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Zacks Research Digest www.zackspro.com Andrx Corp. October 11, 2006 Research Associate: Shilpa Chandak, CA Editor: Nelson Bishop, CFA Sr. Editor: Ian Madsen, CFA: [email protected]: 1-800-767-3771; x417 Ian Madsen, MBA, CFA, Editor, 312.630.9880 x.417 155 North Wacker Drive Chicago, IL 60606 [email protected] (ADRX - NASDAQ) $24.57 Note to Reader: All new material since last update is highlighted. Reason for Report: Minor changes and news update. Prev. Ed.: August 22, 2006 Overview Andrx Corp. (ADRX) is an emerging healthcare company with significant operations in the manufacture and distribution of generic pharmaceuticals. The company is headquartered in Plantation, Florida. It formulates and commercializes controlled-release oral pharmaceuticals using its proprietary drug delivery technologies. Through its distribution operations, it sells generic drugs manufactured by third parties, primarily to pharmacies that do not maintain their own central warehousing facilities and pharmacy buying groups. The company has a number of abbreviated new drug applications (ANDAs) for branded pharmaceuticals progressing through the FDA review process. The branded business is losing money because of high R&D expenses and delays in product launches. The company’s website is www.andrx.com. ADRX’s fiscal year ends in December; the fiscal year coincides with the calendar year. Analysts have identified the following factors for evaluating the investment merits of ADRX: Key Positive Arguments Andrx Corp. is significantly restructuring its internal activities and marketing initiatives in an effort to expand business opportunities, which would leverage its strength in product formulation and development as well as generic drug distribution. The company has lined up a large number of prospective pipeline products which might hit the market once the Official Action Indicated (OAI) status of the company is withdrawn by the FDA. Key Negative Arguments The company is still under review of the FDA regarding manufacturing issues. The company received its second Form 483 in April 2006. The royalty rate on generic Prilosec is in decline and may totally disappear by 2006. Increased competition for Cardizem CD and Tiazac may negatively impact ADRX’s business. On March 13, 2006 Andrx Corporation and Watson Pharmaceuticals, Inc. (WPI) announced that they have signed a definitive merger agreement providing for the acquisition of Andrx by Watson. Under the terms of the agreement, Watson will acquire all of the outstanding shares of Andrx common stock for a cash amount of $25.00 per share. The transaction has a total indicated purchase price of approximately $1.9 billion. The Boards of Directors of both companies have unanimously approved the transaction. Recent Events Andrx reported its 2Q06 results on August 8, 2006. The company reported 2Q06 revenue of $254.7 million and GAAP EPS of $0.02. © Copyright 2006, Zacks Investment Research. All Rights Reserved. Revenue ADRX has a number of co-promotional distribution deals with other branded and generic pharmaceuticals. The company also manufactures a number of its own branded and generic products, and receives royalties and licensing revenue on other products. ADRX’s generic oral contraceptive marketing partner, TEVA, has only managed to capture 3.3% share for the two products it currently markets. A number of ADRX produced generic and branded pharmaceuticals are: Cartia XT Indications: It is indicated for the treatment of hypertension. It may be used alone or in combination with other antihypertensive medications. It is also used for the treatment of chronic stable angina, an angina occurring from coronary artery spasm. Product Life Cycle: Matured, widely sold and distributed. Cartia XT continues to be a core driver of sales. Recent Results: Cartia XT is a bioequivalent of Cardizem CD. Competition: Once Apotex receives the final FDA approval for the generic version of Cardizem CD, ADRX will face increased competition. Diltizem HCL Indications: Used in the treatment of hypertension. It may be used alone or in combination with other antihypertensive medications. Product Life Cycle: Matured, widely sold and distributed. Recent Results: Diltizem HCL is a bioequivalent of Forest Lab’s Tiazac. Competitors: The generic Cardizem CD or Tiazac markets may face additional competition. The competitors may act