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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 0-31781



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American Pharmaceutical Partners, Inc.

(Exact name of registrant as specified in its charter)



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|                                                        |  |                                     
|------------------------------------------------------- |  | ------------------------------------
|Delaware                                                |  | 68-0389419                          
|(State of Incorporation)                                |  | (I.R.S. Employer Identification No.)
|                                                        | 
|1501 East Woodfield Road, Suite 300 East Schaumburg, IL |  | 60173-5837                          
|(Address of principal executive offices)                |  | (Zip Code)                          



(847) 969-2700

(Registrants telephone number, including area code)



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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.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as determined by rule 12b-2 of the Exchange Act).    Yes  x    No ̈



As of November 2, 2004, the registrant had 70,537,986 shares of $0.001 par value common stock outstanding.



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##### Table of Contents

American Pharmaceutical Partners, Inc.



INDEX



|                              |  |                                                                                                                                            |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                                                                            |  | Page
|PART I. Financial Information |  |                                                                                                                                           
|                              |  |                                                                                                                                           
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                           |  |     
|                              |  |                                                                                                                                           
|                              |  | Condensed consolidated balance sheets  September 30, 2004 and December 31, 2003                                                           |  | 3   
|                              |  |                                                                                                                                           
|                              |  | Condensed consolidated statements of income  Three months endedSeptember 30, 2004 and 2003; Nine months ended September 30, 2004 and 2003 |  | 4   
|                              |  |                                                                                                                                           
|                              |  | Condensed consolidated statements of cash flows  Nine months endedSeptember 30, 2004 and 2003                                             |  | 5   
|                              |  |                                                                                                                                           
|                              |  | Notes to condensed consolidated financial statements  September 30, 2004                                                                  |  | 6   
|                              |  |                                                                                                                                           
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                      |  | 14  
|                              |  |                                                                                                                                           
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                 |  | 27  
|                              |  |                                                                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                                                                    |  | 29  
|                              | 
|PART II. Other Information    |  |                                                                                                                                           
|                              |  |                                                                                                                                           
|Item 1.                       |  | Legal Proceedings                                                                                                                          |  | 30  
|                              |  |                                                                                                                                           
|Item 6.                       |  | Exhibits                                                                                                                                   |  | 31  
|                              | 
|Signatures                    |  | 32                                                                                                                                        



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



American Pharmaceutical Partners, Inc.

Condensed Consolidated Balance Sheets



|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|(in thousands, except share data)                                                                                                     |  | September 30, 2004 |         |   | December 31, 2003 |  
|                                                                                                                                      |  | (Unaudited)        |         |   | (Note 1)          |  
|Assets                                                                                                                                |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                                                       |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                             |  | $                  | 61,943  |   |                   | $ | 58,625  |  
|Accounts receivable, net                                                                                                              |  |                    | 8,558   |   |                   |   | 31,402  |  
|Inventories                                                                                                                           |  |                    | 143,903 |   |                   |   | 110,384 |  
|Prepaid expenses and other current assets                                                                                             |  |                    | 8,341   |   |                   |   | 7,340   |  
|Deferred income taxes                                                                                                                 |  |                    | 7,948   |   |                   |   | 7,948   |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Total current assets                                                                                                                  |  |                    | 230,693 |   |                   |   | 215,699 |  
|Property, plant and equipment, net                                                                                                    |  |                    | 100,254 |   |                   |   | 77,340  |  
|Investment in Drug Source Co., LLC                                                                                                    |  |                    | 5,981   |   |                   |   | 5,166   |  
|Product license rights and other non-current assets, net                                                                              |  |                    | 5,172   |   |                   |   | 3,027   |  
|Deferred financing costs, net                                                                                                         |  |                    | 426     |   |                   |   | 2,553   |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Total assets                                                                                                                          |  | $                  | 342,526 |   |                   | $ | 303,785 |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Liabilities and stockholders equity                                                                                                  |  |                    |         |   |                   |   |         |  
|Current liabilities:                                                                                                                  |  |                    |         |   |                   |   |         |  
|Accounts payable                                                                                                                      |  | $                  | 20,866  |   |                   | $ | 26,560  |  
|Accrued expenses                                                                                                                      |  |                    | 30,013  |   |                   |   | 29,120  |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                                             |  |                    | 50,879  |   |                   |   | 55,680  |  
|Deferred income taxes                                                                                                                 |  |                    | 2,044   |   |                   |   | 2,044   |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                     |  |                    | 52,923  |   |                   |   | 57,724  |  
|                                                                                                                                      |  |                   
|Stockholders equity                                                                                                                  |  |                    |         |   |                   |   |         |  
|Common stock - $.001 par value; 100,000,000 shares authorized, 77,168,083 and 76,514,964 shares issued in 2004 and 2003,
respectively |  |                    | 77      |   |                   |   | 77      |  
|Additional paid-in capital                                                                                                            |  |                    | 209,853 |   |                   |   | 201,009 |  
|Amounts due from American BioScience, Inc.                                                                                            |  |                    | (21,693 | ) |                   |   | (21,132 | )
|Deferred stock-based compensation                                                                                                     |  |                    | (1,016  | ) |                   |   | (1,309  | )
|Retained earnings                                                                                                                     |  |                    | 158,377 |   |                   |   | 123,550 |  
|Accumulated other comprehensive income                                                                                                |  |                    | 279     |   |                   |   | 140     |  
|Less treasury stock at cost, 6,646,398 common shares in 2004 and 2003                                                                 |  |                    | (56,274 | ) |                   |   | (56,274 | )
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                            |  |                    | 289,603 |   |                   |   | 246,061 |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                            |  | $                  | 342,526 |   |                   | $ | 303,785 |  
|                                                                                                                                      |  |                    |         |   |                   |   |         |  



See notes to condensed consolidated
financial statements.



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American Pharmaceutical Partners, Inc.

Condensed Consolidated Statements of Income

(Unaudited)



|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                    |  | Three Months EndedSeptember 30,       |        |   | Nine Months EndedSeptember 30, |  
|                                                                                    |  | 2004                                  |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|                                                                                    |  | (in thousands, except per share data) |       
|Net sales                                                                           |  | $                                     | 95,614 |   |                                | $ | 90,354 |      |  | $ | 282,456 |   |  | $ | 262,115 |  
|Cost of sales                                                                       |  |                                       | 43,915 |   |                                |   | 41,817 |      |  |   | 133,229 |   |  |   | 116,792 |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                                        |  |                                       | 51,699 |   |                                |   | 48,537 |      |  |   | 149,227 |   |  |   | 145,323 |  
|Operating expenses:                                                                 |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                                            |  |                                       | 7,406  |   |                                |   | 4,987  |      |  |   | 21,346  |   |  |   | 16,130  |  
|Selling, general and administrative                                                 |  |                                       | 21,693 |   |                                |   | 13,256 |      |  |   | 65,583  |   |  |   | 37,389  |  
|Milestone payment                                                                   |  |                                       |       |   |                                |   |       |      |  |   | 10,000  |   |  |   |        |  
|Stock-based compensation                                                            |  |                                       | 175    |   |                                |   | 256    |      |  |   | 650     |   |  |   | 989     |  
|Equity in net income of Drug Source Co., LLC                                        |  |                                       | (753   | ) |                                |   | (551   | )    |  |   | (1,991  | ) |  |   | (1,049  | )
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                            |  |                                       | 28,521 |   |                                |   | 17,948 |      |  |   | 95,588  |   |  |   | 53,459  |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from operations                                                              |  |                                       | 23,178 |   |                                |   | 30,589 |      |  |   | 53,639  |   |  |   | 91,864  |  
|Interest income                                                                     |  |                                       | 439    |   |                                |   | 420    |      |  |   | 1,284   |   |  |   | 1,315   |  
|Interest expense and other                                                          |  |                                       | 142    |   |                                |   | (9     | )    |  |   | 50      |   |  |   | 317     |  
|Loss on early extinguishment of credit facility                                     |  |                                       | (1,986 | ) |                                |   |       |      |  |   | (1,986  | ) |  |   |        |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income before income taxes                                                          |  |                                       | 21,773 |   |                                |   | 31,000 |      |  |   | 52,987  |   |  |   | 93,496  |  
|Provision for income taxes                                                          |  |                                       | 7,960  |   |                                |   | 12,710 |      |  |   | 18,160  |   |  |   | 38,333  |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                          |  | $                                     | 13,813 |   |                                | $ | 18,290 |      |  | $ | 34,827  |   |  | $ | 55,163  |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income per common share:                                                            |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                               |  | $                                     | 0.20   |   |                                | $ | 0.26   |      |  | $ | 0.50    |   |  | $ | 0.79    |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                             |  | $                                     | 0.19   |   |                                | $ | 0.25   |      |  | $ | 0.48    |   |  | $ | 0.76    |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest income includes interest earned from American BioScience, Inc. as follows: |  | $                                     | 271    |   |                                | $ | 298    |      |  | $ | 833     |   |  | $ | 923     |  
|                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



See notes to condensed consolidated
financial statements.



