United States Securities and Exchange Commission

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Form 10-Q

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

For the Quarterly Period Ended June 30, 2004
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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          o NO

The approximate number of shares outstanding of the issuer’s common stock as of August 3, 2004 is 72,788,000.

This Form 10-Q contains trademarks held by Andrx Corporation and third parties.

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ANDRX CORPORATION AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Andrx Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

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

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

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

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Andrx Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

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

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

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’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 the Company’s unaudited financial position, results of operations and cash flows. The unaudited results of operations for the three and six months ended June 30, 2004, and cash flows for the six months ended June 30, 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, and its quarterly report on Form 10-Q for the quarter ended March 31, 2004. 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.

     SIGNIFICANT ACCOUNTING POLICIES

     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 and six months ended June 30, 2004.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

     Revenue Recognition

     Andrx’s distributed product revenues are revenues derived from the sale of pharmaceutical products purchased from third parties, including generic products sold on behalf of Andrx’s unconsolidated joint ventures. Andrx products revenues include Andrx’s generic and brand product revenues. Andrx generic product revenues are revenues derived from the sale of generic products either manufactured by Andrx pursuant to an Andrx Abbreviated New Drug Application (“ANDA”) or sold with an Andrx New Drug Code (“NDC”), excluding generic products sold on behalf of Andrx’s unconsolidated joint ventures. Andrx brand product revenues are revenues derived from the sale of branded products either manufactured by Andrx pursuant to an Andrx New Drug Application (“NDA”) or sold with an Andrx NDC.

     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 are provided in the same period as the related sales are recorded based on currently available information and are periodically monitored and evaluated.

     Revenues from Andrx’s brand products are recognized after products are received by customers and are based on Andrx’s estimate of when such products 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, competing generic product introductions and Andrx’s brand product inventory levels in the distribution channel, which the Company periodically evaluates. As a result, Andrx had $8,190 and $5,722 in deferred revenue in the June 30, 2004 Unaudited Condensed Consolidated Balance Sheet and the December 31, 2003 Consolidated Balance Sheet, respectively.

     Allowances against sales for estimated returns, chargebacks, rebates and other sales allowances are established by Andrx concurrently with the recognition of revenue. These allowances are established based upon consideration of a variety of factors, including, but not limited to, customers’ right of return, historical returns, chargebacks and rebates 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, current and projected economic conditions and anticipated future product pricing. Actual product returns, chargebacks, rebates and other sales allowances incurred are dependent upon future events. Andrx periodically monitors the factors that influence sales returns and 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, revisions to previous estimates may be required, potentially in significant amounts. Changes in the level of provisions for estimated sales returns, chargebacks, rebates and other sales allowances will affect revenues from sales of Andrx’s generic and brand products.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

     The pharmaceutical industry 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 inventory 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 revenues from sales of its generic products. In order to make such an accrual, Andrx makes significant accounting estimates, including estimates of the quantities sold by customers, product still on customers’ shelves and price declines that may 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, revisions to previous estimates may be required, potentially in significant 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, future levels of prescriptions for its products and Andrx’s brand product 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 three and six months ended June 30, 2004, approximately 74% and 70%, respectively, of Andrx’s 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 therapeutically unique brand product line, these customers exert significant leverage on Andrx relative to, among other things, product returns and other concessions. Andrx periodically reviews its estimates for sales returns and allowances, and if conditions change in future periods, revisions to previous estimates may be required, potentially in significant amounts.

     Andrx sometimes enters into collaborative agreements where the other party markets the Company’s product. In these instances, Andrx recognizes revenue based on information supplied by the other party related to shipment of the product to and acceptance by customers, less estimates for sales returns and allowances. The revenues Andrx reports are subject to several estimates by such parties, similar to those the Company experiences with sales of its 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 from the other party that support the amount of revenue Andrx recognizes, and amounts recognized are then compared to the cash subsequently remitted to the Company.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

     Licensing and royalties revenues are recognized when the obligations associated with the earning of the licensing or royalty revenue have been satisfied. The Company reviews each contract, and if appropriate, defers up-front and milestone payments, whether or not they are refundable, and recognizes such amounts over future periods after services have been rendered or delivery has occurred and the amounts are fixed or determinable (See Notes 7 and 11).

