United States Securities and Exchange Commission

Form 10-Q

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

For the Quarterly Period Ended March 31, 2004

Commission file number 0-31475

ANDRX CORPORATION

(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 twelve 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:

[X] YES [  ] NO

The approximate number of shares outstanding of the issuer’s common stock as of May 3, 2004 is 72,688,000.

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ANDRX CORPORATION AND SUBSIDIARIES

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ANDRX CORPORATION AND SUBSIDIARIES

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

2

Andrx Corporation and Subsidiaries

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

3

Andrx Corporation and Subsidiaries

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

4

Andrx Corporation and Subsidiaries

1. GENERAL

     The accompanying unaudited condensed consolidated financial statements for each period include the consolidated balance sheets, statements of income and cash flows of Andrx Corporation and subsidiaries (“Andrx” or the “Company”). 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 U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to the SEC 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 the Company’s unaudited financial position, results of operations and cash flows. The unaudited results of operations and cash flows for the three months ended March 31, 2004, are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2004. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Andrx’s Annual Report on Form 10-K for the year ended December 31, 2003. The December 31, 2003 Consolidated Balance Sheet included herein was extracted from the December 31, 2003 Audited Consolidated Balance Sheet included in the 2003 Form 10-K.

     CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The preparation of these interim financial statements requires Andrx 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. Andrx bases its estimates on, among other things, currently available information, its historical experience and on various assumptions, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although Andrx believes that these 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. Since December 31, 2003, none of the critical accounting policies, or Andrx’s application thereof, as more fully described in Andrx’s Annual Report on Form 10-K for the year ended December 31, 2003, have significantly changed. Certain critical accounting policies have been presented below due to the significance of related transactions during the three month period ended March 31, 2004.

     Revenue Recognition

     Revenues from Andrx’s distributed and generic products and the related cost of goods sold are recognized at the time the product is received by Andrx’s customers. Estimated sales returns and allowances related to the sales to its customers are provided in the same period as the related sales are recorded based on currently available information and are continuously monitored and evaluated.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     Revenues from Andrx’s brand products are recognized for products received by customers that Andrx reasonably estimates will be pulled through the distribution channel taking into account, among other things, historical prescription data provided by external, independent sources, projected prescription data, incentives granted to customers, customers’ right of return, generic introductions and inventory levels in the distribution channel, which the Company periodically evaluates. As a result, Andrx had $3,591 and $5,722 in deferred revenue in the March 31, 2004 and December 31, 2003 Consolidated Balance Sheets, respectively.

     Allowances against sales for estimated returns, chargebacks, rebates and other sales allowances are established by Andrx concurrently with the recognition of net revenue. These allowances are established based upon consideration of a variety of factors, including, but not limited to, historical return experience by product type, the number and timing of competitive products approved for sale, both historical and projected, the estimated size of the market for the product, estimated customer inventory levels by product and current and projected economic conditions, including historical and anticipated price declines. However, actual product returns, chargebacks, rebates and other sales allowances incurred are dependent upon future events. Andrx periodically monitors the factors that influence sales allowances and makes adjustments to these provisions when Andrx believes that actual product returns, chargebacks, rebates and other sales allowances may differ from established allowances. If conditions in future periods change, additional allowances may be required, potentially in significant amounts. The level of provisions for estimated sales returns, chargebacks, rebates and other sales allowances may affect net revenues from sales of our generic and brand products.