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American Pharmaceutical Partners, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                   |  |                                 |         |   |      |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                   |  | Nine Months Ended September 30, |        
|                                                                                   |  | 2004                            |         |   | 2003 |  
|                                                                                   |  | (in thousands)                  |        
|Cash flows from operating activities:                                              |  |                                 |         |  
|Net income                                                                         |  | $                               | 34,827  |   |      | $ | 55,163  |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                                 |         |   |      |   |         |  
|Depreciation                                                                       |  |                                 | 6,183   |   |      |   | 6,360   |  
|Amortization                                                                       |  |                                 | 832     |   |      |   | 708     |  
|Stock-based compensation                                                           |  |                                 | 650     |   |      |   | 989     |  
|Loss on early extinguishment of credit facility                                    |  |                                 | 1,986   |   |      |   |        |  
|Loss on disposal of property, plant and equipment                                  |  |                                 | 13      |   |      |   |        |  
|Deferred income taxes                                                              |  |                                 |        |   |      |   | (666    | )
|Equity in net income of Drug Source Company, LLC, net of dividends received        |  |                                 | (815    | ) |      |   | (1,181  | )
|Income tax benefit on stock option exercises                                       |  |                                 | 2,923   |   |      |   | 4,462   |  
|Changes in operating assets and liabilities:                                       |  |                                 |         |   |      |   |         |  
|Accounts receivable, net                                                           |  |                                 | 22,844  |   |      |   | (1,281  | )
|Inventories                                                                        |  |                                 | (33,519 | ) |      |   | (22,425 | )
|Prepaid expenses and other current assets                                          |  |                                 | (1,001  | ) |      |   | (3,263  | )
|Accounts payable and accrued expenses                                              |  |                                 | (3,606  | ) |      |   | 18,787  |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                          |  |                                 | 31,317  |   |      |   | 57,653  |  
|                                                                                   |  |                                
|Cash flows from investing activities:                                              |  |                                 |         |   |      |   |         |  
|Purchases of property, plant and equipment                                         |  |                                 | (29,110 | ) |      |   | (17,539 | )
|Purchase of other non-current assets                                               |  |                                 | (2,396  | ) |      |   |        |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                              |  |                                 | (31,506 | ) |      |   | (17,539 | )
|                                                                                   |  |                                
|Cash flows from financing activities:                                              |  |                                 |         |   |      |   |         |  
|Proceeds from the exercise of stock options                                        |  |                                 | 1,961   |   |      |   | 2,483   |  
|Proceeds from the sale of stock under employee retirement and stock purchase plans |  |                                 | 2,408   |   |      |   | 1,048   |  
|Increase in amounts due from American BioScience, Inc.                             |  |                                 | (561    | ) |      |   | (357    | )
|Payment of deferred financing costs                                                |  |                                 | (440    | ) |      |   |        |  
|Purchase of treasury stock                                                         |  |                                 |        |   |      |   | (19,999 | )
|                                                                                   |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                |  |                                 | 3,368   |   |      |   | (16,825 | )
|                                                                                   |  |                                
|Effect of foreign currency translation                                             |  |                                 | 139     |   |      |   | 116     |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Increase in cash and cash equivalents                                              |  |                                 | 3,318   |   |      |   | 23,405  |  
|Cash and cash equivalents at beginning of period                                   |  |                                 | 58,625  |   |      |   | 39,771  |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                         |  | $                               | 61,943  |   |      | $ | 63,176  |  
|                                                                                   |  |                                 |         |   |      |   |         |  



See notes to condensed consolidated
financial statements.



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AMERICAN PHARMACEUTICAL PARTNERS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



September 30, 2004



(Unaudited)



(1) Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of American
Pharmaceutical Partners, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial
statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December
31, 2004.



The balance sheet information at December 31, 2003 has been derived
from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.



A wholly owned subsidiary of American Pharmaceutical Partners holds a 50% interest in Drug
Source Company, LLC. Drug Source Company is a joint venture with three other partners established in June 2000 to purchase raw materials for resale to pharmaceutical companies, including us. Because our 50% interest in Drug Source Company does not
provide financial or operational control of the entity, we account for our interest in Drug Source Company under the equity method. Our equity in the net income of Drug Source Company, net of intercompany profit on purchases of inventory, is
classified in operating expenses in the accompanying condensed consolidated statements of income. Research and development expense includes raw material purchases from Drug Source Company of $0.3 million and $0.2 million for the nine months ended
September 30, 2004 and 2003, respectively. Ending inventory included raw material purchases from Drug Source Company of $1.7 million at September 30, 2004 and $0.8 million at December 31, 2003.



For further information, refer to the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2003.



(2) Quarterly Periods



We use a 52-week, 53-week fiscal year
that ends on the Saturday nearest to December 31. For quarterly reporting purposes, the quarterly periods end on the Saturday nearest to the end of the quarter. For clarity of presentation, comparative periods are presented as if the quarters ended
on September 30. Both of the three-month periods ended September 30, 2004 and 2003 included 13 weeks and each of the nine month periods ended September 30, 2004 and 2003 included 39 weeks.



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(3) Earnings Per Share Information



The following tables set forth the computation of basic and diluted earnings per share for the periods indicated:



|                                                     |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|---------------------------------------------------- |  | ------------------------------------ | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                     |  | Three Months Ended September 30,     |        | Nine Months Ended September 30,
|                                                     |  | 2004                                 |        | 2003                            |   | 2004   |  | 2003
|                                                     |  | (in thousands except per share data)
|Basic and dilutive numerator:                        |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Net income applicable to common stock                |  | $                                    | 13,813 |                                 | $ | 18,290 |  | $    | 34,827 |  | $ | 55,163
|                                                     |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Denominator:                                         |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Weighted-average common shares outstanding - basic   |  |                                      | 70,399 |                                 |   | 69,585 |  |      | 70,234 |  |   | 69,643
|Net effect of dilutive securities:                   |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Stock options and restricted stock awards            |  |                                      | 2,626  |                                 |   | 3,222  |  |      | 2,893  |  |   | 3,050 
|                                                     |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Weighted-average common shares outstanding - diluted |  |                                      | 73,025 |                                 |   | 72,807 |  |      | 73,127 |  |   | 72,693
|                                                     |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Income per common share - basic                      |  | $                                    | 0.20   |                                 | $ | 0.26   |  | $    | 0.50   |  | $ | 0.79  
|                                                     |  |                                      |        |                                 |   |        |  |      |        |  |   |       
|Income per common share - diluted                    |  | $                                    | 0.19   |                                 | $ | 0.25   |  | $    | 0.48   |  | $ | 0.76  
|                                                     |  |                                      |        |                                 |   |        |  |      |        |  |   |       



Employee stock options
for which the exercise price exceeded the average market price of our common stock were excluded from the computation of diluted income per common share as follows:



|                          |  |                                      |  |                                 |  |                 |  |                
|------------------------- |  | ------------------------------------ |  | ------------------------------- |  | --------------- |  | ---------------
|                          |  |                                     
|                          |  | Three Months Ended September 30,     |  | Nine Months Ended September 30,
|                          |  | 2004                                 |  | 2003                            |  | 2004            |  | 2003           
|                          |  | (in thousands except per share data)
|Number of shares excluded |  | 618                                  |  | 8                               |  | 264             |  | 50             
|Range of exercise prices  |  | $29.08 - $46.20                      |  | $32.89                          |  | $35.54 - $46.20 |  | $23.10 - $32.89



(4) Transactions with American
BioScience, Inc.



Product License and Manufacturing Agreements



We have secured the North American marketing and manufacturing rights for
ABRAXANE from American BioScience, Inc., which is
responsible for conducting the clinical studies of and obtaining regulatory approval for ABRAXANE.



In November
2001, we signed a perpetual license agreement with American BioScience, Inc. under which we acquired the exclusive rights to market and sell ABRAXANE in North America for indications relating to breast, lung, ovarian, prostate and other cancers. Under the agreement, we made an initial
payment to American BioScience of $60.0 million and committed to future milestone payments contingent upon achievement of specified regulatory and sales objectives for licensed indications. American BioScience is responsible for conducting clinical
studies in support of ABRAXANE and for
substantially all costs associated with the development and obtaining regulatory approval for ABRAXANE, except that we provided $2.0 million of ABRAXANE for use in clinical trials, the cost of which we charged to research and development expense in 2001. We may receive revenue resulting from this agreement only after our launch of
ABRAXANE in North America, which will not occur
until after FDA approval is obtained. Even though the FDA accepted American BioSciences NDA filing for ABRAXANE for metastatic breast cancer in May 2004, we cannot predict when the FDA will complete its review of the filing, or when or if the NDA will be
approved. Any profit, as defined in the license agreement, resulting from American Pharmaceutical Partners sales of ABRAXANE following approval would be shared equally between American BioScience and us, following the recapture of half of the pre-launch sales, marketing and
pre-production costs we have incurred.



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The terms of the license agreement were negotiated to reflect the value of the licensed product rights acquired, then in
late-stage development, American BioSciences remaining obligation to complete the NDA filing and the potential sales of the product under licensed clinical indications. The license agreement was a product of several months of extensive
negotiation with American BioScience involving outside counsel, investment banks and a nationally recognized valuation firm. Based upon the analysis and recommendations of our advisors, we believe that the overall terms of the agreement were fair to
us, including in comparison to similar licenses between unrelated parties. The agreement was unanimously approved by the disinterested members of our Board of Directors, with those directors who also have an affiliation with American BioScience
recusing themselves from the vote. There are no restrictions on how American BioScience would use payments made under the license agreement and we understand such payments have been and will be used both to fund the development of ABRAXANE in relation to our licensed product rights and for
other purposes.



In December 2001, upon completion of our initial public
offering, we recorded an initial payment due American BioScience of $60.0 million. In our financial statements, the license agreement was accounted for as an asset contributed by a principal shareholder using the shareholders historical cost
basis which was zero, and the $60.0 million payment was accounted for as a distribution of stockholders equity. For income tax purposes, the payment was recorded as an asset and is being amortized over a 15-year period. Because there was no
corresponding charge to income, the income tax benefit of this payment is being credited to stockholders equity as realized.



Future milestone payments which will be earned upon achievement of regulatory events enumerated in the license agreement prior to FDA approval for each licensed
indication will be expensed as achieved, while regulatory milestone payments earned upon FDA approval of those indications will be capitalized and amortized over the expected life of the product. Any future sales-based milestone payments will be
expensed in the period in which the sales milestone is achieved.



In May 2004,
the FDA accepted, meaning that the FDA found the NDA complete on its face in all respects, American BioSciences NDA filing for the first potential ABRAXANE indication being studied, metastatic breast cancer. This FDA acceptance triggered a $10.0 million milestone payment to
American BioScience which was paid and expensed in the second quarter of 2004. Additionally, upon FDA approval of the NDA for metastatic breast cancer, we will be required to pay American BioScience an additional $15.0 million which will be
capitalized and amortized over the expected life of the product, subject to periodic review for impairment. Regulatory achievements related to other licensed indications under study, including lung, ovarian and prostate cancers, will trigger further
milestone payments to American BioScience, but only after ABRAXANE has received NDA approval related to the breast cancer indication. Such payments generally total $17.5 million per agreed indication. As with the indication of breast cancer, those payments earned prior to FDA approval
for each indication will be expensed, while amounts earned upon FDA approval of those indications will be capitalized and amortized over the expected life of the product. We have the option not to make one or more of the milestone payments tied to
certain indications under study if, following breast cancer approval, sales of the product do not meet specified levels.



Subsequent to FDA approval of ABRAXANE and upon achievement of major annual one-time ABRAXANE sales milestones, we would be required to make additional payments which, in the aggregate, could total $110.0 million should annual
ABRAXANE sales exceed $1.0 billion. The first
sales milestone payment of $10.0 million would be triggered upon achievement of annual calendar year ABRAXANE sales in excess of $200.0 million. Sales milestone payments will be expensed in the period in which the sales milestone is achieved.



