Andrx Corporation

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2005

Commission file number 0-31475

ANDRX CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware		65-1013859
(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer
Organization)		Identification No.)

4955 Orange Drive
Davie, Florida		33314
(Address of Principal Executive Offices)		(Zip Code)

(954) 584-0300
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ YES o NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

þ YES o NO

There were approximately 73,280,000 shares of Andrx common stock outstanding as of July 29, 2005.

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Andrx Corporation and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)


	June 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	41,921		$	42,290
Short-term investments available-for-sale, at market value		223,450			44,815
Accounts receivable, net of allowance for doubtful accounts of $4,843
and $4,703 at June 30, 2005 and December 31, 2004, respectively		130,631			144,025
Inventories		176,324			197,304
Deferred income tax assets		79,250			57,883
Assets held for sale		—			49,120
Prepaid and other current assets		45,126			23,502

Total current assets		696,702			558,939

Long-term investments available-for-sale, at market value		80,025			122,962
Property, plant and equipment, net		283,660			284,105
Goodwill		7,665			7,665
Other intangible assets, net		7,976			7,106
Other assets		11,437			8,936

Total assets	$	1,087,465		$	989,713


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	106,727		$	105,715
Accrued expenses and other liabilities		91,746			136,169
Liabilities held for sale		—			3,489

Total current liabilities		198,473			245,373

Deferred income tax liabilities		35,993			34,605
Deferred revenue		104,672			10,974

Total liabilities		339,138			290,952


Commitments and contingencies

Stockholders’ equity:
Convertible preferred stock; $0.001 par value, 1,000,000 shares authorized; none issued and outstanding		—			—
Common stock; $0.001 par value, 200,000,000 shares authorized; 73,266,600 and 72,924,400 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		73			73
Additional paid-in capital		524,497			507,934
Restricted stock units, net		(16,713	)		(6,471	)
Retained earnings		241,209			197,874
Accumulated other comprehensive loss, net of income taxes		(739	)		(649	)

Total stockholders’ equity		748,327			698,761

Total liabilities and stockholders’ equity	$	1,087,465		$	989,713

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these
unaudited condensed consolidated balance sheets.

Andrx Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Income
(in thousands, except share and per share amounts)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues:
Distributed products	$	168,821		$	163,327		$	348,546		$	336,822
Andrx products		78,335			114,743			170,749			213,243
Licensing and royalties		6,748			12,489			11,457			32,624
Other		5,165			25			6,020			70

Total revenues		259,069			290,584			536,772			582,759
Cost of goods sold		199,640			209,657			400,794			399,908

Gross profit		59,429			80,927			135,978			182,851

Operating expenses:
Selling, general and administrative		39,087			51,856			101,840			101,664
Research and development		9,928			11,745			21,359			22,503
Goodwill impairment, litigation settlements and other charges		—			7,800			26,316			7,800

Total operating expenses		49,015			71,401			149,515			131,967

Income (loss) from operations		10,414			9,526			(13,537	)		50,884
Other income (expense):
Equity in earnings of joint ventures		715			765			1,739			2,267
Interest income		2,355			693			3,961			1,437
Interest expense		(584	)		(587	)		(1,270	)		(1,192	)

Income (loss) before income taxes		12,900			10,397			(9,107	)		53,396
Provision (benefit) for income taxes		4,902			3,953			(52,442	)		20,290

Net income	$	7,998		$	6,444		$	43,335		$	33,106


Earnings per share :
Basic	$	0.11		$	0.09		$	0.59		$	0.46

Diluted	$	0.11		$	0.09		$	0.59		$	0.45

Weighted average shares of common stock outstanding:
Basic		73,224,000			72,714,000			73,119,000			72,630,000

Diluted		73,657,000			73,651,000			73,624,000			73,628,000

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these
unaudited condensed consolidated statements.

Andrx Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)


	Six Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	43,335		$	33,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		17,429			16,210
Provision for (recoveries of) allowance for doubtful accounts receivable		995			(109	)
Non-cash impairment charges		26,865			18,035
Amortization of restricted stock units, net		1,360			682
Accretion of deferred revenue		(1,302	)		(52	)
Equity in earnings of joint ventures		(1,739	)		(2,267	)
Deferred income tax (benefit) provision		(20,264	)		7,249
Change in accrual for tax contingencies		(32,344	)		13,041
Income tax benefit on exercises of stock options and restricted stock units		1,162			1,808
Changes in operating assets and liabilities:
Accounts receivable		12,399			(21,700	)
Inventories		35,561			(11,358	)
Prepaid and other assets		(16,925	)		5,907
Income tax (payments) refunds		(5,979	)		639
Accounts payable, accrued expenses and other liabilities		(6,867	)		(1,533	)
Deferred revenue		10,000			—

Net cash provided by operating activities		63,686			59,658


Cash flows from investing activities:
Purchases of investments available-for-sale		(342,776	)		(225,311	)
Maturities and sales of investments available-for-sale		206,935			182,012
Purchases of property, plant and equipment, net		(13,049	)		(49,512	)
Proceeds from the sale and licensing of certain assets and rights		73,333			—
Distributions from joint ventures		3,629			2,533
Refund of product rights		10,000			—
Payment for product rights		(4,500	)		(5,000	)

Net cash used in investing activities		(66,428	)		(95,278	)


Cash flows from financing activities:
Proceeds from issuances of common stock in connection with exercises of stock options		3,260			4,753
Proceeds from issuances of common stock in connection with the employee stock purchase plan		643			818
Principal payments on capital lease obligations		(1,530	)		(446	)

Net cash provided by financing activities		2,373			5,125


Net decrease in cash and cash equivalents		(369	)		(30,495	)
Cash and cash equivalents, beginning of period		42,290			67,498

Cash and cash equivalents, end of period	$	41,921		$	37,003

(Continued)

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

(1) General

The accompanying unaudited condensed consolidated financial statements for each period include the condensed consolidated balance sheets, statements of income and cash flows of Andrx Corporation and subsidiaries. All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements reflect all material adjustments (which include normal recurring adjustments) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations for the three and six months ended June 30, 2005 and cash flows for the six months ended June 30, 2005, are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2005. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004 (2004 10-K). The December 31, 2004 Unaudited Condensed Consolidated Balance Sheet included herein was derived from the December 31, 2004 audited Consolidated Balance Sheet included in our 2004 10-K.

We consummated agreements for the sale and licensing of certain rights and assets related to our two former main brand products, Altoprev® and Fortamet®, on March 28, 2005, as more fully discussed in Note 2. We completed the disposition of our brand business that resulted in the termination of substantially all of the brand business employees in May 2005. Our generic business now includes our Entex® and Anexsia® product lines.

Significant Accounting Policies

Since December 31, 2004, none of the critical accounting policies, or our application thereof, as more fully described in our 2004 10-K, has significantly changed. Certain critical accounting policies have been presented below due to the significance of related transactions during the three and six months ended June 30, 2005.

Use of Estimates

The preparation of these interim financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates we have made include, but are not limited to, those related to revenue recognition, sales returns and allowances (SRAs), allowance for doubtful accounts receivable, inventories and cost of goods sold, determining the useful life or impairment of goodwill and other long-lived assets and income taxes. The net revenues we report related to collaborative agreements for the sale of certain products sold by other parties are subject to numerous estimates by these other parties, such as returns and other SRAs and certain related expenses. We periodically evaluate estimates used in the preparation of consolidated financial statements for reasonableness, including estimates provided by third parties. Appropriate adjustments to the estimates will be made prospectively, as necessary, based on such periodic evaluations. We base our estimates on, among other things, currently available information, our historical experience and various assumptions, which together form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

from other sources. Although we believe that our assumptions are reasonable under the circumstances, estimates would differ if different assumptions were utilized and these estimates may prove in the future to have been inaccurate.

Pre-Launch Inventories

There are typically few risks and uncertainties concerning market acceptance of approved generic products because the brand product has an established demand, and the lower priced generic product may be substituted for that referenced brand product. Therefore, in order to optimize our profit potential and avoid being at a competitive disadvantage, we have from time to time made, and may hereafter make, commercial quantities of our product candidates prior to the date that we anticipate that our Abbreviated New Drug Application (ANDA) submissions for such products will receive FDA final marketing approval (FDA Approval), and/or we have achieved a satisfactory resolution of pending patent issues, which may involve litigation, with respect to such product. We refer to these inventories as “pre-launch inventories”.

Having pre-launch inventories of our product available for shipment, in commercial quantities, on the day we obtain the ability to prudently market our product (i.e., after FDA Approval and without undue patent infringement or other risks) requires us to, among other things, begin to validate our manufacturing processes in accordance with FDA regulations well before the date we anticipate our product will be approved, and may entail a “scale-up” process. The scale-up process allows us to modify the equipment and processes employed in the manufacture of our product to increase manufacturing lot sizes. Scale-up activities are expensed, including the raw material used in such activities.

Raw materials for planned product launches are generally purchased well in advance of the anticipated product launch and are carried at cost. Such raw materials generally have relatively long shelf lives of five years or more, and generally can be returned to the vendor or sold if we do not use that material.

We generally determine whether our ANDA is nearing FDA Approval based on communications with representatives of the FDA’s Office of Generic Drugs (OGD) and other factors. We generally determine whether we will be able to market our product, without undue patent or other risks, based on communications with internal and external patent counsel. The decision to begin the manufacture of pre-launch inventory is based upon our estimates of the time required to conduct the activities necessary to enable us to have sufficient quantities on hand on the date we anticipate our product can be prudently marketed. In making that decision, we also consider numerous other factors, including but not limited to, our ability to meet the manufacturing specifications that we anticipate will likely be approved for our product, the projected time necessary for us to successfully scale-up our production process and thereafter make both the validation lots and the anticipated launch quantities of our product, the expiration dates of any patents or exclusivities that might prevent the launch of our product, and other events that might potentially affect our willingness or ability to market our product. As our product will generally have a shelf life of two years, we will time our decision to begin the manufacture of pre-launch inventory so that we will have sufficient remaining commercial shelf life (generally 12 months or more, but sometimes less) at the anticipated launch date for our product.

The decision to capitalize the cost of our pre-launch inventory typically requires us to consider whether our manufactured product will likely have sufficient remaining commercial shelf life at the time we anticipate that the product will be sold, whether our product will be manufactured in accordance with the specifications that will likely be approved for our product, and whether there has not been any adverse change in our belief that we will likely prevail in any patent infringement litigation involving our ANDA product. Based upon our review of these factors, and our determination that we will derive probable future economic benefits from our

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

pre-launch inventories, we will capitalize any direct and indirect manufacturing costs we incur during the manufacture of such inventories, including the validation lots (such lots are permitted to be sold).

After such inventory has been produced, we will continue to evaluate the probable future economic benefits that we expect to derive from such pre-launch inventories and whether such inventories are stated at the lower of cost or market. This ongoing evaluation considers, among other things, the remaining shelf life of that inventory, current and expected market conditions, the amount of inventory on hand, the substance of any later communications with the FDA during the regulatory approval process and the then current views of our patent and/or litigation counsel. As appropriate, we will reassess these determinations and will make provisions through cost of goods sold to reduce pre-launch inventories to net realizable value. In the event the factors above do not provide a basis for determining that there is a probable future economic benefit, the manufactured cost of such pre-launch inventories, including raw material used in the manufacturing process, would be expensed as incurred.

Production of pre-launch inventories involves the risks that FDA may not approve such product(s) for marketing on a timely basis, if ever, that such approval may require additional or different testing and/or specifications than what was performed in the manufacture of such pre-launch inventories, and/or that the results of related litigation or other legal issues may not be satisfactory. If these risks were to materialize, provisions may be required to reduce the inventories to their net realizable value, if any. Such additional provisions could be material. Generally, pre-launch inventories related to publicly disclosed product candidates are separately identified except in circumstances that we believe would place us at a competitive disadvantage to do so.

Impairment of Goodwill

Under the purchase method of accounting for acquisitions, goodwill represents the excess of the purchase price over the fair value of the net assets acquired. We account for goodwill under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is subject to an assessment for impairment in value by applying a fair-value based test on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any applicable impairment loss is the amount, if any, by which the implied fair value of goodwill is less than the carrying value. See Note 2.

Revenue Recognition, including Sales Returns and Allowances

Andrx distributed product revenues are derived from the sale of pharmaceutical products purchased from third parties, including generic products sold on behalf of our unconsolidated joint ventures. Andrx product revenues include our generic and brand product revenues. Andrx generic product revenues are derived from the sale of generic products either manufactured by us pursuant to our ANDAs or sold with our New Drug Code (NDC), but exclude generic products sold on behalf of our unconsolidated joint ventures. Andrx brand product revenues were revenues derived from the sale of branded products either manufactured by us pursuant to our New Drug Application (NDA) or sold with our NDC through March 31, 2005. Sales generated by the Entex and Anexsia product lines, previously reflected in Andrx brand product revenues, are included in Andrx generic product revenues.

Andrx distributed product revenues and the related cost of goods sold are recognized at the time the product is accepted by our customers.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

through the distribution channel. We do not recognize revenue and the related cost of goods sold where we believe the customer has more than a reasonable level of inventory, taking into account, among other things, historical prescription data provided by external independent sources, projected prescription data, historical purchases and demand, incentives granted to customers, customers’ right of return, competing product introductions and our product inventory levels in the distribution channel, all of which we periodically evaluate.

Allowances against sales for estimated discounts, rebates, returns, chargebacks, shelf stock adjustments and other SRAs are established by us concurrently with the recognition of revenue. Accruals for these SRAs are presented in the Unaudited Condensed Consolidated Balance Sheets as reductions to accounts receivable, net or within accrued expenses and other liabilities.

Our most significant SRAs vary depending upon the business segment. In our distribution business, our most significant SRAs are for estimated returns, discounts and rebates. SRAs for estimated discounts and rebates have historically been predictable and less subjective. In our generic business, our most significant SRAs are for estimated discounts, customer and Medicaid rebates, returns, chargebacks and shelf stock adjustments. Of these estimates, the estimates for returns, chargebacks and shelf stock adjustments are more subjective and, consequently, may be more variable. In our brand business, our most significant SRAs were for estimated discounts, returns, Medicaid rebates and managed care rebates. Of these estimates, the estimates for returns are more subjective and, therefore, may be more variable.

Accruals for estimated rebates and discounts are estimated based on historical payment experience, historical relationships to revenues and contractual arrangements. We believe that such accruals are readily determinable due to the limited number of assumptions involved and the consistency of historical experience. Accruals for estimated chargebacks, returns and shelf stock adjustments involve more subjective judgments and are more complex in nature. Actual product returns, chargebacks, shelf stock adjustments and other SRAs incurred are dependent upon future events. We periodically monitor the factors that influence SRAs and make adjustments to these provisions when we believe that actual product returns, chargebacks, shelf stock adjustments and other SRAs may differ from established allowances. If conditions in future periods change, revisions to previous estimates may be required, potentially in significant amounts. Changes in the level of provisions for estimated product returns, chargebacks, shelf stock adjustments and other SRAs will affect revenues.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Accruals related to SRAs are reflected in the Unaudited Condensed Consolidated Balance Sheets as follows:


	June 30,		December 31,
	2005		2004
Accruals included in accounts receivable, net	$	30,135	$	31,219
Accruals included in accrued expenses and other liabilities		27,116		31,958

Total	$	57,251	$	63,177

When other parties market our products or when we are entitled to revenues from the sale of their products, we recognize revenue based on information supplied by the other parties related to shipment to, and their customers’ acceptance of, the products, less estimates for SRAs. We receive periodic reports from other parties that support the revenues we recognize, and amounts recognized are then compared to the cash subsequently remitted to us. Such revenues are subject to several estimates, similar to those we experience with the sales of our products. We periodically monitor the factors that influence these SRAs and conduct inquiries of the other parties regarding these estimates. Such estimates are revised as changes become known and may be significant.

When we receive licensing and royalties revenues, we recognize those revenues when the obligations associated with the earning of that revenue have been satisfied, based upon the terms of the contract. If obligations associated with the earning of that revenue remain, we will defer all or a portion of the payment, whether or not it is refundable, and recognize such amount over future periods after the remaining services have been rendered or delivery has occurred and the amounts are fixed or determinable.

When we enter into revenue arrangements with multiple deliverables, we evaluate and determine whether the deliverables are separate units of accounting and we divide the deliverables into separate units of accounting in accordance with the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables”. If the deliverables are separate units of accounting and there is objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units based on their relative fair values. If there is no reliable and objective evidence of fair value for a delivered item, but there is objective and reliable evidence of fair value for the undelivered item(s), the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered item(s). If there is no reliable and objective evidence of fair value for an undelivered item, or if the arrangement consideration allocable to a delivered item does not have standalone value to the customer, or a right of return exists, the delivered item does not qualify as a separate unit of accounting. In this case, the consideration received for that deliverable is combined with the amount allocable to the other undelivered item(s), deferred and recognized systematically over the periods that the revenues are earned. Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” provides additional interpretation and guidance in the application of EITF Issue No.00-21. See Note 2.

During the three and six months ended June 30, 2005, other revenues include the accretion of the deferred revenue associated with the sale and licensing of certain rights and assets related to Fortamet to First Horizon, as well as the related Fortamet and Altoprev contract manufacturing revenues associated with the manufacturing and supply of these products, recognized when product is shipped. See Note 2.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Income Taxes

Our future effective tax rate is based on estimates of expected results of operations, enacted statutory tax rates and tax planning strategies. Significant judgment is required in determining our effective tax rate and the ultimate resolution of our tax return positions. Despite our belief that our tax return positions are correct, our policy is to establish accruals for tax contingencies that may result from examinations by tax authorities. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. It is reasonably possible that our effective tax rate and/or cash flows may be materially impacted by the ultimate resolution of our tax positions. See Note 7.

Stock-Based Compensation

We account for stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Stock options are granted under those plans with an exercise price equal to the market value of the underlying common stock on the date of grant. Accordingly, no stock-based employee compensation expense is reflected in the Unaudited Condensed Consolidated Statements of Income for stock options. For restricted stock unit grants, the fair value on the date of the grant is fixed and is amortized on a straight-line basis over the related period of service for service based grants and over the performance period for performance based grants to the extent we believe the performance based criteria will be achieved. Such amortization expense is included in selling, general and administrative (SG&A).