     In the pharmaceutical industry, the practice is generally to grant customers the right to return or exchange purchased goods. In the generic pharmaceutical industry, this practice has resulted in generic manufacturers issuing credits (also known as shelf-stock adjustments) to customers based on the customers’ existing inventory following decreases in the market price of the related generic pharmaceutical product. The determination to grant an inventory credit to a customer following a price decrease is generally at the Company’s discretion, and not pursuant to contractual arrangements with customers. Shelf-stock adjustments occur frequently, potentially in significant amounts. Andrx accrues an estimate for sales allowances in the same period the sale is recognized. Accordingly, the level of provisions for estimated shelf-stock adjustments affects net revenues from sales of its generic products. In order to make such an accrual, Andrx makes significant accounting estimates, including estimates of the quantities shipped by customers and product still on customers’ shelves, and estimates of the price declines that will occur before the products pull through the distribution channel. Andrx periodically reviews and, as necessary, adjusts such estimates. As a result, if conditions in future periods change, additional allowances or reversals may be required. Such additional allowances or reversals could be significant.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     In Andrx’s brand business, the Company makes significant estimates for sales returns and allowances, which are dependent on Andrx’s ability to promote to physicians, create demand for its products, pull products through the distribution channel and estimate returns, future levels of prescriptions for its products and the inventory levels in the distribution channel. It is a common pharmaceutical industry practice for brand manufacturers to offer customers, among other things, buy-in allowances on initial purchases prior to promotion activities by the manufacturer. In addition, Andrx conducts a significant amount of its sales with a limited number of large pharmaceutical wholesalers and warehousing pharmacy chains that have a right to return or exchange product they purchased. During the first quarter of 2004, approximately 61% of the brand products’ shipments were made to three customers. As there are a limited number of large customers and Andrx does not have a substantial and unique brand product line, these customers can and do exert significant leverage on Andrx relative to, among other things, product returns and other concessions. As a result, the Company makes significant estimates related to sales returns and allowances in connection with the recognition of revenues, and periodically reviews such estimates. Andrx’s policy is to recognize net revenues to the extent the Company can reasonably estimate returns and the product being pulled through the distribution channel. If conditions change in future periods, additional allowances or reversals may be required. Such additional allowances could be significant.

     Andrx recognizes revenue from collaborative arrangements based on information supplied by the other parties related to shipment of the product to and acceptance by customers, less estimates for sales returns and allowances. The net revenues Andrx reports are subject to several estimates by such parties similar to those we experience with the sales of the Company’s products. Andrx periodically monitors the factors that influence sales returns and allowances and conducts inquiries of the other parties regarding these estimates. Such estimates are revised as changes become known. In addition, Andrx receives periodic reports by the other parties that support the amount of revenue that Andrx recognizes. Amounts recognized are then compared to the cash subsequently remitted to the Company.

     In July 2003, Andrx entered into an Exclusivity Transfer Agreement (“Exclusivity Agreement”) with Impax Corporation (“Impax”) and Teva Pharmaceutical Industries Ltd (“Teva”) pertaining to the respective Abbreviated New Drug Applications (“ANDAs”) for generic versions of Wellbutrin SR^® and Zyban^® (See Note 4).

     Andrx has an arrangement with L. Perrigo Company (“Perrigo”) whereby the Company agreed to manufacture and supply Perrigo with Andrx’s generic versions of Claritin-D^® 12, Claritin-D^® 24 and Claritin^® RediTabs, and Perrigo agreed to market such products as store-brand, over-the-counter (“OTC”) products. In June 2003, Perrigo launched Andrx’s OTC generic version of Claritin-D 24 and in January 2004, its OTC generic version of Claritin RediTabs. Under the terms of the arrangement, Andrx will manufacture and Perrigo will package and market these products, and the parties will share the net profits, as defined, from product sales. Andrx recognizes revenue from such sales after Perrigo has shipped and the customer has received and accepted the product, less estimates by Perrigo for product returns and other customary allowances. The net revenues reported by the Company are subject to numerous estimates by Perrigo, such as returns and other sales allowances and certain related expenses.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     Licensing and royalty fees are recognized when the obligations associated with the earning of the licensing or royalty fee have been satisfied. Andrx’s accounting policy is to review each contract, and if appropriate, defer up-front and milestone payments, whether or not they are refundable, and recognize such milestones over the obligation period. Revenue recognition is deferred until all significant contingencies have been resolved.