Under the license agreement, any profit on ABRAXANE sales in North America would be shared equally between American BioScience and us. The
license agreement defines profit as ABRAXANE net
sales less cost of goods sold, selling expenses (including pre-launch production and other expenses which we will continue to expense as incurred, but which will be accumulated and charged against first profit under the agreement) and an allocation
of related general and administrative expenses. We will expense American BioSciences share of any profit earned in our statements of income. Any costs and expenses



8



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related to product recalls and product liability claims generally will be split equally between American BioScience and
us and expensed as incurred. Pursuant to an agreement that we have with American BioScience, certain costs of any unsaleable ramp-up inventory of ABRAXANE that is manufactured in preparation for its projected launch will be shared equally between us and American BioScience.



In November 2001, along with the license agreement for ABRAXANE, we also entered into a manufacturing agreement with American BioScience
under which we agreed to manufacture ABRAXANE for
American BioScience and its licensees for sales outside North America. Under this agreement, we have the exclusive right to manufacture ABRAXANE for sales in North America for a period of three years and the non-exclusive right to manufacture ABRAXANE for sales (a) outside North America and (b) in North America after expiration of the
three year exclusivity period. We will charge American BioScience and its licensees a customary margin on our manufacturing costs based on whether the product will be used for clinical trials or commercial sale. The initial term of this agreement is
ten years and may be extended for successive two-year terms by American BioScience.



Loans to American BioScience, Inc.



Prior to our licensing of
ABRAXANE in November 2001, we made loans to
American BioScience, our majority shareholder, to support development of ABRAXANE. Subsequent to formalization of the license and manufacturing agreements on December 14, 2001, we received a demand promissory note, which replaced prior notes, from American BioScience for the outstanding
loan balance (Demand Note). The Demand Note is capped at $23.0 million, and the terms of our September 2004 credit facility limit any increases in such amount. The Demand Note bears interest at a rate equal to the rate of interest on our
credit facility, 4.25% at September 30, 2004. American BioScience is required to repay any amounts outstanding under the Demand Note by the earlier of November 20, 2006 or our cumulative payment of $75.0 million of profit on ABRAXANE to American BioScience. As security for American
BioSciences obligations under the Demand Note, American BioScience pledged and granted to us a security interest in shares of our common stock held by American BioScience having a fair market value equal to 120% of the balance of the Demand
Note.



We charge payments made on American BioSciences behalf related to
labor and other costs directly related to new product development, income taxes, interest and an agreed allocation of administrative costs to the American BioScience loan account. A summary of activity in the amounts due from American BioScience,
which is classified as a reduction of stockholders equity in the accompanying condensed consolidated balance sheets, follows:



|                                           |  |                   |        |   |                  |   |        |  
|------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                           |  | September 30,2004 |        |   | December 31,2003 |  
|                                           |  | (in thousands)    |       
|Balance at beginning of year               |  | $                 | 21,132 |   |                  | $ | 22,567 |  
|Payments on behalf of American BioScience: |  |                   |        |   |                  |   |        |  
|New product development                    |  |                   | 295    |   |                  |   | 1,229  |  
|Interest charged to American BioScience    |  |                   | 833    |   |                  |   | 1,221  |  
|Other                                      |  |                   | 38     |   |                  |   | 85     |  
|Reductions in lieu of income tax liability |  |                   |       |   |                  |   | (2,252 | )
|Repayments by American Bioscience          |  |                   | (605   | ) |                  |   | (1,718 | )
|                                           |  |                   |        |   |                  |   |        |  
|                                           |  | $                 | 21,693 |   |                  | $ | 21,132 |  
|                                           |  |                   |        |   |                  |   |        |  



American BioScience



We are a majority owned subsidiary of American BioScience. American BioScience is a
privately held biotechnology company focused on the discovery, development and delivery of next-generation therapeutic compounds including ABRAXANE and a variety of biologically active molecules, already existing within the human biological system, for the treatment of life-threatening diseases.
American BioSciences employees, administration and research facilities are independent, separate and distinct from our operations. Except for our President, Chief Executive Officer and Chairman of our Board of Directors,



9



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Patrick Soon-Shiong, M.D., no employee of American BioScience is also an employee of ours. Even though Dr. Soon-Shiong is
also the president, chief financial officer and a director of American BioScience, we believe that compensation paid to Dr. Soon-Shiong by us is commensurate with his duties to us.



Under the license agreement, American BioScience is responsible for conducting clinical studies in support of ABRAXANE and for substantially all costs associated with the
development and obtaining regulatory approval for ABRAXANE, for each indication licensed to us. Other than the $2.0 million of ABRAXANE that we provided American BioScience in 2001 for use in clinical trials, we have no further obligation under the license agreement for the development or regulatory approval of
ABRAXANE. Due to the multiple ABRAXANE indications which we license, American
BioSciences obligations under the license agreement will be ongoing and we cannot predict when American BioScience will be able to complete the development and regulatory approval of each of these indications.



American BioScience began research and development work on its nanoparticle drug delivery
platform, including ABRAXANE, in 1994. Prior to
execution of the license agreement, American BioScience had completed multiple pre-clinical animal studies, two Phase I human studies and two Phase II clinical studies. After execution of the license agreement, American BioScience completed a single
Phase III clinical study in metastatic breast cancer as a basis for FDA approval and published the data from this Phase III study on December 5, 2003 at the San Antonio Breast Cancer Symposium. In June 2003, American BioScience began the
ABRAXANE NDA filing process with the
pre-submission of the Pre-clinical and Chemistry, Manufacturing and Control sections of the NDA under the Fast Track designation granted ABRAXANE by the FDA earlier in 2003, completing the entire filing on March 8, 2004. In May 2004, we announced that American BioSciences NDA application
for ABRAXANE had been accepted for filing with
standard review by the FDA, indicating that the FDA had determined that the application is sufficiently complete to permit a substantive review. The FDA action date is within 10 months of completion of the filing, or January 8, 2005. American
BioScience has also conducted a Phase II clinical trial to explore a weekly dosing regimen of ABRAXANE in metastatic breast cancer patients in which prior taxane therapy failed and Phase I and/or Phase II trials evaluating ABRAXANE in non-small cell lung, head and neck, ovarian, melanoma and cervical cancers, the
rights to which we have licensed. To date, American BioScence has initiated or is planning approximately 36 ABRAXANE clinical trials in various settings, including those listed above, and prostate cancer.



(5) Inventories



Inventories consisted of the following:



|                |  |                    |         |                  |   |        
|--------------- |  | ------------------ | ------- | ---------------- | - | -------
|                |  | September 30, 2004 |         | December 31,2003
|                |  | (in thousands)    
|Finished goods  |  | $                  | 41,940  |                  | $ | 30,300 
|Work in process |  |                    | 19,218  |                  |   | 15,948 
|Raw materials   |  |                    | 82,745  |                  |   | 64,136 
|                |  |                    |         |                  |   |        
|                |  | $                  | 143,903 |                  | $ | 110,384
|                |  |                    |         |                  |   |        



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##### Table of Contents

(6) Accrued Expenses



Accrued expenses consisted of the following:



|                              |  |                    |        |                  |   |       
|----------------------------- |  | ------------------ | ------ | ---------------- | - | ------
|                              |  | September 30, 2004 |        | December 31,2003
|                              |  | (in thousands)    
|Sales and marketing           |  | $                  | 12,688 |                  | $ | 8,932 
|Payroll and employee benefits |  |                    | 7,737  |                  |   | 7,785 
|Legal and insurance           |  |                    | 3,839  |                  |   | 6,383 
|Accrued income taxes          |  |                    | 4,239  |                  |   | 4,498 
|Other                         |  |                    | 1,510  |                  |   | 1,522 
|                              |  |                    |        |                  |   |       
|                              |  | $                  | 30,013 |                  | $ | 29,120
|                              |  |                    |        |                  |   |       



(7) Credit Facilities and
Non-Recurring Charge



On September 2, 2004 we entered into a $100 million
three-year unsecured revolving credit and letter of credit facility . The new credit facility may be extended to $150 million at our request.



The new credit facility replaced a $50 million senior secured revolving credit facility which was put in place in December 2001. As a result of our early termination of
the prior credit facility, we recorded a non-recurring, non-cash pretax charge of approximately $2.0 million, or approximately $1.2 million net of applicable income tax, in the 2004 third quarter to write-off unamortized debt acquisition costs
related to the prior facility. We had never drawn on the prior facility. Debt acquisition fees of approximately $0.4 million for the new facility will be amortized over its three year term.



Interest rates under the new credit facility vary depending on the type of loan made and our
leverage ratio. The interest rate for Base Rate Loans and letters of credit is the greater of the prime rate charged by the lead bank, or the federal funds rate plus 0.5%, less an Applicable Margin ranging from minus 50 basis points to
zero, depending on our leverage ratio. At September 30, 2004, the interest rate for Base Rate Loans under the credit facility was 4.25%. The credit facility limits the amount of and assesses a 0.125% fee on the face amount of outstanding letters of
credit. With respect to the capital stock held by American BioScience, the credit facility prohibits us from declaring or paying any cash dividends or making any other such cash distributions. Additionally, the terms of our September 2004 credit
facility limit the principal amount of the demand note received from American BioScience to $23 million, among various other covenants and restrictions. There was no outstanding balance or letters of credit under the new credit facility, and we were
in compliance with all covenants, at September 30, 2004.



No interest expense
was capitalized during the nine month period ended September 30, 2004.



(8)
Stock Options and Restricted Stock



During the nine months ended September
30, 2004, options for the purchase of 733,850 shares of our common stock were granted at a weighted average exercise price of $34.96 and options for 406,920 shares were exercised at a weighted average exercise price of $4.59. Stock-based
compensation charges were $0.2 million and $0.3 million for the three months ended September 30, 2004 and 2003, respectively, and $0.7 million and $1.0 million for the nine months ended September 30, 2004 and 2003, respectively.