aggressively on pricing to gain share, which will negatively impact ADRX’s business. Analysts in the digest group are concerned regarding the competition. Cardizem LA Indications: Cardizem LA is indicated for chronic stable angina (chest pain) and hypertension (high blood pressure). Litigation: On October 19, 2005 Andrx disclosed an ANDA for a generic version of Cardizem LA 120mg, 180mg, 240mg, 300mg, 360mg, and 420mg strengths. Andrx had previously filed on the 420mg strength. Kos Pharmaceuticals filed a suit against Andrx in BVF’s name on the 420 mg strength on August 10, 2005. On October 14, 2005, Biovail sued Andrx on the remaining strengths. Andrx believes it is first to file on all strengths of Cardizem LA and is therefore entitled to 180 days of market exclusivity. By suing ADRX, BVF has set in motion the 30-month stay on Cardizem LA approvability, assuming that ADRX’s formulation is deemed approvable. ADRX will likely challenge all of the strengths of Cardizem LA. The Cardizem LA patent litigation vs. Biovail is currently scheduled for April 9, 2007. Bupropin HCL Indications: It is an antidepressant. Zacks Investment Research Page 2 www.zackspro.com Product Life Cycle: Matured, widely sold and distributed. Partnership: Bupropin HCL is a bioequivalent of GSK’s Wellbutrin SR. The company has licensed its exclusive rights to Impax. ADRX will receive a royalty payment from Impax, but it will be less than what it would have earned if the company could have delivered sales of the product itself. Impax has partnered with Teva Pharmaceuticals regarding sales. Wellbutrin SR’s royalty expired in September 2005 and was largely impacted by shelf stock adjustment granted by TEVA. Competition: The first-to-file status has not paid off. ADRX has been hampered by legal battles as well as manufacturing issues. Andrx has recently relinquished its 180-day marketing exclusivity rights on the 150mg version (70% of the Wellbutrin SR franchise sales). This provides Eon Labs and Watson the right to immediately launch their version of the drug. Loratadine Indications: It is an antihistamine. It relieves the symptoms of hay fever (sneezing, running nose, and itchy, watery eyes), and can also treat hives and associated itching of the skin. Product Life Cycle: Received final FDA approval on November 4, 2003 on the 10mg strength. The company had 180 days of exclusivity. Partnership: Loratadine is a bioequivalent of SGP’s Claritin, Claritin D-24, and Claritin Reditabs. ADRX will partner with Perrigo for co-marketing and sales. Sales have been strong so far. Valproate Indications: Treatment of mania, epilepsy, and migraine. Product Life Cycle: On May 10, 2004, ADRX received tentative approval on 125mg, 250mg and 500mg strength. Regulatory Issues: Valproate (divalproex Na) is a bioequivalent of ABT’s Depakote. Andrx has filed 505(b) (2) filing for Depakote and is currently engaged in patent litigation with innovator Abbott Laboratories in the Southern District of Florida. In December 2005, the court denied Andrx’s motion for summary judgment though litigation continues. Annual sales for Depakote are approximately $800.0 million. Glucotrol ER Indications: Treatment of diabetes. Partnership: Glucotrol ER is a bioequivalent of PFE/JNJ’s Glucotrol XL. It has been licensed from Pfizer, and the final deal was closed on January 20, 2004. ADRX will partner with WPI for its own generic versions but it has also signed a distribution agreement with PFE on the resale of this generic. The distribution agreement with PFE is of a lower margin. Competition: PFE recently started marketing its own generic version of Glucotrol XL through its Greenstone division. This product will compete against ADRX’s generic version. Management stated that the product launch had a modest effect on ADRX’s market share till date though there has been a slight decline in prices. Competition and price erosion in generic Glucotrol XL market has contributed to the decline in generic revenue. Quinapril Indications: Treatment of hypertension. Zacks Investment Research Page 3 www.zackspro.com Product Life Cycle: ANDA filed, and pending at the FDA. Recent Results: Quinapril –– bioequivalent of PFE’s Accupril. Metoprolol Indications: Treatment of hypertension (beta blocker). Product Life Cycle: ANDA filed, and its Paragraph IV is pending at the FDA. First-to-file 50mg dose (45% of branded sales). Expected launch in 2007. Cardura XL Indications: Treatment for benign prostate hyperplasia. Product Life Cycle: ADRX received an approvable letter for Cardura XL on June 21, 2004. Partnership: The company terminated its Cadura XL agreement with PFE and received $10 million milestone refund in February, 2005. Biaxin XL Indications: It is used to treat certain bacterial infections of the respiratory tract. Product Life Cycle: Received final approval on June 25, 2004 on the 500mg strength. Potential 2H06 launch. Biaxin XL generic is a key driver for Andrx. Regulatory Issues: On November 11, 2005, ADRX announced that the district court of Northern Illinois has granted Abbott Laboratories’ motion for a preliminary injunction on Andrx’s generic Clarithromycin Extended Release Tablets (Biaxin XL) pending a trial on the merits. ADRX is evaluating the court’s decision and will determine its course of action. Since no specific trial date has been set yet, it appears that a trial is unlikely before 2H06, which suggests a decision on the patent issue may not be reached until late ’06 or early ’07. As a result, if Andrx loses the PI case and is unsuccessful in making another appeal, it may not be able to launch its generic Biaxin XL until later next year. If the outcome is successful, ADRX intends to launch it immediately. Abbott had already been granted a preliminary injunction (PI) in similar cases against Teva and Ranbaxy. This decision blocks Teva from launching until either the PI decision is reversed on appeal or the lower court rules in its favor. Competition: Sandoz's generic Biaxin XL, a $311 million antibiotic; Sandoz is the third company to receive final approval for an AB-rated generic. Concerta Indications: Concerta is used to treat attention deficit disorder (ADD), attention deficit hyperactivity disorder (ADHD), and narcolepsy. Product Life Cycle: Pending FDA approval. Competition: Concerta is Johnson and Johnson’s (J&J) $800 million drug that lost its primary patent in March 2004 but the launch of the generic have been delayed by a Citizen's Petition. Although it is unlikely J&J will get a 30-month stay against any filer, the patent issued to Johnson and Johnson, could give competitor Impax Laboratories 180 days of exclusivity on generic Concerta. According to ADRX, it Zacks Investment Research Page 4 www.zackspro.com was a day late in filing its Paragraph IV for the patent. ADRX’s generic version of Concerta will be blocked from the market until Impax concludes its 180-day exclusitivity. This news removes a significant potential drug from Andrx's near-term pipeline. The negative effects on Andrx are twofold: (1) the obvious timing delay (sales pushed to 2006 or later from 2005), and (2) Teva and an authorized generic (from JNJ) would have plenty of time to lock up a good portion of the market before Andrx launches its generic. ADRX has expensed $4.1 million as cost of goods sold related to its pre-launch inventories. Management stated that the company has submitted questions to the FDA to initiate a dialogue related to Impax’s FTF status. FDA has not responded to issues related to the 180-day exclusivity rights related to generic Concerta. In addition, there has been no FDA action on the pending Citizen’s Petition. Lamisil Indications: It is an antifungal drug. Recent Results: Generic Lamisil is a bioequivalent of Novartis’ Lamisil. This is a $585 million product. ADRX and two other generic companies (Dr. Reddy’s and Teva) have received tentative approval. Lamisil is protected by two patents, one of which has expired in July 2004 and the other will expire in December 2006. Lovenox Indications: An anticoagulant agent treatment for blood clots. Product Life Cycle: Approval of Amphastar’s ANDA continues to be delayed by a Citizen’s Petition filed by innovator Sanofi-Aventis. Potential launch is expected in 2006. Marketing Rights: On May 2, 2005, ADRX entered into an alliance with Amphastar on generic Lovenox. ADRX gains exclusive marketing rights for Amphastar’s generic Lovenox. On June 16, 2005, ADRX received positive news as a court invalidated a patent protecting $1.4 billion Lovenox (an anti-clotting drug). ADRX’s marketing rights extend to the U.S. pharmacy market, which represents 30% of the total Lovenox sales. ADRX paid $4.5 million upon execution of the agreement and will make an additional $5.5 million payment to Amphastar once certain milestones relating to the product are