The following table summarizes our pro forma consolidated results of operations as though the provisions of the fair value-based method of accounting for employee stock-based compensation of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” had been used:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income:
As reported	$	7,998		$	6,444		$	43,335		$	33,106
Add: stock-based employee compensation expense included in reported net income, net of related tax effect		512			228			857			423
Deduct: total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effect		(540	)		(4,008	)		(27,478	)		(6,956	)

Pro forma net income	$	7,970		$	2,664		$	16,714		$	26,573

Basic net income per common share:
As reported	$	0.11		$	0.09		$	0.59		$	0.46

Pro forma	$	0.11		$	0.04		$	0.23		$	0.37

Diluted net income per common share:
As reported	$	0.11		$	0.09		$	0.59		$	0.45

Pro forma	$	0.11		$	0.04		$	0.23		$	0.36

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

On March 2, 2005, we accelerated the vesting of out-of-the-money unvested stock options based on a review of our long-term incentive programs in light of current market conditions and the issuance of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). An option was considered out-of-the-money if the exercise price was greater than the March 2, 2005 NASDAQ market closing price of $21.57. As a result of the acceleration, options outstanding at March 2, 2005 to acquire approximately 2,000,000 shares of Andrx common stock, with a weighted-average exercise price of $34.98, became immediately exercisable. We believe that the acceleration of the vesting of these stock options will eliminate the need for recognizing future compensation expense associated with these options. In accordance with APB Opinion No. 25, this acceleration did not result in the recognition of any compensation expense; however under the fair value-based method of accounting of SFAS No. 123, compensation expense would have been recognized, resulting in the significant increase in pro forma compensation expense for the six months ended June 30, 2005 compared to the six months ended June 30, 2004.

The fair value of our options was estimated using the Black-Scholes option pricing model and the following assumptions:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005		2004			2005			2004
Risk-free interest rate		—		2.8	%		4.2	%		3.0	%
Average life of options (years)		—		3.0			6.0			5.9
Average volatility		—		82	%		70	%		83	%
Dividend yield		—		—			—			—

The range of fair values per share of our options, as of the respective dates of grant, was $14.14 to $14.62 for stock options granted during the three months ended March 31, 2005, and $10.89 to $20.14, and $10.89 to $21.60 for stock options granted during the three and six months ended June 30, 2004, respectively. There were no stock options granted during the three months ended June 30, 2005.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model, like all option valuation models, requires highly subjective assumptions including expected stock price volatility.

Recent Accounting Pronouncements

Inventory Costs

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs”, amending the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing” by clarifying the accounting for certain items. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges, and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, however, earlier application is permitted. SFAS No. 151 will not have a material impact on our condensed consolidated financial statements.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) requires the cost of share-based payment transactions, including share options, restricted share plans, and employee share purchase plans, be recognized in financial statements. The cost of these transactions will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. In April 2005, the SEC extended the compliance dates and public companies will now be required to apply the provisions of SFAS No. 123(R) no later than the first fiscal year that begins after June 15, 2005.

On March 2, 2005, we accelerated the vesting of out-of-the-money unvested stock options, as previously discussed. In accordance with APB Opinion No. 25, this acceleration did not result in the recognition of any compensation expense. There can be no assurance that the acceleration of the vesting of these options will not result in some future compensation expense. We will begin to expense the remaining in-the-money unvested stock options awarded to acquire approximately 900,000 shares of Andrx common stock beginning January 2006, in accordance with the SEC’s extension of the compliance dates for SFAS No. 123(R). We estimate the compensation expense to be recognized related to these options, assuming no forfeitures and no additional grants, will be approximately $2,350, of which $1,550, $650, and $150 will be expensed in 2006, 2007, and thereafter, respectively.

Once the provisions of SFAS No. 123(R) go into effect, our Employee Stock Purchase Plan (ESPP) will also be treated as compensatory. The compensation expense that will be recognized in connection with our ESPP will depend on the number of employees participating in the plan, our stock price at the end of each month, and other factors. Had SFAS No. 123(R) been in effect for the six months ended June 30, 2005, the compensation expense recognized in connection with our ESPP would have been immaterial to our results of operations.

Accounting for Income Taxes – the American Jobs Creation Act of 2004

In December 2004, the FASB issued FASB Staff Position (FSP) FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. FSP FAS 109-1 states that the qualified production activities deduction under the American Jobs Creation Act of 2004 be accounted for as a special deduction in accordance with FAS 109, and not as a rate reduction. A special deduction is accounted for by recording the benefit of the deduction in the year in which it can be taken in the company’s tax return, and not by adjusting deferred taxes in the period of enactment. FSP FAS 109-1 was effective upon issuance. This standard and the American Jobs Creation Act of 2004 did not have a material impact on our Consolidated Financial Statements.

Accounting Changes and Error Corrections

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 changes the requirements for the accounting for and reporting of changes in accounting principles, requiring retrospective application to prior periods’ financial statements,

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

unless it is impracticable to do so. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

Change in Accounting Estimate

In June 2004, the FDA approved an NDA for an over-the-counter (OTC) product containing the same active ingredients as our Entex PSE prescription product. According to FDA guidance, once FDA approves a version of any product that is presently permitted to be on the market and sold by prescription without an approved ANDA or NDA, similar unapproved drug products, such as our Entex product line, may be subject to FDA action. As a result, in July 2004, we began amortizing the remaining carrying amount of our Entex product rights over 18 months and the amortization expense related to the Entex product rights increased by $3,056 to $4,526 on an annual basis. This change in accounting estimate decreased our reported net income by $963, and basic and diluted earnings per share by $0.01 per share each, for the six months ended June 30, 2005.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. In the Unaudited Condensed Consolidated Statement of Income for the three and six months ended June 30, 2004, we reclassified royalties on our generic version of Cardizem® CD to our former co-chairman and Chief Scientific Officer from SG&A to cost of goods sold in the amounts of $845 and $1,732, respectively. In the Unaudited Condensed Consolidated Statements of Cash Flows, we reclassified from cash and cash equivalents to investments available-for-sale $48,550 and $42,750 as of June 30, 2004 and December 31, 2003, respectively, as well as $13,041 from change in accounts payable, accrued expenses and other liabilities to change in accrual for tax contingencies for the six months ended June 30, 2004.

(2) Disposition of the Brand Business

First Horizon Transaction

In December 2004, our board of directors approved a plan to divest, or seek other strategic alternatives for our brand pharmaceutical business. On March 28, 2005, we consummated agreements with First Horizon for the sale and licensing of certain rights and assets related to our former Fortamet and Altoprev brand pharmaceutical products, and the manufacturing and supply of these products, at which time we received $50,000 related to Fortamet. We are entitled to receive up to $35,000 in proceeds for Altoprev, contingent upon meeting certain supply requirements, as defined. Proceeds we receive for Altoprev are refundable if certain supply requirements, as defined, are not maintained over a specified period. Of such $35,000 amount, $23,333 was received in April 2005 and the remaining $11,667 was recorded in June 2005 and is included in other current assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet, as we believe that our agreements with First Horizon currently entitle us to receive such $11,667. However, we received only $4,084 of such amount in July 2005 due to First Horizon’s contention that the $7,583 balance is not due to us as a result of a disagreement concerning the dating of the 60mg product to be delivered by us to First Horizon. We are also entitled to receive royalties of 8% and 15% of net sales, as defined, from First Horizon’s sales of Fortamet and Altoprev, respectively, until a respective product encounters generic competition. We have retained our obligation to pay a royalty to Sandoz Inc. related to net sales of Fortamet, as defined, until May 2009, which is subject to certain annual minimums ranging from $4,000 to $5,000 and a $10,000 annual maximum. We initially deferred recognition of the $85,000 as described below. The manufacturing and supply agreement for Fortamet and Altoprev entered into with First Horizon is for a ten-year term and is subject to a two-year notice of intent by us to terminate beginning five years after the date the agreement was executed. Transaction related

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

costs of approximately $1,778 were deferred and recorded in other assets, and are being amortized to cost of goods sold over the ten-year term of the manufacturing and supply agreement.

The transaction with First Horizon constitutes a revenue arrangement with multiple deliverables consisting of the licensing of the rights to the products and the manufacture and supply of the products. We do not have objective and reliable evidence of the fair value of the licensing of the rights to Fortamet and Altoprev. In addition, we are unable to reliably estimate future production requirements under our manufacturing and supply arrangements in order to determine the fair value of the related contract manufacturing services, as we are not able to reliably estimate future prescription levels or the timing of potential generic introductions of each respective product. Also, we estimate that the profit margin in the manufacturing and supply agreement is below a fair market value margin for these types of services. As a result, the $85,000 of up-front fees to be received from First Horizon will be deferred and recognized as revenue on a straight-line basis generally over the ten-year term of the manufacturing and supply agreement.

Since we are required to refund all or a portion of the Altoprev proceeds in the event that we are unable to meet certain supply requirements, as defined, we cannot recognize any deferred revenue related to Altoprev until that contingency begins to abate ratably over a 30-month period in August 2005. In the second quarter of 2005, we recognized $1,250 of deferred revenue related to Fortamet. As of June 30, 2005, we had deferred revenue related to Fortamet and Altoprev of $83,750, included in deferred revenue in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet.

The Brand Business Segment included $26,316 of goodwill, which we evaluated for impairment subsequent to the First Horizon transaction. The remaining products (our Entex and Anexsia lines) do not require sales force promotion and are currently managed by our generic business. As a result, we made the decision to terminate substantially all of our brand business employees in May 2005, which effectively completed the disposition of the brand business. Consequently, the brand business goodwill was deemed to have no implied fair value. Accordingly, in the first quarter of 2005, we recorded a non-cash goodwill impairment charge of $26,316, included in goodwill impairment, litigation settlements and other charges in the Unaudited Condensed Consolidated Statement of Income for the six months ended June 30, 2005.

During the 2005 first quarter, we recorded charges associated with the disposition of our brand business, including i) personnel related charges for severance, performance incentives and retention of approximately $9,957, reflected in SG&A, and ii) $3,805 of non-cash charges, including the write-off of $1,000 of inventory and $2,258 of sample inventory for Altoprev and Fortamet, included in cost of goods sold and SG&A, respectively. As of June 30, 2005, the remaining personnel related accruals associated with the disposition of the brand business were $3,542.

We continued to incur operating expenses in the second quarter of 2005 as we wound down the brand business. We will record an additional estimated $500 of severance cost in the third quarter of 2005 and may potentially incur additional costs related to leased facilities, which we currently estimate to be approximately $1,000.

As of December 31, 2004, we ceased depreciating and amortizing assets held for sale. As part of the First Horizon transaction, we retained $3,889 of Fortamet product rights, net, which we resumed amortizing in April 2005 over approximately two years.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Termination of Cardura XL Agreement

In November 2003, we entered into a five-year supply and distribution agreement with Pfizer Inc. in the U.S. regarding their NDA for Cardura® XL, a sustained-release formulation of doxazosin mesylate used to treat benign prostatic hyperplasia (BPH). We paid Pfizer $10,000 upon execution of this agreement. This $10,000 amount was included in prepaid and other current assets in the December 31, 2004 Unaudited Condensed Consolidated Balance Sheet. In January 2005, we notified Pfizer that we were exercising our right to terminate this agreement and Pfizer refunded the $10,000 to us in February 2005.

(3)

Inventories and Cost of Goods Sold

Inventories consist of the following:


	June 30, 2005						December 31, 2004
	Commercial		Pre-launch		Total		Commercial		Pre-launch		Total
Raw materials	$	18,861	$	12,502	$	31,363	$	17,841	$	7,603	$	25,444
Work in process		15,958		2,016		17,974		12,274		2,623		14,897
Finished goods		126,441		546		126,987		155,444		1,519		156,963

	$	161,260	$	15,064	$	176,324	$	185,559	$	11,745	$	197,304

Pre-launch inventories as of June 30, 2005 consisted primarily of our generic version of Biaxin® XL, which has been approved by FDA and is subject to patent litigation (see Note 13), and our generic version of Monopril®, as well as $1,525 of raw materials of our generic version of Concerta®. Pre-launch inventories as of December 31, 2004 consisted primarily of our generic version of Concerta. The remaining shelf lives of our pre-launch inventories generally exceed one year.

The following table summarizes charges to cost of goods sold associated with production related write-offs, write-offs of pre-launch inventories, impairment charges, and under-utilization and inefficiencies related to the manufacture of our products and product candidates:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Production related write-offs	$	3,143	$	6,263	$	5,569	$	12,496

Write-offs of pre-launch inventories		4,852		191		6,109		1,891

Impairment charges:
North Carolina facility		—		14,535		—		14,535
Entex product rights		—		3,500		—		3,500
Under-utilization and inefficiencies of manufacturing operations		1,891		3,030		4,251		4,423

	$	9,886	$	27,519	$	15,929	$	36,845

Production related write-offs represent inventory write-offs at our manufacturing facilities. For the three and six months ended June 30, 2005, write-offs of pre-launch inventories primarily consisted of $4,271 and $5,282, respectively, related to our generic version of Concerta. These write-offs primarily resulted from the aging of product that may be short-dated by the date we currently anticipate that our product will likely be sold.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

In July 2005, the first patent related to Concerta was listed in the FDA’s Electronic Orange Book. Although we filed our Paragraph IV certification with the FDA relating to this patent and notified the NDA holder and all patentees of such certification, we learned that FDA received the first Paragraph IV certification as to this patent prior to our certification. Consequently, it is likely that FDA will award the 180-day marketing exclusivity rights to another ANDA filer. It is also our understanding that, under current law, no 30-month stay of approvals will be imposed as a result of any litigation that results from the listing of this patent in the Orange Book. While we believe that we have an approvable product, as evidenced by the building of pre-launch inventories, our approval may now be subject to the 180-day exclusivity period granted to another ANDA filer. Based on these recent events, we no longer believe that the FDA will approve our generic version of the Concerta product during 2005. Consequently, we have re-evaluated the probable future economic benefits related to certain of our pre-launch inventories due to dating and have expensed $4,147 to cost of goods sold related to our pre-launch inventories.

We purchased our North Carolina facility in December 2002 for approximately $28,250, and began renovating the facility in 2003. In June 2004, we determined that a significant expansion of our Florida facilities would allow us to fulfill our current and projected manufacturing requirements through at least 2007, and decided to discontinue renovation of our North Carolina facility. These actions, among other things, made it more likely than not that this facility will be sold. Accordingly, in June 2004, we recorded a $14,535 impairment charge to our Generic Products Segment cost of goods sold, which represented the difference between the carrying value and the estimated fair value of our North Carolina facility based on independent appraisals. We entered into a listing agreement for this facility in July 2005. Management estimates that it is likely that the sale of this facility will not be completed within one year. The ultimate amount realized from a sale of this facility may differ from our fair value estimate.

In June 2004, as a result of the FDA approval of an NDA for an OTC product containing the same active ingredients as our Entex PSE prescription product, we recorded a charge of $3,500 to our cost of goods sold related to the impairment of our Entex product rights. The charge was originally recorded as part of the Brand Products Segment, but has been reclassified to the Generic Products Segment herein (see Notes 12 and 13).

(4)

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:


	June 30,		December 31,
	2005		2004
Tax accruals, excluding payroll taxes	$	23,234	$	56,397
SRAs		27,116		31,958
Payroll, payroll taxes and related benefits		18,363		22,016
Other		23,033		25,798

	$	91,746	$	136,169

See Note 7 for discussion related to our tax accruals.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

(5)

Collaborative Agreements

Generic Lovenox

On May 2, 2005, we entered into an agreement to obtain certain exclusive marketing rights for both strengths of Amphastar Pharmaceuticals, Inc.’s proposed generic version for Aventis Pharmaceuticals, Inc.’s Lovenox® (enoxaparin sodium) injectable product. Amphastar submitted its ANDA for generic Lovenox to the FDA in March 2003, and is the subject of a patent infringement lawsuit filed by Aventis. In June 2005, the United States District Court for the Central District of California granted summary judgment in Amphastar’s favor in the patent infringement lawsuit filed by Aventis relating to this ANDA. As a result of this court decision, the 30-month stay of approval of this ANDA imposed by law is no longer in effect, though such decision will not trigger any right Amphastar’s ANDA may have to a 180-day period of exclusivity; assuming Aventis appeals that decision, as they publicly indicated they would. However, approval of Amphastar’s ANDA continues to be delayed by a Citizen Petition and possibly other factors. On July 18, 2005, Amphastar submitted additional comments on Aventis’ Citizen Petition.

The marketing rights we obtained from Amphastar generally extend to the U.S. retail pharmacy market. To obtain such rights, we paid $4,500 upon execution of the agreement, which was included in other assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet, and will make an additional $5,500 payment to Amphastar once certain milestones relating to the product are achieved, including obtaining FDA marketing approval and a favorable resolution of the pending patent litigation. In exchange, we will receive up to 50% of the net profits, as defined, generated from sales of Amphastar’s product in the retail pharmacy market. Under certain specified conditions, we have the right to receive a refund of the amounts we paid to Amphastar.

Actos and Extended-Release Metformin Combination Product

In December 2003, we entered into an agreement with Takeda Chemical Industries, Ltd. to develop and market a combination product consisting of Takeda’s Actos® (pioglitazone) and our extended-release metformin, each of which is administered once a day for the treatment of Type 2 diabetes. We are responsible for the formulation and manufacture of this combination product and Takeda is responsible for obtaining regulatory approval of and marketing this combination product, both in the U.S. and in other countries. In June 2005, we recorded the second $10,000 milestone payment due to the occurrence of certain specified events, which is included in other current assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet. We received the $10,000 payment in July 2005. Deferred revenue in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet includes $20,000 associated with the Takeda agreement, as the amounts to be retained by us are contingent upon the occurrence of certain future events. In addition, for the three and six months ended June 30, 2005, we have recorded as a reduction to research and development expenses $1,753 and $2,433, respectively, of reimbursement of development costs from Takeda.

(6)

Licensing and Royalties Revenue

For the three and six months ended June 30, 2005, we recorded $6,748 and $11,457, respectively, of licensing and royalties revenue primarily resulting from agreements with First Horizon (see Note 2), Kremers Urban Development Company (KUDCo), Ranbaxy Pharmaceuticals Inc., and Mallinckrodt, Inc. related to Fortamet and Altoprev, and generic versions of Prilosec®, Monopril-HCT®, and Anexsia, respectively. For the three and six months ended June 30, 2004, licensing and royalties revenue of $12,489 and $32,624, respectively, primarily resulted from our agreement with Teva Pharmaceuticals Curacao N.V. and Impax Laboratories, Inc. related to generic versions of Wellbutrin SR® 150mg and Zyban®, which expired in September and November 2004, respectively. Our agreement with KUDCo expires in February 2006 and our agreement with Ranbaxy expired in June 2005.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

(7)

Income Taxes

For the three months ended June 30, 2005, we recorded a provision for income taxes of $4,902, which was in excess of the expected annual effective federal statutory rate of 35% primarily due to the effect of state income taxes. For the six months ended June 30, 2005, we recorded an income tax benefit of $52,442, which was in excess of the expected annual effective federal statutory rate of 35% primarily due to the reversal of accrued tax contingencies and the benefit from the recognition of a net operating loss carryforward in the first quarter of 2005 as a result of the Internal Revenue Service (IRS) completion of its audit of our 2003 income tax return and, to a lesser extent, the effect of state income taxes. For the three and six months ended June 30, 2004, we recorded a provision for income taxes of $3,953 and $20,290, respectively, which was in excess of the expected annual effective federal statutory rate of 35% primarily due to the effect of state income taxes.