11



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##### Table of Contents

The following table illustrates the pro forma effect on net income and income per common share had we applied the fair
value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation:



|                                                                                                                                                |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                                |  | Three Months EndedSeptember 30,       |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                                |  | 2004                                  |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|                                                                                                                                                |  | (in thousands, except per share data) |       
|Net income, as reported                                                                                                                         |  | $                                     | 13,813 |   |                                | $ | 18,290 |      |  | $ | 34,827 |   |  | $ | 55,163 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                      |  |                                       | 108    |   |                                |   | 151    |      |  |   | 399    |   |  |   | 583    |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                       | (1,783 | ) |                                |   | (1,002 | )    |  |   | (4,144 | ) |  |   | (2,434 | )
|                                                                                                                                                |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                                            |  | $                                     | 12,138 |   |                                | $ | 17,439 |      |  | $ | 31,082 |   |  | $ | 53,312 |  
|                                                                                                                                                |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income per common share:                                                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic - as reported                                                                                                                             |  | $                                     | 0.20   |   |                                | $ | 0.26   |      |  | $ | 0.50   |   |  | $ | 0.79   |  
|Basic - pro forma                                                                                                                               |  | $                                     | 0.17   |   |                                | $ | 0.25   |      |  | $ | 0.44   |   |  | $ | 0.77   |  
|                                                                                                                                                |  |                                       |        |  
|Diluted - as reported                                                                                                                           |  | $                                     | 0.19   |   |                                | $ | 0.25   |      |  | $ | 0.48   |   |  | $ | 0.76   |  
|Diluted - pro forma                                                                                                                             |  | $                                     | 0.17   |   |                                | $ | 0.24   |      |  | $ | 0.43   |   |  | $ | 0.73   |  



(9) Treasury Stock



On April 24, 2003, our Board of Directors amended our stock repurchase program to
authorize, from time-to-time, the repurchase of up to an additional $20.0 million of our common stock through open market purchases and/or privately negotiated transactions. No repurchases have been made under the April 24, 2003
authorization.



(10) Litigation



In October and November of 2003, several purported federal securities class action lawsuits
were filed against us in the United States District Court for the Northern District of Illinois. All of the class action lawsuits were consolidated in March 2004 and an amended complaint against us, one of our officers, and American BioScience, Inc.
was filed in the consolidated cases in May 2004, alleging violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, and rule 10b-5, principally relating to purportedly false and misleading statements made by us regarding
ABRAXANE. Management believes that these claims
are without merit and intends to vigorously defend against these claims.



Additionally, in December 2003 a purported shareholder derivative action was filed in the Circuit Court of Cook County, Illinois, Chancery Division against each member of our Board of Directors and one non-director executive officer. The
Company is a nominal defendant in this lawsuit, which alleges claims relating to essentially the same purported misleading statements that are at issue in the pending securities class action lawsuits. In the securities class action lawsuits, the
Company denies making any misleading statements. The derivative complaint also alleges claims relating to stock transactions by certain of the director and officer defendants. The Company believes that there are many defects in this complaint and
intends to vigorously defend this action.



We are from time to time subject to
claims and litigation arising in ordinary courses of business. These claims have included assertions that the our products infringe existing patents and also claims that the use of our products has caused personal injuries. We intend to defend
vigorously any such litigation that may arise under all defenses that would be available to the us. In the opinion of management, the ultimate outcome of proceedings of which management is aware, will not have a material adverse effect on our
consolidated financial position or results of operations.



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(11) Net Sales by Product Line



Net sales by product line is as follows:



|                       |  |                                 |        |                                |   |        |  |      |         |  |   |        
|---------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                       |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                       |  | 2004                            |        | 2003                           |   | 2004   |  | 2003
|                       |  | (in thousands)                 
|Critical care          |  | $                               | 41,391 |                                | $ | 44,566 |  | $    | 125,656 |  | $ | 126,956
|Anti-infective         |  |                                 | 29,865 |                                |   | 21,016 |  |      | 83,914  |  |   | 65,198 
|Oncology               |  |                                 | 24,267 |                                |   | 23,511 |  |      | 69,274  |  |   | 66,641 
|Contract manufacturing |  |                                 | 91     |                                |   | 1,040  |  |      | 3,501   |  |   | 2,756  
|Other                  |  |                                 |       |                                |   | 221    |  |      | 111     |  |   | 564    
|                       |  |                                 |        |                                |   |        |  |      |         |  |   |        
|                       |  | $                               | 95,614 |                                | $ | 90,354 |  | $    | 282,456 |  | $ | 262,115
|                       |  |                                 |        |                                |   |        |  |      |         |  |   |        



(12) Enterprise Resource Planning
System



In March 2002, we entered into various licensing and support
agreements for the implementation of a new enterprise resource planning (ERP) business system application. Through September 30, 2004, we had capitalized $16.5 million in construction in progress for license fees, development and other costs related
to this project.



(13) Acquisition of Assets



On July 28, 2004, we acquired certain assets, including a 25,000 square foot manufacturing
facility and certain injectable oncology product rights for a purchase price of approximately $11 million in cash, subject to adjustments, including for inventory. Located in Barbengo, Switzerland, the FDA approved facility uses Isolator Technology
which is particularly suitable for the manufacture of oncolytic products, including daunorubicin, methotrexate, and leucovorin calcium, for our U.S. operations. We had previously been purchasing products from this facility for resale in the U.S. We
anticipate, and it is our intention to, invest in both personnel and systems to enhance quality standards. Additionally, we acquired eight FDA approved ANDAs covering 15 product codes and one ANDA pending with the U.S. FDA. Also included in the
transaction were a number of generic injectable oncology products currently marketed in Europe and South America and a number of Marketing Authorization Applications (MAAs) currently approved or pending with the European Agency for the Evaluation of
Medicinal Products as well as other products under development. Initially, the acquired facility will continue to supply certain products to our U.S. operations and to sell existing products in Europe and South America to certain third parties.
Acquired intangible assets will be amortized over their estimated useful lives, on average, approximately five to seven years.



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##### Table of Contents

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



Note Regarding Forward-Looking Statements



Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, are forward-looking statements, as the term is defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of
factors, which include, but are not limited to:



| |  | the timing of and costs associated with the expected launch of ABRAXANE;
| | - | -------------------------------------------------------------------------



| |  | the timing of any approvals of any ongoing or future NDA applications for ABRAXANE;
| | - | ------------------------------------------------------------------------------------



| |  | the acceptance of and demand for our existing and new pharmaceutical products;
| | - | ------------------------------------------------------------------------------



| |  | the impact of competitive products and pricing;
| | - | -----------------------------------------------



| |  | the ability to successfully manufacture products in an efficient, time-sensitive and cost effective manner;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | the impact on our products and revenues of patents and other proprietary rights licensed or owned by us, our competitors and other third parties;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability, and that of our suppliers, to comply with laws, regulations, and standards, and the application and interpretation of those laws, regulations, and standards, that
govern or affect the pharmaceutical industry, the non-compliance with which may delay or prevent the sale of our products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | the ability to successfully integrate the recent and potential future acquisitions;
| | - | -----------------------------------------------------------------------------------



| |  | evolution of the fee-for-service arrangements being adopted by our major wholesale customers;
| | - | ---------------------------------------------------------------------------------------------



| |  | the impact of recent legislative changes to the governmental reimbursement system.
| | - | ----------------------------------------------------------------------------------



Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used
in this report, the words may, will, should, could, expect, plan, anticipate, believe, estimate, predict, continue,
and similar expressions are generally intended to identify forward-looking statements.



Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision
to these forward-looking statements.



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##### Table of Contents

OVERVIEW



The overview section of Managements Discussion and Analysis of Financial Conditions and Results of Operations (MD&A) is designed to
provide the reader with summary level information on: our history, strategy, highlights of our third-quarter 2004 results and an update on our outlook for the remainder of 2004. Following this overview the third-quarter 2004 MD&A is organized as
follows:



| |  | a discussion of our operating results,
| | - | --------------------------------------



| |  | a review of factors impacting our liquidity and cash flow,
| | - | ----------------------------------------------------------



| |  | a discussion of accounting policies and estimates critical to an understanding of the assumptions and judgments incorporated in our financial results, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | information on the license and manufacturing agreements relating to our proprietary oncology product candidate, ABRAXANE.
| | - | --------------------------------------------------------------------------------------------------------------------------



The MD&A should be read in conjunction with our 2003 Annual Report on Form 10-K, including Item 1: Business;
Item 6: Selected Financial Data; and Item 8: Financial Statements and Supplemental Data.



Background



We commenced operations in 1996 and reincorporated in Delaware in 2001. We are a majority owned subsidiary of American BioScience, Inc., a California
corporation, which at September 30, 2004 owned 47,984,160 shares, or 68.0%, of our outstanding common stock.



We are a specialty pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only
independent U.S. public company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical
industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried.



We began in 1996 with an initial focus on U.S. marketing and distribution of generic pharmaceutical products manufactured by others. In June 1998, we
acquired Fujisawa USA, Inc.s generic injectable pharmaceutical business including manufacturing facilities in Melrose Park, Illinois and Grand Island, New York and our research and development facility in Melrose Park, Illinois. We also
acquired additional assets in this transaction, including inventories, plant and equipment and abbreviated new drug applications that were approved by and pending with the FDA. We have derived substantially all of our revenue since the acquisition
from the sale of products manufactured in the facilities acquired from Fujisawa.



In November 2001, we obtained the exclusive North American rights to manufacture and sell ABRAXANE, formerly known as ABI-007, a proprietary nanoparticle injectable oncology product that is a patented formulation of paclitaxel. Paclitaxel is the
active ingredient in Taxol®, one of the
worlds top selling cancer drugs. A multi-center Phase III clinical trial of ABRAXANE in the treatment of metastatic breast cancer, or breast cancer that has spread to other parts of the body, was completed in 2003 and American BioScience completed the submission of the
New Drug Application (NDA) filing with the U.S. Food and Drug Administration (FDA) in March 2004. In May 2004, we announced that American BioSciences NDA application for ABRAXANE had been accepted for filing with standard review by the FDA, indicating that the FDA
had determined that the application was sufficiently complete to permit a substantive review.



