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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



(Mark One)



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



For the quarterly period ended September 30, 2005



| ̈ | 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 0-33407



American Pharmaceutical Partners, Inc.

(Exact name of registrant as specified in its charter)



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



(847) 969-2700

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No ̈



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



Indicate by check mark whether the registrant is a shell company (as determined by rule 12b-2 of the Exchange Act).
Yes ̈No þ



As of November 4, 2005, the registrant had 72,439,795 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, 2005 and December 31, 2004                                 |  | 3   
|                                                                                                                 | 
|Condensed consolidated statements of income  Three and nine month periods ended September 30, 2005 and 2004     |  | 4   
|                                                                                                                 | 
|Condensed consolidated statements of cash flows  Three and nine month periods ended September 30, 2005 and 2004 |  | 5   
|                                                                                                                 | 
|Notes to condensed consolidated financial statements  September 30, 2005                                        |  | 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                                               |  | 29  
|                                                                                                                 | 
|Item 4. Controls and Procedures                                                                                  |  | 30  
|                                                                                                                 | 
|PART II. Other Information                                                                                       |  |     
|                                                                                                                 | 
|Item 1. Legal Proceedings                                                                                        |  | 31  
|                                                                                                                 | 
|Item 6. Exhibits                                                                                                 |  | 32  
|                                                                                                                 | 
|Signatures                                                                                                       |  | 33  



2



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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 30,2005 |         |   | December 31,2004 |  
|                                                                                                                                      |  | (Unaudited)       |         |   | (Note 1)         |  
|Assets                                                                                                                                |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                       |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                             |  | $                 | 29,861  |   |                  | $ | 1,154   |  
|Short-term investments                                                                                                                |  |                   | 31,285  |   |                  |   | 66,475  |  
|Accounts receivable, net                                                                                                              |  |                   | 38,597  |   |                  |   | 15,457  |  
|Inventories                                                                                                                           |  |                   | 171,656 |   |                  |   | 151,035 |  
|Prepaid expenses and other current assets                                                                                             |  |                   | 13,483  |   |                  |   | 6,492   |  
|Deferred income taxes                                                                                                                 |  |                   | 12,825  |   |                  |   | 12,825  |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                  |  |                   | 297,707 |   |                  |   | 253,438 |  
|Property, plant and equipment, net                                                                                                    |  |                   | 136,106 |   |                  |   | 106,410 |  
|Investment in Drug Source Co., LLC                                                                                                    |  |                   | 2,803   |   |                  |   | 6,256   |  
|Product license rights and other non-current assets, net                                                                              |  |                   | 24,272  |   |                  |   | 7,229   |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                          |  | $                 | 460,888 |   |                  | $ | 373,333 |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Liabilities and stockholders equity                                                                                                  |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                  |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                                      |  | $                 | 19,778  |   |                  | $ | 22,247  |  
|Accrued expenses                                                                                                                      |  |                   | 35,638  |   |                  |   | 35,562  |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                             |  |                   | 55,416  |   |                  |   | 57,809  |  
|Deferred income taxes                                                                                                                 |  |                   | 2,833   |   |                  |   | 2,833   |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                     |  |                   | 58,249  |   |                  |   | 60,642  |  
|Stockholders equity                                                                                                                  |  |                   |         |   |                  |   |         |  
|Common stock - $.001 par value; 100,000,000 shares authorized, 79,044,015 and 77,284,831 shares issued in 2005 and 2004,
respectively |  |                   | 79      |   |                  |   | 77      |  
|Additional paid-in capital                                                                                                            |  |                   | 238,889 |   |                  |   | 212,399 |  
|Amounts due from American BioScience, Inc.                                                                                            |  |                   | (22,878 | ) |                  |   | (21,603 | )
|Deferred stock-based compensation                                                                                                     |  |                   | (1,653  | ) |                  |   | (2,385  | )
|Retained earnings                                                                                                                     |  |                   | 243,232 |   |                  |   | 180,243 |  
|Accumulated other comprehensive income                                                                                                |  |                   | 1,244   |   |                  |   | 234     |  
|Less treasury stock at cost, 6,646,398 common shares in 2005 and 2004                                                                 |  |                   | (56,274 | ) |                  |   | (56,274 | )
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                            |  |                   | 402,639 |   |                  |   | 312,691 |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                            |  | $                 | 460,888 |   |                  | $ | 373,333 |  
|                                                                                                                                      |  |                   |         |   |                  |   |         |  



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, |  
|                                                                                    |  | 2005                                  |         |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|                                                                                    |  | (in thousands, except per share data) |        
|Net sales                                                                           |  | $                                     | 128,794 |   |                                | $ | 95,614 |      |  | $ | 373,984 |   |  | $ | 282,456 |  
|Cost of sales                                                                       |  |                                       | 63,295  |   |                                |   | 43,915 |      |  |   | 164,185 |   |  |   | 133,229 |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                                        |  |                                       | 65,499  |   |                                |   | 51,699 |      |  |   | 209,799 |   |  |   | 149,227 |  
|Operating expenses:                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                                            |  |                                       | 8,155   |   |                                |   | 7,406  |      |  |   | 22,446  |   |  |   | 21,346  |  
|Selling, general and administrative                                                 |  |                                       | 31,612  |   |                                |   | 21,693 |      |  |   | 92,243  |   |  |   | 65,583  |  
|Milestone payment                                                                   |  |                                       |        |   |                                |   |       |      |  |   |        |   |  |   | 10,000  |  
|Stock-based compensation                                                            |  |                                       | 93      |   |                                |   | 175    |      |  |   | 1,009   |   |  |   | 650     |  
|Equity in net income of Drug Source Co., LLC                                        |  |                                       | (283    | ) |                                |   | (753   | )    |  |   | (1,808  | ) |  |   | (1,991  | )
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                            |  |                                       | 39,577  |   |                                |   | 28,521 |      |  |   | 113,890 |   |  |   | 95,588  |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from operations                                                              |  |                                       | 25,922  |   |                                |   | 23,178 |      |  |   | 95,909  |   |  |   | 53,639  |  
|Interest income                                                                     |  |                                       | 563     |   |                                |   | 439    |      |  |   | 1,646   |   |  |   | 1,284   |  
|Interest expense and other                                                          |  |                                       | 139     |   |                                |   | 142    |      |  |   | 102     |   |  |   | 50      |  
|Loss on early extinguishment of credit facility                                     |  |                                       |        |   |                                |   | (1,986 | )    |  |   |        |   |  |   | (1,986  | )
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income before income taxes                                                          |  |                                       | 26,624  |   |                                |   | 21,773 |      |  |   | 97,657  |   |  |   | 52,987  |  
|Provision for income taxes                                                          |  |                                       | 8,386   |   |                                |   | 7,960  |      |  |   | 34,668  |   |  |   | 18,160  |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                          |  | $                                     | 18,238  |   |                                | $ | 13,813 |      |  | $ | 62,989  |   |  | $ | 34,827  |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income per common share:                                                            |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                               |  | $                                     | 0.25    |   |                                | $ | 0.20   |      |  | $ | 0.88    |   |  | $ | 0.50    |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                             |  | $                                     | 0.25    |   |                                | $ | 0.19   |      |  | $ | 0.85    |   |  | $ | 0.48    |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest income includes interest earned from American BioScience, Inc. as follows: |  | $                                     | 339     |   |                                | $ | 271    |      |  | $ | 904     |   |  | $ | 833     |  
|                                                                                    |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |         |  



See notes to condensed consolidated
financial statements.



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American Pharmaceutical Partners, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                   |  |                                |         |   |      |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                   |  | Nine Months EndedSeptember 30, |        
|                                                                                   |  | 2005                           |         |   | 2004 |  
|                                                                                   |  | (in thousands)                 |        
|Cash flows from operating activities:                                              |  |                                |         |   |      |   |         |  
|Net income                                                                         |  | $                              | 62,989  |   |      | $ | 34,827  |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                                |         |   |      |   |         |  
|Depreciation                                                                       |  |                                | 9,541   |   |      |   | 6,183   |  
|Amortization                                                                       |  |                                | 2,419   |   |      |   | 832     |  
|Stock-based compensation                                                           |  |                                | 1,009   |   |      |   | 650     |  
|Loss on early extinguishment of credit facility                                    |  |                                |        |   |      |   | 1,986   |  
|Loss on disposal of property, plant and equipment                                  |  |                                | 61      |   |      |   | 13      |  
|Equity in net income of Drug Source Company, LLC, net of dividends received        |  |                                | 3,453   |   |      |   | (815    | )
|Income tax benefit on stock option exercises                                       |  |                                | 11,926  |   |      |   | 2,923   |  
|Changes in operating assets and liabilities:                                       |  |                                |         |   |      |   |         |  
|Accounts receivable, net                                                           |  |                                | (23,140 | ) |      |   | 22,844  |  
|Inventories                                                                        |  |                                | (20,621 | ) |      |   | (33,519 | )
|Prepaid expenses and other current assets                                          |  |                                | (6,991  | ) |      |   | (1,001  | )
|Accounts payable and accrued expenses                                              |  |                                | (1,305  | ) |      |   | (3,606  | )
|                                                                                   |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                          |  |                                | 39,341  |   |      |   | 31,317  |  
|                                                                                   |  |                               
|Cash flows from investing activities:                                              |  |                                |         |   |      |   |         |  
|Purchases of property, plant and equipment                                         |  |                                | (39,298 | ) |      |   | (29,110 | )
|Purchases of other non-current assets                                              |  |                                | (18,530 | ) |      |   | (2,396  | )
|Net sale of short-term investments                                                 |  |                                | 35,190  |   |      |   | (5,005  | )
|                                                                                   |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                              |  |                                | (22,638 | ) |      |   | (36,511 | )
|                                                                                   |  |                               
|Cash flows from financing activities:                                              |  |                                |         |   |      |   |         |  
|Proceeds from the exercise of stock options                                        |  |                                | 10,072  |   |      |   | 1,961   |  
|Proceeds from the sale of stock under employee retirement and stock purchase plans |  |                                | 3,129   |   |      |   | 2,408   |  
|Increase in amounts due from American BioScience, Inc.                             |  |                                | (1,275  | ) |      |   | (561    | )
|Payment of deferred financing costs                                                |  |                                | (125    | ) |      |   | (440    | )
|                                                                                   |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                          |  |                                | 11,801  |   |      |   | 3,368   |  
|                                                                                   |  |                                |         |   |      |   |         |  
|Effect of foreign currency translation                                             |  |                                | 203     |   |      |   | 139     |  
|                                                                                   |  |                                |         |   |      |   |         |  
|Increase in cash and cash equivalents                                              |  |                                | 28,707  |   |      |   | (1,687  | )
|Cash and cash equivalents at beginning of period                                   |  |                                | 1,154   |   |      |   | 5,460   |  
|                                                                                   |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                         |  | $                              | 29,861  |   |      | $ | 3,773   |  
|                                                                                   |  |                                |         |   |      |   |         |  