Our 2003 income tax return reflected a significant tax loss as the result of certain ordinary business developments. We believed the loss was appropriate and deductible. Nevertheless, due to the complexity of the tax rules and likelihood of a review and subsequent challenge by the taxing authorities, we recorded an accrual to fully offset the resulting 2003 and 2004 income tax benefits. As of December 31, 2004, we had accrued $31,321 related to this tax contingency that was included in accrued expenses and other liabilities in our Unaudited Condensed Consolidated Balance Sheet. The IRS began its audit of the 2003 income tax return shortly after the return was filed in September 2004. During March 2005, the IRS agreed the 2003 loss was deductible, but not the amount of such loss. In April 2005, the IRS disallowed a portion of the 2003 loss in the amount of $40,522, and completed their examination of our 2003 income tax return. Due to the resolution of the 2003 loss with the IRS and the completion of the 2003 examination, in the first quarter of 2005, we recognized a one-time tax benefit of approximately $48,971 as a result of the reversal of previously accrued income tax contingencies of $32,335 and recognition of an additional $16,636 net operating loss carryforward, tax effected. Excluding the impact from the resolution of the 2003 loss, our effective tax rate for the six months ended June 30, 2005 would have been 38%.

Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. It is reasonably possible that our effective tax rate and/or cash flows may be materially impacted by the ultimate resolution of our tax positions.

(8)

Earnings Per Share

Earnings per share is calculated in accordance with SFAS No. 128, “Earnings per Share”, which requires presentation of basic and diluted earnings per share. For the three and six months ended June 30, 2005 and 2004, the shares used in computing basic net income per share are based on the weighted average shares of common stock outstanding, including the vested portion of restricted stock units. Diluted per share calculations included weighted average shares of common stock outstanding, including the vested portion of restricted stock units, plus dilutive common stock equivalents, computed using the treasury stock method. Our common stock equivalents consist of stock options and the unvested portion of restricted stock units.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

A reconciliation of the denominators of basic and diluted earnings per share of common stock is as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Basic weighted average shares of common stock outstanding		73,224,000		72,714,000		73,119,000		72,630,000
Effect of dilutive items:
Stock options and unvested restricted stock units, net		433,000		937,000		505,000		998,000

Diluted weighted average shares of common stock outstanding		73,657,000		73,651,000		73,624,000		73,628,000


Anti-dilutive weighted average common stock equivalents		4,930,000		2,849,000		4,717,000		2,844,000

(9)

Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income” establishes standards for reporting and presentation of comprehensive income and its components in financial statements. The components of comprehensive income are as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income	$	7,998		$	6,444		$	43,335		$	33,106
Investments available-for-sale:
Unrealized gain (loss), net		554			(845	)		(143	)		(824	)
Income tax (provision) benefit		(205	)		321			53			313

		349			(524	)		(90	)		(511	)

Comprehensive income	$	8,347		$	5,920		$	43,245		$	32,595

(10)

Issuance of Restricted Stock Units

On March 17, 2005, we granted a total of 75,000 restricted stock units (RSUs) to seven non-employee directors. Each RSU represents the right to acquire one share of Andrx common stock. Based on the March 17, 2005 closing price of Andrx common stock, the total compensation expense is $1,703. The compensation expense will be recognized from 2005 through 2010 on a straight-line basis in accordance with the underlying vesting provisions.

During the 2005 second quarter, we granted 487,000 RSUs, of which 391,000 vest annually over seven years (service based RSUs) and 96,000 vest in April 2009, subject to acceleration if we achieve certain defined performance criteria, as measured against our 2006 audited financial results (performance based RSUs). Both service based RSUs and performance based RSUs may be accelerated, in whole or in part, at the discretion of the Compensation Committee of our board of directors and under certain other circumstances. The total related compensation expense is based on the NASDAQ closing market price of Andrx common stock on the date of grant. The total compensation expense related to the service based RSUs is $8,400 and will be recognized on a straight-line basis over seven years. The compensation expense for the performance based RSUs of $2,100 will

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

be recognized through the first quarter of 2007 to the extent we believe the performance criteria will be achieved. In the event that it is determined that it is more likely than not that the performance criteria will not be achieved, any remaining unamortized compensation expense will be recognized on a straight-line basis over the remaining vesting period.

(11)

401(k) and Profit Sharing Plan

Effective January 1, 2005, we match employee contributions to the 401(k) Plan on a dollar-for-dollar basis, up to 6% of an employee’s eligible salary and bonus. Prior to this change, we matched 50% of the first 5% of an employee’s contribution, subject to certain limitations. If we achieve specific financial goals that will be established annually, a portion of our profits will be funded into the 401(k) Plan for the benefit of substantially all full-time Andrx employees as of the end of the year that have worked more than 501 hours during the year.

(12)

Segments

See our 2004 10-K, for a discussion of our business segments. Revenues and costs associated with the sale and licensing of certain rights and assets related to our former Fortamet and Altoprev brand pharmaceutical products to First Horizon, including the accretion of the deferred revenue, the contract manufacturing revenues and cost of goods sold and the royalty revenues, are included in the Corporate and Other Segment. Revenues and cost of goods sold related to our Entex and Anexsia product lines have been reclassified from the Brand Products Segment to the Generic Products Segment.

The following table presents financial information by business segment:


	As of or for the Three Months Ended June 30, 2005
	Distributed		Generic		Brand			Corporate
	Products		Products		Products			& Other			Consolidated
Revenues	$	168,833	$	82,318	$	—		$	7,918		$	259,069
Income (loss) from operations		15,007		11,946		(3,029	)		(13,510	)		10,414
Equity in earnings of joint ventures		—		715		—			—			715
Interest income		—		—		—			2,355			2,355
Interest expense		—		—		—			584			584
Depreciation and amortization		621		6,103		90			2,173			8,987
Purchases of property, plant and equipment, net		710		4,298		(825	)		(5	)		4,178
Total assets		176,193		395,081		766			515,425			1,087,465


	As of or for the Three Months Ended June 30, 2004
	Distributed		Generic		Brand			Corporate
	Products		Products		Products			& Other			Consolidated
Revenues	$	163,327	$	111,270	$	15,987		$	—		$	290,584
Income (loss) from operations		13,575		28,369		(13,331	)		(19,087	)		9,526
Equity in earnings of joint ventures		—		765		—			—			765
Interest income		—		—		1			692			693
Interest expense		—		—		29			558			587
Depreciation and amortization		755		5,605		672			1,296			8,328
Purchases of property, plant and equipment, net		335		31,790		—			3,124			35,249
Total assets		211,089		379,809		69,603			353,488			1,013,989

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)


	Six Months Ended June 30, 2005
	Distributed		Generic		Brand			Corporate
	Products		Products		Products			& Other			Consolidated
Revenues	$	348,602	$	165,579	$	13,888		$	8,703		$	536,772
Income (loss) from operations		28,048		31,551		(46,330	)		(26,806	)		(13,537	)
Equity in earnings of joint ventures		—		1,739		—			—			1,739
Interest income		—		—		—			3,961			3,961
Interest expense		—		—		15			1,255			1,270
Depreciation and amortization		1,248		12,073		248			3,860			17,429
Purchases of property, plant and equipment, net		932		12,264		(825	)		678			13,049


	Six Months Ended June 30, 2004
	Distributed		Generic		Brand			Corporate
	Products		Products		Products			& Other			Consolidated
Revenues	$	336,822	$	218,911	$	27,026		$	—		$	582,759
Income (loss) from operations		26,775		80,035		(24,557	)		(31,369	)		50,884
Equity in earnings of joint ventures		—		2,267		—			—			2,267
Interest income		—		—		1			1,436			1,437
Interest expense		—		—		51			1,141			1,192
Depreciation and amortization		1,524		11,188		1,075			2,423			16,210
Purchases of property, plant and equipment, net		620		42,646		147			6,099			49,512

For the three and six months ended June 30, 2004, we reclassified revenues of $4,328 and $9,261, respectively, and gross profit (loss) of $(312) and $3,641, respectively, related to our Entex and Anexsia product lines from the Brand Products Segment to the Generic Products Segment. In addition, for the three and six months ended June 30, 2004, we reclassified product rights amortization of $455, and $910, respectively, related to our Entex and Anexsia product lines from the Brand Products Segment to the Generic Products Segment. For the three months ended March 31, 2005, we classified revenues of $4,906, gross profit of $3,167, and product rights amortization of $1,219 related to our Entex and Anexsia product lines as part of the Brand Products Segment. For the six months ended June 30, 2005, these amounts have been classified as part of the Generic Products Segment. For the three months ended March 31, 2005, we classified contract manufacturing revenues of $786 and gross loss of $222 as part of the Brand Products Segment. For the six months ended June 30, 2005, these amounts have been classified as part of the Corporate and Other Segment. For the June 30, 2004 total assets, we reclassified product rights and inventories of $8,280 related to our Entex and Anexsia product lines from the Brand Products Segment to the Generic Products Segment.

Generic Products Segment revenues by group of similar products are presented as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Controlled-release	$	57,219	$	76,554	$	116,196	$	141,992
Immediate-release and niche		18,763		18,581		34,604		36,199
Other		2,353		3,646		6,083		8,029

Total generic product sales, net		78,335		98,781		156,883		186,220
Licensing and royalties		3,983		12,489		8,696		32,691

Total Generic Product Segment revenues	$	82,318	$	111,270	$	165,579	$	218,911

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

(13)

Litigation, Contingencies and Commitments

Ongoing Patent Infringement Litigation

Following submission of a Paragraph IV certification that our ANDA product candidate does not infringe the valid patent rights of the referenced brand product, we would anticipate that patent infringement litigation will be commenced against us. Generally, unless we commence selling such ANDA product before the related litigation has been concluded, we would not incur any substantial damages in connection with this type of litigation. See our 2004 10-K for a complete discussion of such matters.

Naproxen Sodium (Naprelan)

In March 2002, the U.S. District Court for the Southern District of Florida issued an order that Elan Corporation Plc’s patent was invalid, and in September 2002, we commenced selling naproxen sodium, our generic version of Naprelan®. In March 2003, the District Court issued an order denying, among other things, (i) Elan’s motion for reconsideration of the March 2002 order invalidating its patent, and (ii) our motion asking the District Court for a ruling on our non-infringement defenses. Both parties appealed that March 2003 decision. On May 5, 2004, the Federal Circuit Court of Appeals reversed the District Court’s determination that the Elan patent was invalid, and remanded the case back to the District Court for a determination as to whether our product infringes the Elan patent. On July 12, 2005, the Federal Circuit Court of Appeals issued a decision, in an unrelated case, on how a court should address issues of claim construction, and the District Court judge handling our case instructed the parties to file briefs on how the District Court should proceed in this matter in light of the Federal Circuit Court of Appeals decision. In January 2005, Elan filed a complaint in the U.S. District Court for the Southern District of Florida seeking willful damages as a result of our sale of our generic version of Naprelan. In February 2005, we filed our answer to Elan’s January 2005 complaint and filed a counterclaim for declaratory relief for unenforceability due to inequitable conduct and for non-infringement and invalidity of the applicable patent. We are not in a position to determine the ultimate outcome of this matter. However, since we have sold and are continuing to sell our generic version of Naprelan, an adverse determination could have a material adverse effect on our business and our consolidated financial statements.

Omeprazole (Prilosec)

In 1998, we filed an ANDA seeking approval from the FDA to market omeprazole, our generic version of Prilosec. In May 1998, AstraZeneca plc filed suit under the provisions of the Hatch-Waxman Act alleging patent infringement. The matter was tried in the U.S. District Court for the Southern District of New York along with the consolidated claims of three other ANDA applicants. In October 2002, the District Court entered an order and an opinion finding that Astra’s ‘505 and ‘230 patents are valid and that the generic versions of Prilosec developed by us infringe those patents. On December 11, 2003, the Federal Circuit Court of Appeals affirmed the lower court’s opinion that Astra’s patents are valid and infringed by our product. Astra advised the District Court that it believes it may be entitled to damages as a result of our decision to build an inventory of our product prior to the District Court’s determination, but has not sought to enforce such claims. On May 19, 2004, the District Court ruled that our product does not infringe any valid claims of the ‘281 patent, and that Astra’s ‘505 and ‘230 patents are not unenforceable against our product. Both Astra and we have appealed this determination. The District Court has not issued an opinion on Astra’s claims for willful infringement of the ‘505 and ‘230 patents or on Astra’s request for attorneys’ fees. Though we believe that Astra is unlikely to prevail in its request for damages or attorneys’ fees and that Astra has not been damaged as a result of our decision to build inventory prior to the District Court’s determination, if Astra were to prevail in these claims, it could have a material adverse effect on our business and consolidated financial statements.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Clarithromycin ER (Biaxin XL)

In October 2002, we submitted an ANDA seeking FDA approval to market Clarithromycin extended-release tablets 500mg, our generic version of Abbott Laboratories’ Biaxin XL 500mg product. On March 14, 2005, Abbott filed a complaint against Andrx Corporation in the United States District Court for the Northern District of Illinois for alleged patent infringement, which was amended on March 25, 2005, to instead name Andrx Pharmaceuticals, Inc. as the defendant in that action. In April 2005, Abbott filed a second amended complaint wherein it seeks to enjoin Andrx or any of its entities from commercially manufacturing, using, offering to sell or selling generic versions of Biaxin XL. Additionally, Abbott seeks declaratory judgment of infringement against Andrx for four patents related to Abbott’s product. On March 30, 2005, we filed for a declaratory judgment in the United States District Court for the Southern District of Florida against Abbott Laboratories and Taisho Pharmaceuticals (the owner of one of the patents at issue with Abbott) for non-infringement and invalidity of six patents related to Abbott’s Biaxin product. On May 20, 2005, we and Abbott entered into an agreed temporary restraining order (TRO) to enjoin us from selling or offering to sell our product in the United States until a ruling is entered on Abbott’s motion for preliminary injunction against Andrx or following ten days notice by Andrx, if the court fails to issue a ruling with respect to such hearing by the end of September 2005. The preliminary injunction hearing is presently scheduled to occur in September 2005. The TRO further stipulates that it will automatically vacate if any other party sells, offers to sell or imports any generic Biaxin XL product prior to a ruling on Abbott’s preliminary injunction. Abbott was directed to post a $20 million bond. We are at this time unable to determine the ultimate outcome of these matters.

Metoprolol Succinate (Toprol-XL)

In 2003 and 2004, we filed ANDAs seeking FDA approval to market metoprolol succinate extended-release tablets in the 25mg, 50mg, 100mg and 200mg strengths, respectively, of our generic versions of Toprol-XL®. AstraZeneca AB, Aktiebolaget Hassle and AstraZeneca LP sued us for patent infringement in the U.S. District Court for the District of Delaware in February 2004 on the 50mg strength, in July 2004 on the 25mg strength, and in December 2004 on the 100mg and 200mg strengths. On August 9, 2004, the Multidistrict Litigation Panel consolidated and sent to the U.S. District Court for the Eastern District of Missouri the three pending metoprolol succinate patent infringement cases brought by Astra against Andrx and two other generic drug companies for pretrial discovery purposes. Both Astra and Andrx have filed motions for summary judgment that are still pending with the Court. We are at this time unable to determine the ultimate outcome of these matters, but an adverse determination is unlikely to have a material adverse effect on our consolidated financial statements unless we were to commence selling our product prior to such determination.

Sodium Valproate

We filed an ANDA seeking FDA approval to market a generic version of Depakote®, and in March 2000, Abbott Laboratories sued us in the U.S. District Court for the Southern District of Florida for patent infringement. The FDA refused to accept our ANDA and as a result, we filed a 505(b)(2) application to market a sodium valproate product that is bioequivalent to Depakote. In May 2003, Abbott filed a new infringement complaint against us in the same U.S. District Court in connection with our new application. Both cases were consolidated and the original ANDA lawsuit was subsequently dismissed without prejudice. On May 23, 2005, we filed a motion for summary judgment of non-infringement. This summary judgment motion is set for oral argument on September 23, 2005. The trial of this matter has been tentatively scheduled to begin in October 2005. We are at this time unable to determine the ultimate outcome of these matters, but an adverse determination is unlikely to have a material adverse effect on our consolidated financial statements unless we were to commence selling our product prior to such determination.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Other Pending Litigation

Drug Pricing Litigation

On August 4, 2004, the City of New York filed an action in the U. S. District Court for the Southern District of New York against numerous pharmaceutical companies, including us, claiming they overcharged Medicaid for prescription medications. Since then, 26 separate New York counties filed complaints reiterating the same type of allegations against Andrx. These complaints generally allege overpayments of varying amounts with respect to our products, in particular our generic versions of Glucophage XR and Cardizem CD. On June 15, 2005, plaintiffs filed a consolidated complaint wherein Andrx, along with other companies, was no longer named as a defendant. One other New York State action, by Erie County, remains pending in the Supreme Court of the State of New York. In addition, the state of Alabama, by its Attorney General, filed a similar lawsuit against numerous pharmaceutical companies, including Andrx, in the Circuit Court of Montgomery County, Alabama. In July 2005, the Alabama matter was transferred to the U.S. District Court for the Middle District of Alabama. Thereafter, the Alabama Attorney General filed a motion to transfer the case back to the state court. There are reportedly numerous other lawsuits and investigations pending throughout the country against pharmaceutical companies related to these issues, which may result in additional claims against us. Though we are at this time unable to determine the ultimate outcome of these matters, an adverse determination could have a material adverse effect on our business and our consolidated financial statements.

Cardizem CD Antitrust Litigation

Beginning in August 1998, several putative class action lawsuits were filed against Aventis (formerly Hoechst Marion Roussel, Inc.) and us arising from a 1997 stipulation entered into between Aventis and us in connection with a patent infringement suit brought by Aventis with regard to its product, Cardizem CD. The actions pending in federal court have been consolidated for multi-district litigation purposes in the U.S. District Court for the Eastern District of Michigan, with one of the cases filed by a group of direct purchasers having since been remanded back to the U.S. District Court for the Southern District of Florida. The complaint in each action alleges that Aventis and us, by way of the 1997 stipulation, have engaged in alleged state antitrust and other statutory and common law violations that allegedly have given Aventis and us a near monopoly in the U.S. market for Cardizem CD and a generic version of that pharmaceutical product. Each complaint seeks compensatory damages on behalf of each class member in an unspecified amount and, in some cases, treble damages, as well as costs and counsel fees, disgorgement, injunctive relief and other remedies. In June 2000, the U.S. District Court for the Eastern District of Michigan granted summary judgment to plaintiffs finding that the 1997 stipulation was a per se violation of antitrust laws. On June 13, 2003, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court’s decision, and on October 12, 2004, the U.S. Supreme Court declined to review this case.

Essentially reiterating the claims asserted against us in the aforementioned Cardizem CD antitrust class action litigation and seeking the same relief sought in that litigation are: (i) the May 14, 2001 complaint filed by the attorneys general for the states of New York and Michigan, joined by 13 additional states and the District of Columbia, on behalf of their government entities and consumers resident in their jurisdictions, which was subsequently amended to add 12 additional states and Puerto Rico to the action; (ii) the July 26, 2001 complaint filed by Blue Cross Blue Shield of Michigan, joined by three other Blue Cross Blue Shield plans; (iii) two actions pending in state courts in Florida, and (iv) two actions pending in state courts in Kansas.

On November 26, 2002, the U.S. District Court for the Eastern District of Michigan approved a settlement between the direct purchasers and Aventis and us. In October 2003, the U.S. District Court for the

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Eastern District of Michigan approved a settlement between the indirect purchasers and Aventis and us. In November 2004, the U.S Court of Appeals for the Sixth Circuit denied an appeal of the District Court’s approval of that settlement. On May 23, 2005, the U.S. Supreme Court refused to hear the appeal. On May 31, 2005, a motion was entered granting the plaintiffs motion to distribute the settlement funds to consumers.

All of the cases regarding this matter have been settled or dismissed or are in the process of being dismissed.

Wellbutrin SR Related Securities Claims

Seven complaints were filed against us and certain of our current and former officers and directors for alleged material misrepresentations regarding the expiration dating for our generic versions of Wellbutrin SR/Zyban and that we knew that our products would not receive timely FDA approval. All of these cases were consolidated and on October 20, 2003, the plaintiffs filed a consolidated amended class action complaint in the U.S. District Court for the Southern District of Florida against us and Richard J. Lane, our former Chief Executive Officer, alleging a class period from March 1, 2002 through March 4, 2003. After the District Court granted our motion to dismiss this complaint, on March 5, 2004, the plaintiffs further amended their complaint. This matter was settled in March 2005 for $2,500, which has been preliminarily approved by the court subject to a settlement hearing date of October 7, 2005. The proposed settlement does not require a material payment by us, as the settlement proceeds will mainly be paid by our insurance carrier.

PPA Litigation

Beginning in October 2001, 12 product liability lawsuits were filed against us, and others, for personal injuries allegedly arising out of the use of phenylpropanolamine (PPA). The actions have been consolidated and transferred to the U.S. District Court for the Western District of Washington. We were named in the suits because we acquired the Entex product from Elan. While PPA was at one time contained in Elan’s Entex product, we reformulated Entex upon acquiring it from Elan and eliminated PPA as an active ingredient thereof. All of these cases were dismissed, either voluntarily or pursuant to court order. Notwithstanding a court order dated September 15, 2004, which dismissed the case and enjoined the re-filing of that case in state court, in December 2004, the plaintiff in one of those actions, Laura M. Bonucchi, filed an amended complaint in the Michigan Circuit Court for the County of Ingham, to again name us as a defendant in connection with this matter. In April 2005, a hearing was set on our motion to dismiss. However, in May 2005, the court canceled the hearing and remanded the matter to a different judge. Elan has agreed to indemnify us with respect to this claim.

Lemelson Patent Litigation

On November 23, 2001, the Lemelson Medical, Education & Research Foundation, LP filed an action in the U.S. District Court for the District of Arizona alleging patent infringement against us and others involving “machine vision” or “computer image analysis.” On March 20, 2002, the U.S. District Court for the District of Arizona entered an Order of Stay in the proceedings, pending the resolution of another suit before the U.S. District Court for the District of Nevada, which involves the same patents, but does not involve us. On January 23, 2004, that Nevada court issued an order determining that certain Lemelson patents, including the patents asserted against us, were unenforceable. Lemelson moved to amend or alter that judgment and on May 27, 2004, an amended judgment of non-infringement was entered. On June 22, 2004, Lemelson appealed the judgment to the U.S. Court of Appeals for the Federal Circuit, which was heard by the Federal Circuit Court of Appeals on June 6, 2005. No ruling has been issued by the Federal Circuit Court of Appeals.

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

Other Pending Matters

We are also involved in various other disputes, governmental and/or regulatory inspections, inquiries, investigations and proceedings that are deemed immaterial by us, and litigation may arise from time to time in the ordinary course of business. The process of resolving such matters through litigation or other means is inherently uncertain, and it is possible that the resolution of these matters could have a material adverse effect on our business and consolidated financial statements.

Contingencies

We are subject to regular inspections by FDA. The FDA completed an inspection in May 2005 and issued a Form 483 — List of Inspectional Observations. We have provided FDA with our response to that Form 483, which included a proposed corrective action plan. Any non-compliance with current Good Manufacturing Practices (cGMP), or the corrective action plan we have proposed to FDA in response to Forms 483, could have a material adverse effect on our financial condition and results of operations.

In June 2004, the FDA approved an NDA for an OTC product containing the same active ingredients as our Entex PSE prescription product. According to FDA guidance, once FDA approves a version of any product that is presently permitted to be on the market and sold by prescription without an approved ANDA or NDA, similar unapproved drug products, such as our Entex product line, may be subject to FDA action. We will continue to periodically assess the unamortized portion of our Entex product rights and inventories ($2,263 and $185, respectively, as of June 30, 2005) and the useful life of our Entex product rights whenever events or changes in circumstances indicate that the carrying amount of our Entex product rights may not be recoverable.

Pursuant to our agreement with Genpharm Inc., we began marketing all four strengths of Genpharm’s generic version of Paxil® (paroxetine hydrochloride) in the United States, in exchange for a royalty based on the net profits, as defined, in May 2004. Andrx and Genpharm agreed to equally share the attorneys’ fees associated with the pending patent infringement litigation with Glaxo SmithKline involving Genpharm’s product. That litigation has been “stayed” and will be dismissed by Glaxo in the event Glaxo does not prevail in its appeal of an adverse determination in a related patent litigation matter. Andrx and Genpharm agreed to share any patent infringement damages that may ultimately be awarded commensurate with their respective share of profits, except that we have agreed to be responsible for any damages awarded to Glaxo in the pending patent litigation that exceeds the aggregate royalty amount Genpharm received from us. Other sharing arrangements apply to other types of claims that may be asserted.

In connection with our agreements with First Horizon for the sale and licensing of certain rights and assets related to Altoprev, we are entitled to receive up to $35,000 in proceeds for Altoprev, contingent upon meeting certain supply requirements, as defined. Proceeds we receive for Altoprev are refundable if certain supply requirements, as defined, are not maintained over a specified period. This contingency abates ratably over a 30-month period beginning on August 1, 2005. Of such $35,000 amount, $23,333 was received in April 2005 and the remaining $11,667 was recorded in June 2005 and is included in other current assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet, as we believe that our agreements with First Horizon currently entitle us to receive such $11,667. However, we received only $4,084 of such amount in July 2005 due to First Horizon’s contention that the $7,583 balance is not due to us as a result of a disagreement concerning the dating of the 60mg product to be delivered by us to First Horizon.

Able Laboratories, Inc., a vendor of our distribution business, initiated a recall of all of their products in the second quarter of 2005. On July 18, 2005, Able filed a petition to reorganize under Chapter 11 of the United

Andrx Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
(in thousands, except for share and per share amounts)

States Bankruptcy Code. As a result, we may owe amounts to our customers in connection with the recall and will only have an unsecured claim against Able to recover such amount in the bankruptcy proceeding. We have reserved the entire estimated amount of this unsecured claim of $2,556.

In June 2005, we recorded the second $10,000 milestone payment due in connection with our agreement with Takeda to develop and thereafter manufacture a combination product consisting of Takeda’s Actos (pioglitazone) and our extended-release metformin, which was received in July 2005. This $10,000 amount is included in other current assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet. As we may be required to repay all or a portion of the $20,000 in milestone payments from Takeda, this entire amount is reflected as deferred revenue in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet.

Tax Matters

The IRS is in the process of finalizing their audits for the years 1999 through 2002. Despite our belief that our tax return positions are correct, it is our policy to establish accruals for tax contingencies that may result from examinations by tax authorities. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. It is reasonably possible that our effective tax rate and/or cash flows may be materially impacted by the ultimate resolution of our tax positions. See Note 7 for a discussion of our tax accruals.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our Business

We are a pharmaceutical company that:

	•		develops, manufactures and commercializes generic versions of controlled-release, niche and immediate-release pharmaceutical products, including oral contraceptives;

	•		distributes pharmaceuticals, primarily generics, which have been commercialized by others, as well as our own, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians’ offices; and

	•		develops and manufactures pharmaceutical products for other pharmaceutical companies, including combination products and controlled-release formulations utilizing our patented technologies and formulation capabilities.

Our controlled-release pharmaceutical products use our proprietary controlled-release drug delivery technologies. Controlled-release pharmaceutical products generally provide more consistent drug levels in the bloodstream than immediate-release dosage forms and may improve drug efficacy and reduce side effects, by releasing drug dosages at specific times and in specific locations in the gastrointestinal tract of the body. They also provide “patient friendly” dosage forms that reduce the number of times a drug must be taken, thus improving patient compliance.

We have commercialized brand pharmaceuticals that, in some instances, use our proprietary controlled-release drug delivery technologies. As discussed below, we sold and licensed certain rights and assets related to Fortamet® and Altoprev®, our primary brand products, to First Horizon Pharmaceutical Corporation on March 28, 2005. We have agreed to continue to manufacture these products for First Horizon.

We are focusing our efforts on our core competencies of formulation development of generic versions of controlled-release and other pharmaceutical products as well as the sales, marketing and distribution of both our own and others’ generic pharmaceutical products. Our growth strategies include both internal and external efforts, such as strategic alliances, collaborative agreements and acquisitions. We continue to seek agreements with third parties that will leverage our formulation capabilities and our controlled-release technologies, including but not limited to, agreements to develop combination and other products.

Key Performance Factors

In our generic business, growth will continue to result primarily from the launch of our new products and will be influenced by the extent of competition such products will encounter. Such growth will be offset by reductions in price and market share of our existing products.

In our distribution business, growth will continue to be primarily a function of our participation in the distribution of new generic products launched by others, offset by the net price declines typically associated with the distribution of generic products over time.

Our operating results have been and continue to be highly dependent on (i) a limited number of products, particularly the revenues from our generic versions of Cardizem® CD and, to a lesser extent, Tiazac® and Glucotrol XL® (currently supplied by Pfizer), (ii) our distribution business, which is generally reflective of the growth of the generic industry as a whole, and (iii) production related write-offs, under-utilization and inefficiencies at our manufacturing facilities.

Future operating results will also continue to depend on the timing and extent of additional competition our existing generic products will encounter; the timing of our launch of our future generic products, particularly our generic versions of Biaxin® XL and Toprol-XL®, as well as Concerta® and additional oral contraceptives; our participation in Amphastar’s commercialization of its generic version of Lovenox®; and the extent of competition that those products will face. The timing and value of generic product introductions depends on a number of factors, including successful scale-up, receiving Food and Drug Administration (FDA) marketing approval, satisfactory resolution of patent litigation and Citizen Petitions, our manufacturing capabilities and capacities, our maintaining compliance with current Good Manufacturing Practices (cGMP) and other FDA guidelines, competition, the expiration of others’ patent and exclusivity rights, and various other factors described in our Annual Report on Form 10-K for the year ended December 31, 2004 (2004 10-K) and in our other U.S. Securities and Exchange Commission (SEC) filings. In addition, future operating results will be influenced by First Horizon’s ability to market Altoprev and Fortamet and our related royalties, as well as our ability to meet the supply requirements for Altoprev in association with the First Horizon agreements, and the timing of generic introductions of Altoprev and Fortamet.

Forward Looking Statements

Forward-looking statements (statements which are not historical facts) in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein or which are otherwise made by or on behalf of Andrx that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “to,” “plan,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements involve risk and uncertainties, including but not limited to, our dependence on a relatively small number of products; licensing revenues; the timing and scope of patents issued to our competitors; the timing and outcome of patent, antitrust and other litigation and future product launches; whether we will be awarded any marketing exclusivity period and, if so, the precise dates thereof; whether other companies will be awarded exclusivity rights that delay the approval or launch of our product, and for how long, including our generic version of Concerta; whether additional inventory write-offs for our generic version of Concerta will be required; government regulation generally; competition; manufacturing capacities, safety issues, output and quality processes; our ability to develop and successfully commercialize new products; the loss of revenues from existing products; development and marketing expenses that may not result in commercially successful products; our inability to obtain, or the high cost of obtaining, licenses for third party technologies; our ability to meet the supply and manufacturing requirements of the First Horizon agreement; the consolidation or loss of customers; our relationship with our suppliers; the success of our joint ventures; difficulties in integrating, and potentially significant charges associated with, acquisitions of technologies, products and businesses; our inability to obtain sufficient supplies and/or active pharmaceuticals from key suppliers; the impact of sales returns and allowances; product liability claims; rising costs and limited availability of product liability and other insurance; recent management changes and the potential loss of senior management and other key personnel; failure to comply with environmental laws; the absence of certainty regarding the receipt of required regulatory approvals or the timing or terms of such approvals; our ability to commercialize all of our pre-launch inventory. Actual results may differ materially from those projected in a forward-looking statement. We are also subject to other risks detailed herein or detailed from time to time in our 2004 10-K or in our other SEC filings. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in our 2004 10-K and in our other SEC filings.

Readers are cautioned not to place reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of these interim financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates we have made include, but are not limited to, those related to revenue recognition, sales returns and allowances (SRAs), allowance for doubtful accounts receivable, inventories and cost of goods sold, determining the useful life or impairment of goodwill and other long-lived assets and income taxes. The net revenues we report related to collaborative agreements for the sale of certain products sold by other parties are subject to numerous estimates by these other parties, such as returns and other SRAs and certain related expenses. We periodically evaluate estimates used in the preparation of the consolidated financial statements for reasonableness, including estimates provided by third parties. Appropriate adjustments to the estimates will be made prospectively, as necessary, based on such periodic evaluations. We base our estimates on, among other things, currently available information, our historical experience and various assumptions, which together form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that our assumptions are reasonable under the circumstances, estimates would differ if different assumptions were utilized and these estimates may prove in the future to have been inaccurate.

Revenue Recognition, including Sales Returns and Allowances (SRAs)

Andrx distributed product revenues are derived from the sale of pharmaceutical products purchased from third parties, including generic products sold on behalf of our unconsolidated joint ventures. Andrx product revenues include our generic and brand product revenues. Andrx generic product revenues are derived from the sale of generic products either manufactured by us pursuant to our Abbreviated New Drug Applications (ANDAs) or sold with our New Drug Code (NDC), but exclude generic products sold on behalf of our unconsolidated joint ventures. Andrx brand product revenues were revenues derived from the sale of branded products either manufactured by us pursuant to our New Drug Application (NDA) or sold with our NDC through March 31, 2005. Sales generated by the Entex and Anexsia product lines, previously reflected in Andrx brand product revenues, are included in Andrx generic product revenues.

Andrx distributed product revenues and the related cost of goods sold are recognized at the time the product is accepted by our customers.

Andrx generic and brand product revenues and the related cost of goods sold are recognized after products are accepted by our customers and are based on our estimates of when such products will be pulled through the distribution channel. We do not recognize revenue and the related cost of goods sold where we believe the customer has more than a reasonable level of inventory, taking into account, among other things, historical prescription data provided by external independent sources, projected prescription data, historical purchases and demand, incentives granted to customers, customers’ right of return, competing product introductions and our product inventory levels in the distribution channel, all of which we periodically evaluate.

rebates have historically been predictable and less subjective. In our generic business, our most significant SRAs are for estimated discounts, customer and Medicaid rebates, returns, chargebacks and shelf stock adjustments. Of these estimates, the estimates for returns, chargebacks and shelf stock adjustments are more subjective and, consequently, may be more variable. In our brand business, our most significant SRAs were for estimated discounts, returns, Medicaid rebates and managed care rebates. Of these estimates, the estimates for returns are more subjective and, therefore, may be more variable.

SRAs are established based upon consideration of a variety of factors, including, but not limited to, prescription data, inventory reports and other information received from our customers and other third parties, our customers’ right of return, historical information by product, the number and timing of competitive products approved for sale, both historically and as projected, the estimated size of the market for our products, current and projected economic conditions, anticipated future product pricing, future levels of prescriptions for our products and analysis that we perform. We believe that the sales allowance accruals are reasonably determinable and are based on the information available at that time to arrive at our best estimate of the accruals. The key assumptions we use to arrive at our best estimate of the accruals for SRAs are our estimates of inventory levels in the distribution channel, future price changes and potential returns, as well as historical information by product. Our estimates of prescription data, inventory at customers and in the distribution channel are subject to the inherent limitations of estimates that rely on third party data, as certain third party information may itself rely on estimates, and reflect other limitations. Actual product returns, chargebacks, shelf stock adjustments and other SRAs incurred are dependent upon future events. We periodically monitor the factors that influence SRAs and make adjustments to these provisions when we believe that actual product returns, chargebacks, shelf stock adjustments and other SRAs may differ from established allowances. If conditions in future periods change, revisions to previous estimates may be required, potentially in significant amounts. Changes in the level of provisions for estimated product returns, chargebacks, shelf stock adjustments and other SRAs will affect revenues.

Returns - Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period both prior and subsequent to the product’s expiration date. Our estimate of the provision for returns is based upon our historical experience with actual returns and estimated levels of inventory in the distribution channel. We periodically monitor the factors that influence our provision for returns and make adjustments to the provision when we believe that actual product returns may differ from our established reserves. These adjustments may occur over a prolonged period of time.

In our distribution business, our return allowances, excluding the 2005 charge for returns related to Able Laboratories, Inc.’s recall of its products, as a percentage of gross sales were 1.0% and 0.9% for the six months ended June 30, 2005 and 2004, respectively. If our 2005 distribution return allowances, excluding the 2005 charge for returns related to Able’s recall of its products, as a percentage of gross revenues were to differ by 10% from our estimates, our distribution business return allowances for the six months ended June 30, 2005 would change by $365,000. In our generic product business, our return allowances as a percentage of gross sales were 1.1% and 2.4% for the six months ended June 30, 2005 and 2004, respectively. If our 2005 generic return allowances as a percentage of gross revenues were to differ by 10% from our estimates, our generic business return allowances for the six months ended June 30, 2005 would change by $247,000.