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##### Table of Contents

Strategy



Our goal is to expand upon our position as an industry leader in the development, manufacture, sale and distribution of injectable pharmaceutical
products, with an intent of offering a broad portfolio of injectable products affecting every aspect of hospital care. Key elements of our strategy include:



| |  | Continue to focus on new, higher-margin injectable product opportunities, including: our proprietary oncology product candidate, ABRAXANE; generic opportunities as products approach patent expiry; low molecular weight
heparins; and, as the FDA regulatory environment evolves, generic biological products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Maintain and improve our current Good Manufacturing Practice (cGMP) product development and manufacturing capabilities and capacity to meet future market needs and
evolving regulatory requirements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Enhance our customer relationships with group purchasing organizations (GPOs), specialty distributors and end-user organizations by providing the service level, quality
and relationships expected by our customers, further enhanced by our breadth of product offering and sole supplier position for needed products.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Make targeted acquisitions to enhance our product offerings, market presence and capabilities, both in the United States and globally.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| |  | Advance our strategic sourcing capabilities to obtain raw materials, intellectual property, technology and processes necessary to develop and manufacture both future and existing
products.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2004 Highlights



| |  | To date in 2004, we have obtained 15 FDA approvals, including 14 Abbreviated New Drug Application (ANDA) approvals, one final approval for a product for which we had
already received a tentative approval, and our first NDA approval, Tobramycin Powder. We currently have 14 ANDAs on file and under review at the FDA and over 50 additional products under development.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The ABRAXANE NDA filing was completed on March 8, 2004 and on May 9, 2004, we announced that American BioSciences NDA application for ABRAXANE had been accepted for filing with standard review by the FDA, indicating that the FDA had determined that the
application is sufficiently complete to permit a substantive review. The FDA action date is within 10 months of completion of the filing, or January 8, 2005. American BioScience has also conducted a Phase II clinical trial to explore a weekly dosing
regimen of ABRAXANE in metastatic breast cancer
patients in which prior taxane therapy failed and Phase I and/or Phase II trials evaluating ABRAXANE in non-small cell lung, head and neck, ovarian, melanoma and cervical cancers, the rights to which we have licensed. To date, American BioScence has initiated or is planning
approximately 36 ABRAXANE clinical trials in
various settings, including those listed above, and prostate cancer.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On July 28, 2004, we acquired certain assets, including a 25,000 square foot manufacturing facility and certain injectable oncology product rights for a purchase price of
approximately $11 million in cash, subject to adjustments, including for inventory. Located in Barbengo, Switzerland, the FDA approved facility uses Isolator Technology which is particularly suitable for the manufacture of oncolytic products,
including daunorubicin, methotrexate, and leucovorin calcium, for our U.S. operations. We had previously been purchasing products from this facility for resale in the U.S. We anticipate, and it is our intention to, invest in both personnel and
systems to enhance quality standards. Additionally, we acquired eight FDA approved ANDAs covering 15 product codes and one ANDA pending with the U.S. FDA. Also included in the transaction were a number of generic injectable oncology products
currently marketed in Europe and South America and a number of Marketing Authorization Applications (MAAs) currently
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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##### Table of Contents

approved or pending with the European Agency for the Evaluation of Medicinal Products as well as other
products under development. Initially, the acquired facility will continue to supply certain product to our U.S. operations and to sell existing products in Europe and South America to certain third parties. Acquired intangible assets will be
amortized over their estimated useful lives, on average, approximately five to seven years.



2004 Outlook



With
respect to the remainder of 2004, we provide the following guidance:



| |  | With revenue growth year-to-date of 8% together with the recent approval of carboplatin, 2004 net sales are expected to increase approximately 15% over 2003;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fiscal 2004 gross margin in the core business is expected to be in the low to mid 50% range;
| | - | --------------------------------------------------------------------------------------------



| |  | The FDA accepted the ABRAXANE NDA filing on May 8, 2004 and we are preparing for the potential launch of ABRAXANE. Expenses related to ABRAXANE, totaling $30.4 million in the first nine months of 2004, are expected to approximate $40 million for all of 2004. In addition, we paid and expensed a
$10.0 million milestone payment in the 2004 second quarter triggered upon the FDAs acceptance of the ABRAXANE NDA filing, and expect to pay a $15.0 million milestone payment 30 days following FDA approval of the NDA. The FDA action date is within 10 months of
completion of the NDA filing, or January 8, 2005. The FDA approval milestone would be capitalized and amortized over the estimated life of the product.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Even though the FDA accepted American BioSciences NDA filing for ABRAXANE for metastatic breast cancer in May 2004, we cannot predict when the FDA will complete
its review of the filing or when or if the NDA will be approved. Any resulting profit, as defined in the license agreement, on North American sales of ABRAXANE for licensed indications would be shared equally between American BioScience and us.



If regulatory approval of ABRAXANE for metastatic breast cancer in the United States is not obtained or is substantially
delayed, we do not believe there will be any material accumulated adverse impact on earnings or cash flow as marketing and pre-launch costs (excluding inventory) are being expensed as incurred and we would not be required to make any future payments
for the achievement of regulatory milestones for any other indication. In addition, we anticipate that we would be able to recover a substantial portion of our investment in paclitaxel raw material inventory; however, we expect that we would have to
write-off any commercial ABRAXANE finished goods
inventory, of which we currently have none. Pursuant to an agreement that we have with American BioScience, certain costs of any unsaleable ramp-up inventory of ABRAXANE that is manufactured in preparation for its projected launch will be shared equally between us and American BioScience.



17



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##### Table of Contents

RESULTS OF OPERATIONS



Three Months Ended September 30, 2004 and September 30, 2003



The table below sets forth the results of our operations for the periods indicated, and forms the basis for the following discussion of our third quarter
operating activities:



|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|----------------------------------------------- |  | ----------------------------------------------------- | ------ | - | ------------------------------ | - | ------ | - |  | - | ------- | - |  | --- | --
|                                                |  | Three Months Ended September 30,                      |        |   | Change Favorable (Unfavorable) |  
|                                                |  | 2004                                                  |        |   | 2003                           |   |        | $ |  |   | %       |  
|                                                |  | (in thousands, except per share data and percentages) |       
|Consolidated statement of income data:          |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Net sales                                       |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Critical care                                   |  | $                                                     | 41,391 |   |                                | $ | 44,566 |   |  | $ | (3,175  | ) |  | (7  | )%
|Anti-infective                                  |  |                                                       | 29,865 |   |                                |   | 21,016 |   |  |   | 8,849   |   |  | 42  | % 
|Oncology                                        |  |                                                       | 24,267 |   |                                |   | 23,511 |   |  |   | 756     |   |  | 3   | % 
|Contract manufacturing and other                |  |                                                       | 91     |   |                                |   | 1,261  |   |  |   | (1,170  | ) |  |     |   
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Total net sales                                 |  |                                                       | 95,614 |   |                                |   | 90,354 |   |  |   | 5,260   |   |  | 6   | % 
|Cost of sales                                   |  |                                                       | 43,915 |   |                                |   | 41,817 |   |  |   | (2,098  | ) |  |     |   
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Gross profit                                    |  |                                                       | 51,699 |   |                                |   | 48,537 |   |  |   | 3,162   |   |  | 7   | % 
|Percent to net sales                            |  |                                                       | 54.1   | % |                                |   | 53.7   | % |  |   |         |   |  |     |   
|Operating expenses:                             |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Research and development costs                  |  |                                                       | 7,406  |   |                                |   | 4,987  |   |  |   | (2,419  | ) |  | (49 | )%
|Percent to net sales                            |  |                                                       | 7.7    | % |                                |   | 5.5    | % |  |   |         |   |  |     |   
|Selling, general and administrative expenses    |  |                                                       | 21,693 |   |                                |   | 13,256 |   |  |   | (8,437  | ) |  | (64 | )%
|Percent to net sales                            |  |                                                       | 22.7   | % |                                |   | 14.7   | % |  |   |         |   |  |     |   
|Stock-based compensation                        |  |                                                       | 175    |   |                                |   | 256    |   |  |   | 81      |   |  | 32  | % 
|Equity in net income of Drug Source Co., LLC    |  |                                                       | (753   | ) |                                |   | (551   | ) |  |   | 202     |   |  | 37  | % 
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Total operating expenses                        |  |                                                       | 28,521 |   |                                |   | 17,948 |   |  |   | (10,573 | ) |  | (59 | )%
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Percent to net sales                            |  |                                                       | 29.8   | % |                                |   | 19.9   | % |  |   |         |   |  |     |   
|Operating income                                |  |                                                       | 23,178 |   |                                |   | 30,589 |   |  |   | (7,411  | ) |  | (24 | )%
|Percent to net sales                            |  |                                                       | 24.2   | % |                                |   | 33.9   | % |  |   |         |   |  |     |   
|Interest income                                 |  |                                                       | 439    |   |                                |   | 420    |   |  |   | 19      |   |  | 5   | % 
|Interest expense and other                      |  |                                                       | 142    |   |                                |   | (9     | ) |  |   | 151     |   |  |     |   
|Loss on early extinguishment of credit facility |  |                                                       | (1,986 | ) |                                |   |       |   |  |   | (1,986  | ) |  |     |   
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Income before income taxes                      |  |                                                       | 21,773 |   |                                |   | 31,000 |   |  |   | (9,227  | ) |  | (30 | )%
|Provision for income taxes                      |  |                                                       | 7,960  |   |                                |   | 12,710 |   |  |   | 4,750   |   |  |     |   
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Net income                                      |  | $                                                     | 13,813 |   |                                | $ | 18,290 |   |  | $ | (4,477  | ) |  | (24 | )%
|                                                |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Income per common share:                        |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Basic                                           |  | $                                                     | 0.20   |   |                                | $ | 0.26   |   |  |   |         |   |  |     |   
|Diluted                                         |  | $                                                     | 0.19   |   |                                | $ | 0.25   |   |  |   |         |   |  |     |   
|                                                |  |                                                       |        |  
|Weighted-average common shares outstanding:     |  |                                                       |        |   |                                |   |        |   |  |   |         |   |  |     |   
|Basic                                           |  |                                                       | 70,399 |   |                                |   | 69,585 |   |  |   |         |   |  |     |   
|Diluted                                         |  |                                                       | 73,025 |   |                                |   | 72,807 |   |  |   |         |   |  |     |   



Net Sales



Net sales for the 2004 third quarter increased $5.3
million, or 6%, over the prior year third quarter. Growth was driven primarily by strong demand for a range of our anti-infective products, including the newly launched Tobramycin Powder and increased penetration into the specialty oncology
distribution channel for Pamidronate, one of our key products.



18



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##### Table of Contents

Gross Profit



As compared to the 2003 third quarter, gross profit increased $3.2 million, or 7%, due primarily to the increase in net
sales. Gross profit represented 54.1% of sales in the 2004 quarter, comparable to the 53.7% of sales in the third quarter of 2003.



Research and development (R&D)



Third quarter 2004 R&D expense increased $2.4 million, or 49%, as compared to the 2003 third quarter due primarily to increased development activity
on the generic side of the business and a $0.9 million increase in pre-production development work on ABRAXANE.



Selling, general and administrative (SG&A)



As compared to the 2003 third quarter, SG&A expense increased $8.4 million, or 64%, in the 2004 third quarter due primarily to a $7.1 million increase in sales and marketing costs in anticipation of approval and
launch of ABRAXANE. The remaining increase was
attributable to higher professional services, infrastructure and staffing requirements resulting from continued growth in the core generics business. Excluding the investment in ABRAXANE pre-launch costs, SG&A expense for the core injectable business was 15.0% and
14.4% of sales in the 2004 and 2003 third quarters, respectively.



Other Expenses



Drug Source Company, LLC, is a
50% owned company, and is a selling agent of raw material to the pharmaceutical industry, including APP. Our investment in Drug Source Company is intended to both generate a return on our investment and to strengthen our strategic sourcing
capabilities over time. Because our 50% ownership interest in Drug Source Company does not provide financial or operational control of Drug Source Company, we account for our interest in Drug Source Company under the equity method. As compared to
the prior year quarter, our equity income in Drug Source Company increased $0.2 million, to $0.8 million, in the 2004 third quarter due primarily to the introduction of new products by Drug Source Company. Research and development expense included
no raw material purchases from Drug Source Company in either the 2004 and 2003 third quarter. Ending inventory included raw material purchases from Drug Source Company of $1.7 million and $0.8 million at September 30, 2004 and December 31, 2003,
respectively.



Interest income consists primarily of interest
earned on the intercompany note from American BioScience and interest earned on invested cash, and was comparable between the 2004 and 2003 third quarters. Interest expense and other consists primarily of miscellaneous interest expense and other
financing costs. The third-quarter 2004 credit resulted primarily from foreign exchange gains on our intercompany trading account with our wholly owned Canadian subsidiary, Pharmaceutical Partners of Canada.



Loss on early extinguishment of credit facility



In the third quarter of 2004 we recorded a non-recurring, non-cash pretax
charge of $2.0 million, or $1.2 million net of applicable income tax, to write-off unamortized debt acquisition costs related to the early extinguishment of our prior five-year credit facility.



Provision for income taxes



Our effective income tax rate in the 2004 third quarter was 36.6% as
compared to 41.0% in the comparable prior year quarter. The decline was due to a lower effective state income tax rate, favorable experience as a standalone tax entity and resolution of tax matters.



19



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##### Table of Contents

Nine months Ended September 30, 2004 and September 30, 2003



The table below sets forth the results of our operations for the periods
indicated, and forms the basis for the following discussion of our year-to-date operating activities:



|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|----------------------------------------------- |  | ----------------------------------------------------- | ------- | - | ------------------------------ | - | ------- | - |  | - | ------- | - |  | --- | --
|                                                |  | Nine Months EndedSeptember 30,                        |         |   | Change Favorable (Unfavorable) |  
|                                                |  | 2004                                                  |         |   | 2003                           |   |         | $ |  |   | %       |  
|                                                |  | (in thousands, except per share data and percentages) |        
|Consolidated statement of income data:          |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Net sales                                       |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Critical care                                   |  | $                                                     | 125,656 |   |                                | $ | 126,956 |   |  | $ | (1,300  | ) |  | (1  | )%
|Anti-infective                                  |  |                                                       | 83,914  |   |                                |   | 65,198  |   |  |   | 18,716  |   |  | 29  | % 
|Oncology                                        |  |                                                       | 69,274  |   |                                |   | 66,641  |   |  |   | 2,633   |   |  | 4   | % 
|Contract manufacturing and other                |  |                                                       | 3,612   |   |                                |   | 3,320   |   |  |   | 292     |   |  |     |   
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Total net sales                                 |  |                                                       | 282,456 |   |                                |   | 262,115 |   |  |   | 20,341  |   |  | 8   | % 
|Cost of sales                                   |  |                                                       | 133,229 |   |                                |   | 116,792 |   |  |   | (16,437 | ) |  |     |   
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Gross profit                                    |  |                                                       | 149,227 |   |                                |   | 145,323 |   |  |   | 3,904   |   |  | 3   | % 
|Percent to net sales                            |  |                                                       | 52.8    | % |                                |   | 55.4    | % |  |   |         |   |  |     |   
|Operating expenses:                             |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Research and development costs                  |  |                                                       | 21,346  |   |                                |   | 16,130  |   |  |   | (5,216  | ) |  | (32 | )%
|Percent to net sales                            |  |                                                       | 7.6     | % |                                |   | 6.2     | % |  |   |         |   |  |     |   
|Selling, general and administrative expenses    |  |                                                       | 65,583  |   |                                |   | 37,389  |   |  |   | (28,194 | ) |  | (75 | )%
|Percent to net sales                            |  |                                                       | 23.2    | % |                                |   | 14.3    | % |  |   |         |   |  |     |   
|Milestone payment                               |  |                                                       | 10,000  |   |                                |   |        |   |  |   | (10,000 | ) |  |     |   
|Stock-based compensation                        |  |                                                       | 650     |   |                                |   | 989     |   |  |   | 339     |   |  | 34  | % 
|Equity in net income of Drug Source Co., LLC    |  |                                                       | (1,991  | ) |                                |   | (1,049  | ) |  |   | 942     |   |  | 90  | % 
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Total operating expenses                        |  |                                                       | 95,588  |   |                                |   | 53,459  |   |  |   | (42,129 | ) |  | (79 | )%
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Operating income                                |  |                                                       | 53,639  |   |                                |   | 91,864  |   |  |   | (38,225 | ) |  | (42 | )%
|                                                |  |                                                       |         |  
|Interest income                                 |  |                                                       | 1,284   |   |                                |   | 1,315   |   |  |   | (31     | ) |  | (2  | )%
|Interest expense and other                      |  |                                                       | 50      |   |                                |   | 317     |   |  |   | (267    | ) |  |     |   
|Loss on early extinguishment of credit facility |  |                                                       | (1,986  | ) |                                |   |        |   |  |   | (1,986  | ) |  |     |   
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Income before income taxes                      |  |                                                       | 52,987  |   |                                |   | 93,496  |   |  |   | (40,509 | ) |  | (43 | )%
|Provision for income taxes                      |  |                                                       | 18,160  |   |                                |   | 38,333  |   |  |   | 20,173  |   |  |     |   
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Net income                                      |  | $                                                     | 34,827  |   |                                | $ | 55,163  |   |  | $ | (20,336 | ) |  | (37 | )%
|                                                |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Income per common share:                        |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Basic                                           |  | $                                                     | 0.50    |   |                                | $ | 0.79    |   |  |   |         |   |  |     |   
|Diluted                                         |  | $                                                     | 0.48    |   |                                | $ | 0.76    |   |  |   |         |   |  |     |   
|                                                |  |                                                       |         |  
|Weighted-average common shares outstanding:     |  |                                                       |         |   |                                |   |         |   |  |   |         |   |  |     |   
|Basic                                           |  |                                                       | 70,234  |   |                                |   | 69,643  |   |  |   |         |   |  |     |   
|Diluted                                         |  |                                                       | 73,127  |   |                                |   | 72,693  |   |  |   |         |   |  |     |   



Net Sales



Net sales increased $20.3 million, or 8%, in the first
nine months of 2004 as compared to the same prior year period. The 2004 increase resulted primarily from recent product launches, unit sales growth for certain key oncolytic products and strong demand for anti-infective products, partially offset by
the impact of price declines which occurred during late 2003 on certain products.



20



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##### Table of Contents

Gross Profit



As compared to the first nine months of 2003, gross profit increased $3.9 million, or 3%, in the first nine months of 2004 ,
representing 52.8% of sales in the 2004 period as compared to 55.4% of sales in the first nine months of 2003. Gross profit margins declined primarily due to the impact of price declines, principally in late 2003 on key products launched in 2002 and
the cost and sales impact of an extended seasonal plant shut-down in the 2004 first quarter.



R&D



R&D
expense increased by $5.2 million, or 32%, in the first nine months of 2004 as compared to the 2003 period due principally to a $4.5 million increase in ABRAXANE pre-production costs, and increased development activity, and the timing of such activity, on the generic side of the
business.



SG&A



As compared to the first nine months of 2003, SG&A expense increased
$28.2 million, or 75%, in the 2004 period due to $22.8 million in ABRAXANE sales and marketing pre-launch costs, as well as increased risk management costs and staffing requirements resulting from growth in the core injectable business. Excluding the investment in ABRAXANE pre-launch costs, SG&A for the core injectable
business were 15.1% and 14.0% of sales in the first nine months of 2004 and 2003, respectively.



Other Expenses



In the second quarter of 2004, we expensed and paid a $10.0 million milestone payment to American BioScience triggered by the FDAs May 8, 2004
acceptance of the ABRAXANE NDA filing.



Stock-based compensation expense declined by $0.3 million as
compared to the first nine months of 2003 due primarily to the lower stock price at period end, and the accelerated amortization schedule used to expense pre-IPO grants. Stock-based compensation expense results primarily from the issuance, prior to
our initial public offering, of stock based compensation for which the exercise price was less than the estimated fair value of common stock on the grant date.



As compared to the first nine months of 2003, equity income in Drug Source Company increased $0.9 million, to $2.0 million, in the 2004 period due
primarily to the introduction of new products by Drug Source Company. Research and development expense includes raw material purchases from Drug Source Company of $0.3 million and $0.2 million in the year-to-date 2004 and 2003 periods, respectively.



Interest income consists primarily of interest earned on the
intercompany note from American BioScience and interest earned on invested cash and was comparable between the 2004 and 2003 periods. Interest expense and other consists primarily of miscellaneous interest expense and other financing costs. The
credits in both 2004 and 2003 resulted primarily from foreign exchange gains on our intercompany trading account with our wholly owned Canadian subsidiary, Pharmaceutical Partners of Canada.



Loss on early extinguishment of credit facility



In the third quarter of 2004 we recorded a non-recurring, non-cash pretax
charge of approximately $2.0 million, or approximately $1.2 million net of applicable income tax, to write-off unamortized debt acquisition costs related to the early extinguishment of our prior five-year credit facility.



Provision for income taxes



Our 2004 provision for income taxes included the benefit of a $1.7 million
one-time investment tax credit finalized in the second quarter. Absent this one-time benefit, our effective income tax rate in the 2004 first nine months was 37.5% as compared to 41.0% in the comparable prior period with the decline due to a lower
effective state income tax rate, favorable experience as a standalone tax entity and resolution of tax matters.