     DIVESTITURES

     Andrx divested its Massachusetts aerosol manufacturing operation and its POL web portal in October and December 2003, respectively. For the three months ended March 31, 2003, other revenues included $2,998 from the contract manufacture of aerosol products from the Company’s Massachusetts facility and revenues generated from its Internet operations, including the Physicians’ Online (“POL”) web portal.

     RECLASSIFICATIONS

     Certain prior period amounts have been reclassified to conform to the current period presentation.

     STOCK-BASED COMPENSATION

     The Company accounts for its stock-based compensation plans under the recognition and measurement principles of APB No. 25 and related interpretations. Options granted under those plans are to employees or members of the Board of Directors with an exercise price equal to the market value of the underlying common stock on the date of grant. Accordingly, no employee compensation expense for stock options is reflected in the Unaudited Condensed Consolidated Statements of Income. 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. Such amortization expense is included in selling, general and administrative (“SG&A”) expenses.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     The following table summarizes the pro forma consolidated results of operations of Andrx as though the provisions of the fair value based accounting method of accounting for employee stock option compensation of SFAS No. 123 had been used:

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

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     The range of fair values per share of Andrx options as of the respective dates of grant was $17.45 to $21.60, and $6.61 to $23.12, for stock options granted during the three months ended March 31, 2004 and 2003, respectively.

     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. In addition, the Black-Scholes model, like all option valuation models, requires highly subjective assumptions including the expected stock price volatility. As the Company’s employee stock options have characteristics significantly different than those of traded options, and changes in the assumptions can materially affect the fair value estimate, in management’s opinion, the option pricing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

Recent Accounting Pronouncements

     Variable Interest Entities

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”), which is intended to clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In December 2003, the FASB issued a revision to FIN No. 46, which partially delayed its effective date for public companies until the period ending after March 15, 2004, but permitted earlier adoption for some or all of their investments. FIN No. 46 requires a company to consolidate variable interest entities (“VIEs”), if that company is the primary beneficiary of the variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected returns or both. Since Andrx does not have any VIEs, the adoption of FIN No. 46 for the 2003 period and the period ending after March 15, 2004, did not have an impact on Andrx’s consolidated financial statements.

   Revenue Recognition

     In December 2003, the SEC published Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” This SAB updates portions of the SEC staff’s interpretive guidance provided in SAB 101 and included in Topic 13 of the Codification of Staff Accounting Bulletins. SAB 104 deletes interpretative material no longer necessary, and conforms the interpretive material retained, because of pronouncements issued by the FASB’s EITF on various revenue recognition topics, including EITF 00-21. SAB 104 also incorporates into the SAB Codification of certain sections of the SEC staff’s “Revenue Recognition in Financial Statements – Frequently Asked Questions and Answers” (“FAQ”). To the extent not incorporated into the SAB codification, the SEC staff’s FAQ on SAB 101 (Topic 13) has been rescinded. Adoption of the provisions of SAB 104 did not have a significant impact on the Company’s consolidated financial statements.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

2. EARNINGS PER SHARE

     For the three months ended March 31, 2004 and 2003, 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 during the three months ended March 31, 2004 and 2003, plus dilutive common stock equivalents, computed using the treasury stock method. The Company’s dilutive common stock equivalents consist of stock options and the unvested portion of restricted stock units. Anti-dilutive common stock equivalents include stock options and the unvested portion of restricted stock units in which the exercise price or the issuance price, respectively, exceeded the average market price for the respective three-month period.

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

3. INVENTORIES

     Inventories consist of the following:

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     As of March 31, 2004, the Company had approximately $12,224 in inventories relating to products pending launch while the Company awaits receipt of final Food and Drug Administration (“FDA”) marketing approval. Of such amount, $5,817 was for inventory that was approved for sale by FDA subsequent to March 31, 2004.

     During the three months ended March 31, 2004 and 2003, Andrx recorded charges of $7,933 and $7,590, respectively, directly to cost of goods sold related to the production of the Company’s products and product candidates. Charges for the March 31, 2003 period included $5,723 related to Wellbutrin SR/Zyban placed into production after December 31, 2002.