Chargebacks - We enter into agreements with certain pharmacy chains and other customers to establish contract pricing for certain of our products, which these entities purchase from the wholesaler of their choice. Alternatively, we enter into agreements with certain wholesalers to establish contract pricing for certain products that the wholesaler will agree to place in their preferential pricing programs. Under either form of agreement, we will provide our wholesalers with a credit, known as a chargeback, for an amount equal to the

difference between our agreed upon contract price and the price we previously invoiced to the wholesaler. The provision for chargebacks is based on our estimate of wholesaler inventory levels, and the expected sell-through of our products by the wholesalers at the contract price, based on historical chargeback experience and other factors. Our estimates of inventory levels at the wholesalers are subject to inherent limitations, as they rely on third party data, and their data may itself rely on estimates, and be subject to other limitations. We periodically monitor the factors that influence our provision for chargebacks, and make adjustments when we believe that actual chargebacks may differ from established allowances. These adjustments occur in a relatively short period of time.

As of June 30, 2005, our chargeback accrual as a percentage of our estimate of generic product inventory levels at wholesalers was 24%, based on historical experience, our estimate of wholesaler inventory levels and the expected sell-through of our generic products by the wholesalers at the contract price. Historically, the accrual as a percentage of our estimate of generic product inventory levels at wholesalers ranged from 16% to 24%. If actual chargeback rates as a percentage of the inventory levels at wholesalers or our estimate of wholesaler inventory levels were to differ by 10% from the rates or levels used in our provision estimate, the impact on our chargeback accrual as of June 30, 2005 would be $405,000.

Shelf Stock Adjustments - Shelf stock adjustments are inventory credits we issue to our customers to reflect decreases in the selling prices of our generic products. These adjustments are based upon the amount of product that our customers have remaining in their inventories at the time we decide to reduce the selling price of our product, generally as a result of market conditions, and not pursuant to contractual arrangements with customers. These inventory credits allow customers with existing inventories to compete with those buying product at the current market price, and allows us to maintain shelf space, market share and customer loyalty. Amounts recorded for estimated shelf stock adjustments are based on estimated launch dates of competing products, estimated declines in market price and estimates of inventory held by the customer. These estimates are subject to inherent limitations, as they rely on third party data and our judgment of the likelihood of future events and the likely impact of those events. We periodically monitor these and other factors that influence our provision for shelf stock adjustments and make adjustments when we believe that actual shelf stock adjustments may differ from established allowances.

As of June 30, 2005, our generic business shelf stock adjustment accrual was based on estimated declines in market price by product ranging from 2% to 20% and estimated levels of inventory at customers by product ranging from approximately one month to two months on average. If actual declines in market price were to differ by 5% on average from our estimates, the impact on our generic business shelf stock adjustment accrual as of June 30, 2005 would be $2.0 million. If actual levels of inventory at customers were to differ by 10% from our estimates, the impact on our generic business shelf stock adjustment accrual as of June 30, 2005 would be $527,000.

When we enter into revenue arrangements with multiple deliverables, we evaluate and determine whether the deliverables are separate units of accounting and we divide the deliverables into separate units of accounting, if appropriate. If the deliverables are separate units of accounting and there is objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units based on their relative fair values. If there is no reliable and objective evidence of fair value for a delivered item, but there is objective and reliable evidence of fair value for the undelivered item(s), the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered item(s). If there is no reliable and objective evidence of fair value for an undelivered item, or if the arrangement consideration allocable to a delivered item does not have standalone value to the customer, or a right of return exists, the delivered item does not qualify as a separate unit of accounting. In this case, the consideration received for that deliverable is combined with the amount allocable to the other undelivered item(s), deferred and recognized systematically over the periods that the revenues are earned. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements.

Impairment of Goodwill

Under the purchase method of accounting for acquisitions, goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is subject to an assessment for impairment in value by applying a fair-value based test on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any applicable impairment loss is the amount, if any, by which the implied fair value of goodwill is less than the carrying value. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements.

Income Taxes

Pre-Launch Inventories

There are typically few risks and uncertainties concerning market acceptance of approved generic products because the brand product has an established demand, and the lower priced generic product may be substituted for that referenced brand product. Therefore, in order to optimize our profit potential and avoid being at a competitive disadvantage, we have from time to time made, and may hereafter make, commercial quantities of our product candidates prior to the date that we anticipate that our ANDA submissions for such products will receive FDA final marketing approval (FDA Approval), and/or we have achieved a satisfactory resolution of pending patent issues, which may involve litigation, with respect to such product. We refer to these inventories as “pre-launch inventories”.

accordance with FDA regulations well before the date we anticipate our product will be approved, and may entail a “scale-up” process. The scale-up process allows us to modify the equipment and processes employed in the manufacture of our product to increase manufacturing lot sizes. Scale-up activities are expensed, including the raw material used in such activities.

As of June 30, 2005 and December 31, 2004, we had pre-launch inventories pending final FDA approval and/or satisfactory resolution of litigation broken down as follows:


	June 30,		December 31,
	2005		2004
	($ in thousands)
Raw materials	$	12,502	$	7,603
Work in process		2,016		2,623
Finished goods		546		1,519

	$	15,064	$	11,745

Pre-launch inventories as of June 30, 2005 consisted primarily of our generic version of Biaxin® XL, which has been approved by FDA and is subject to patent litigation (see Note 13 of Notes to Unaudited Condensed Consolidated Financial Statements), and our generic version of Monopril®, as well as $1.5 million of raw materials of our generic version of Concerta®. Pre-launch inventories as of December 31, 2004 consisted primarily of our generic version of Concerta. The remaining shelf lives of our pre-launch inventories generally exceed one year.

For the three and six months ended June 30, 2005, we had write-offs of pre-launch inventories related to our generic version of Concerta in the amount of $4.3 million and $5.3 million, respectively. These write-offs primarily resulted from the aging of product that may be short-dated by the date we currently anticipate that our product will likely be sold.

In July 2005, the first patent related to Concerta was listed in the FDA’s Electronic Orange Book. Although we filed our Paragraph IV certification with the FDA relating to this patent and notified the NDA holder and all patentees of such certification, we learned that FDA received the first Paragraph IV certification as to this patent prior to our certification. Consequently, it is likely that FDA will award the 180-day marketing exclusivity rights to another ANDA filer. It is also our understanding that, under current law, no 30-month stay of approvals will be imposed as a result of any litigation that results from the listing of this patent in the Orange Book. While we believe that we have an approvable product, as evidenced by the building of pre-launch inventories, our approval may now be subject to the 180-day exclusivity period granted to another ANDA filer. Based on these recent events, we no longer believe that the FDA will approve our generic version of the Concerta product during 2005. Consequently, we have re-evaluated the probable future economic benefits related to certain of our pre-launch inventories due to dating and have expensed $4.1 million to cost of goods sold related to our pre-launch inventories.

ANDRX CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS
Revenues and Gross Profit (Loss)


	Three Months Ended
	June 30,			June 30,
	2005			2004
	(In thousands)
Distributed Products
Gross revenues	$	180,290		$	170,865
SRAs		11,469			7,538
SRAs as a % of gross revenues		6.4	%		4.4	%
Net revenues		168,821			163,327
Gross profit		34,252			29,770
Gross margin		20.3	%		18.2	%
Andrx Products — Generic
Gross revenues	$	114,459		$	135,094
SRAs		36,124			36,313
SRAs as a % of gross revenues		31.6	%		26.9	%
Net revenues		78,335			98,781
Gross profit		22,532			29,063
Gross margin		28.8	%		29.4	%
Andrx Products — Brand
Gross revenues	$	—		$	25,641
SRAs		—			9,679
SRAs as a % of gross revenues		—			37.7	%
Net revenues		—			15,962
Gross profit		—			9,580
Gross margin		—			60.0	%
Andrx Products-Total
Gross revenues	$	114,459		$	160,735
SRAs		36,124			45,992
SRAs as a % of gross revenues		31.6	%		28.6	%
Net revenues		78,335			114,743
Gross profit		22,532			38,643
Gross margin		28.8	%		33.7	%
TOTAL PRODUCT REVENUES
Gross revenues	$	294,749		$	331,600
SRAs		47,593			53,530
SRAs as a % of gross revenues		16.1	%		16.1	%
Net revenues		247,156			278,070
Gross profit		56,784			68,413
Gross margin		23.0	%		24.6	%
LICENSING AND ROYALTIES
Net revenues	$	6,748		$	12,489
Gross margin		100.0	%		100.0	%
OTHER
Net revenues	$	5,165		$	25
Gross (loss) profit		(4,103	)		25
Gross margin		(79.4	)%		100.0	%
TOTALS
Net revenues	$	259,069		$	290,584
Gross profit		59,429			80,927
Gross margin		22.9	%		27.8	%

Three Months Ended June 30, 2005 (2005 Quarter) Compared to Three Months Ended June 30, 2004 (2004 Quarter)

For the 2005 Quarter, we generated net income of $8.0 million, compared to $6.4 million for the 2004 Quarter.

Revenues and Gross Profit (Loss)

Distributed Products

Revenues from distributed products increased by 3.4% to $168.8 million for the 2005 Quarter, compared to $163.3 million for the 2004 Quarter. The increase generally reflects our participation in the distribution of new generic product introductions, primarily due to the launch of generic versions of Neurontin®, Duragesic®, OxyContin® and Ultracet®, partially offset by the overall price declines common to generic products. Net revenues were negatively impacted by a $2.6 million charge for returns related to Able Laboratories, Inc.’s recall of its products, and its subsequent bankruptcy filing. SRAs as a percentage of gross revenues increased by 2.0% to 6.4% in the 2005 Quarter, from 4.4% in the 2004 Quarter. The increase was primarily attributable to the $2.6 million charge for returns related to Able’s recall of its products recorded in the 2005 Quarter. In the 2005 Quarter, revenues from distributed products generated $34.3 million of gross profit with a gross margin of 20.3% compared to $29.8 million of gross profit with a gross margin of 18.2% for the 2004 Quarter. The improvement in the gross margin was primarily attributable to the impact of higher margins related to new product introductions as well as the favorable impact of purchasing related programs.

When we participate in the distribution of generic products that face little or no competition, we generally generate higher revenues and lower gross margins. When such products encounter additional competition, the resulting lower prices generally cause us to generate lower revenues, but higher gross margins, as we generally are able to purchase such products at more competitive prices.

Andrx Products

Generic Products

For the 2005 Quarter, revenues from our generic products decreased by 20.7% to $78.3 million, compared to $98.8 million in the 2004 Quarter. Our generic product sales include sales of (i) controlled-release generic products, (ii) immediate-release and niche generic products, and (iii) other products, which include our Entex and Anexsia product lines, previously reflected in Andrx brand product revenues. There were no significant product introductions during the 2005 Quarter.

Revenues from our generic controlled-release products were $57.2 million for the 2005 Quarter, compared to $76.5 million in the 2004 Quarter, a decrease of $19.3 million, or 25.3%. The decrease in revenues from controlled-release products primarily resulted from $7.4 million in decreased revenues from our generic version of Cardizem CD (primarily price), $6.7 million in decreased revenues from our generic version of Glucotrol XL, supplied by Pfizer (primarily volume), $3.9 million in decreased revenues from our generic version of OTC Claritin-D® 24 (primarily price), and $3.3 million in decreased revenues from our generic version of Tiazac (primarily volume).

Revenues from our immediate-release and niche generic products were $18.8 million for the 2005 Quarter, compared to $18.6 million in the 2004 Quarter. The increase was mainly due to an increase in revenues of $3.5 million from products launched in the middle of the 2004 Quarter, (primarily the generic version of Paxil®, supplied by Genpharm Inc.), partially offset by a decrease in revenues from other immediate-release and niche generic products of $4.1 million. The decrease in revenues from other immediate-release and niche generic products primarily resulted from decreases in revenues from our generic versions of Glucophage® of $1.4 million ($2.4 million in price decreases, partially offset by $1.0 million in volume increases), OTC Claritin

RediTabs® of $1.2 million (equally price and volume), and Ventolin®, supplied by Armstrong Pharmaceuticals, Inc., of $1.0 million (primarily volume).

SRAs as a percentage of gross revenues increased by 4.7% to 31.6% in the 2005 Quarter, from 26.9% in the 2004 Quarter. The increase was primarily attributable to an increase in chargebacks of 3.7% as a percentage of gross revenues mainly due to increases in sales subject to chargebacks and rates due to price erosion.

In the 2005 Quarter, our generic products generated $22.5 million of gross profit with a gross margin of 28.8%, compared to $29.1 million of gross profit with a gross margin of 29.4% in the 2004 Quarter. The $6.6 million decrease in gross profit from our generic products for the 2005 Quarter, compared to the 2004 Quarter, resulted primarily from reductions in gross profit from existing generic products of $26.0 million, partially offset by a decrease in other charges to cost of goods sold of $17.8 million, mainly due to impairment charges of $14.5 million and $3.5 million related to our North Carolina facility and our Entex product rights, respectively, in the 2004 Quarter.

In the 2005 Quarter, we recorded charges directly to cost of goods sold of $4.9 million in write-offs of pre-launch inventories (mainly due to $4.3 million in write-offs of our generic version of Concerta), $1.6 million as a result of production related write-offs, and $1.9 million for under-utilization and inefficiencies at our manufacturing facilities. In the 2004 Quarter, we recorded charges directly to cost of goods sold of $4.4 million as a result of production related write-offs and $3.0 million for under-utilization and inefficiencies at our manufacturing facilities.

In July 2005, the first patent related to Concerta was listed in the FDA’s Electronic Orange Book. Although we filed our Paragraph IV certification with the FDA relating to this patent and notified the NDA holder and all patentees of such certification, we learned that FDA received the first Paragraph IV certification as to this patent prior to our certification. Consequently, it is likely that FDA will award the 180-day marketing exclusivity rights to another ANDA filer. It is also our understanding that, under current law, no 30-month stay of approvals will be imposed as a result of any litigation that results from the listing of this patent in the Orange Book. While we believe that we have an approvable product, as evidenced by the building of pre-launch inventories, our approval may now be subject to the 180-day exclusivity period granted to another ANDA filer. Based on these recent events, we no longer believe that the FDA will approve our generic version of the Concerta product during 2005. Consequently, we have re-evaluated the probable future economic benefits related to certain of our pre-launch inventories due to dating and have expensed $4.1 million to cost of goods sold related to our pre-launch inventories.

We purchased our North Carolina facility in December 2002 for approximately $28.3 million, and began renovating the facility in 2003. In June 2004, we determined that a significant expansion of our Florida facilities would allow us to fulfill our current and projected manufacturing requirements through at least 2007, and decided to discontinue renovation of our North Carolina facility. These actions, among other things, made it more likely than not that this facility will be sold. Accordingly, in June 2004, we recorded a $14.5 million impairment charge to our Generic Products Segment cost of goods sold, which represented the difference between the carrying value and the estimated fair value of our North Carolina facility based on independent appraisals. We entered into a listing agreement for this facility in July 2005. Management estimates that it is likely that the sale of this facility will not be completed within one year. The ultimate amount realized from a sale of this facility may differ from our fair value estimate.

In June 2004, as a result of the FDA approval of an NDA for an OTC product containing the same active ingredients as our Entex PSE prescription product, we recorded a charge of $3.5 million to our cost of goods sold related to the impairment of our Entex product rights. The charge was originally recorded as part of the Brand Products Segment, but has been reclassified to the Generic Products Segment herein. This charge represented the difference between the carrying amount and the fair value of the Entex product rights based on the present value of estimated future cash flows. According to FDA guidance, once FDA approves a version of any product that is presently permitted to be on the market and sold by prescription without an approved ANDA or NDA, similar unapproved drug products, such as our Entex product line, may be subject to FDA action.

We expect to continue to experience charges to cost of goods sold as a result of production related write-offs, under-utilization and inefficiencies at our manufacturing facilities. Many of these charges relate to the expansion of our manufacturing facilities in anticipation of new product launches and other factors, as well as the cost of maintaining the North Carolina facility.

The decrease in gross margin from our generic products for the 2005 Quarter, compared to the 2004 Quarter, resulted primarily from price erosion, a decrease in our profit share from Perrigo’s sales of our OTC Claritin products as a result of additional competitors entering the market, and increased write-offs of pre-launch inventories of $4.7 million (mainly related to our generic version of Concerta), partially offset by the unfavorable impact in the 2004 Quarter from the impairment charges of $14.5 million and $3.5 million related to our North Carolina facility and our Entex product rights, respectively.

Disposition of Brand Business

For the 2004 Quarter, revenues from our brand products were $16.0 million (excluding sales from our Entex and Anexsia product lines, which were reclassified to generic products) with a gross profit of $9.6 million and a gross margin of 60.0%. There were no brand product revenues or gross profit for the 2005 Quarter as a result of the First Horizon transaction discussed below.

In December 2004, our board of directors approved a plan to divest, or seek other strategic alternatives for our brand pharmaceutical business. On March 28, 2005, we consummated agreements with First Horizon for the sale and licensing of certain rights and assets related to our former Fortamet and Altoprev brand pharmaceutical products, and the manufacturing and supply of these products, at which time we received $50 million related to Fortamet. We are entitled to receive up to $35 million in proceeds for Altoprev, contingent upon meeting certain supply requirements, as defined. Proceeds we receive for Altoprev are refundable if certain supply requirements, as defined, are not maintained over a specified period. Of such $35 million amount, $23.3 million was received in April 2005 and the remaining $11.7 million was recorded in June 2005 and is included in other current assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet, as we believe that our agreements with First Horizon currently entitle us to receive such $11.7 million. However, we received only $4.1 million of such amount in July 2005 due to First Horizon’s contention that the $7.6 million balance is not due to us as a result of a disagreement concerning the dating of the 60mg product to be delivered by us to First Horizon. We are also entitled to receive royalties of 8% and 15% of net sales, as defined, from First Horizon’s sales of Fortamet and Altoprev, respectively, until a respective product encounters generic competition. We have retained our obligation to pay a royalty to Sandoz related to net sales of Fortamet, as defined, until May 2009, which is subject to certain annual minimums ranging from $4 million to $5 million and a $10 million annual maximum. The $85 million of up-front fees to be received from First Horizon will be deferred and will be recognized as revenue on a straight-line basis generally over the ten-year term of the manufacturing and supply agreement. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.

Licensing and Royalties Revenue

In the 2005 Quarter, we recorded $6.7 million in licensing and royalties revenue, compared to $12.5 million in the 2004 Quarter. In the 2005 Quarter, licensing and royalties revenue primarily resulted from agreements with First Horizon, Kremers Urban Development Company (KUDCo), Ranbaxy Pharmaceuticals Inc., and Mallinckrodt, Inc. related to Fortamet and Altoprev, and generic versions of Prilosec®, Monopril-HCT, and Anexsia, respectively. The 2004 Quarter also included licensing and royalties revenue resulting from an agreement with Teva Pharmaceuticals Curacao N.V. and Impax Laboratories, Inc. related to a generic version of Wellbutrin SR 150mg and Zyban, which expired in September and November 2004, respectively.

Licensing and royalties revenues were as follows (in thousands):


	Three Months Ended
	June 30,		June 30,
	2005		2004			Change
First Horizon	$	2,695	$	—		$	2,695
KUDCo		1,645		(2,577	)		4,222
Mallinckrodt		1,612		682			930
Ranbaxy		647		—			647
Teva/Impax		—		14,289			(14,289	)
Other		149		95			54

	$	6,748	$	12,489		$	(5,741	)

Licensing and royalties revenue associated with the generic version of Prilosec for the 2004 Quarter included an allocation to us of $6.3 million made by KUDCo related to its June 2004 $50 million settlement of patent infringement litigation with Mylan Laboratories, Inc. and Esteve Quimica S.A., partially offset by a $1.8 million reversal of sales returns and allowances reserve previously recorded by KUDCo.

Other Revenue

In the 2005 Quarter, we recorded $5.2 million in other revenue that included the accretion of the deferred revenue related to the upfront payments received for Fortamet, as well as the related Fortamet and Altoprev contract manufacturing revenues associated with the supply of these products to First Horizon. In the 2005 Quarter, we recorded a gross loss associated with other revenue of $4.1 million mainly as a result of the manufacturing costs related to these products, including $4.4 million in charges due to manufacturing issues primarily related to Altoprev, as well as $1.5 million in royalties to Sandoz Inc. and amortization of product rights related to Fortamet.

Revenues and Costs Related to First Horizon

The royalties that we are now receiving from First Horizon’s sales of Fortamet and Altoprev are included in licensing and royalties revenue. Our contract manufacturing revenues and the accretion of the deferred revenue related to upfront payments from First Horizon are recorded in other revenues. The manufacturing costs associated with these products as well as the Sandoz royalties and amortization for product rights related to Fortamet are included in cost of goods sold.

The following is a summary of revenues and costs related to First Horizon for the 2005 Quarter (in thousands):


Contract manufacturing revenue	$	3,876
Accretion of deferred revenue		1,250

Total other revenue		5,126
Licensing and royalties		2,695

Total revenue		7,821


Contract manufacturing costs		3,588
Royalties and product rights amortization		1,467
Manufacturing variances and write-offs		4,382

Total costs		9,437


Gross loss	$	(1,616	)

Selling, General and Administrative (SG&A)

SG&A expenses were $39.1 million, or 15.1% of total revenues for the 2005 Quarter, compared to $51.9 million, or 17.8% of total revenues for the 2004 Quarter. For both periods, SG&A expenses included expenses related to the administration, marketing, sale, distribution and warehousing of distributed products, our former brand products and our generic products, corporate overhead and legal costs (primarily patent infringement and antitrust matters related to our ANDA filings).

SG&A expenses, excluding the Brand Products Segment, were $36.1 million for the 2005 Quarter, compared to $31.7 million for the 2004 Quarter, an increase of $4.4 million. This increase was primarily attributable to (i) increased corporate overhead of $898,000, mainly due to increased costs of $527,000 associated with the support and maintenance of our JD Edwards Enterprise Resource Planning (ERP) system, and increased employee benefit costs of $708,000, partially offset by a reduction in insurance expense of $763,000 and (ii) increased distribution SG&A of $3.0 million, primarily due to increased wages and benefits of $2.0 million and increased bad debt expense of $663,000.

In our distribution business, we employed approximately 225 and 220 sales representatives and sales support staff in the 2005 and 2004 Quarters, respectively.

SG&A expenses for our Brand Business Segment were $3.0 million for the 2005 Quarter, compared to $20.2 million for the 2004 Quarter. This decrease of $17.2 million was primarily attributable to the termination of substantially all brand business employees effective May 2005. We will record an additional estimated $500,000 of severance cost in the third quarter of 2005 and may potentially incur additional costs related to leased facilities, which we currently estimate to be approximately $1.0 million.

Research and Development (R&D)

R&D expenses were $9.9 million for the 2005 Quarter, compared to $11.7 million in the 2004 Quarter, a decrease of $1.8 million, or 15.5%. The decrease in R&D spending was attributable to the absence of brand R&D in the 2005 Quarter, and a reimbursement of development costs from Takeda Chemical Industries, Ltd. of $1.8 million, partially offset by increases in expenses for our generic (ANDA) product development program. We submitted three ANDAs in each of the 2005 and 2004 Quarters.

Our R&D efforts are currently focused on developing controlled-release generic products, using our proprietary, controlled-release drug delivery technologies, as well as niche and immediate-release generic products, including oral contraceptives. We are also working on the development of a combination product comprised of Actos® (pioglitazone), marketed by Takeda, and our extended-release metformin product.

Goodwill Impairment, Litigation Settlements and Other Charges

In the 2004 Quarter, we recorded $7.8 million in litigation settlements and other charges primarily due to settlement costs of $6.0 million related to the KOS Pharmaceuticals, Inc. trademark litigation and $1.6 million related to the Alpharma USPD Inc. breach of contract litigation.

Equity in Earnings of Joint Ventures

We recorded $715,000 of equity in earnings of our unconsolidated joint ventures (ANCIRC and CARAN) in the 2005 Quarter, compared to $765,000 in the 2004 Quarter, a decrease of $50,000. ANCIRC is a 50/50 joint venture with Watson Pharmaceuticals, Inc. and CARAN is a 50/50 joint venture with Carlsbad Technologies, Inc.

Interest Income

We recorded interest income of $2.4 million in the 2005 Quarter, compared to $693,000 in the 2004 Quarter. The $1.7 million increase in interest income is primarily the result of the higher average level of cash, cash equivalents and investments available-for-sale maintained during the 2005 Quarter compared to the 2004 Quarter, as well as an increase in interest rates. We invest in taxable, tax-advantaged and tax-free investment grade securities.

Interest Expense

We incurred interest expense of $584,000 in the 2005 Quarter, compared to $587,000 in the 2004 Quarter. Interest expense is primarily related to the unused line fee and amortization of issuance costs related to our secured line of credit, and, to a lesser extent, financing charges on capital lease obligations and certain insurance premiums.

Income Taxes

For the 2005 and 2004 Quarters, we recorded a provision for income taxes of $4.9 million and $4.0 million, respectively, or 38% of income before income taxes. For both quarters, we provided for income taxes in excess of the expected annual effective federal statutory rate of 35% primarily due to the effect of state income taxes.

ANDRX CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS

Revenues and Gross Profit (Loss)


	Six Months Ended
	June 30,			June 30,
	2005			2004
	(In thousands)
Distributed Products
Gross revenues	$	367,235		$	351,617
SRAs		18,689			14,795
SRAs as a % of gross revenues		5.1	%		4.2	%
Net revenues		348,546			336,822
Gross profit		67,299			61,681
Gross margin		19.3	%		18.3	%
Andrx Products — Generic
Gross revenues	$	220,304		$	258,401
SRAs		63,421			72,181
SRAs as a % of gross revenues		28.8	%		27.9	%
Net revenues		156,883			186,220
Gross profit		52,257			71,522
Gross margin		33.3	%		38.4	%
Andrx Products — Brand
Gross revenues	$	17,293		$	39,493
SRAs		3,427			12,470
SRAs as a % of gross revenues		19.8	%		31.6	%
Net revenues		13,866			27,023
Gross profit		8,672			16,954
Gross margin		62.5	%		62.7	%
Andrx Products-Total
Gross revenues	$	237,597		$	297,894
SRAs		66,848			84,651
SRAs as a % of gross revenues		28.1	%		28.4	%
Net revenues		170,749			213,243
Gross profit		60,929			88,476
Gross margin		35.7	%		41.5	%
TOTAL PRODUCT REVENUES
Gross revenues	$	604,832		$	649,511
SRAs		85,537			99,446
SRAs as a % of gross revenues		14.1	%		15.3	%
Net revenues		519,295			550,065
Gross profit		128,228			150,157
Gross margin		24.7	%		27.3	%
LICENSING AND ROYALTIES
Net revenues	$	11,457		$	32,624
Gross margin		100.0	%		100.0	%
OTHER
Net revenues	$	6,020		$	70
Gross (loss) profit		(3,707	)		70
Gross margin		(61.6	)%		100.0	%
TOTALS
Net revenues	$	536,772		$	582,759
Gross profit		135,978			182,851
Gross margin		25.3	%		31.4	%

Six Months Ended June 30, 2005 (2005 Period) Compared to Six Months Ended June 30, 2004 (2004 Period)

For the 2005 Period, we generated net income of $43.3 million, compared to $33.1 million for the 2004 Period.

Revenues and Gross Profit (Loss)

Distributed Products

Revenues from distributed products increased by 3.5% to $348.5 million for the 2005 Period, compared to $336.8 million for the 2004 Period. The increase generally reflects our participation in the distribution of new generic product introductions, primarily due to the launch of generic versions of Neurontin and Duragesic, partially offset by the overall price declines common to generic products. Net revenues were negatively impacted by a $2.6 million charge for returns related to Able’s recall of its products, and its subsequent bankruptcy filing. SRAs as a percentage of gross revenues increased by 0.9% to 5.1% in the 2005 Period, from 4.2% in the 2004 Period. The increase was primarily attributable to the $2.6 million charge for returns related to Able’s recall of its products recorded in the 2005 Quarter. In the 2005 Period, revenues from distributed products generated $67.3 million of gross profit with a gross margin of 19.3% compared to $61.7 million of gross profit with a gross margin of 18.3% for the 2004 Period. The improvement in the gross margin was primarily attributable to the impact of higher margins related to new product introductions as well as the favorable impact of purchasing related programs.

Andrx Products

Generic Products

For the 2005 Period, revenues from our generic products decreased by 15.8% to $156.9 million, compared to $186.2 million in the 2004 Period. Our generic product sales include sales of (i) controlled-release generic products, (ii) immediate-release and niche generic products, and (iii) other products, which include our Entex and Anexsia product lines, previously reflected in Andrx brand product revenues. There were no significant product introductions during the 2005 Period.

Revenues from our generic controlled-release products were $116.2 million for the 2005 Period, compared to $142.0 million in the 2004 Period, a decrease of $25.8 million, or 18.2%. The decrease in revenues from controlled-release products primarily resulted from $12.3 million in decreased revenues from our generic version of Glucotrol XL, supplied by Pfizer ($3.0 million in price decreases and $9.3 million in volume decreases), $8.1 million in decreased revenues from our generic version of Cardizem CD ($4.2 million in price decreases and $3.9 million in volume decreases), $5.5 million in decreased revenues from our generic version of OTC Claritin-D 24 ($7.9 million in price decreases, partially offset by $2.4 million in volume increases), and $3.5 million in decreased revenues from our generic version of Tiazac ($1.2 million in price decreases and $2.3 million in volume decreases).

Revenues from our immediate-release and niche generic products were $34.6 million for the 2005 Period, compared to $36.2 million in the 2004 Period, a decrease of $1.6 million, or 4.4%. The decrease was mainly due to a decrease in revenues from existing immediate-release and niche generic products of $11.2 million, partially offset by an increase in revenues of $8.2 million from products launched in the 2004 Period, (primarily generic versions of Paxil, supplied by Genpharm, Vicoprofen® and Ortho Tri-Cyclen®), and $1.5 million of revenues related to a new product, a generic version of Pletal, supplied by Genpharm. The decrease in revenues from existing immediate-release and niche generic products primarily resulted from decreases in

revenues from our generic versions of Glucophage of $4.7 million ($6.2 million in price decreases, partially offset by $1.5 million in volume increases), OTC Claritin RediTabs® of $3.6 million ($1.3 million in price decreases and $2.3 million in volume decreases), and Ventolin®, supplied by Armstrong, of $3.1 million (primarily volume decreases).

SRAs as a percentage of gross revenues increased by 0.9% to 28.8% in the 2005 Period, from 27.9% in the 2004 Period. The increase was primarily attributable to an increase in chargebacks of 4.1% as a percentage of gross revenues, mainly due to increases in sales subject to chargebacks and rates due to price erosion, partially offset by decreases in customer rebates, returns, and shelf stock adjustments of 1.0%, 1.2% and 0.8%, respectively, as a percentage of gross revenues.

In the 2005 Period, our generic products generated $52.3 million of gross profit with a gross margin of 33.3%, compared to $71.5 million of gross profit with a gross margin of 38.4% in the 2004 Period. The $19.2 million decrease in gross profit from our generic products for the 2005 Period, compared to the 2004 Period, resulted primarily from reductions in gross profit from existing generic products of $44.2 million, partially offset by $5.1 million in gross profit related to products launched in the 2004 Period and decreased other charges to cost of goods sold of $20.0 million, mainly due to impairment charges of $14.5 million and $3.5 million related to our North Carolina facility and our Entex product rights, respectively, in the 2004 Quarter.

In the 2005 Period, we recorded charges directly to cost of goods sold of $6.1 million in write-offs of pre-launch inventories (mainly due to $5.3 million in write-offs of our generic version of Concerta), $2.9 million as a result of production related write-offs, $4.3 million for under-utilization and inefficiencies at our manufacturing facilities, and $3.4 million in other charges, primarily due to inventory expiration issues. In the 2004 Period, we recorded charges directly to cost of goods sold of $9.5 million as a result of production related write-offs, $1.7 million related to write-offs of pre-launch inventories, and $4.4 million for under-utilization and inefficiencies at our manufacturing facilities.

In July 2005, the first patent related to Concerta was listed in the FDA’s Electronic Orange Book. Although we filed our Paragraph IV certification with the FDA relating to this patent and notified the NDA holder and all patentees of such certification, we learned that FDA received the first Paragraph IV certification as to this patent prior to our certification. Consequently, it is likely that FDA will award the 180-day marketing exclusivity rights to another ANDA filer. It is also our understanding that, under current law, no 30-month stay of approvals will be imposed as a result of any litigation that results from the listing of this patent in the Orange Book. While we believe that we have an approvable product, as evidenced by the building of pre-launch inventories, our approval may now be subject to the 180-day exclusivity period granted to another ANDA filer. Based on these recent events, we no longer believe that the FDA will approve our generic version of the Concerta product during 2005. Consequently, we have re-evaluated the probable future economic benefits related to certain of our pre-launch inventories due to dating and have expensed $4.1 million to cost of goods sold related to our pre-launch inventories.

the Brand Products Segment, but has been reclassified to the Generic Products Segment herein. This charge represented the difference between the carrying amount and the fair value of the Entex product rights based on the present value of estimated future cash flows. According to FDA guidance, once FDA approves a version of any product that is presently permitted to be on the market and sold by prescription without an approved ANDA or NDA, similar unapproved drug products, such as our Entex product line, may be subject to FDA action.

The decrease in gross margin from our generic products for the 2005 Period, compared to the 2004 Period, resulted primarily from price erosion, a decrease in our profit share from Perrigo’s sales of our OTC Claritin products as a result of additional competitors entering the market, and increased write-offs of pre-launch inventories of $4.4 million (mainly related to our generic version of Concerta), partially offset by the unfavorable impact in the 2004 Quarter from the impairment charges of $14.5 million and $3.5 million related to our North Carolina facility and our Entex product rights, respectively, and decreased production related write-offs of $6.6 million.

Disposition of Brand Business

For the 2004 Period, revenues from our brand products were $27.0 million (excluding sales from the Entex and Anexsia product lines, which were reclassified herein to generic products) with gross profit of $17.0 million and a gross margin of 62.7%. For the 2005 Period, revenues from our brand products were $13.9 million with gross profit of $8.7 million and a gross margin of 62.5%. The decrease resulted from the sale and licensing of certain rights and assets related to our former Fortamet and Altoprev brand pharmaceutical products to First Horizon on March 28, 2005. See “Three Months Ended June 30, 2005 (2005 Quarter) Compared to Three Months Ended June 30, 2004 (2004 Quarter) — Revenues and Gross Profit — Disposition of Brand Business” and Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.

Licensing and Royalties Revenue

In the 2005 Period, we recorded $11.5 million in licensing and royalties revenue, compared to $32.6 million in the 2004 Period. In the 2005 Period, licensing and royalties revenue primarily resulted from agreements with First Horizon, KUDCo, Ranbaxy Pharmaceuticals Inc., and Mallinckrodt, Inc. related to Fortamet and Altoprev (beginning in April 2005), and generic versions of Prilosec, Monopril-HCT, and Anexsia, respectively. The 2004 Period also included licensing and royalties revenue resulting from an agreement with Teva Pharmaceuticals Curacao N.V. and Impax Laboratories, Inc. related to a generic version of Wellbutrin SR 150mg and Zyban, which expired in September and November 2004, respectively. Licensing and royalties revenues were as follows (in thousands):


	Six Months Ended
	June 30,			June 30,
	2005			2004		Change
First Horizon	$	2,695		$	—	$	2,695
KUDCo		3,769			728		3,041
Mallinckrodt		2,788			1,232		1,556
Ranbaxy		2,254			—		2,254
Teva/Impax		—			30,485		(30,485	)
Other		(49	)		179		(228	)

	$	11,457		$	32,624	$	(21,167	)

Other Revenue

In the 2005 Period, we recorded $6.0 million in other revenue that included the accretion of the deferred revenue related to the upfront payments received for Fortamet, as well as the related Fortamet and Altoprev contract manufacturing revenues associated with the supply of these products to First Horizon. In the 2005 Period, we recorded a gross loss associated with other revenue of $3.7 million, mainly as a result of the manufacturing costs related to these products, including $4.4 million in charges due to manufacturing issues primarily related to Altoprev, as well as $1.5 million in royalties to Sandoz and amortization of product rights related to Fortamet.

Revenues and Costs Related to First Horizon

The following is a summary of revenues and costs related to First Horizon for the 2005 Period (in thousands):


Contract manufacturing revenue	$	4,662
Accretion of deferred revenue		1,250

Total other revenue		5,912
Licensing and royalties		2,695

Total revenue		8,607


Contract manufacturing costs		4,596
Royalties and product rights amortization		1,467
Manufacturing variances and write-offs		4,382

Total costs		10,445


Gross loss	$	(1,838	)

Selling, General and Administrative (SG&A)

SG&A expenses were $101.8 million, or 19.0% of total revenues for the 2005 Period, compared to $101.7 million, or 17.4% of total revenues for the 2004 Period. For both periods, SG&A expenses included expenses related to the administration, marketing, sale, distribution and warehousing of distributed products, our former brand products and our generic products, corporate overhead and legal costs (primarily patent infringement and antitrust matters related to our ANDA filings).

SG&A expenses, excluding the Brand Products Segment, were $73.1 million for the 2005 Period, compared to $65.6 million for the 2004 Period, an increase of $7.5 million. This increase was primarily attributable to (i) increased corporate overhead of $2.2 million, mainly due to increased costs of $3.3 million associated with the support and maintenance of our JD Edwards Enterprise Resource Planning (ERP) system, increased employee benefit costs of $1.0 million, and increased depreciation expense of $420,000, partially offset by a $1.7 million charge for severance and benefits for our former CEO recorded in the 2004 first quarter and a reduction in insurance expense of $1.7 million, (ii) increased distribution SG&A of $4.4 million, primarily due to increased freight costs of $1.2 million, increased wages of $1.5 million and increased bad debt expense of $801,000, and (iii) increased generic SG&A of $913,000 primarily related to bad debt expense.

In our distribution business, we employed approximately 230 and 220 sales representatives and sales support staff in the 2005 and 2004 Periods, respectively.

SG&A expenses for our Brand Business Segment were $28.7 million for the 2005 Period, compared to $36.1 million for the 2004 Period. This decrease of $7.4 million was primarily attributable to a decrease in brand sales force expenses resulting from a reduction in brand sales representatives during the 2005 first quarter and the termination of substantially all brand business employees effective May 2005, partially offset by charges recorded in the 2005 first quarter associated with the disposition of our brand business, including personnel related charges for severance, performance incentives and retention of approximately $10.0 million and a $2.3 million write-off of sample inventory for Altoprev and Fortamet. We will record an additional estimated $500,000 of severance cost in the third quarter of 2005 and may potentially incur additional costs related to leased facilities, which we currently estimate to be approximately $1.0 million.

Research and Development (R&D)

R&D expenses were $21.4 million for the 2005 Period, compared to $22.5 million in the 2004 Period, a decrease of $1.1 million, or 5.1%. The decrease in R&D spending was attributable to the absence of brand R&D in the 2005 Period, and a reimbursement of development costs from Takeda of $2.4 million, partially offset by increases in our generic (ANDA) product development program. We submitted four ANDAs in the 2005 Period and six ANDAs in the 2004 Period.

Goodwill Impairment, Litigation Settlements and Other Charges

The Brand Business Segment included $26.3 million of goodwill, which we evaluated for impairment subsequent to the First Horizon transaction. The remaining brand products (our Entex and Anexsia lines) do not require sales force promotion and will be managed by our generic business. As a result, we made the decision to terminate substantially all of our brand business employees in May 2005, which effectively completed the disposition of the brand business. Consequently, the brand business goodwill was deemed to have no implied fair value. Accordingly, in the 2005 first quarter, we recorded a non-cash goodwill impairment charge of $26.3 million (see Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements).

Equity in Earnings of Joint Ventures

We recorded $1.7 million of equity in earnings of our unconsolidated joint ventures (ANCIRC and CARAN) in the 2005 Period, compared to $2.3 million in the 2004 Period. The $528,000 decrease is primarily due to a decrease in CARAN’s gross profit on sales of generic Mevacor®. ANCIRC is a 50/50 joint venture with Watson Pharmaceuticals, Inc. and CARAN is a 50/50 joint venture with Carlsbad Technologies, Inc.

Interest Income

We recorded interest income of $4.0 million in the 2005 Period, compared to $1.4 million in the 2004 Period. The $2.5 million increase in interest income is primarily the result of the higher average level of cash, cash equivalents and investments available-for-sale maintained during the 2005 Period compared to the 2004 Period, as well as an increase in interest rates. We invest in taxable, tax-advantaged and tax-free investment grade securities.

Interest Expense

We incurred interest expense of $1.3 million in the 2005 Period, compared to $1.2 million in the 2004 Period. Interest expense is primarily related to the unused line fee and amortization of issuance costs related to our secured line of credit, and, to a lesser extent, financing charges on capital lease obligations and certain insurance premiums.

Income Taxes

For the 2005 and 2004 Periods, we recorded a (benefit) provision for income taxes of ($52.4) million and $20.3 million, respectively. For the 2005 Period, we recorded an income tax benefit in excess of the expected annual effective federal statutory rate of 35% primarily due to the reversal of accrued tax contingencies and the benefit from the recognition of a net operating loss carryforward as a result of the Internal Revenue Service (IRS) completion of its audit of our 2003 income tax return and, to a lesser extent, the effect of state income taxes. For the 2004 Period, we provided for income taxes in excess of the expected annual effective federal statutory rate of 35% primarily due to the effect of state income taxes.

Our 2003 income tax return reflected a significant tax loss as the result of certain ordinary business developments. We believed the loss was appropriate and deductible. Nevertheless, due to the complexity of the tax rules and likelihood of a review and subsequent challenge by the taxing authorities, we recorded an accrual to fully offset the resulting 2003 and 2004 income tax benefits. As of December 31, 2004, we had accrued $31.3 million related to this tax contingency that was included in accrued expenses and other liabilities in our Unaudited Condensed Consolidated Balance Sheet. The IRS began its audit of the 2003 income tax return shortly after the return was filed in September 2004. During March 2005, the IRS agreed the 2003 loss was deductible, but not the amount of such loss. In April 2005, the IRS disallowed a portion of the 2003 loss in the amount of $40.5 million, and completed their examination of our 2003 income tax return. Due to the resolution of the 2003 loss with the IRS and the completion of the 2003 examination in the first quarter of 2005, we recognized a one-time tax benefit of approximately $49.0 million as a result of the reversal of previously accrued income tax contingencies of $32.4 million and recognition of an additional $16.6 million net operating loss carryforward, tax effected. Excluding the impact from the resolution of the 2003 loss, our effective tax rate for the six months ended June 30, 2005 would have been 38%.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2005, we had $345.4 million in cash, cash equivalents and investments available-for-sale, and $498.2 million in working capital.

Operating Activities

In the 2005 Period, net cash provided by operating activities was $63.7 million, compared to $59.7 million in the 2004 Period.

In the 2005 Period, net cash provided by operating activities of $63.7 million primarily resulted from net income of $43.3 million, as adjusted for non-cash items, as well as decreases in accounts receivable and inventories of $12.4 million and $35.6 million, respectively, and an increase in deferred revenue of $10.0 million, partially offset by an increase in prepaid and other assets of $16.9 million. The increase in deferred revenue and prepaid and other assets relating to operating activities includes the second $10.0 million milestone associated with our agreement with Takeda. Significant non-cash items included impairment charges of $26.9 million (mainly the brand business goodwill) and depreciation and amortization of $17.4 million, offset by deferred income tax benefit of $20.3 million and change in accrual for tax contingencies of $32.3 million primarily as a result of the IRS’ completion of their audit of our 2003 tax return.

In the 2004 Period, net cash provided by operating activities of $59.7 million primarily resulted from net income of $33.1 million, as adjusted for non-cash items, partially offset by increases in accounts receivable of $21.7 million and inventories of $11.4 million. Significant non-cash items included depreciation and amortization of $16.2 million, impairment charges related to our North Carolina facility and Entex products of $14.5 million and $3.5 million, respectively, deferred income tax provision of $7.2 million and the change in accrual for tax contingencies of $13.0 million. The increase in accounts receivable was primarily related to licensing revenues receivable from Teva for the generic versions of Wellbutrin SR and Zyban. The increase in inventories was primarily due to purchases of generic Glucotrol XL supplied by Pfizer. Our levels of inventories and accounts payable and accrued expenses are also influenced by purchasing opportunities in our distribution business.

Investing Activities

Net cash used in investing activities was $66.4 million in the 2005 Period, compared to $95.3 million in the 2004 Period.

In the 2005 Period, net cash used in investing activities of $66.4 million primarily consisted of $135.8 million in purchases of investments available-for-sale, net, $13.0 million in purchases of property, plant and equipment and $4.5 million in partial payment of marketing rights to Amphastar for their generic version of Lovenox®, partially offset by $73.3 million in proceeds from the sale and licensing of certain rights and assets related to our former Fortamet and Altoprev brand pharmaceutical products, recorded as deferred revenue, and $10 million refunded by Pfizer to us in February 2005 as a result of the January 2005 termination of our supply and distribution agreement with Pfizer for Cardura® XL. Our purchases of property, plant and equipment primarily relate to capital investments in our manufacturing and R&D facilities in Florida.

In the 2004 Period, net cash used in investing activities of $95.3 million consisted of $49.5 million in purchases of property, plant and equipment, net, $43.3 million in purchases of investments available-for-sale, net, and $5.0 million for the acquisition of the Fortamet product marketing rights, partially offset by $2.5 million in proceeds from distributions of joint ventures. Our purchases of property, plant and equipment primarily related to capital investments in our manufacturing and R&D facilities in Florida and the renovation of our North Carolina manufacturing facility (prior to the decision in June 2004 to discontinue renovations).

Financing Activities

Net cash provided by financing activities was $2.4 million in the 2005 Period and $5.1 million in the 2004 Period.

In the 2005 Period, net cash provided by financing activities of $2.4 million consisted of $3.3 million in proceeds from issuances of shares of Andrx common stock from exercises of Andrx stock options, and $643,000 in proceeds from issuances of shares of Andrx common stock under the employee stock purchase plan, partially offset by $1.5 million in principal payments on capital lease obligations.

In the 2004 Period, net cash provided by financing activities of $5.1 million consisted of $4.8 million in proceeds from issuances of shares of Andrx common stock from exercises of Andrx stock options, and $818,000 in proceeds from issuances of shares of Andrx common stock under the employee stock purchase plan, partially offset by $446,000 in principal payments on capital lease obligations.

Sufficiency of Capital Resources

Our most significant 2005 cash requirement will be for facilities, machinery and equipment related to the expansion of our Florida manufacturing facilities. Capital expenditures were $13.0 million for the 2005 Period, and are currently estimated to be approximately $45 million in 2005.

In connection with our agreements with First Horizon for the sale and licensing of certain rights and assets related to Altoprev, we are entitled to receive up to $35 million in proceeds for Altoprev, contingent upon meeting certain supply requirements, as defined. Proceeds we receive for Altoprev are refundable if certain supply requirements, as defined, are not maintained over a specified period. This contingency abates ratably over a 30-month period beginning in August 1, 2005.Of such $35 million amount, $23.3 million was received in April 2005 and the remaining $11.7 million was recorded in June 2005 and is included in other current assets in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet, as we believe that our agreements with First Horizon currently entitle us to receive such $11.7 million. However, we received only $4.1 million of such amount in July 2005 due to First Horizon’s contention that the $7.6 million balance is not due to us as a result of a disagreement concerning the dating of the 60mg product to be delivered by us to First Horizon.

The IRS is in the process of concluding their audits for the years 1999 through 2002. During those years, despite our belief that our tax return positions are correct, we established accruals for tax contingencies that may become payable in the event our positions are not upheld. As of June 30, 2005, we had remaining accrued tax contingencies of $21.0 million included in accrued expenses and other liabilities in the Unaudited Condensed Consolidated Balance Sheet. Despite our belief that our tax return positions are correct, it is our policy to establish accruals for tax contingencies that may result from examinations by tax authorities. While it is difficult to predict the final outcome of any particular tax matter, we believe our tax accruals are adequate. The tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. It is reasonably likely that our effective tax rate and/or cash flows may be materially impacted by the ultimate resolution of our tax positions.

On December 30, 2002, we entered into a four-year, secured revolving line of credit facility for up to an aggregate amount of $185.0 million, none of which was outstanding at June 30, 2005. Borrowings available under the credit facility are limited to defined values of eligible accounts receivable, inventories, property, plant and equipment and reserves established by the lenders. Interest accrues on the average outstanding principal balance under the credit facility and a fee accrues on the unused portion of the credit facility. Andrx and its subsidiaries granted the lenders a first priority security interest in substantially all of their respective assets, including accounts receivable, inventories, deposit accounts, property, plant and equipment and general intangibles, and real estate owned at the date of the credit facility. The credit facility contains certain financial covenants and we are currently in compliance with all the required covenants. However, the borrowing base limits our borrowing availability to approximately $148 million as of June 30, 2005. We are considering amending, replacing or terminating the credit facility.

Absent a significant acquisition of a product or business or other presently unforeseen circumstances, we anticipate that our existing capital resources and cash flows from operations will be sufficient to enable us to maintain our operations and meet our capital expenditure requirements and other commitments through at least the next 12 months without drawing on our credit facility.

OUTLOOK

As noted elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, investors are cautioned that all forward-looking statements involve risk and uncertainties. Accordingly, investors are cautioned not to rely on forward-looking statements, including those made in this Outlook section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Distributed Products

We believe revenues from our pharmaceutical distribution business will continue to grow at a rate generally consistent with the growth of the overall generic industry. Revenues from these operations are affected, in large part, by our participation in the launch of new generic products by other generic manufacturers, and the commencement and extent of competition for these products and the other products we distribute. Sales prices for generic products typically decline with the onset of additional generic competition, particularly after such products are sold during an initial marketing exclusivity period. As published data

indicates that generic versions of numerous brand products having substantial annual sales will likely be launched in the next few years, growth in revenues will continue to be primarily a function of new generic products launched by others, offset by the overall level of net price declines on existing distributed products.

Our pharmaceutical distribution business competes with a number of large wholesalers that market, among other things, both brand and generic pharmaceutical products to their customers and may therefore offer broader marketing programs. We also compete with other pharmaceutical distributors. Though the distribution of pharmaceutical products is historically a relatively low gross margin industry, competition could result in further pressure on revenues and gross margins.

In the 2005 third quarter, we are ceasing the distribution of certain brand products, which have provided minimal contribution to profits. Revenues for such products were $6.1 million and $11.4 million in the 2005 Quarter and the 2005 Period, respectively.

Our distribution business plays a significant role in the sale of our current generic products and can similarly benefit our collaborative partners’ products. For external reporting purposes, this segment’s financial results do not include its participation in the distribution of our generic products. Such revenues are classified as Andrx product revenues in our unaudited Condensed Consolidated Statements of Income. We continue to explore various means to leverage our distribution capabilities.

Andrx Products — Generic

The generic pharmaceutical industry is highly competitive and selling prices are often subject to significant and rapid declines as a result of competition among existing products or new products entering the market. In our generic sales efforts, we compete with domestic and international companies, including brand pharmaceutical companies that sell their brand product as an authorized generic through partners and/or their own generic affiliates. Many of these competitors offer a wider variety of generic products to their customers, and some manufacture their products in countries such as India and China where raw materials are obtained and finished product can be manufactured at a significantly lower cost.

As the brand products’ patents and other bases for market exclusivity expire, generic competitors enter the marketplace and compete for market share, which generally results in a unit price decline as the number of generic competitors increases. The timing of these price decreases is difficult to predict and can result in significantly curtailed profitability for a generic product. Revenues and gross profits from our generic products may also be affected by competition involving the corresponding brand product, including the introduction and promotion of alternative brand or OTC versions of such products. Additionally, customer purchasing power and purchasing programs continue to pressure profitability.

Though the industry is highly competitive, we believe that many of our generic products will face less competition than most generic products, as a limited number of competitors have the scientific, manufacturing and legal expertise to develop, manufacture and/or market controlled-release products and niche products. With potentially fewer competitors and the synergistic value derived from our pharmaceutical distribution business, we believe that we are better positioned to compete in the generic product marketplace.

Currently, our overall level of profitability remains dependent, to a great extent, on a relatively small number of products. As these products, particularly our generic versions of Cardizem CD and, to a lesser extent, Tiazac and Glucotrol XL (supplied by Pfizer) experience increased competition, the resulting price reductions and/or reduced market share will significantly adversely affect these products’ contribution to our results of operations. Additional generic competition for our versions of these products could occur at any time, particularly since an additional generic version of Cardizem CD was approved by the FDA in May 2004 (which has not yet been launched), and ANDAs for additional generic versions of Tiazac are pending approval by the FDA.

Our generic product revenues have declined over the last four quarters and, absent introductions of significant new generic products, we are likely to continue to experience sequential quarterly declines in our operating results. Revenues and gross profits will also vary depending upon the timing and market environment related to the launch of our new products.

Future growth of our generic products business will be generated from the launch of new products, particularly our generic versions of Biaxin XL which has been approved by FDA but is presently the subject of patent litigation, Toprol-XL, which has not been approved by FDA and is presently the subject of patent litigation, and Concerta, which has not been approved by the FDA and remains the subject of Citizen Petitions, as well as our participation in the marketing of Amphastar’s generic version of Lovenox. We are also working towards the launch of other ANDA products awaiting approval at the FDA. In the event that FDA does not approve certain of our product candidates or their market introduction is delayed or prevented due to factors such as litigation, new patent listings, our inability to scale-up and validate our manufacturing or other issues, we may need to write-off all or a portion of our pre-launch inventories related to these product candidates.

In July 2005, a new patent related to Concerta was listed in the FDA’s Electronic Orange Book. Although we filed our Paragraph IV certification with the FDA relating to this patent and notified the NDA holder and all patentees of such certification, we learned that FDA received the first Paragraph IV certification as to this patent prior to our filing. Consequently, it is likely that FDA will award the 180-day marketing exclusivity rights to another ANDA filer. It is also our understanding that, under current law, no 30-month stay of approvals will be imposed as a result of any litigation that results from the listing of this patent in the Orange Book. While we believe that we have an approvable product, as evidenced by the building of pre-launch inventories, our approval may now be subject to the 180-day exclusivity period granted to another ANDA filer. Based on these recent events, we no longer believe that the FDA will approve our generic version of the Concerta product during 2005.

On May 2, 2005, we entered into an agreement to obtain certain exclusive marketing rights for both strengths of Amphastar’s proposed generic version for Aventis Pharmaceuticals, Inc.’s Lovenox injectable product. Amphastar submitted its ANDA for generic Lovenox to the FDA in March 2003, and is the subject of a patent infringement lawsuit filed by Aventis. In June 2005, the United States District Court for the Central District of California granted summary judgment in Amphastar’s favor in the patent infringement lawsuit filed by Aventis relating to this ANDA. As a result of this court decision, the 30-month stay of approval of this ANDA imposed by law is no longer in effect, though such decision will not trigger any right Amphastar’s ANDA may have to a 180-day period of exclusivity; assuming Aventis appeals that decision, as they publicly indicated they would. However, approval of Amphastar’s ANDA continues to be delayed by a Citizen Petition and possibly other factors. On July 18, 2005, Amphastar submitted additional comments on Aventis’ Citizen Petition. Our marketing rights generally extend to the U.S. retail pharmacy market, and we will receive up to 50% of the net profits, as defined, generated from such sales.

In April 2005, we received FDA approval of generic versions of Loestrin® Fe. We have not launched this product as we are presently improving our oral contraceptive facility to both increase capacity and enhance its engineering. We anticipate that these improvements will be completed in September 2005, so we can commence manufacturing and then launching this and other oral contraceptive products that we have already manufactured but are awaiting approval, later this year.