21



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Overview



The following table summarizes key elements of our financial position and sources and (uses) of cash and cash equivalents for the periods
identified:



|                                                            |  |                                 |         |   |                  |   |         |  
|----------------------------------------------------------- |  | ------------------------------- | ------- | - | ---------------- | - | ------- | -
|                                                            |  | September 30,2004               |         |   | December 31,2003 |  
|                                                            |  | (in thousands)                  |        
|Summary Financial Position:                                 |  |                                 |         |   |                  |   |         |  
|Cash and cash equivalents                                   |  | $                               | 61,943  |   |                  | $ | 58,625  |  
|                                                            |  |                                 |         |   |                  |   |         |  
|Working capital                                             |  | $                               | 179,814 |   |                  | $ | 160,019 |  
|                                                            |  |                                 |         |   |                  |   |         |  
|Total assets                                                |  | $                               | 342,526 |   |                  | $ | 303,785 |  
|                                                            |  |                                 |         |   |                  |   |         |  
|Total stockholders equity                                  |  | $                               | 289,603 |   |                  | $ | 246,061 |  
|                                                            |  |                                 |         |   |                  |   |         |  
|                                                            | 
|                                                            |  | Nine Months Ended September 30, |        
|                                                            |  | 2004                            |         |   | 2003             |  
|                                                            |  | (in thousands)                  |        
|Summary of Sources and (Uses) of Cash and Cash Equivalents: |  |                                 |         |   |                  |   |         |  
|Operating activities                                        |  | $                               | 31,317  |   |                  | $ | 57,653  |  
|                                                            |  |                                 |         |   |                  |   |         |  
|Investing activities                                        |  | $                               | (31,506 | ) |                  | $ | (17,539 | )
|                                                            |  |                                 |         |   |                  |   |         |  
|Financing activities                                        |  | $                               | 3,368   |   |                  | $ | (16,825 | )
|                                                            |  |                                 |         |   |                  |   |         |  



We believe that our
current cash and short-term investments, cash generated from operations, funds available under our revolving line of credit and the ability to issue debt or equity securities under our shelf registration will be sufficient to finance our operations,
including pre-launch activity relating to ABRAXANE, product development and capital expenditures for at least the next 12 months and foreseeable future. In the event we engage in future acquisitions or other extraordinary corporate events we may have to raise
additional capital through additional borrowings or the issuance of debt or equity securities pursuant to our shelf registration or otherwise.



Capital Requirements



Our capital requirements depend on numerous factors, including:



| |  | working capital requirements and sales and marketing costs required to fund the ABRAXANE commercialization effort;
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | the need for manufacturing expansion and improvement and information technology requirements;
| | - | ---------------------------------------------------------------------------------------------



| |  | the requirements of our recent, and of any potential future, acquisitions, asset purchases or equity investments;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | the amount of cash generated by operations;
| | - | -------------------------------------------



| |  | the possible repurchase of up to an additional $20.0 million of our common stock as authorized by our Board of Directors on April 24, 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



We presently anticipate that our 2004 capital expenditure requirements will
approximate $35 - $40 million.



Adequate funds for these and
other purposes may not be available when needed or on terms acceptable to us, and we may need to raise capital that may not be available on terms favorable or acceptable to us, if at all. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive covenants. If we cannot raise money when needed, we may have to reduce or slow ABRAXANE pre-launch activities, reduce capital expenditures or scale back development of new products.



22



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##### Table of Contents

Sources of Financing



In addition to available cash on hand and cash flow from operations, we have additional financing available under our new
$100 million credit facility established in September 2004, and up to $150 million potentially available under a universal shelf registration statement filed in September 2003, which are further described below:



| |  | Our credit facility consists of an unsecured, three-year, $100 million revolving line of credit which can be increased to $150 million at our request . There were no balances
outstanding under our credit facility and we were in compliance with all covenants at September 30, 2004. Compared to our prior credit facility, our new credit facility is larger, more flexible and provides us with enhanced financial capacity to
support continued growth of our base and proprietary businesses at a lower cost of capital, with fewer restrictive covenants.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On September 5, 2003, we filed a universal shelf registration statement on Form S-3, which was declared effective by the Securities and Exchange Commission on September 22, 2003.
Under the shelf registration statement, we may from time to time, offer and sell up to $150 million of our common stock (which may include some or all of the our 6,646,398 treasury shares), debt securities, common stock warrants and/or debt warrants
at prices and on terms to be determined at the time of the offering of such securities. If and when we offer and sell these securities, we anticipate using the resulting proceeds for general corporate purposes including efforts related to the
commercialization of ABRAXANE. The terms of any
offering under the universal shelf registration would be determined at the time of the offering. We cannot assure you that any offering under the universal shelf will be available to us on terms acceptable or favorable to us. Additionally, American
BioScience may, from time to time, sell up to 3,000,000 shares of our common stock under the shelf registration. We would not receive any proceeds from the sale of shares of our common stock by American BioScience. As of the date of this filing, no
securities have been offered under the shelf registration and we currently do not have any plans to offer securities pursuant to this shelf registration.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sources and Uses of Cash



Operating Activities



Cash flow from operating activities is our primary source of liquidity. Net cash provided by operating activities was $31.3 million in the first nine
months of 2004 as compared to $57.7 million in the same period last year. The decrease in cash provided by operating activities was due primarily to: a $26.5 million increase in ABRAXANE sales, marketing and development expense; the $10.0 million milestone payment
triggered upon the FDAs May 2004 acceptance of the ABRAXANE NDA filing; and a $33.5 million increase in inventory. The higher 2004 inventory levels resulted from increased anti-infective inventory requirements, increased raw material and work-in-process inventory relating to
ABRAXANE and inventory for pending and recently
launched products. We had $34.4 million and $27.6 million of paclitaxel raw material inventory on hand at September 30, 2004 and December 31, 2003, respectively. These 2004 uses of cash from operating activities were partially offset by a $22.8
million decrease in accounts receivable due primarily to the impact of timing issues related to cash payments versus chargebacks processed in the third quarter of 2004.



Investing Activities



Our investing activities consist principally of capital expenditures necessary to expand and maintain our manufacturing capabilities and infrastructure
and, to a lesser extent, outlays necessary to acquire various product or intellectual property rights. Net cash used in investing activities totaled $31.5 million and $17.5 million in the first nine months of 2004 and 2003, respectively. The 2004
increase resulted from the purchase of certain assets, including a manufacturing facility in Switzerland and certain injectable oncology rights in the 2004 second quarter for approximately $11 million in cash, and a higher level of capital
expenditures supporting additional or improved manufacturing capacity and information technology initiatives.



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Financing Activities



Financing activities generally include cash flows from the issuance or repurchase of our common stock, proceeds from the
exercise of employee stock options and transactions with American BioScience, our parent company. Net cash provided by financing activities totaled $3.4 million in the first nine months of 2004 as compared to $16.8 million used in the same period in
2003. First nine months 2004 financing activities included $4.4 million in cash proceeds from the exercise of employee stock options and sale of stock through the employee stock purchase program. Financing activities in the 2003 first nine months
included the repurchase of 1,596,081 shares of our common stock on the open market for $20.0 million pursuant to the stock repurchase program.



Stock Repurchase Program



On April 24, 2003, our Board of Directors amended our stock repurchase program to authorize the repurchase, from time to time, of up to an additional
$20.0 million of our common stock through open market purchases and/or privately negotiated transactions. No repurchases have been made under the April 24, 2003 authorization. During the 2003 first quarter, pursuant to a December 10, 2002
authorization by our Board of Directors, we repurchased 1,596,081 of our shares for $20.0 million. In aggregate, the 6,646,398 common shares held as treasury stock at December 31, 2003 have a cost basis of $8.47 per share.



ABRAXANE LICENSE AND MANUFACTURING AGREEMENT



We have secured the North American marketing and manufacturing rights for ABRAXANE from American BioScience, Inc., which is responsible for conducting the clinical
studies of and obtaining regulatory approval for ABRAXANE.



In November 2001, we signed a perpetual
license agreement with American BioScience, Inc. under which we acquired the exclusive rights to market and sell ABRAXANE in North America for indications relating to breast, lung, ovarian, prostate and other cancers. Under the agreement, we made an initial payment to
American BioScience of $60.0 million and committed to future milestone payments contingent upon achievement of specified regulatory and sales objectives for licensed indications. American BioScience is responsible for conducting clinical studies in
support of ABRAXANE and for substantially all
costs associated with the development and obtaining regulatory approval for ABRAXANE, except that we provided $2.0 million of ABRAXANE for use in clinical trials, the cost of which we charged to research and development expense in 2001. We may receive revenue resulting from this agreement only after our launch of ABRAXANE in North America, which will not occur until after FDA
approval is obtained. Even though the FDA accepted American BioSciences NDA filing for ABRAXANE for metastatic breast cancer in May 2004, we cannot predict when the FDA will complete its review of the filing, or when or if the NDA will be approved. Any profit, as defined in the
license agreement, resulting from American Pharmaceutical Partners sales of ABRAXANE following approval would be shared equally between American BioScience and us, following the recapture of half of the pre-launch sales, marketing and pre-production start-up costs we
have incurred.



The terms of the license agreement were negotiated to reflect
the value of the licensed product rights acquired, then in late-stage development, American BioSciences remaining obligation to complete the NDA filing and the potential sales of the product under licensed clinical indications. The license
agreement was a product of several months of extensive negotiation with American BioScience involving outside counsel, investment banks and a nationally recognized valuation firm. Based upon the analysis and recommendations of our advisors, we
believe that the overall terms of the agreement were fair to us, including in comparison to similar licenses between unrelated parties. The agreement was unanimously approved by the disinterested members of our Board of Directors, with those
directors who also have an affiliation with American BioScience recusing themselves from the vote. There are no restrictions on how



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American BioScience would use payments made under the license agreement and we understand such payments have been and
will be used both to fund the development of ABRAXANE in relation to our licensed product rights and for other purposes.



In December 2001, upon completion of our initial public offering, we recorded an initial payment due American BioScience of $60.0 million. In our financial statements, the license agreement was accounted for as an
asset contributed by a principal shareholder using the shareholders historical cost basis which was zero, and the $60.0 million payment was accounted for as a distribution of stockholders equity. For income tax purposes, the payment was
recorded as an asset and is being amortized over a 15-year period. Because there was no corresponding charge to income, the income tax benefit of this payment is being credited to stockholders equity as realized.



Future milestone payments which will be earned upon achievement of regulatory events
enumerated in the license agreement prior to FDA approval for each licensed indication will be expensed as achieved, while regulatory milestone payments earned upon FDA approval of those indications will be capitalized and amortized over the
expected life of the product. Any future sales-based milestone payments will be expensed in the period in which the sales milestone is achieved.



On May 9, 2004 we announced that the FDA had accepted, meaning that the FDA found the NDA complete on its face in all respects, American BioSciences NDA filing for
the first potential ABRAXANE indication being
studied, metastatic breast cancer. This FDA acceptance triggered a $10.0 million milestone payment to American BioScience which was expensed and paid in the second quarter of 2004. Additionally, upon FDA approval of the NDA for metastatic breast
cancer, we will be required to pay American BioScience an additional $15.0 million which will be capitalized and amortized over the expected life of the product, subject to periodic review for impairment. Regulatory achievements related to other
licensed indications under study, including lung, ovarian and prostate cancers, will trigger further milestone payments to American BioScience, but only after ABRAXANE has received NDA approval related to the breast cancer indication. Such payments generally total $17.5 million per
agreed indication. As with the indication of breast cancer, those payments earned prior to FDA approval for each indication will be expensed, while amounts earned upon FDA approval of those indications will be capitalized and amortized over the
expected life of the product. We have the option not to make one or more of the milestone payments tied to certain indications under study if, following breast cancer approval, sales of the product do not meet specified levels.