     During the three months ended March 31, 2004 and 2003, Andrx recorded charges of $1,393 and $1,600, respectively, directly to cost of goods sold associated with its manufacturing facilities (utilization issues at its Florida facilities and its Morrisville, North Carolina manufacturing facility, which the Company is renovating). The March 31, 2003, three month period also included $1,713 relating primarily to excess capacities at its Massachusetts facility, which the Company sold in October 2003.

4. LICENSING AND ROYALTIES REVENUE

     For the three months ended March 31, 2004 and 2003, the Company recorded $20,135 and $31,013 in licensing and royalties revenue, respectively. For the three months ended March 31, 2004, licensing and royalties revenue included $16,196 from Impax and Teva for relinquishing Andrx’s exclusivity rights to the 150mg strength of the generic version of Wellbutrin SR and $3,304 from Kremers Urban Development Company (“KUDCo”) for relinquishing Andrx’s exclusivity rights to the 10mg and 20mg strengths of generic Prilosec. Licensing and royalties revenue for the three months ended March 31, 2003 included $30,406 from KUDCo.

     Generic Wellbutrin SR/Zyban

     In July 2003, Andrx entered into an Exclusivity Agreement with Impax and Teva pertaining to the respective ANDAs for generic versions of Wellbutrin SR/Zyban. In March 2004, Andrx relinquished its rights to the 180-day period of market exclusivity for the generic 150mg strength of Wellbutrin SR, thereby allowing Impax and other companies to gain FDA approval to market their products. Teva launched the Impax product in the first quarter of 2004, and Andrx is entitled to a share of the profits derived from such sales for a 180-day period. Such sales, which includes the initial pipeline fill, generated licensing revenues to Andrx of $16,196 during the three month period ended March 31, 2004. The licensing revenue recorded by Andrx is subject to numerous estimates for discounts, returns, chargebacks, rebates, shelf-stock adjustments and other sales allowances and related expenses. The Company has not relinquished the 180-day period of market exclusivity pertaining to its ANDA for a generic version of Zyban.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

     Generic Prilosec

     The licensing rate due from KUDCo was 15% until June 2003, when the rate decreased to 9%, and further declined to 6.25% in February 2004, consistent with Andrx’s agreement with KUDCo. Competition has also resulted in reduced sales for KUDCo’s generic version of Prilosec, which has further reduced Andrx’s licensing revenues from KUDCo.

5. PROVISION FOR INCOME TAXES

     For the three months ended March 31, 2004 and 2003, the Company recorded a provision for income taxes of $16,337 and $3,895, respectively, or 38% for each period of income before income taxes. For the three months ended March 31, 2004 and 2003, the Company 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.

     During 2003, the Company incurred, and will report on its 2003 income tax return, a significant tax loss as the result of certain ordinary business developments. The loss was not fully utilized during 2003; accordingly, the unused portion will be carried forward to 2004. The Company believes the loss is appropriate and deductible; however, the complexity of the tax rules and the likelihood of a review and subsequent challenge by the taxing authorities resulted in the Company recording an accrual, which is included in accrued and other liabilities, to fully offset the utilization of such loss carryforward. Additionally, the remaining loss, approximately $30,139, tax effected, will be carried forward and may be available to reduce certain future taxable income, which will be similarly offset by an accrual for financial reporting purposes at that time. This reserve will be reassessed upon any changes in status of any contingencies related to this deduction, until such contingencies are fully resolved. The Company’s effective tax rate and cash flows could be materially impacted by the ultimate resolution of this matter.

6. COMPREHENSIVE INCOME

     The components of the Company’s comprehensive income are as follows:

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2004
(in thousands, except share and per share amounts)

7. BUSINESS SEGMENTS

     See the Company’s Form 10-K for the year ended December 31, 2003, for a discussion of its business segments.

     The following table represents unaudited financial information by business segment: