, dollar volume and product type, as well as unit "shipment" reports. The Finance Department also distributed monthly financial reports comparing Dura's actual financial results to projected results. Thus, each Dura Defendant was apprised of the status of orders for and sales of every Dura product so that they knew where Dura stood in terms of the sale of and demand for its products as well as Dura's actual results compared to budget. Thus, the Dura Defendants were constantly aware of the current order rate for those products and knew that orders for those products were weak and thus that Dura's 98-99 EPS forecasts could and would not be achieved.

32. Dura recognized revenue on the sale of a product when it shipped the product to drug wholesalers. These drug wholesalers in turn resell the drug to pharmacies, drug chains or even individual physicians. Dura did not disclose to analysts or investors sales of each of its various drug products, i.e., shipments to wholesalers. Thus, analysts and investors were completely dependent upon what Dura told them regarding sales of these products, as shipment to wholesaler data is not publicly available. While the number of prescriptions written for a given drug is publicly available on approximately a weekly basis, and thus analysts and sophisticated investors are able to determine the rate at which physicians are prescribing a drug and a given drug's market share of prescriptions, this information does not disclose the rate at which drugs are being shipped to wholesalers into the distribution channel, as that information is not publicly available. While during the Class Period prescription data for Ceclor CD was available and analysts could determine the rate of growth of prescriptions for that product and that product's growing market share, this information was misleading because what analysts and investors did not know was that Dura was shipping excessive amounts of Ceclor CD to wholesalers and into the distribution channel, well in excess of the amount justified by or necessary to keep pace with current prescription levels and thus Dura had created vastly excessive amounts of inventory of Ceclor CD in the distribution channel which, while it enabled Dura to report higher pharmaceutical product revenue and EPS during each of the quarters of 97, inevitably meant that Ceclor CD sales would decline sharply in 98, when these excessive inventory levels had to be worked off.

33. The successful completion of development and approval for commercial sale of Dura's Spiros delivery system was absolutely indispensable to Dura achieving the kind of revenue and EPS growth it was forecasting for 98-2000. The Spiros inhaler was designed to deliver a consistent dose of drug to the lungs independent of the patient's ability to breath deeply. It was designed to overcome the coordination difficulty inherent in existing metered dose inhalers ("MDIs") making it much easier for patients to use and to be free of the chlorofluorocarbons ("CFCs") associated with the depletion of the ozone layer. The Spiros pulmonary drug delivery system was to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs, providing advantages over other currently used methods of pulmonary drug delivery. By 12/96, Dura was engaging in extensive patient dosing clinical trials, which trials were completed in 3/97. During those patient dosing trials, significant electro-mechanical defects in the Spiros inhaler were uncovered by Dura. One defect was that the dosing indicator light, which was to come on to indicate the medication dose had been delivered, operated erratically and did not consistently turn on when the medication dose had in fact been delivered. A second defect was that the breath-activated fan designed to drive the dosage so it could be inhaled with minimal effort also operated erratically and frequently failed to function. These were serious and substantial defects that would prevent the commercial marketing of the Spiros albuterol product. Even though Dura's insiders were aware of these defects, they proceeded with Phase III clinical human trials of the product during the 1stH of 97 without correcting these defects. They did this because they knew that taking the time to try to correct these defects would delay the Phase III clinical trial tests for many months and thus delay the commercial introduction of Spiros albuterol, which would have a very negative impact on Dura's stock. While the Phase III human clinical trials were underway, Dura attempted to fix the electro-mechanical defects in the inhaler so that when the clinical trials were completed and the NDA was submitted to the FDA, they would be able to try to persuade the FDA that they had fixed the electro-mechanical defects in the product and, based on the Phase III clinical trials, should be permitted to begin to market the product. However, Dura's insiders knew from their experience in the drug industry that it was extremely unlikely that the FDA would give approval to market a drug and drug delivery system where the drug and its delivery system had been modified subsequent to the completion of Phase III human clinical trials, as the FDA historically has demanded that the Phase III human clinical trials exactly and precisely mimic the product for which approval is sought.

34. In 3/96, Dura purchased a new inventory control system from Walsh International. The Precise System was originally to be installed to Dura's satisfaction by 9/1/96. In fact, roll-out of the Palm Tops and Sample Inventory System was delayed due to hardware design defects and did not commence until 3/97. Yet, by 4/97, 24 important items were identified as defective and malfunctioning and requiring further attention in order to meet Dura's specifications. In 5/97, Dura was continuing to experience a variety of malfunctions with the Palm Tops and Sample Inventory System, among which were sales representatives showing negative inventory balances, faulty error-file processing, loss of call transactions, and an assortment of other failures. During 97, these malfunctions increased enormously and included by late 97, the following:

100 out of 185 Palm Tops were returned for repairs -- many experienced multiple problems requiring repeated repairs.

Use of Palm Tops was discontinued until difficulties could be resolved; down-time to repair Palm Tops averaged four to five weeks.

Syncing of the Walsh system with Dura's Home Office Inventory System could not be achieved.

The large volume of Palm Top down-time prevented quarterly inventories, a vital tool for Dura.

Inventories on Palm Tops failed to appear on the Home Office Inventory System, thereby preventing accurate FDA reporting.

The Home Office Inventory System failed to meet the contract specifications.

Of the some 24 items requiring correcting or completion by Walsh in order to render the Precise System functional, only six were completed by 12/97, none of which were the priority items.

Walsh was unable to integrate IMS data into its system.

The sales force monitoring and reporting capability, using the Sample Inventory System and other programs, was not operational for long periods and whatever data was stored was worthless.

By 1/98, the Precise System was to be completely operational and functioning. Of particular importance was the necessity to synchronize and operate the Home Office Inventory System in order that Dura could comply with its annual Prescription Drug Marketing reporting duties. However, the myriad of malfunctions infecting the entire system rendered accurate FDA reporting impossible, producing inefficiency, frustration and a complete lack of corporate confidence in the viability of the Precise System. See Exhibit A attached hereto.

Motive/Opportunity

35. In addition to having actual knowledge of the falsity of their false statements, each of the defendants had the motive and the opportunity to perpetrate the fraudulent scheme and course of business alleged herein.

36. Each Dura insider had the opportunity to commit the fraud alleged. As the top officers and/or directors of Dura, they controlled the dissemination of, and could thereby falsify, information about Dura's business and finances which reached the investing public and affected the price of Dura's stock. They controlled the content of Dura's press releases, corporate reports and SEC filings, which were created, reviewed and approved by each of the Individual Defendants. Also, their insider corporate positions gave them knowledge about Dura's business that was not public -- creating the opportunity for them to make false public statements, artificially inflate Dura's stock price and take advantage of their non-public information by using their corporate positions at Dura.

37. Dura went public in 92 and pursued a business strategy as a marketer of niche pharmaceutical drugs. Because Dura did not have the resources or ability to develop its own new drugs, it purchased, from large pharmaceutical companies like Eli Lilly, Squibb, Bristol-Meyers, etc., marketing rights for drugs they had developed but which did not have a sufficiently large market potential to be meaningful to them. Because the drugs Dura was purchasing the rights to sell had only limited market potential, in order for Dura to continue to show strong revenue and EPS growth, it had to keep buying the marketing rights to more drugs, thus expanding the portfolio of drugs it sold. Because the large companies Dura was purchasing drug marketing rights from would not accept Dura's stock as payment, it was absolutely indispensable to Dura's business strategy of reporting growing revenues and EPS by adding new drugs to its portfolio that Dura keep raising large amounts of new capital -- which it could do only by keeping its stock price high so it could raise large amounts of new capital by selling its common stock or other equity securities to the public. Because of the apparent success of Dura's business, it was able to complete four secondary public equity offerings during 94 and 96, raising $385 million in new capital. During this time period, Dura's stock was a tremendously strong performer and, by the end of 96, had increased to $47-7/8 from $6-$7 in 95.

38. By 95, Dura's management realized that due to Dura's increasing size, its ability to continue to show strong revenue and EPS growth solely by acquiring the marketing rights to niche drugs was becoming increasingly difficult. In order for Dura to continue to show the kind of EPS growth necessary to support a strong performance by its stock, it was necessary for Dura to begin to develop its own proprietary drug products. However, if Dura began to spend millions on research and development for new drug products, this would adversely affect Dura's EPS, as such expenditures had to be immediately expensed, i.e., charged against current earnings. In order to avoid this, Dura adopted an "off balance sheet" research and development financing technique by creating Spiros I, to pay Dura's research and development costs and thus avoid having those costs expensed against Dura's current period revenues. Moreover, services performed by Dura for Spiros I could be treated as contract revenues, thereby improving Dura's reported revenues -- in 97 alone, revenues from Spiros I represented 60% of Dura's reported contract revenues. However, in order to induce investors to finance Spiros I by purchasing its stock, it was necessary for Dura to also grant them warrants to purchase 2.2 million shares of Dura stock at $19.47 per share and also to preserve for itself an option to purchase Spiros I stock back in exchange for Dura stock. While this financing method sheltered Dura's current results from research and development charges, it exacerbated the pressure on Dura's insiders to keep Dura's stock at high levels, as Dura would have to use its stock to repurchase the Spiros I technology and would have to continue to raise large additional amounts of capital through follow-on Spiros-type development vehicles which would require it to provide investors by providing them warrants to purchase Dura stock.

39. During 96, Dura had acquired the rights to market two antibiotics -- Ceclor CD and Keftab -- from Roche, which Dura initially told investors had substantial market potential and later said were selling very well -- better than expected -- and which it expected would provide sufficient revenue and EPS growth to allow Dura to continue