     Impairment or Disposal of Long-Lived Assets

     The Company utilizes the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of its long-lived assets or whether the remaining balance of long-lived assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets to determine whether impairment has occurred. Fair value, as determined by appraisal or discounted cash flow analysis, is compared to the carrying value in calculating any impairment. (See Notes 5 and 6).

     DIVESTITURES

     Andrx divested its Massachusetts aerosol manufacturing operation and its Physicians’ Online (“POL”) web portal in October and December 2003, respectively. For the three and six months ended June 30, 2003, other revenues included $1,131 and $4,129, respectively, from these divested operations. (See Note 4).

     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 Accounting Principles Board Opinion (“APB”) No. 25 and related interpretations. Options granted under those plans are to eligible participants 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
June 30, 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 issued was estimated using the Black-Scholes option pricing model and the following assumptions:

     The range of fair values per share of Andrx options as of the respective dates of grant was $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, and $7.58 to $17.13 and $6.61 to $23.12, for stock options granted during the three and six months ended June 30, 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.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

Recent Accounting Pronouncements

     Variable Interest Entities

     In January 2003, the Financial Accounting Standards Board (“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 year ended December 31, 2003, and the six month period ended June 30, 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 interpretative 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 interpretative material retained, because of pronouncements issued by the FASB’s Emerging Issues Task Force (“EITF”) on various revenue recognition topics, including EITF 00-21, “Revenue Arrangements with Multiple Deliverables” and EITF 99-19, “Reporting Revenue Gross as Principal Versus Net as an Agent”. 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.

2. COLLABORATIVE ARRANGEMENTS

     Andrx has entered into an agreement with Genpharm, Inc. (“Genpharm”) whereby the Company has the exclusive rights to either market Genpharm’s generic versions of Paxil® (paroxetine hydrochloride) 10mg, 20mg, 30mg, and 40mg tablets or Andrx’s own ANDA product(s) in the United States, in exchange for a royalty based on the net profits, as defined. In May 2004, Andrx launched all four strengths of Genpharm’s generic Paxil product. (See Note 11).

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

     Andrx has a collaborative 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, Andrx’s OTC generic version of Claritin RediTabs. Under the terms of the arrangement, Andrx manufactures and Perrigo packages and markets these “store-brand” products, and the parties share the net profits, as defined, from product sales.

     Andrx has a collaborative arrangement with Teva Pharmaceutical Industries Ltd (“Teva”) whereby the Company agreed to manufacture and supply Teva with Andrx’s line of generic oral contraceptive products and Teva agreed to market the products. Under the terms of the arrangement, the parties share the net profits, as defined, from product sales. In April 2004, Teva launched Andrx’s generic versions of Ortho Tri-Cyclen® and Ortho Cyclen-28®.

     In July 2004, Andrx entered into a collaborative arrangement with Martec Pharmaceutical, Inc. (“Martec”) whereby Martec will supply its generic version of Procardia® XL (nifedipine) 90mg tablets to Andrx and Andrx will market the product in the United States. Under the terms of the arrangement, the parties share the net profits, as defined, from product sales.

3. EARNINGS PER SHARE

     For the three and six months ended June 30, 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, including the vested portion of restricted stock units, during the three and six months ended June 30, 2004 and 2003, respectively, 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 certain restricted stock units in which the exercise price or the issuance price, respectively, exceeded the average market price for the respective three and six-month periods.

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

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

4. INVENTORIES AND COST OF GOODS SOLD

     Inventories consist of the following:

     As of June 30, 2004, the Company had approximately $8,728 in inventories relating to products pending launch while the Company awaits receipt of final Food and Drug Administration (“FDA”) marketing approval. (See Note 11).

     During the three and six months ended June 30, 2004, the Company recorded an impairment charge of $14,535 directly to cost of goods sold related to its North Carolina facility. (See Note 5).

     During the three and six months ended June 30, 2004, the Company recorded an impairment charge of $3,500 directly to cost of goods sold related to its Entex product rights. (See Note 6).

     During the three and six months ended June 30, 2003, Andrx also recorded charges of $9,440 and $10,870, respectively, included in cost of goods sold, related to the writedown of certain assets ($2,994 for inventories and $5,183 for property, plant and equipment) and under-utilization and inefficiencies from the Massachusetts aerosol manufacturing operation that was sold in October 2003.

     During the three and six months ended June 30, 2004, Andrx recorded charges of $6,454 and $14,387, respectively, directly to cost of goods sold as a result of production issues related to the Company’s products and product candidates. During the three and six months ended June 30, 2003, Andrx recorded charges of $2,732 and $10,322, respectively, directly to cost of goods sold as a result of production issues related to the Company’s products and product candidates. Charges for the six months ended June 30, 2003, included $5,723 related to Andrx’s generic versions of Wellbutrin SR®/Zyban® product placed into production after December 31, 2002.

     During the three and six months ended June 30, 2004, Andrx recorded charges directly to cost of goods sold of approximately $4,500 associated with under-utilization and inefficiencies of its manufacturing facilities. During the three and six months ended June 30, 2003, cost of goods sold included $1,132 and $2,731, respectively, associated with under-utilization and inefficiencies of Andrx’s manufacturing facilities.

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Andrx Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2004
(in thousands, except share and per share amounts)

5. PROPERTY, PLANT AND EQUIPMENT, NET

     The Company purchased its North Carolina facility in December 2002 for approximately $28,250. Renovation of the facility commenced in 2003. In June 2004, the Company determined that, as a result of its near term manufacturing needs and the extended time horizon for commercial scale production at the North Carolina facility, among other factors, a significant expansion of its Florida facilities would allow it to fulfill its current and projected manufacturing requirements through at least 2007. As a result of this determination, the Company concluded that it would discontinue renovation of its North Carolina facility. As the Company is not presently utilizing such facility, and has no plans for its utilization, it is more likely than not that this facility will be sold. Accordingly, the Company recorded a $14,535 impairment charge to its Generic Products Segment cost of goods sold for the three and six months ended June 30, 2004, which represented the difference between the carrying value and the estimated fair value of its North Carolina facility based on independent appraisals. (See Note 4). The ultimate amount realized from a sale of this facility may differ from the Company’s fair value estimate.

6. OTHER INTANGIBLE ASSETS, NET

     In the three months ended June 30, 2004, pursuant to its October 2001 agreement with Sandoz Inc. (“Sandoz”) (formerly known as Geneva Pharmaceuticals, Inc., a subsidiary of Novartis), whereby the Company reacquired the marketing rights for Fortamet™ (metformin extended-release), the Company made milestone payments to Sandoz of $2,000 upon FDA approval of Fortamet and $3,000 upon the first commercial sale of Fortamet. Such product marketing rights payments have been recorded in other intangible assets in the June 30, 2004 Unaudited Condensed Consolidated Balance Sheet. The product marketing rights are being amortized on a straight-line basis through cost of goods sold over the three-year Fortamet marketing exclusivity period granted by the FDA.

     In June 2004, as a result of the FDA approval of an NDA for an OTC product containing the same active ingredients as Andrx’s Entex^® PSE prescription product, Andrx recorded a charge of $3,500 to its Brand Products Segment cost of goods sold for the three and six months ended June 30, 2004, related to the impairment of its Entex product rights, which the Company acquired in 2001 (see Note 4). This charge represents the difference between the carrying amount and the fair value of the Entex product rights based on th