See notes to condensed consolidated
financial statements.



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AMERICAN PHARMACEUTICAL PARTNERS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



September 30, 2005



(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, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.



The balance sheet information at December 31, 2004 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 in ending 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 $2.0 million and $0.3 million for the nine-month periods ended September 30, 2005 and 2004, respectively. Ending inventory
included raw material purchased from Drug Source Company of $3.4 million at September 30, 2005 and $2.9 million at December 31, 2004.



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,
2004.



|(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. Each of the three-month periods ended September 30, 2005 and 2004 included 13 weeks and each of the nine-month periods ended September 30,
2005 and 2004 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 EndedSeptember 30,      |        | Nine Months EndedSeptember 30,
|                                                     |  | 2005                                 |        | 2004                           |   | 2005   |  | 2004
|                                                     |  | (in thousands except per share data)
|Basic and dilutive numerator:                        |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Net income                                           |  | $                                    | 18,238 |                                | $ | 13,813 |  | $    | 62,989 |  | $ | 34,827
|                                                     |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Denominator:                                         |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Weighted-average common shares outstanding - basic   |  |                                      | 72,158 |                                |   | 70,399 |  |      | 71,636 |  |   | 70,234
|Net effect of dilutive securities:                   |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Stock options and restricted stock awards            |  |                                      | 1,947  |                                |   | 2,626  |  |      | 2,405  |  |   | 2,893 
|                                                     |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Weighted-average common shares outstanding - diluted |  |                                      | 74,105 |                                |   | 73,025 |  |      | 74,041 |  |   | 73,127
|                                                     |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Income per common share - basic                      |  | $                                    | 0.25   |                                | $ | 0.20   |  | $    | 0.88   |  | $ | 0.50  
|                                                     |  |                                      |        |                                |   |        |  |      |        |  |   |       
|Income per common share - diluted                    |  | $                                    | 0.25   |                                | $ | 0.19   |  | $    | 0.85   |  | $ | 0.48  
|                                                     |  |                                      |        |                                |   |        |  |      |        |  |   |       



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,
|                          |  | 2005                                 |  | 2004                            |  | 2005            |  | 2004           
|                          |  | (in thousands except per share data)
|Number of shares excluded |  | 678                                  |  | 618                             |  | 126             |  | 264            
|Range of exercise prices  |  | $45.86 - $56.02                      |  | $29.08 - $46.20                 |  | $49.20 - $56.02 |  | $35.54 - $46.20



|(4) | Transactions with American BioScience, Inc.
|--- | -------------------------------------------



Product License and Manufacturing Agreements



We hold the exclusive North American marketing rights and the non-exclusive worldwide manufacturing rights for ABRAXANE. The FDA approved ABRAXANE for the
filed indication on January 7, 2005 and ABRAXANE was launched on February 7, 2005. ABRAXANE is licensed from American BioScience, 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 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 profit sharing and future milestone payments contingent upon achievement of specified regulatory, publication 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.



Under the license agreement, profit on our sales of ABRAXANE in North America will 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 accumulated pre-launch production and other expenses which we have expensed as incurred, but which will be charged against first profit under the agreement) and an allocation of related general and administrative expenses. At
December 31, 2004, accumulated ABRAXANE expenses, which are being offset against future ABRAXANE profit sharing, totaled $49.1 million. We anticipate that ABRAXANE profit, as defined in the license agreement, will exceed this
accumulated expense in late 2005, at which point we will begin expensing American BioSciences share of any profit earned



7



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in our statements of income as an element of cost of sales. 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.



Under the license agreement, American BioScience earned milestone payments upon the filing and approval of ABRAXANE for the metastatic breast cancer indication. The first such milestone of $10.0 million was achieved in May 2004 when
the FDA accepted American BioSciences NDA for the metastatic breast cancer indication. This payment was expensed and paid in the second quarter of 2004. The FDA then approved ABRAXANE for the filed indication in January 2005, triggering
a $15.0 million milestone payment in the first quarter of 2005, which has been capitalized and is being amortized over seven years.



Regulatory or publication achievements related to other licensed indications under study, including lung, ovarian and prostate cancers, will trigger further milestone
payments to American BioScience. Such payments generally total $17.5 million per agreed indication while publications related to any further indications will trigger a $5.0 million milestone payment. As with the indication for 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 sales of the product do not meet specified levels.



Upon achievement of major annual one-time ABRAXANE sales milestones, we are 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 and the second sales milestone of
$20.0 million upon the achievement of annual calendar year sales in excess of $400.0 million. Any future sales-based milestone payments will be expensed in the period in which the sales milestone is achieved.



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, in conjunction with 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.



In November 2001, along with the license agreement for ABRAXANE, we also entered into a
non-exclusive 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 right to manufacture
ABRAXANE worldwide. For sales outside of our licensed territories, 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.



8



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##### Table of Contents

Loan to American BioScience



Prior to our 2001 licensing of ABRAXANE, we made loans to American BioScience, our majority shareholder, to support development of
ABRAXANE. Subsequent to formalization of the license and manufacturing agreements in November 2001, we received a demand promissory note, which replaced prior notes, from American BioScience for the outstanding loan balance, or Demand Note.
The Demand Note is capped at $23.0 million and the terms of our September 2004 credit facility cap the note at such amount. The Demand Note bears interest at a rate equal to the rate of interest on our credit facility, which was 6.25% at
September 30, 2005. 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
under the license agreement. 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.



American
Pharmaceutical Partners charges incurred on American BioSciences behalf related to labor and other costs directly associated with ABRAXANE 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 consolidated balance sheets, follows:



|                                           |  |                   |        |   |                  |   |        |  
|------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                           |  | September 30,2005 |        |   | December 31,2004 |  
|                                           |  | (in thousands)    |       
|Balance at beginning of year               |  | $                 | 21,603 |   |                  | $ | 21,132 |  
|Payments on behalf of American BioScience: |  |                   |        |   |                  |   |        |  
|New product development                    |  |                   | 845    |   |                  |   | 421    |  
|Other                                      |  |                   | (474   | ) |                  |   | (510   | )
|Interest charged to American BioScience    |  |                   | 904    |   |                  |   | 1,097  |  
|Reductions in lieu of income tax liability |  |                   |       |   |                  |   | (537   | )
|                                           |  |                   |        |   |                  |   |        |  
|                                           |  | $                 | 22,878 |   |                  | $ | 21,603 |  
|                                           |  |                   |        |   |                  |   |        |  



|(5) | Inventories
|--- | -----------



Inventories consisted of the following:



|                |  |                    |         |                           |   |                |  |          |         |                           |   |                |  |   |        |  |   |        
|--------------- |  | ------------------ | ------- | ------------------------- | - | -------------- |  | -------- | ------- | ------------------------- | - | -------------- |  | - | ------ |  | - | -------
|                |  | September 30, 2005 |         | December 31, 2004        
|                |  | Approved           |         | PendingRegulatoryApproval |   | TotalInventory |  | Approved |         | PendingRegulatoryApproval |   | TotalInventory
|                |  | (in thousands)    
|Finished goods  |  | $                  | 31,627  |                           | $ | 4,124          |  | $        | 35,751  |                           | $ | 36,706         |  | $ |       |  | $ | 36,706 
|Work in process |  |                    | 18,401  |                           |   | 224            |  |          | 18,625  |                           |   | 16,888         |  |   | 7,674  |  |   | 24,562 
|Raw materials   |  |                    | 108,386 |                           |   | 8,894          |  |          | 117,280 |                           |   | 49,563         |  |   | 40,204 |  |   | 89,767 
|                |  |                    |         |                           |   |                |  |          |         |                           |   |                |  |   |        |  |   |        
|                |  | $                  | 158,414 |                           | $ | 13,242         |  | $        | 171,656 |                           | $ | 103,157        |  | $ | 47,878 |  | $ | 151,035
|                |  |                    |         |                           |   |                |  |          |         |                           |   |                |  |   |        |  |   |        



Inventories consist of products
currently approved for marketing and may include certain products pending regulatory approval. From time to time, we capitalize inventory costs associated with products prior to regulatory approval based on our judgment of probable future commercial
success and realizable value. Such judgment incorporates our knowledge and best judgment of where the product is in the regulatory review process, our required investment in the product, market conditions, competing products and our economic
expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. If final regulatory approval for such products is denied or delayed, we may need to provide for and expense such inventory.



9



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At September 30, 2005, inventory included $13.2 million in cost relating to generic products pending FDA approval on
that date. Included in the amount pending approval at September 30, 2005 was $7.5 million of Ceftriaxone. Based on information recently provided by our supplier regarding the results of an FDA inspection of the supplier, we do not anticipate
FDA approval of our Ceftriaxone product in the near term. In the event that the FDA approval is unduly delayed or denied, our intention is to recover our investment in Ceftriaxone material from the supplier, although we may have to provide for and
expense all, or a portion of, such inventory. At December 31, 2004, our investment in inventory pending regulatory approval consisted solely of ABRAXANE related inventory pending approval as of the financial statement date. Commercial
shipment of ABRAXANE commenced on February 7, 2005.



We routinely
review our inventory and establish reserves when the cost of the inventory is not expected to be recovered or our product cost exceeds realizable market value. In instances where inventory is at or approaching expiry, is not expected to be saleable
based on our quality and control standards or for which the selling price has fallen below cost, we reserve for any inventory impairment based on the specific facts and circumstances. In evaluating the market value of inventory pending regulatory
approval as compared to its cost, we consider the market, pricing and demand for competing products, our anticipated selling price for the product and the position of the product in the regulatory review process. Provisions for inventory reserves
are reflected in the financial statements as an element of cost of sales with inventories presented net of related reserves.



|(6) | Accrued Expenses
|--- | ----------------



Accrued expenses consisted of the following:



|                                  |  |                   |        |                  |   |       
|--------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                  |  | September 30,2005 |        | December 31,2004
|                                  |  | (in thousands)   
|Sales and marketing               |  | $                 | 15,823 |                  | $ | 15,133
|Payroll and employee benefits     |  |                   | 10,781 |                  |   | 6,893 
|Legal, professional and insurance |  |                   | 6,586  |                  |   | 1,976 
|Accrued income taxes              |  |                   | 1,300  |                  |   | 10,458
|Other                             |  |                   | 1,148  |                  |   | 1,102 
|                                  |  |                   |        |                  |   |       
|                                  |  | $                 | 35,638 |                  | $ | 35,562
|                                  |  |                   |        |                  |   |       



|(7) | Credit Facility
|--- | ---------------



On September 2, 2004, we entered into a $100 million three-year unsecured revolving credit and letter of credit facility. On August 2, 2005, this credit facility was increased to $150 million, the term was
extended by a year and certain reductions were made to the margins for Eurodollar Rate Loans and future commitment fees. Related credit facility acquisition fees of $0.5 million are being amortized over a three-year period. In the third quarter
2004, as a result of our early termination of our 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, to write-off unamortized debt
acquisition costs related to the prior facility.



Interest rates under the
credit facility vary depending on the type of loan made and our leverage ratio. The interest rate for Base Rate Loans 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, 2005, the interest rate for Base Rate Loans under the credit facility was 6.25%. 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 the credit facility limit the principal amount of the demand note received from American BioScience to $23.0 million, among various other covenants and restrictions. There were no outstanding balances or letters of credit
under the credit facility, and we were in compliance with all covenants, at September 30, 2005.



No interest expense was capitalized during the nine-month periods ended September 30, 2005 or 2004.



10



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##### Table of Contents

|(8) | Stock Options and Restricted Stock
|--- | ----------------------------------



During the nine months ended September 30, 2005, options for the purchase of 740,800 shares of our common stock were granted at a weighted average exercise price of
$46.03 and options for 1,655,271 shares were exercised at a weighted average exercise price of $6.47. Stock-based compensation charges were $0.1 million and $0.2 million for the three month periods ended September 30, 2005 and 2004,
respectively, and $1.0 million and $0.7 million for the nine month periods ended September 30, 2005 and 2004, respectively.



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, |  
|                                                                                                                                                |  | 2005                                  |        |   | 2004                           |   |        | 2005 |  |   | 2004   |  
|                                                                                                                                                |  | (in thousands, except per share data) |       
|Net income, as reported                                                                                                                         |  | $                                     | 18,238 |   |                                | $ | 13,813 |      |  | $ | 62,989 |   |  | $ | 34,827 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                      |  |                                       | 57     |   |                                |   | 108    |      |  |   | 625    |   |  |   | 399    |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                       | (2,341 | ) |                                |   | (1,783 | )    |  |   | (6,510 | ) |  |   | (4,144 | )
|                                                                                                                                                |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                                            |  | $                                     | 15,954 |   |                                | $ | 12,138 |      |  | $ | 57,104 |   |  | $ | 31,082 |  
|                                                                                                                                                |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income per common share:                                                                                                                    |  |                                       |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic - as reported                                                                                                                             |  | $                                     | 0.25   |   |                                | $ | 0.20   |      |  | $ | 0.88   |   |  | $ | 0.50   |  
|Basic - pro forma                                                                                                                               |  | $                                     | 0.22   |   |                                | $ | 0.17   |      |  | $ | 0.80   |   |  | $ | 0.44   |  
|                                                                                                                                                |  |                                       |        |  
|Diluted - as reported                                                                                                                           |  | $                                     | 0.25   |   |                                | $ | 0.19   |      |  | $ | 0.85   |   |  | $ | 0.48   |  
|Diluted - pro forma                                                                                                                             |  | $                                     | 0.22   |   |                                | $ | 0.17   |      |  | $ | 0.77   |   |  | $ | 0.43   |  



|(9) | Litigation
|--- | ----------



We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims have included assertions that 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 us. In the opinion of management, the ultimate outcome of proceedings of which management is
aware, even if adverse to us, will not have a material adverse effect on our consolidated financial position or results of operations.



11



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##### Table of Contents

|(10) | Net Sales by Product Line
|---- | -------------------------



Net sales by product line is as follows:



|                                 |  |                    |         |                   |   |        |  |      |         |  |   |        
|-------------------------------- |  | ------------------ | ------- | ----------------- | - | ------ |  | ---- | ------- |  | - | -------
|                                 |  | Three Months Ended |         | Nine Months Ended
|                                 |  | 2005               |         | 2004              |   | 2005   |  | 2004
|                                 |  | (in thousands)    
|Oncology                         |  | $                  | 46,576  |                   | $ | 24,267 |  | $    | 125,149 |  | $ | 69,274 
|Anti-infective                   |  |                    | 39,461  |                   |   | 29,865 |  |      | 129,137 |  |   | 83,914 
|Critical care                    |  |                    | 42,279  |                   |   | 41,391 |  |      | 119,100 |  |   | 125,656
|Contract manufacturing and other |  |                    | 478     |                   |   | 91     |  |      | 598     |  |   | 3,612  
|                                 |  |                    |         |                   |   |        |  |      |         |  |   |        
|                                 |  | $                  | 128,794 |                   | $ | 95,614 |  | $    | 373,984 |  | $ | 282,456
|                                 |  |                    |         |                   |   |        |  |      |         |  |   |        



|(11) | 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 $9.6 million in cash, after final purchase price adjustments. We completed our purchase accounting in the third quarter of 2005 and have allocated the purchase price to the fair value of property, plant and equipment of $9.0 million and
inventory of $0.6 million. 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 have, and continue to, invest in both personnel and systems to enhance quality standards. The facility was validated by the Swiss medic, the Swiss version of our FDA, in the third quarter 2005 and we now expect to
initiate production in the fourth quarter 2005. Additionally, we acquired eight FDA approved ANDAs covering 15 product codes and one ANDA pending with the U.S. FDA in the transaction which also included a number of generic injectable oncology
products currently marketed in Europe and South America and a number of Marketing Authorization Applications, or MAAs, currently approved or pending with the European Agency for the Evaluation of Medicinal Products.



|(12) | Comprehensive Income
|---- | --------------------



Elements of comprehensive income, net of income taxes, follow:



|                                                                  |  |                                 |        |                                |   |        |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30, |  
|                                                                  |  | 2005                            |        | 2004                           |   | 2005   |  |   | 2004   |  
|                                                                  |  | (in thousands)                  |       
|Foreign currency translation adjustments                          |  | $                               | 340    |                                | $ | 215    |  | $ | 204    |   |  | $ | 138    |  
|Unrealized gain on marketable equity securities                   |  |                                 | 1,519  |                                |   |       |  |   | 807    |   |  |   |       |  
|                                                                  |  |                                 |        |                                |   |        |  |   |        |   |  |   |        |  
|Other comprehensive gain, net of tax                              |  |                                 | 1,859  |                                |   | 215    |  |   | 1,011  |   |  |   | 138    |  
|Net income                                                        |  |                                 | 18,238 |                                |   | 13,813 |  |   | 62,989 |   |  |   | 34,827 |  
|                                                                  |  |                                 |        |                                |   |        |  |   |        |   |  |   |        |  
|Comprehensive income                                              |  | $                               | 20,097 |                                | $ | 14,028 |  | $ | 64,000 |   |  | $ | 34,965 |  
|                                                                  |  |                                 |        |                                |   |        |  |   |        |   |  |   |        |  
|Supplemental comprehensive income information, net of tax:        |  |                                 |        |                                |   |        |  |   |        |   |  |   |        |  
|Cumulative foreign currency translation (income) loss adjustments |  |                                 |        |                                |   |        |  | $ | 124    |   |  | $ | (278   | )
|Cumulative unrealized gain on marketable equity securities        |  |                                 |        |                                |   |        |  |   | (1,369 | ) |  |   |       |  



|(13) | Recent Accounting Pronouncements
|---- | --------------------------------



On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, or SFAS 123(R). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends Statement No. 95, Statement of Cash Flows. Generally, SFAS 123(R) requires all share-based payments
to employees to be recognized in the income statement based on their estimated fair value at date of grant amortized over the grants vesting period. Pro forma disclosure of such estimated fair value is no longer an alternative financial
statement presentation.



SFAS 123(R) is effective for fiscal years beginning
after June 15, 2005 and offers two alternate means of adoption, either: the modified prospective method in which compensation cost is recognized for awards granted after the effective date of the statement and outstanding, unvested
awards granted prior to SFAS 123(R)s effective date, or; a modified retrospective



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##### Table of Contents

method which applies the modified prospective method, but allows companies to restate prior periods based on amounts calculated for pro forma disclosures
under the original Statement 123 for either all prior periods presented or prior interim periods in the year of adoption.



We plan to adopt SFAS 123(R) in the first quarter of 2006 but have not yet determined which transition option we will apply. The adoption of SFAS 123(R) will
significantly impact our results of operations, but will have no impact on our overall financial position. The impact of SFAS 123(R) on our results of operations cannot be accurately predicted at this time, as it will depend on future market prices
and equity grants. However, had we adopted SFAS 123(R) in prior periods, the impact of the standard on the past period would likely approximate the pro forma amounts calculated and disclosed under the original Statement 123. SFAS 123(R) also
requires that any tax benefit in excess of compensation cost, as calculated under the new standard, be reported in the statement of cash flows as a financing activity rather than an operating activity. This change will reduce reported net operating
cash flow and will equally increase reported net financing cash flow in periods after adoption. While we cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in prior periods for such excess tax
deductions were $2.9 million, $5.1 million, and $2.4 million in 2004, 2003 and 2002, respectively.



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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 market adoption of our existing and new pharmaceutical products, including ABRAXANE;
| | - |  | -----------------------------------------------------------------------------------------



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



| |  |  | the actual results achieved in further clinical trials of ABRAXANEmay or may not be consistent with results achieved to date;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the timing of the completion of the re-validation process at the Melrose Park and Swiss facilities;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | 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, or approval, of our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the availability and price of acceptable raw materials and components from third-party suppliers;
| | - |  | -------------------------------------------------------------------------------------------------



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



| |  |  | inventory reductions or fluctuations in buying patterns by wholesalers or distributors;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the impact of recent, or future, 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. Readers should carefully review the factors described in Business: Factors that May Affect Future Results of Operations and other documents we file from time to time with the Securities and Exchange
Commission, including this and future Quarterly Reports on Form 10-Q to be filed by us in fiscal year 2005.



14



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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 2005 first nine months and an update on our outlook for the remainder of 2005. Following this overview, the third-quarter 2005 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, ABRAXANE.
| | - |  | ----------------------------------------------------------------------------------------------------------------



The MD&A should be read in conjunction with our 2004 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 are a
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 hold the exclusive North
American right to sell ABRAXANE, 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. ABRAXANEwas approved by the U.S. Food and Drug Administration, or FDA,
in January 2005 and was launched on February 7, 2005.



Our
core generic injectable products are generally used in hospitals, long-term care facilities, alternate care sites and clinics within North America. Unlike the retail pharmacy market for oral products, the injectable pharmaceuticals marketplace is
largely made up of end users who have relationships with group purchasing organizations, or GPOs, and/or specialty distributors who distribute products within a particular end-user market, such as oncology clinics. GPOs and specialty distributors
generally enter into collective product purchasing agreements with pharmaceutical suppliers in an effort to secure more favorable drug pricing on behalf of their members.



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 or pending with the U.S. Food and Drug Administration, or FDA.



We are a Delaware corporation that was formed in 2001 as successor to a
California corporation formed in 1996. We are a majority owned subsidiary of American BioScience, Inc., a California corporation. At September 30, 2005, American BioScience owned 47,984,160 shares, or 66.3%, of our outstanding common stock.



15



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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 on offering a broad portfolio of injectable products affecting every aspect of hospital care. Key elements of our strategy include:



| |  |  | quickly develop the market for our new proprietary oncology product, ABRAXANE, via strong marketing and educational programs, introduction into other licensed North American markets and further clinical pursuit of the use of ABRAXANEin other indications and treatment regimens;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continued focus on other new, higher-margin injectable product opportunities, including: complementary proprietary products; generic opportunities as products approach patent
expiry; low molecular weight heparins; and, as the FDA regulatory environment evolves, generic biological products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining and improving our current Good Manufacturing Practice, or cGMP, product development and manufacturing capabilities and creating capacity to meet future market needs and
evolving regulatory requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



2005 Year-to-date Highlights



ABRAXANE



The FDA approved ABRAXANE, our licensed oncology product, for the filed indication on January 7, 2005 and ABRAXANEwas launched on February 7, 2005. ABRAXANE net sales totaled $86.3 million in the first nine months of 2005.



ABRAXANE,
consists only of albumin-bound paclitaxel nanoparticles, is free of toxic solvents and demonstrated a superior response rate with an almost doubling of the reconciled target lesion response rate when compared with the solvent-based Taxol®in a prospectively randomized Phase III trial of 460 patients with metastatic breast cancer. Because
it contains no toxic solvents, this next-generation taxane product enables the administration of 50% more chemotherapy with a well-tolerated safety profile, requires no routine premedication to prevent hypersensitivity reactions and can be given
over a shorter infusion time using standard IV tubing.



In the
latter half of 2005, ABRAXANEhas attained important clinical publication objectives in the Journal of
Clinical Oncology, including three editorials and three trial results, in the latter half of 2005, including:



| |  |  | on September 1, 2005, results for the multi-center Phase II study of ABRAXANE, which showed a 64% response rate in patients who received ABRAXANE in first-line therapy, were
published in the Journal of Clinical Oncology;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | on November 1, 2005, and available early online as the article was expected to have a substantial and immediate impact on clinical practice, the Pivotal Phase III
trial in metastatic breast cancer; and,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | on November 1, 2005, a report on activity in lung and ovarian cancer followed by weekly dosing of ABRAXANE.
| | - |  | -----------------------------------------------------------------------------------------------------------



To date, approximately 65 ABRAXANEclinical trials have been initiated or are planned. Going forward, the ABRAXANE clinical strategy is focused on obtaining additional data
in:



| |  |  | earlier stages of disease;
| | - |  | --------------------------



| |  |  | in combination with chemo therapeutics, such as carboplatin, and in biologic products such as Herceptin®and Avastin®; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | expanded indications in other cancers and settings in which taxanes have been found effective.
| | - |  | ----------------------------------------------------------------------------------------------



16



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##### Table of Contents

Current ABRAXANE studies initiated in various settings include:



| |  |  | twenty-one studies in breast cancer; 14 in early disease and 15 in advanced disease;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | fourteen studies in non-small cell lung cancer;
| | - |  | -----------------------------------------------



| |  |  | six studies in ovarian cancer; and
| | - |  | ----------------------------------



| |  |  | studies in prostate cancer, head and neck cancer and melanoma.
| | - |  | --------------------------------------------------------------



Currently, 20 ABRAXANE clinical studies are open, including:



| |  |  | nine breast cancer studies including evaluation:
| | - |  | ------------------------------------------------



| |  |  | as monotherapy in first-line metastatic breast cancer, plus Herceptin® in HER 2 positive patients;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | in weekly dosing plus carboplatin, with Herceptin® for advanced HER 2 positive patients;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | in combination with Xelodain first-line
metastatic breast cancer;
| | - |  | ------------------------------------------------------------------



| |  |  | inweekly in neoadjuvant breast cancer; and
| | - |  | ------------------------------------------



| |  |  | a dose dense pilot adjuvant study in breast cancer.
| | - |  | ---------------------------------------------------



| |  |  | lung cancer studies including:
| | - |  | ------------------------------



| |  |  | a phase II study as monotherapy in first-line non-small cell lung cancer;
| | - |  | -------------------------------------------------------------------------



| |  |  | a phase II trial in combination with carboplatin in first-line non-small cell lung cancer; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | a phase II toxicity trial in combination with carboplatin in advanced non-small cell lung cancer.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | open studiesin other indications:
| | - |  | ---------------------------------



| |  |  | a phase II trial in metastatic melanoma of previously treated and untreated ABRAXANEpatients;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | a phase I/II trialin solid tumors; and
| | - |  | --------------------------------------



| |  |  | a preclinical study in combination with radiation.
| | - |  | --------------------------------------------------



Core Generic Business



With respect to our core generic business, to date in 2005, we have obtained four FDA Abbreviated New Drug Application (ANDA) approvals. We
currently have over 60 products under development, including 23 NDA/ANDAs on file and under review at the FDA, with related IMS proprietary sales approximating $2.8 billion, with over 40 potential ANDA applications under development with an IMS
sales value of approximately $7.7 billion.



Third quarter 2005
cost of sales was impacted by $9.7 million in unabsorbed manufacturing costs related to the extended third-quarter upgrade and re-validation of production conditions at our Melrose Park, IL manufacturing facility. The Melrose Park facility has
resumed partial production and is expected to resume full production later in November 2005. The full-year 2005 unabsorbed manufacturing costs of the extended shut-down are expected to approximate $15 million.



2005 Outlook



With respect to the remainder of 2005, we provide the following guidance:



| |  |  | Net sales in the base injectable business is expected to be in the range of $380-$400 million for 2005, assuming the re-validation of our Melrose Park facility and the launch of at
least one key product by year end;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net sales of ABRAXANE are expected to be in the range of $125 million to $140 million;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Gross margin is anticipated to be in the upper-50 percent range, after any ABRAXANE profit sharing and including approximately $15 million in incremental expense for the full year
related to the Melrose Park upgrade and extended re-validation;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expenses related to ABRAXANE are expected to be in the range of $55-$60 million for all of 2005.
| | - |  | ------------------------------------------------------------------------------------------------



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##### Table of Contents

RESULTS OF OPERATIONS



Three Months Ended September 30, 2005 and September 30, 2004



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



|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|----------------------------------------------- |  | ----------------------------------------------------- | ------- | - | ---------------------------- | - | ------ | - |  | - | ------- | - |  | --- | -
|                                                |  | Three Months EndedSeptember 30,                       |         |   | ChangeFavorable(Unfavorable) |  
|                                                |  | 2005                                                  |         |   | 2004                         |   |        | $ |  |   | %       |  
|                                                |  | (in thousands, except per share data and percentages) |        
|Consolidated statement of income data:          |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Net sales                                       |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Oncology                                        |  | $                                                     | 46,576  |   |                              | $ | 24,267 |   |  | $ | 22,309  |   |  | 92  | %
|Anti-infective                                  |  |                                                       | 39,461  |   |                              |   | 29,865 |   |  |   | 9,596   |   |  | 32  | %
|Critical care                                   |  |                                                       | 42,279  |   |                              |   | 41,391 |   |  |   | 888     |   |  | 2   | %
|Contract manufacturing and other                |  |                                                       | 478     |   |                              |   | 91     |   |  |   | 387     |   |  |     |  
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Total net sales                                 |  |                                                       | 128,794 |   |                              |   | 95,614 |   |  |   | 33,180  |   |  | 35  | %
|Cost of sales                                   |  |                                                       | 63,295  |   |                              |   | 43,915 |   |  |   | (19,380 | ) |  |     |  
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Gross profit                                    |  |                                                       | 65,499  |   |                              |   | 51,699 |   |  |   | 13,800  |   |  | 27  | %
|Percent to net sales                            |  |                                                       | 50.9    | % |                              |   | 54.1   | % |  |   |         |   |  |     |  
|Operating expenses:                             |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Research and development costs                  |  |                                                       | 8,155   |   |                              |   | 7,406  |   |  |   | (749    | ) |  | -10 | %
|Percent to net sales                            |  |                                                       | 6.3     | % |                              |   | 7.7    | % |  |   |         |   |  |     |  
|Selling, general and administrative expenses    |  |                                                       | 31,612  |   |                              |   | 21,693 |   |  |   | (9,919  | ) |  | -46 | %
|Percent to net sales                            |  |                                                       | 24.5    | % |                              |   | 22.7   | % |  |   |         |   |  |     |  
|Stock-based compensation                        |  |                                                       | 93      |   |                              |   | 175    |   |  |   | 82      |   |  | 47  | %
|Equity in net income of Drug Source Co., LLC    |  |                                                       | (283    | ) |                              |   | (753   | ) |  |   | (470    | ) |  | -62 | %
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Total operating expenses                        |  |                                                       | 39,577  |   |                              |   | 28,521 |   |  |   | (11,056 | ) |  | -39 | %
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Percent to net sales                            |  |                                                       | 30.7    | % |                              |   | 29.8   | % |  |   |         |   |  |     |  
|Operating income                                |  |                                                       | 25,922  |   |                              |   | 23,178 |   |  |   | 2,744   |   |  | 12  | %
|Percent to net sales                            |  |                                                       | 20.1    | % |                              |   | 24.2   | % |  |   |         |   |  |     |  
|Interest income                                 |  |                                                       | 563     |   |                              |   | 439    |   |  |   | 124     |   |  | 28  | %
|Interest expense and other                      |  |                                                       | 139     |   |                              |   | 142    |   |  |   | (3      | ) |  |     |  
|Loss on early extinguishment of credit facility |  |                                                       |        |   |                              |   | (1,986 | ) |  |   | 1,986   |   |  |     |  
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Income before income taxes                      |  |                                                       | 26,624  |   |                              |   | 21,773 |   |  |   | 4,851   |   |  | 22  | %
|Provision for income taxes                      |  |                                                       | 8,386   |   |                              |   | 7,960  |   |  |   | (426    | ) |  |     |  
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Net income                                      |  | $                                                     | 18,238  |   |                              | $ | 13,813 |   |  | $ | 4,425   |   |  | 32  | %
|                                                |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Income per common share:                        |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Basic                                           |  | $                                                     | 0.25    |   |                              | $ | 0.20   |   |  |   |         |   |  |     |  
|Diluted                                         |  | $                                                     | 0.25    |   |                              | $ | 0.19   |   |  |   |         |   |  |     |  
|Weighted-average common shares outstanding:     |  |                                                       |         |   |                              |   |        |   |  |   |         |   |  |     |  
|Basic                                           |  |                                                       | 72,158  |   |                              |   | 70,399 |   |  |   |         |   |  |     |  
|Diluted                                         |  |                                                       | 74,105  |   |                              |   | 73,025 |   |  |   |         |   |  |     |  



Net Sales



Net sales in the 2005 third quarter increased $33.2
million, or 35%, to $128.8 million as compared to the same 2004 quarter. ABRAXANE, launched in February 2005,
contributed $32.1 million in sales in the 2005 quarter. Impacted by the extended shut-down of our Melrose Park, IL manufacturing facility due to plant upgrades and the resulting re-validation of production conditions, third-quarter 2005 core generic
net sales increased $1.1 million to $96.7 million. Third-quarter 2005 anti-infective net sales increased $9.6 million, or 32%, over the prior year quarter, driven by strong demand and pricing for our antibiotic products. Oncolytic net sales,
excluding ABRAXANE, decreased $9.8 million, or 40%, due to lower



18



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##### Table of Contents

demand for pamidronate, due primarily to the ongoing impact of reimbursement changes which became effective January 1, 2005, and the impact of the
extended Melrose Park re-validation process. Third-quarter 2005, critical care net sales rose $0.9 million, or 2%, comparable to the same 2004 quarter. The 1% increase in third-quarter 2005 core generic net sales over the prior year quarter, again
excluding ABRAXANE, was comprised of a 7% unit volume increase offset by the 6% impact of price declines.



Gross Profit



As compared to the 2004 third quarter, gross profit increased $13.8 million, or 27%, due primarily to the February launch of our higher-margin,
proprietary oncology product, ABRAXANE, partially offset by lower sales of pamidronate and $9.7 million in
costs related to the extended shut down of our Melrose Park, IL manufacturing facility due to plant upgrades and the resulting re-validation of production conditions. Including the adverse 7.5% of sales impact of the extended Melrose Park shutdown
on gross profit as a percent of sales , and as a result of the other factors above, gross profit represented 50.9% of sales in the 2005 quarter, or 40.6% excluding ABRAXANE, as compared to 54.1% of sales in the third quarter of 2004.



Research and development (R&D)



Third-quarter 2005 R&D expense increased $0.7 million, or 10%, as compared to the 2004 third quarter due primarily to Swiss facility start up costs
and increased generic development activity, partially offset by a $1.9 million decrease in ABRAXANEproduction development activity post launch.



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



As
compared to the 2004 third quarter, SG&A expense increased $9.9 million, or 46%, in the 2005 third quarter due primarily to a $5.9 million in third-party financial advisory fees, a $4.2 million increase in direct ABRAXANEsales and marketing costs post launch, and higher depreciation expense associated with a new SAP ERP system, partially
offset by lower generic marketing costs.



Other Expenses



Drug Source Company, LLC, is a 50% owned company, and is
a selling agent of raw material to the pharmaceutical industry, including us. 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. Our third-quarter equity income in Drug Source
Company was $0.3 million and $0.8 million in the respective 2005 and 2004 third quarters. Research and development expense included raw material purchases from Drug Source Company of $0.3 million in the third quarters of both 2005 and 2004. Ending
inventory included raw material purchases from Drug Source Company of $3.4 million and $2.9 million at September 30, 2005 and December 31, 2004, 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 2005 and 2004 third quarters. Interest expense and other consists primarily of miscellaneous interest expense, the impact of foreign currency charges on intercompany trading accounts and other
financing costs.



Provision for income taxes



Our effective income tax rate in the 2005 third quarter was 31.5% versus
36.6% in the prior year quarter. The 2005 third quarter included the $1.5 million, cumulative, year-to-date benefit of the reduction of our effective income tax rate from 37.0% to 35.5% in the quarter, reflecting the benefit of tax planning
initiatives and the increased availability of tax credits in the period.



19



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##### Table of Contents

Nine months Ended September 30, 2005 and September 30, 2004



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



|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|----------------------------------------------- |  | ----------------------------------------------------- | ------- | - | ----------------------------- | - | ------- | - |  | - | ------- | - |  | --- | -
|                                                |  | Nine Months Ended September 30,                       |         |   | Change Favorable(Unfavorable) |  
|                                                |  | 2005                                                  |         |   | 2004                          |   |         | $ |  |   | %       |  
|                                                |  | (in thousands, except per share data and percentages) |        
|Consolidated statement of income data:          |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Net sales                                       |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Oncology                                        |  | $                                                     | 125,149 |   |                               | $ | 69,274  |   |  | $ | 55,875  |   |  | 81  | %
|Anti-infective                                  |  |                                                       | 129,137 |   |                               |   | 83,914  |   |  |   | 45,223  |   |  | 54  | %
|Critical care                                   |  |                                                       | 119,100 |   |                               |   | 125,656 |   |  |   | (6,556  | ) |  | -5  | %
|Contract manufacturing and other                |  |                                                       | 598     |   |                               |   | 3,612   |   |  |   | (3,014  | ) |  |     |  
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Total net sales                                 |  |                                                       | 373,984 |   |                               |   | 282,456 |   |  |   | 91,528  |   |  | 32  | %
|Cost of sales                                   |  |                                                       | 164,185 |   |                               |   | 133,229 |   |  |   | (30,956 | ) |  |     |  
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Gross profit                                    |  |                                                       | 209,799 |   |                               |   | 149,227 |   |  |   | 60,572  |   |  | 41  | %
|Percent to net sales                            |  |                                                       | 56.1    | % |                               |   | 52.8    | % |  |   |         |   |  |     |  
|Operating expenses:                             |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Research and development costs                  |  |                                                       | 22,446  |   |                               |   | 21,346  |   |  |   | (1,100  | ) |  | -5  | %
|Percent to net sales                            |  |                                                       | 6.0     | % |                               |   | 7.6     | % |  |   |         |   |  |     |  
|Selling, general and administrative expenses    |  |                                                       | 92,243  |   |                               |   | 65,583  |   |  |   | (26,660 | ) |  | -41 | %
|Percent to net sales                            |  |                                                       | 24.7    | % |                               |   | 23.2    | % |  |   |         |   |  |     |  
|Milestone payment                               |  |                                                       |        |   |                               |   | 10,000  |   |  |   | 10,000  |   |  |     |  
|Stock-based compensation                        |  |                                                       | 1,009   |   |                               |   | 650     |   |  |   | (359    | ) |  | -55 | %
|Equity in net income of Drug Source Co., LLC    |  |                                                       | (1,808  | ) |                               |   | (1,991  | ) |  |   | (183    | ) |  | -9  | %
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Total operating expenses                        |  |                                                       | 113,890 |   |                               |   | 95,588  |   |  |   | (18,302 | ) |  | -19 | %
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Percent to net sales                            |  |                                                       | 30.5    | % |                               |   | 33.8    | % |  |   |         |   |  |     |  
|Operating income                                |  |                                                       | 95,909  |   |                               |   | 53,639  |   |  |   | 42,270  |   |  | 79  | %
|Percent to net sales                            |  |                                                       | 25.6    | % |                               |   | 19.0    | % |  |   |         |   |  |     |  
|Interest income                                 |  |                                                       | 1,646   |   |                               |   | 1,284   |   |  |   | 362     |   |  | 28  | %
|Interest expense and other                      |  |                                                       | 102     |   |                               |   | 50      |   |  |   | 52      |   |  |     |  
|Loss on early extinguishment of credit facility |  |                                                       |        |   |                               |   | (1,986  | ) |  |   | 1,986   |   |  |     |  
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Income before income taxes                      |  |                                                       | 97,657  |   |                               |   | 52,987  |   |  |   | 44,670  |   |  | 84  | %
|Provision for income taxes                      |  |                                                       | 34,668  |   |                               |   | 18,160  |   |  |   | (16,508 | ) |  |     |  
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Net income                                      |  | $                                                     | 62,989  |   |                               | $ | 34,827  |   |  | $ | 28,162  |   |  | 81  | %
|                                                |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Income per common share:                        |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|Basic                                           |  | $                                                     | 0.88    |   |                               | $ | 0.50    |   |  |   |         |   |  |     |  
|Diluted                                         |  | $                                                     | 0.85    |   |                               | $ | 0.48    |   |  |   |         |   |  |     |  
|Weighted-average common shares outstanding:     |  |                                                       |         |   |                               |   |         |   |  |   |         |   |  |     |  
|                                                |  |                                                       |         |  
|Basic                                           |  |                                                       | 71,636  |   |                               |   | 70,234  |   |  |   |         |   |  |     |  
|Diluted                                         |  |                                                       | 74,041  |   |                               |   | 73,127  |   |  |   |         |   |  |     |  



Net Sales



Net sales in the first nine months of 2005 increased
$91.5 million, or 32%, to $374.0 million as compared to the first nine months of 2004. ABRAXANE, launched in February 2005, contributed $86.3 million to this increase. Excluding ABRAXANE, net sales of oncolytic products for the first
nine months declined $30.4 million due to reduced demand for pamidronate, due primarily to the ongoing impact of reimbursement changes which became effective January 1, 2005. Anti-infective net sales for the first nine months of 2005 increased
$45.2 million, or 54%, driven by good demand and stable pricing for our antibiotic products. Net sales of critical care products for the first nine months of 2005 fell $6.6 million, or 5%, as compared to the same period last year due primarily to
the maturation of key critical care products. The 2% increase in the first nine months 2005 core generic net sales over the prior year period, again excluding ABRAXANE, was comprised of a 3% unit volume increase offset by the 1% impact of
price declines.



20



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##### Table of Contents

Gross Profit



As compared to the first nine months of 2004, gross profit increased $60.6 million, or 41%, due primarily to the February
2005 launch of ABRAXANE, our higher-margin, proprietary oncology product, partially offset by lower sales of pamidronate and $9.7 million in costs, or 2.6% of sales, related to the extended shut down of our Melrose Park, IL manufacturing
facility. Gross profit represented 56.1% of sales in the first nine months of 2005, 47.8% excluding ABRAXANE,
as compared to 52.8% of sales in the first nine months of 2004.



Research and development



R&D expense for
the first nine months of 2005 increased $1.1 million, or 5%, as compared to the first nine months of 2004 due primarily to Swiss facility start up costs and increased generic development activity, partially offset by lower ABRAXANEproduction development activity post launch.



Selling, general and administrative



As compared to the first nine months of 2004, SG&A expense increased $26.7 million, or 41%, in the first nine months of
2005 due primarily to a $15.4 million increase in direct ABRAXANEsales and marketing costs and $5.9 million
in third-party financial advisory fees. The remaining increase was attributable to increased staffing requirements and related costs resulting from infrastructure enhancement and to higher depreciation expense associated with a new IT system.



Other Expenses



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



As compared to the first nine months of the prior year, our equity income in Drug Source Company increased $0.2 million, to $1.8 million in the 2005
period, primarily due to increased European sales of recently launched products. Research and development expense included raw material purchases from Drug Source Company of $2.0 million and $0.3 million in the year-to-date 2005 and 2004 periods,
respectively.



Interest income consists primarily of interest
earned on the intercompany note from American BioScience and interest earned on invested cash. The $0.4 million increase in interest income between the first nine months of 2005 and 2004 was primarily due to higher average interest rates in 2005 and
higher balances of invested cash. Interest expense and other consists primarily of miscellaneous interest expense and other financing costs.



Provision for income taxes



Our effective income tax rate in the first nine months of 2005 was 35.5% versus 34.3% in the first nine months of the prior year. The 2004 period included
the benefit of finalization of a $1.7 million investment tax credit. The 2005 effective rate reflects the benefits of tax planning strategies and increased availability of tax credits.



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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 30,2005               |         |   | December 31,2004 |  
|                                                                            |  | (in thousands)                  |        
|Summary Financial Position:                                                 |  |                                 |         |   |                  |   |         |  
|Cash, cash equivalents and short-term investments                           |  | $                               | 61,146  |   |                  | $ | 67,629  |  
|                                                                            |  |                                 |         |   |                  |   |         |  
|Working capital                                                             |  | $                               | 242,291 |   |                  | $ | 195,629 |  
|                                                                            |  |                                 |         |   |                  |   |         |  
|Total assets                                                                |  | $                               | 460,888 |   |                  | $ | 373,333 |  
|                                                                            |  |                                 |         |   |                  |   |         |  
|Total stockholders equity                                                  |  | $                               | 402,639 |   |                  | $ | 312,691 |  
|                                                                            |  |                                 |         |   |                  |   |         |  
|                                                                            | 
|                                                                            |  | Nine Months Ended September 30, |        
|                                                                            |  | 2005                            |         |   | 2004             |  
|                                                                            |  | (in thousands)                  |        
|Summary of Sources and (Uses) of Cash and Cash Equivalents:                 |  |                                 |         |   |                  |   |         |  
|Operating activities                                                        |  | $                               | 39,341  |   |                  | $ | 31,317  |  
|                                                                            |  |                                 |         |   |                  |   |         |  
|Purchase of property, plant and equipment, product license rights and other |  | $                               | (57,828 | ) |                  | $ | (31,506 | )
|                                                                            |  |                                 |         |   |                  |   |         |  
|Financing activities                                                        |  | $                               | 11,801  |   |                  | $ | 3,368   |  
|                                                                            |  |                                 |         |   |                  |   |         |  



Capital
Requirements



Our capital requirements depend on numerous
factors, including:



| |  |  | working capital requirements and production, sales, marketing and development costs and any milestone payments required to support our recently launched proprietary oncology
product, ABRAXANE;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the need for manufacturing expansion and improvement;
| | - |  | -----------------------------------------------------



| |  |  | the cost to upgrade and expand our product development facilities;
| | - |  | ------------------------------------------------------------------



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



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



We presently anticipate that our 2005 capital expenditure requirements will approximate $60 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 or undesirable covenants and costs. If we cannot raise money when needed, we may have to reduce or slow ABRAXANEactivity, reduce capital expenditures or scale back development of new products.



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Sources of Financing



In addition to available cash on hand, totaling $79.3 million on November 4, 2005, and cash flow from operations, we have
additional financing available under our unsecured, four-year $150 million credit facility. There were no balances outstanding under our credit facility and we were in compliance with all covenants at September 30, 2005.



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



Sources and Uses of Cash



Operating Activities



In the first nine months of 2005, net cash provided by operating activities was $39.3 million as compared to $31.3 million in the first nine months of
2004. The increase in cash provided by operations for the first nine months of 2005 was due primarily to a $28.2 million increase in net income due in large part to ABRAXANE, and a $9.0 million increase in the income tax benefit on stock option exercises, and a $4.9 million increase in non-cash depreciation and amortization
expense.



Investing Activities



Our investing activities consist principally of capital expenditures
necessary to expand and maintain our manufacturing capabilities and infrastructure and outlays necessary to acquire various product or intellectual property rights. Also included in investing activities in the first nine months of 2005 and 2004 were
a source of $35.2 million and a use of $5.0 million, respectively, related to our net sales or purchases of short-term investments. Our short-term investments consist of liquid, available-for-sale, municipal variable rate demand notes, which are
recorded at cost, and may generally be redeemed upon short notice. Net cash used for the acquisition of property, plant and equipment totaled $39.3 million and $29.1 million in the first nine months of 2005 and 2004, respectively, the increase due
primarily to increased investment in our core manufacturing and development capabilities. In the first nine months of 2005, purchase of product license rights included a $15.0 million license payment to American BioScience resulting from the
FDAs January 2005 approval of ABRAXANE. The $15.0 million ABRAXANEmilestone payment has been capitalized and is being amortized over seven years.



Financing Activities



Financing activities generally include cash flows from the proceeds from the exercise of employee stock options, the issuance or repurchase of our common
stock and transactions with American BioScience, our parent company. Net cash provided by financing activities totaled $11.8 million in the first nine months of 2005 as compared to $3.4 million in the same period last year, and in each period
consisted primarily of cash proceeds from the exercise of employee stock options and sale of stock through the employee stock purchase program.



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ABRAXANE LICENSE AND MANUFACTURING AGREEMENT



We hold the exclusive North American marketing rights and the non-exclusive worldwide manufacturing rights for
ABRAXANE. The FDA approved ABRAXANE for the filed indication on January 7, 2005 and ABRAXANE was launched on February 7, 2005. ABRAXANE is licensed from American BioScience, 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 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 profit sharing and future milestone payments contingent upon achievement of specified regulatory,
publication 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.



Under the license agreement, profit on our sales of ABRAXANE North America will 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 accumulated pre-launch production and other expenses which we have expensed as incurred, but which will be
charged against first profit under the agreement) and an allocation of related general and administrative expenses. At December 31, 2004, accumulated ABRAXANE expenses, which are being offset against future ABRAXANE profit sharing,
totaled $49.1 million. We anticipate that ABRAXANE profit, as defined in the license agreement, will exceed this accumulated expense in late 2005, at which point we will begin expensing American BioSciences share of any profit earned in
our statements of income as an element of cost of sales. 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.



Under the license agreement, American BioScience earned milestone payments
upon the filing and approval of ABRAXANE for the metastatic breast cancer indication. The first such milestone of $10.0 million was achieved in May 2004 when the FDA accepted American BioSciences NDA for the metastatic breast cancer
indication. This payment was expensed and paid in the second quarter of 2004. The FDA then approved ABRAXANE for the filed indication in January 2005, triggering a $15.0 million milestone payment in the first quarter of 2005, which has been
capitalized and is being amortized over seven years.



Regulatory or publication achievements related to other licensed indications under study, including lung, ovarian and prostate cancers, will trigger further milestone payments to American BioScience. Such payments generally total $17.5
million per agreed indication while publications related to any further indications will trigger a $5.0 million milestone payment. As with the indication for 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 sales of the product do not meet specified levels.



Upon achievement of major annual one-time ABRAXANE sales milestones, we are 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 and the second sales milestone of $20.0 million upon the achievement of annual calendar year sales
in excess of $400.0 million. Any future sales-based milestone payments will be expensed in the period in which the sales milestone is achieved.



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.



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In December 2001, in conjunction with 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.



In November 2001, along with the license agreement for ABRAXANE, we also entered into a non-exclusive 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 right to manufacture ABRAXANE worldwide. For sales outside of our licensed territories, 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.



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 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 title and risk of loss
have transferred to the customer, collection is reasonably assured and we have no further performance obligation. This is typically when the product is received by the customer. At the time of sale, as further described below, we reduce sales and
provide for estimated chargebacks, contractual allowances or customer rebates, product returns and customer credits and cash discounts. Our methodology used to estimate and provide for theses sales provisions was consistent across all periods
presented. Historically, Medicaid rebates issued have not been material; however we anticipate and in 2005 have provided for, an increase in Medicaid rebates as a result of the February 2005 launch of ABRAXANE. Accruals for sales provisions are presented in our financial statements as a reduction of net revenue and accounts receivable and, for
contractual allowances, an increase in accrued liabilities. We regularly review information related to these estimates and adjust our reserves accordingly if, and when, actual experience differs from estimates.



We have extensive, internal historical information on chargebacks, rebates
and customer returns and credits which we use as the primary factor in determining the related reserve requirements. As further described below, due to the nature of our generic injectable products and their primary use in hospital and clinical
settings with generally consistent demand, we believe that this internal historical data, in conjunction with periodic review of available third-party data (as described below) and updated for any applicable changes in available information provides
a reliable basis for such estimates. Additionally, we periodically purchase external data on wholesale inventory levels from our wholesale customers, pharmaceutical sales data from third-party market research organizations and our sales force
regularly visits wholesale locations to review inventory-stocking levels.



Sales to our three major wholesale customers comprised 89% of our 2004 net sales. We periodically, as we believe warranted, review the wholesale supply levels of our significant products by reviewing inventory reports
purchased or available from wholesalers, evaluating our unit sales volume, and incorporating data from third-party market research firms and periodic visits to wholesalers warehouses. Based on these activities, we attempt to keep a consistent
wholesale stocking level of approximately two- to six-weeks across our generic products. The buying patterns of our customers do vary from time to time, both from customer to customer and product to product, but we believe that historic wholesale
stocking or speculative buying activity in our generic distribution channel has not had a significant impact on our historic sales comparisons or sales provisions.



To date we have not entered into any inventory management agreements with any of our wholesale customers which would require
us to pay a fee in connection with their distribution of our products or other services, possibly including sales data and other services and contractual rights for us, but we may be required to enter into such agreements in the future in order to
maintain our relationships with such wholesalers. We are unable to ascertain the potential impact of any such agreements on our cost of sales, but do not believe that such agreements would result in a substantial change in wholesale stocking levels
of our products as compared to current levels.



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Our sales provisions totaled $448.7 million and $570.5 million in the first nine months of 2005 and 2004,
respectively, and related reserves totaled $68.1 million and $124.4 million at September 30, 2005 and December 31, 2004, respectively.



Chargebacks



The estimated provision for chargebacks is our most significant and complex sales allowance. Following industry practice, we typically sell our products
to independent pharmaceutical wholesalers at wholesale list price. The wholesaler in turn sells our products to an end user, normally a hospital or alternative healthcare facility, at a lower contractual price previously established between us and
the end user via a group purchasing organization, or GPO. GPOs enter into collective purchasing contracts with pharmaceutical suppliers to secure more favorable product pricing on behalf of their end-user members.



Our initial sale to the wholesaler, and the resulting receivable, are
recorded at our wholesale list price. As most of these list selling prices will be reduced to a lower end-user contract price, we then reduce reported sales and receivables by the difference between the list price and estimated ultimate end-user
contract price. Then, 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 provision. On a monthly basis, at a product level, we compare the unit and price components of our recorded chargeback provision to estimated ending wholesale units in the distribution channel
pending chargeback under end-user contracts and estimated end-user contract prices, and adjust the chargeback provision as necessary.



These most significant estimates inherent in the initial chargeback provision relate first to wholesale units pending chargeback and, second, to the
ultimate end-user contract-selling price. We base our estimation for these factors primarily on internal, product-specific sales and chargeback processing experience, estimated wholesaler inventory stocking levels, current contract pricing and our
expectation for future contract pricing changes. One factor which complicates the chargeback calculation is the time lag between when the product is sold to the wholesaler, when the wholesaler sells the product to the end-user customer and then when
we receive and process the chargeback. Other complicating factors include product sales for which no chargeback request is submitted and estimating the ultimate selling price of the product for products with rapidly changing market pricing
conditions. Our chargeback provision is also potentially impacted by a number of market conditions, including competitive pricing, competitive products and changes impacting demand in both the distribution channel and healthcare provider. For
example, a one-percent decrease in our estimated end-user contract-selling prices would have reduced net sales for the first nine months of 2005 by $0.6 million and a one percent increase in wholesale units pending chargeback at September 30,
2005 would have decreased net sales for the first nine months of 2005 by $0.4 million. These differences would similarly reduce future operating cash flow, operating earnings and our financial position.



Our methodology used to estimate and provide for chargebacks was consistent
across all periods presented. Due to information constraints in the distribution channel, primarily the inability to track product through the channel on a unit or lot specific basis, it has not been practical, and has not been necessary, for us to
capture and quantify the impact of current versus prior year activity on the chargeback provision. We do review current year chargeback activity to determine whether material changes in the provision relate to prior period sales: such changes have
not been material to the income statement.



Our net chargeback
reserve totaled $38.1 million and $97.4 million at September 30, 2005 and December 31, 2004, respectively. The $59.3 million decrease in chargeback requirements during the first nine months of 2005 resulted primarily from lower quarterly
generic sales, including of certain products with larger chargeback provision requirements, in the third quarter of 2005 as compared to the fourth quarter of 2004. As a proprietary product, ABRAXANE does not require significant chargeback
reserves.



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Contractual allowances, returns and credits, cash discounts and bad debts



Contractual allowances, generally rebates or administrative fees, are
offered to certain wholesale customers, GPOs and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from date of sale. We provide a general provision for
contractual allowances at the time of sale based on the historical relationship between sales and such allowances. Upon receipt of chargeback, due to the availability of product and customer specific information on these programs, we then establish
a specific provision for fees or rebates based on the specific terms of each agreement. Our reserve for contractual allowances totaled $11.9 million at September 30, 2005, comparable to the $11.4 million balance at December 31, 2004. A
one-percent increase in the estimated rate of contractual allowances to sales at September 30, 2005 would increase the provision for contractual allowances by $1.9 million at that point in time. Contractual allowances are reflected in the
financial statements as a reduction of net sales and as a current accrued liability.



Consistent with industry practice, our return policy permits our customers to return products within a window of time before and after the expiration of product dating. We provide for product returns and other
customer credits at the time of sale by applying historical experience factors generally based on our historic data on credits issued by credit category or product, relative to related sales and we provide specifically for known outstanding returns
and credits. Our reserve for customer credits and product returns totaled $12.6 million and $9.4 million at September 30, 2005 and December 31, 2004, respectively. At September 30, 2005, a one percent increase in the estimated reserve
requirements for customer credits and product returns would have decreased net sales for the first nine months of 2005 by $1.2 million.



We generally offer our customers a standard cash discount for prompt payments and, from time-to-time, may offer a greater discount and extended terms in
support of product launches or other promotional programs. Our wholesale customers typically pay within terms and a provision for cash discount is established at the time of sale based on the terms of sale.



We establish a reserve for bad debts based on general and identified customer
credit exposure. Our historic bad debt losses have been insignificant.



Inventories



Inventories consist of products
currently approved for marketing and may include certain products pending regulatory approval. From time to time, we capitalize inventory costs associated with products prior to regulatory approval based on our judgment of probable future commercial
success and realizable value. Such judgment incorporates our knowledge and best judgment of where the product is in the regulatory review process, our required investment in the product, market conditions, competing products and our economic
expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. If final regulatory approval for such products is denied or delayed, we may need to provide for and expense such inventory.



At September 30, 2005, inventory included $13.2 million in cost
relating to generic products pending FDA approval on that date. Included in the amount pending approval at September 30, 2005 was $7.5 million of Ceftriaxone. Based on information recently provided by our supplier regarding the results of an
FDA inspection of the supplier, we do not anticipate FDA approval of our Ceftriaxone product in the near term. In the event that the FDA approval is unduly delayed or denied, our intention is to recover our investment in Ceftriaxone material from
the supplier, although we may have to provide for and expense all, or a portion of, such inventory. At December 31, 2004, our investment in inventory pending regulatory approval consisted solely of ABRAXANE related inventory pending
approval as of the financial statement date. Commercial shipments of ABRAXANE commenced on February 7, 2005.



We routinely review our inventory and establish reserves when the cost of the inventory is not expected to be recovered or our product cost exceeds
realizable market value. In instances where inventory is at or approaching expiry, is not expected to be saleable based on our quality and control standards or for which the selling price has fallen below cost, we reserve for any inventory
impairment based on the specific facts and circumstances. In evaluating the market value of inventory pending regulatory approval as compared to its cost, we consider the market, pricing and demand for competing products, our anticipated selling
price for the product and the position of the product in the regulatory review process. Provisions for inventory reserves are reflected in the financial statements as an element of cost of sales with inventories presented net of related reserves.



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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.



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, enhance our
manufacturing capabilities 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 in line 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



We have recorded deferred stock-based compensation related to stock options
granted to employees and outside directors with such expense related to the issuance of stock based compensation which was either performance-based or, prior to the date of our initial public offering, for which the exercise price was less than the
estimated fair value of common stock on the grant date.



RECENT ACCOUNTING
PRONOUNCEMENTS



On December 16, 2004, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends Statement No. 95, Statement of Cash Flows. Generally, SFAS 123(R) requires all share-based payments to employees to be recognized in the income statement based on their estimated fair value at date of grant amortized over the
grants vesting period. Pro forma disclosure of such estimated fair value is no longer an alternative financial statement presentation.



SFAS 123(R) is effective for fiscal years beginning after June 15, 2005 and offers two alternate means of adoption, either: the modified
prospective method in which compensation cost is recognized for awards granted after the effective date of the statement and outstanding, unvested awards granted prior to SFAS 123(R)s effective date, or; a modified
retrospective method which applies the modified prospective method, but allows companies to restate prior periods based on amounts calculated for pro forma disclosures under the original Statement 123 for either all prior periods presented or
prior interim periods in the year of adoption.



We plan to
adopt SFAS 123(R) in the first quarter of 2006 but have not yet determined which transition option we will apply. The adoption of SFAS 123(R) will significantly impact our results of operations, but will have no impact on our overall financial
position. The impact of SFAS 123(R) on our results of operations cannot be accurately predicted at this time, as it will depend on future market prices and equity grants. However, had we adopted SFAS 123(R) in prior periods, the impact of the
standard on the past period would likely approximate the pro forma amounts calculated and disclosed under the original Statement 123. SFAS 123(R) also requires that any tax benefit in excess of compensation cost, as calculated under the new
standard, be reported in the statement of cash flows as a financing activity rather than an operating activity. This change will reduce reported net operating cash flow and will equally increase reported net financing cash flow in periods after
adoption. While we cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in prior periods for such excess tax deductions were $2.9 million, $5.1 million, and $2.4 million in 2004, 2003 and 2002,
respectively.



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|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
without increasing risk. 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 with our collaborators outside the United States to date have been conducted in U.S. dollars. Our more significant currency risks are
denominated in the Canadian and Australian dollars and Swiss Franc. We do not believe we have a material exposure to foreign currency risk because of the relative stability of these currencies in relation to the U.S. dollar. A 10% adverse change in
currency exchange rates of the Canadian or Australian dollars or Swiss Franc 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.



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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.



In January 2005, we migrated our central data and operational processing system to an SAP
enterprise resource planning, or ERP, system designed for pharmaceutical manufacturers. In addition to expanding and improving our access to information, we believe that, over time, the new ERP system will yield operational efficiencies, facilitate
regulatory compliance and expand our customer service and fulfillment capabilities. As we grow, the new ERP system will also enable us to better control and maintain the integrity of our information systems by providing a standard, central systems
platform. There were no other significant changes in our internal controls or, to the knowledge of management, in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



We are from time
to time subject to claims and litigation arising in the ordinary course of business. These claims have included assertions that 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 us. In the opinion of management, the ultimate outcome of proceedings of which management is aware, even if adverse to us, will not have a
material adverse effect on our consolidated financial position or results of operations.



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|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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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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/ ALAN L. HELLERAlan L. HellerPresident and Chief Executive Officer(Principal Executive Officer)By:

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




Date: November 9, 2005



33