Our ANDA for a generic version of Biaxin XL was approved in 2004. At that time, we indicated that, as a result of patent considerations, we did not plan to launch our product earlier than May 2005. In March 2005, Abbott Laboratories, the marketer of Biaxin XL, filed a complaint in the United States District Court for the Northern District of Illinois seeking to enjoin us from commercially manufacturing, using, offering to sell or selling our generic versions of Biaxin XL, and a declaratory judgment that our product and the active pharmaceutical ingredient we use infringe certain of their patents. On March 30, 2005, we filed for a declaratory judgment in the United States District Court for the Southern District of Florida against Abbott and Taisho Pharmaceuticals, the owner of one of the patents claimed by Abbott, for non-infringement and invalidity of six patents related to Abbott’s Biaxin product. In May 2005, we and Abbott Laboratories, Inc. entered into an

agreed temporary restraining order (TRO) to enjoin us from selling or offering to sell our generic version of Biaxin XL in the United States until a ruling is entered on Abbott’s motion for a preliminary injunction against Andrx or following ten days notice by Andrx, if the court fails to issue a ruling with respect to such hearing by the end of September 2005. The TRO further stipulates that it will automatically vacate if any other party sells, offers to sell or imports any generic Biaxin XL product prior to a ruling on Abbott’s preliminary injunction.

We have deferred indefinitely our attempts to scale-up and validate our OTC generic version of Claritin D-12, which was approved in January 2004. There is no certainty about whether or when our other Andrx products will be approved by the FDA or launched by us.

We are also expanding our business development efforts, both domestically and internationally, in an effort to access additional generic products and increase our margins through strategic alliances, collaborative agreements and acquisitions. In some situations, these efforts are intended to result in the utilization of our sales and marketing capabilities, including those obtained through our distribution operations, to maximize the value of generic products that other companies are seeking to market. In other situations, these efforts are intended to result in the development and/or supply of raw material and finished products by a third party at a lower price. These efforts will primarily be directed towards potential partners in other countries such as India and China.

We continue to invest in R&D and currently have approximately 30 ANDAs pending at FDA. However, the launch of our generic product candidates is dependent upon a number of factors, both within and outside our control. Factors outside our control include new Orange Book patent listings, related patent infringement litigation and the expiration of others’ exclusivity rights, each of which affects the timing of our receipt of FDA marketing approval, FDA’s resolution of Citizen Petitions, and the timing and outcome of our patent litigation. The revenues and gross profits to be generated by these new products will also be affected by the amount of generic competition they encounter, once launched, particularly after the expiration of any 180-day exclusivity period that we or others might have, either alone or on a shared basis, and whether there is an authorized generic product in the market.

We have made, are in the process of making or will make commercial quantities of certain new products prior to the date we received or we anticipate that such products will receive FDA final marketing approval and/or satisfactory resolution of any patent infringement litigation involving such products. The commercial production of these products involves the risk that such product(s) may not be successfully scaled-up or approved for marketing by FDA on a timely basis or ever and/or that the outcome of such litigation may not be satisfactory. When an exclusivity period is involved, this is a particularly difficult determination. These risks notwithstanding, we plan to continue to scale-up and build pre-launch inventories of certain products that have not yet received final FDA marketing approval or for which patent infringement litigation may be pending, when we believe that such action is appropriate in relation to the commercial value of the product launch opportunity.

Licensing and Royalties Revenue

As a result of the sale and licensing of certain rights and assets related to Fortamet and Altoprev, we are entitled to receive royalties of 8% and 15% of net sales, as defined, from First Horizon’s sales of Fortamet and Altoprev, respectively, until a respective product encounters generic competition.

We presently derive licensing and royalties revenue at a rate of 6.25% from our October 2002 Commercialization Agreement with KUDCo, which will end in February 2006. The amount of such revenue we receive depends upon KUDCo’s profits from its sales of its generic versions of Prilosec 10mg and 20mg strengths, which amount is subject to competition and numerous estimates for discounts, returns, chargebacks, rebates, shelf-stock adjustments, and other SRAs and related expenses. As a result of continuing and increased competition, we anticipate that our revenues from this agreement will continue to decline in 2005.

We believe we maintain a 180-day period of market exclusivity with respect to our ANDA for a generic version of the 40mg strength of Prilosec, and will continue to attempt to commercialize the value of that

exclusivity period and our generic version of Prilosec. However, there is pending litigation challenging FDA’s interpretation of the 180-day exclusivity period, and the outcome of that litigation could affect our exclusivity rights.

The licensing and royalties revenue we derive from our agreement with Ranbaxy related to Monopril-HCT ended in June 2005.

Other

On March 28, 2005, we consummated agreements with First Horizon for the sale and licensing of certain rights and assets related to our former Fortamet and Altoprev brand pharmaceutical products, and the manufacturing and supply of these products, at which time we received $50 million related to Fortamet. We subsequently recorded $35 million in proceeds for Altoprev of which all but $7.6 million have been received. We have retained our obligation to pay a royalty to Sandoz related to net sales of Fortamet, as defined, until May 2009, which is subject to certain annual minimums ranging from $4 million to $5 million and a $10 million annual maximum. We initially deferred recognition of the $85 million for the reasons discussed in Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements. The manufacturing and supply agreement for Fortamet and Altoprev entered into with First Horizon is for a ten-year term and is subject to a two-year notice of intent by us to terminate beginning five years after the date the agreement was executed. Transaction related costs of approximately $1.8 million were deferred and recorded in other assets, and are being amortized to cost of goods sold over the ten-year term of the manufacturing and supply agreement.

The $85 million in up-front fees to be received from First Horizon will be deferred and will be recognized as revenue on a straight-line basis generally over the ten-year term of the manufacturing and supply agreement. Since we are required to refund all or a portion of the Altoprev proceeds in the event that we are unable to meet certain supply requirements, as defined, we cannot recognize any deferred revenue related to Altoprev until that contingency begins to abate ratably over a 30-month period in August 2005. In the 2005 Quarter, we recognized $1.3 million of deferred revenue related to Fortamet. As of June 30, 2005, we had deferred revenue related to Fortamet and Altoprev of $83.8 million, included in deferred revenue in the June 30, 2005 Unaudited Condensed Consolidated Balance Sheet.

We have encountered and are experiencing difficulties with respect to the manufacture of Altoprev. Though we have engaged outside consultants to assist us in resolving these issues and are confident that they will be resolved in a timely manner, these issues could result in a refund of amounts received from First Horizon with respect to Altoprev.

In January 2004, we received a $10 million milestone payment from Takeda pursuant to our December 2003 agreement to develop a combination product comprised of their Actos product and our extended-release metformin product. We recorded an additional $10 million milestone in June 2005 for which we received payment in July 2005. We are also entitled to receive significant additional payments from Takeda upon achievement of further milestones, a transfer price for the combination product we manufacture, a royalty and certain additional performance payments related to Takeda’s sale of the combination product. We deferred recognition of the $20 million in milestones to date because the amount to be retained by us is contingent upon the occurrence of certain future events.

In May 2004, FDA issued a tentative NDA approval for our valproate sodium product. Final approval is pending expiration of a 30-month stay (approximately October 2005), FDA’s response to the Citizen Petition filed by Abbott Laboratories and/or favorable resolution of the patent infringement litigation filed by Abbott Laboratories. We are continuing to seek divestiture of our valproate sodium product.

We are going to expand our efforts to develop pharmaceutical products for other pharmaceutical companies, including combination products and controlled-release formulations utilizing our patented technologies and formulation capabilities.

Cost of Goods Sold

Our future financial performance remains dependent on our ability to manufacture sufficient product to meet the market demand for our current and anticipated products on a timely basis. As we have at times had difficulty fulfilling all of the market demand for our products and having pre-launch quantities of our product candidates available when we obtain FDA approval to market our products, we have made various organizational changes that are intended to improve accountability, foster teamwork and improve coordination among our R&D, manufacturing and quality groups. These changes were intended to better ensure the timely and uninterrupted supply of our current products and product candidates, maximize communication and reduce inefficiencies, and included: assigning and hiring new personnel to manage our manufacturing and quality groups; revising our process development and technical transfer processes; establishing a project management office to manage each product line from inception to launch; and changes in our training program to better ensure that our manufacturing and quality employees are properly trained.

We are subject to regular inspections by FDA. The FDA completed an inspection in May 2005 and issued a Form 483 — List of Inspectional Observations. We have provided FDA with our response to that Form 483, which included a proposed corrective action plan. Any non-compliance with cGMP, or the corrective action plan we have proposed to FDA in response to Forms 483, could have a material adverse effect on our financial condition and results of operations.

To meet the market demand for our current and anticipated products, and manufacture our products in compliance with our regulatory submissions and cGMP requirements, we continue to focus on improving the efficiency and quality of our manufacturing operations. These efforts include, among others: (i) optimizing our processes, thereby reducing product rejections; (ii) implementing quality initiatives to ensure compliance with cGMP, including laboratory information management systems; (iii) increasing personnel training, accountability, development and expertise; (iv) utilizing our JD Edwards ERP system, an integrated planning and operating system, which was implemented in early 2005; (v) transferring production (or portions thereof) for certain products to equipment capable of handling larger batch sizes or to third parties, including foreign contract manufacturers; and (vi) renovating our facilities to increase capacity where our manufacturing facilities are over-utilized, to optimize production and to ensure quality and safety (which will result in increased unabsorbed overhead in the near future that will be charged directly to cost of goods sold). Until all of our efforts come to fruition, we will continue to incur significant costs related to inefficiencies and excess capacity at our manufacturing facilities and production related write-offs.

We also continue to incur costs related to under-utilization and inefficiencies at our manufacturing facilities because our products employ a variety of technology platforms and we need to prepare for our future manufacturing requirements. This causes certain of our manufacturing capabilities to at times be over-utilized, while others are under-utilized and, to remedy those areas where our manufacturing facilities are over-utilized, we continue to expand our manufacturing capabilities. This expansion will result in increased unabsorbed overhead in the near future that will be charged directly to cost of goods sold.

We capitalize the costs associated with pre-launch inventories of our product candidates based on our determination that we will derive probable future economic benefits from these pre-launch inventories. Production of pre-launch inventories involves the risks that FDA may not approve such product(s) for marketing on a timely basis, if ever, that such approval may require additional or different testing and/or specifications than what was performed in the manufacture of such pre-launch inventories, and/or that the results of related litigation or other legal issues may not be satisfactory. If these risks were to materialize, provisions may be required to reduce the inventories to their net realizable value, if any. Such additional provisions could be material.

SG&A Expenses

Our SG&A expenses vary with the level of our sales and our sales product mix, which, going forward, will primarily include distributed and generic products, and with changes to general and administrative

activities. SG&A expenses related to our distribution business are primarily variable in nature, and change with our distribution revenues. SG&A expenses related to our generics business are relatively flat and do not vary significantly with the level of generic revenues. Corporate SG&A expenses include general and administrative expenses related to our corporate headquarters, which primarily consists of our information systems, human resources, legal and corporate executive, finance and administrative functions. It also includes amortization expense related to restricted stock units. Our corporate SG&A will also be significantly affected by costs associated with the support and maintenance of our JD Edwards ERP system. In connection with the completion of the brand business disposition, we will record an additional estimated $500,000 of severance cost in the third quarter of 2005 and may potentially incur additional costs related to leased facilities, which we currently estimate to be approximately $1.0 million.

We are evaluating whether our existing infrastructure remains necessary for our current and anticipated operations following the disposition of our brand business. Our determination could result in infrastructure realignment decisions and additional charges for the benefit of future cost savings.

Many of our employees have historically received a grant of stock options as part of their compensation, and beginning in 2003, such options were to be granted on an annual basis to many of our employees. In light of the issuance of SFAS 123(R) regarding stock option expensing, we discontinued the use of broad-based annual stock option grants to all employees, and enhanced certain other aspects of employee compensation, including increasing our match of employee contributions to the 401(k) plan, and utilizing the profit sharing provisions of that plan if certain financial results are achieved. However, as our board continues to believe that the interests of management and stockholders should be aligned, Andrx has continued to grant restricted stock units (RSUs) to its directors and certain employees. As a result, our corporate SG&A will increase in 2005 due to anticipated increases in amortization expense related to RSUs, 401(k) costs, the foregoing profit sharing provisions and, beginning in 2006, the expensing of stock options.

R&D Expenses

We anticipate that R&D expenses for 2005 will total approximately $45 million, and will focus primarily on generic R&D. We will also focus on developing pharmaceutical products for other pharmaceutical companies, including combination products and controlled-release formulations utilizing our patented technologies and formulation capabilities. R&D expenses will be evaluated throughout 2005 giving consideration to, among other things, our level of profitability and development opportunities.

Income Taxes

We believe our combined federal and state effective tax rate for the remaining half of 2005 will be approximately 38%. The IRS is in the process of concluding their audits for the years 1999 through 2002. Despite our belief that our tax return positions are correct, it is our policy to establish accruals for tax contingencies that may result from examinations by tax authorities. While it is difficult to predict the final outcome of any particular tax matter, we believe our tax accruals are adequate. The tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. It is reasonably likely that our effective tax rate and/or cash flows may be materially impacted by the ultimate resolution of our tax positions.

Earnings Guidance

Our policy is not to provide specific earnings projections or guidance, and not to comment on research analyst reports, including earnings estimates or consensus. Through public disclosures such as our press releases and periodic SEC reports, including this Form 10-Q, we attempt to provide sufficient disclosure of both our current status and future prospects, using the Safe Harbor provision for forward-looking statements prescribed in the Private Securities Litigation Reform Act of 1995, to allow the investment community to properly evaluate us and our prospects for performance. There can be no assurance that research analysts in using publicly available information will generate research reports or earnings estimates consistent with our

actual internal plan or that such estimates will not vary significantly from analyst to analyst. Accordingly, even if we execute our own plans, our actual performance may be substantially different than what is reflected in any individual research analyst’s reports or earnings estimate or the consensus of such estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

Inventory Costs

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs”, amending the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing” by clarifying the accounting for certain items. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges, and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. SFAS No. 151 will not have a material impact on our consolidated financial statements.

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) requires the cost of share-based payment transactions, including share options, restricted share plans, and employee share purchase plans, be recognized in financial statements. The cost of these transactions will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. In April 2004, the SEC extended the compliance dates and public companies will now be required to apply the provisions of SFAS No. 123(R) no later than the first fiscal year that begins after June 15, 2005.

On March 2, 2005, we accelerated the vesting of out-of-the-money unvested stock options (see Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements). In accordance with APB Opinion No. 25, this acceleration did not result in the recognition of any compensation expense. There can be no assurance that the acceleration of the vesting of these options will not result in some future compensation expense. We will begin to expense the remaining in-the-money unvested stock options awarded to acquire approximately 900,000 shares of Andrx common stock beginning January 2006. We have estimated that the compensation expense to be recognized related to these options, assuming no forfeitures and no additional grants, will be approximately $2.4 million, of which $1.6 million, $650,000, and $150,000 will be expensed in 2006, 2007, and thereafter, respectively.

Once the provisions of SFAS No. 123(R) go into effect, our Employee Stock Purchase Plan will also be treated as compensatory. The compensation expense that will be recognized in connection with our Employee Stock Purchase Plan will depend on the number of employees participating in the plan, our stock price at the end of each month, and other factors. Had SFAS No. 123(R) been in effect for the six months ended June 30, 2005, the compensation expense recognized in connection with our Employee Stock Purchase Plan would have been immaterial to our results of operations.

Accounting for Income Taxes — the American Jobs Creation Act of 2004

activities deduction under the American Jobs Creation Act of 2004 be accounted for as a special deduction in accordance with FAS 109, and not as a rate reduction. A special deduction is accounted for by recording the benefit of the deduction in the year in which it can be taken in the company’s tax return, and not by adjusting deferred taxes in the period of enactment. FSP FAS 109-1 was effective upon issuance. This standard and the American Jobs Creation Act of 2004 did not have a material impact on our Consolidated Financial Statements.

Accounting Changes and Error Corrections

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes regarding our Quantitative and Qualitative Disclosures About Market Risk since the most recent fiscal year.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 13 of “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part 1, Item 1 of this report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	(a)		On May 20, 2005, we held our annual meeting of stockholders.

	(b)		Not applicable.

	(c)		At the annual meeting, the following matters were voted upon by Andrx Corporation stockholders:

Election of Directors.

The following table sets forth the name of each nominee and the voting with respect to each nominee for director.


Nominee	For	Withhold Authority

Tamara A. Baum Melvin Sharoky, M.D.	61,253,573 40,501,994	4,641,397 25,392,976

Ratification of the appointment of Ernst & Young LLP as Andrx Corporation’s Independent Certified Public Accountants for the year ending December 31, 2005.


For	Against	Abstain/Broker Non-Votes
65,347,410	509,027	38,533

ITEM 5. OTHER INFORMATION

Andrx officers, directors and certain other employees (an “Insider”) from time to time may enter into “Rule 10b5-1 Plans”. Under an appropriate Rule 10b5-1 Plan, an Insider may instruct a third party, such as a brokerage firm, to engage in specific securities transactions in the future based on a formula without further action by the Insider, provided that the plan satisfies the legal requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 as amended.

ITEM 6. EXHIBITS

10.102		Distribution agreement dated May 2, 2005 by and between Amphastar Pharmaceuticals, Inc., a Delaware corporation and Andrx Pharmaceuticals, Inc., a Florida corporation (1).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets - as of June 30, 2005 and December 31, 2004	2

	Unaudited Condensed Consolidated Statements of Income - for the three and six months ended June 30, 2005 and 2004	3

	Unaudited Condensed Consolidated Statements of Cash Flows - for the six months ended June 30, 2005 and 2004	4

	Notes to Unaudited Condensed Consolidated Financial Statements.	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 4.	Submission of Matters to a Vote of Security Holders	61

Item 5.	Other Information	61

Item 6.	Exhibits	61

SIGNATURES		63
Distribution Agreement
CEO Certification pursuant to Rule 13a-15(e) and 15d-15(e)
CFO Certification pursuant to Rule 13a-15(e) and 15d-15(e)
CEO & CFO Certification pursuant to 18 USC Section 1350


	Six Months Ended
	June 30,
	2005			2004
Supplemental disclosure of non-cash investing and financing activities:
Issuance of restricted stock units, net	$	(11,602	)	$	(1,811	)


Acquisition of CTEX Pharmaceuticals, Inc., adjustment	$	—		$	(518	)


Date: August 4, 2005	By:	/s/ Thomas P. Rice


	Thomas P. Rice
	Chief Executive Officer

Date: August 4, 2005	By:	/s/ John M. Hanson


	John M. Hanson
	Senior Vice President and Chief Financial Officer


(1)		Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, which portions are omitted and filed separately with the Securities and Exchange Commission.