Subsequent to FDA approval of ABRAXANE and upon achievement of major annual one-time ABRAXANE sales milestones, we would be required to make additional payments which, in
the aggregate, could total $110.0 million should annual ABRAXANE sales exceed $1.0 billion. The first sales milestone payment of $10.0 million would be triggered upon achievement of annual calendar year ABRAXANE sales in excess of $200.0 million. Sales milestone payments will be expensed in the period in which the sales milestone
is achieved.



Under the license agreement, any profit on ABRAXANE sales in North America would be shared equally between
American BioScience and us. The license agreement defines profit as ABRAXANE net sales less cost of goods sold, selling expenses (including pre-launch production and other expenses which we will continue to expense as incurred, but which will be accumulated and charged against first profit
under the agreement) and an allocation of related general and administrative expenses. We will expense American BioSciences share of any profit earned in our statements of income. Any costs and expenses related to product recalls and product
liability claims generally will be split equally between American BioScience and us and expensed as incurred. Pursuant to an agreement that we have with American BioScience, certain costs of any unsaleable ramp-up inventory of ABRAXANE that is manufactured in preparation for its projected
launch will be shared equally between us and American BioScience.



In November
2001, along with the license agreement for ABRAXANE, we also entered into a manufacturing agreement with American BioScience under which we agreed to manufacture ABRAXANE for American BioScience and its licensees for sales outside North America. Under this agreement, we have the exclusive right to manufacture
ABRAXANE for sales in North America for a period
of three years and the non-exclusive right to manufacture ABRAXANE for sales (a) outside North America and (b) in North America after expiration of the three year exclusivity period. We will charge American BioScience and its licensees a customary margin on our manufacturing costs
based on whether the product will be used for clinical trials or commercial sale. The initial term of this agreement is ten years and may be extended for successive two-year terms by American BioScience.



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates in our condensed consolidated financial statements are discussed below. Actual results could vary from those estimates.



Revenue recognition



We recognize revenue from the sale of a product when that product is shipped
to a customer, acceptance terms are fulfilled and no significant contractual obligations remain. We sell a majority of our products to wholesalers, who generally sell our products to hospitals or alternative healthcare facilities at contractual
prices previously agreed upon between us and group purchasing organizations, or GPOs, on behalf of end users such as hospitals. GPOs enter into collective purchasing contracts with pharmaceutical suppliers for products in an effort to secure
favorable drug pricing on behalf of their members. We invoice wholesalers at our wholesale list price. Net sales represent our wholesale list price offset by wholesaler chargebacks, further adjusted for estimated discounts and contractual
allowances, including GPO fees. Wholesaler chargebacks represent the difference between the wholesale list price and the estimated contractual sales price, based upon our historical experience ratings.



The most significant estimates that affect net sales are wholesaler
chargebacks, sales credits and cash discounts. The wholesaler chargeback calculation is computed as described in the following paragraph. The allowances for doubtful accounts, cash discounts and sales credits are estimated monthly by applying
historical percentages (based on credits issued for each category), which are reassessed periodically, to the product sales for the month.



Chargebacks



The majority of our products are distributed through independent pharmaceutical wholesalers. In accordance with industry practice, sales to wholesalers
are initially transacted at wholesale list price. The wholesalers then generally sell to an end user, normally a hospital, alternative healthcare facility, or an independent pharmacy, at a lower price previously contractually established between the
end user (directly or through a GPO) and us.



When we initially
record a sale to a wholesaler, the sale and resulting receivable are recorded at our list price. However, experience indicates that most of these selling prices will eventually be reduced to a lower, end-user contract price. Therefore, at the time
of the sale, a contra asset is recorded for, and revenue is reduced by, the difference between the list price and the estimated average end-user contract price. This is calculated by product code, taking the expected number of outstanding wholesale
units sold that will ultimately be sold under end-user contracts multiplied by the anticipated, weighted-average contract price. Thus, a contra asset is established, reducing the initial wholesaler receivable by the difference between the initial
list price and the estimated, ultimate end-user selling price. In addition, cash advance credits are also periodically issued to wholesalers as a standard trade practice and an estimated reserve for such discounts is established at the time of sale.
When the wholesaler ultimately sells the product to the end user at the end-user contract price, the wholesaler charges us (a chargeback) for the difference between the list price and the end-user contract price and such chargeback is
offset against our initial estimated contra asset.



Expense
recognition



Cost of sales represents the costs of the
products which we have sold and consists of labor, raw materials, components, packaging, quality assurance and quality control, shipping and manufacturing overhead costs and the cost of finished products purchased from third parties. Our inventories
are valued at the lower of cost or market as determined under the first-in, first-out (FIFO) method.



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Research and development costs are expensed as incurred or consumed and consist primarily of salaries and
other personnel-related expenses, as well as depreciation of equipment, allocable facility, raw material and production expenses, and contract and consulting fees. We have invested and will continue to invest in research and development to expand
our new product offerings and grow our business.



Selling,
general and administrative expenses consist primarily of salaries, commissions and other personnel-related expenses, as well as costs for travel, trade shows and conventions, promotional material and catalogs, advertising and promotion, facilities,
risk management and professional fees. We believe that our selling, general and administrative expenses will continue to increase inline with the growth of our core generic and proprietary business.



Stock-based compensation



Stock-based compensation related to research and development costs and
selling, general and administrative expenses are presented separately in our consolidated statements of operations. Stock-based compensation represents the difference between the exercise price of options granted and the deemed fair value of our
common stock on the grant date in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees and its related interpretations. We recognize stock-based compensation over the option vesting period,
typically four years, primarily on an accelerated basis using the graded vesting method in accordance with Financial Accounting Standards Board Interpretation No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option
Plans.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our activities. Some of the securities that we invest in may have interest rate
risk. This means that a change in prevailing interest rates may cause the fair value of the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the prevailing rate and the
prevailing rate later rises, the fair value of the principal amount of our investment will probably decline.



To minimize this risk, we intend to maintain an investment portfolio of cash equivalents and short-term investments consisting of high credit quality securities, including commercial paper, government and
non-government debt securities and money market funds. We do not use derivative financial instruments. The average maturity of the debt securities in which we invest has been less than 90 days and the maximum maturity has been three months. Because
our investments are diversified and are of a short-term nature, a hypothetical one or two percentage point change in interest rates would not have a material effect on our consolidated financial statements.



We have operated primarily in the United States and the majority of our activities outside
the United States to date have been conducted in U.S. dollars. Our only other significant foreign currency transactions are generally transacted in Canadian dollars, and we do not believe we have a material exposure to foreign currency risk because
of the relative stability of the Canadian dollar in relation to the U.S. dollar. A 10% adverse change in currency exchange rates of the Canadian versus the U.S. dollar would not have a material effect on our consolidated results of operations,
financial position, or cash flows. Accordingly, we have not had any material exposure to foreign currency exchange rate fluctuations.



During the third quarter of 2004, we acquired a facility in Switzerland which manufactures and markets products for our U.S. operations and in Europe and South America.
As a result of this transaction, we will have increased transactional and translational exposure to fluctuations in foreign currency exchange rates, primarily with respect to European currencies. We do not currently expect the transactional foreign



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exchange risk to be significant in the near term and we would expect over the longer term to potentially mitigate
transactional exposure to foreign currency risk by entering into forward currency hedging contracts. We will also have exposure related to the translation of financial statements from the local currency of foreign operations into U.S. dollars, our
functional and reporting currency. We do not expect the potential gain or loss due to foreign currency translation, assuming a 10% aggregate increase or decrease in the respective currencies, to be material to our financial statements in the near
term. We do not anticipate hedging our translational exposure.



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ITEM 4. CONTROLS AND PROCEDURES



(a) Evaluation
of disclosure controls and procedures.



We have carried out an evaluation,
under the supervision and with the participation of management, including our chief executive officer and our chief financial officer of the effectiveness of our internal disclosure controls and procedures as of the end of the period covered by this
report. Based on their evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and are functioning effectively to provide reasonable assurance that we can meet our disclosure
obligations. Consistent with the SECs recommendations to public companies, we have formed a disclosure committee consisting of key personnel designed to review the accuracy and completeness of all disclosures made by us.



(b) Changes in internal controls.



There were no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their most recent evaluation.



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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



In October and
November of 2003, several purported federal securities class action lawsuits were filed against us in the United States District Court for the Northern District of Illinois. All of the class action lawsuits were consolidated in March 2004 and an
amended complaint against us, one of our officers, and American BioScience, Inc. was filed in the consolidated cases in May 2004, alleging violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, and rule 10b-5,
principally relating to purportedly false and misleading statements made by us regarding ABRAXANE. Management believes that these claims are without merit and intends to vigorously defend against these claims.



Additionally, in December 2003 a purported shareholder derivative action was filed in the Circuit Court of Cook County, Illinois, Chancery
Division against each member of our Board of Directors and one non-director executive officer. The Company is a nominal defendant in this lawsuit, which alleges claims relating to essentially the same purported misleading statements that are at
issue in the pending securities class action lawsuits. In the securities class action lawsuits, the Company denies making any misleading statements. The derivative complaint also alleges claims relating to stock transactions by certain of the
director and officer defendants. The Company believes that there are many defects in this complaint and intends to vigorously defend this action.



We are from time to time subject to claims and litigation arising in ordinary courses of business. These claims have included assertions that the our products infringe
existing patents and also claims that the use of our products has caused personal injuries. We intend to defend vigorously any such litigation that may arise under all defenses that would be available to the us. In the opinion of management, the
ultimate outcome of proceedings of which management is aware, will not have a material adverse effect on our consolidated financial position or results of operations.



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ITEM 6. EXHIBITS



| | 10.26(1) | Credit Agreement dated September 2, 2004 among American Pharmaceutical Partners, Inc., Fifth Third Bank, Wachovia Bank, and various lenders.
| | -------- | --------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as required by Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as required by Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------



| | 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------

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|(1) | Incorporated by reference to Exhibit 10.26 to Registrants Form 8-K filed with the Securities and Exchange Commission on September 9, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



AMERICAN PHARMACEUTICAL PARTNERS, INC.By:

/s/ PATRICK SOON-SHIONGPatrick Soon-Shiong, M.D.Chief Executive Officer and President(Principal Executive Officer)By:

/s/ NICOLE S. WILLIAMSNicole S. WilliamsExecutive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)




Date: November 9, 2004



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