achieved, including the FDA marketing approval. Retail market opportunity is approximately $500 million at brand values with Andrx sharing half of the profits. Prilosec Indication: Treatment of heartburn and ulcers. Partnership: The company received 6.25% royalty payment on generic Prilosec from Schwarz pharma. The deal was structured such that ADRX will receive 15% royalty in the first six months of sales, 9% in the next 12 months, and 6.25% in the last 24 months. Toprol-XL (Metoprolol XL): Andrx filed Paragraph IV ANDAs on Toprol XL tablets in the 25mg, 50mg, 100mg, and 200mg strengths. AstraZeneca sued Andrx for patent infringement in the district court of Delaware in February 2004 on the 50mg strength, in July 2004 on the 25mg strength, and in December 2004 on the 100mg and 200mg strengths. Andrx believes it is first to file on the 50 mg strength. The summary judgment, however, came in favor of Andrx. Final approval is still pending for all the generic challengers, and Andrx may not receive final approval until it resolves its manufacturing issues with the FDA, for which visibility remains limited. Official Action Indicated On September 6, 2005 the FDA’s Florida District Office placed ADRX in OAI (Official Action Indicated) status, thereby placing the FDA approval of the company’s abbreviated new drug applications (ANDAs) Zacks Investment Research Page 5 www.zackspro.com on hold. This was a further development of the FDA inspection of the company’s manufacturing facilities that ended in May 2005 after which the FDA had issued a Form 483, List of Inspectional Observations. ADRX submitted a response to the Form 483, including a proposed corrective action. The FDA has not commented on this proposal. ADRX subsequently met with the FDA on December 14, 2005 to address the manufacturing issues raised by the agency in May, 2005. In January 2006, the FDA conducted a limited regulatory inspection related to adverse drug event reporting and customer complaint handling and issued a Form 483 List of Inspectional Observations. The FDA has begun re-inspection of the company’s manufacturing site on March 6, 2006. Management believes that the possible key focus of the re-inspection includes the following: (1) the FDA wants to ensure that the company’s proposed corrective action plan is being properly put in place; (2) general product capability; and (3) assess if Andrx is maintaining manufacturing quality. Andrx management believes that the company has had significant experience in these areas by now and sounded confident. During the 2Q06 conference call, management reported that it met with the FDA in July 2006 and continues to work toward resolution of its manufacturing deficiencies. The company recorded an additional $10.0 million milestone from Takeda Chemical Industries, in connection with its agreement to develop a combination of Actos and Metformin extended release. The company expects an NDA, or New Drug Application, for the product to be filed in 2006, followed by approval and launch in 2007. Generic Oral Contraceptives Andrx Corp. has launched generic Ortho Tri-Cyclen. ADRX will also seek to gain approval for a generic Ortho Novum 1/35, and Ortho Novum 7/7/7. ADRX has two product approvals, and is awaiting other product approvals in order to launch itself in the oral contraceptive arena. ADRX wants to launch the products all at once as a portfolio. The company announced a distribution partnership with TEVA to promote the generic OC business. TEVA’s marketing muscle and financial strength will be a big benefit to ADRX. For generic oral contraceptive Loestrin, ADRX has received the FDA approval and plans to launch it shortly. ADRX is also gaining sales from the CTEX Pharmaceutical acquisition. The FDA had approved an NDA for an OTC product containing the same active ingredients as Entex. The FDA had announced that products which are sold via prescriptions, and do not have an approved ANDA or NDA, will be subject to FDA scrutiny once an ANDA or NDA for a similar product receives approval. Entex falls under this category and is liable to be assessed by the FDA. On January 23, 2006, ADRX announced that it had entered into an agreement to market 11 generic drugs to be manufactured by Invagen Pharmaceuticals Inc. Two ANDAs have been filed already. The remaining nine ANDAs are expected to be filed during the remainder of 2006 and through early 2007. This suggests that the first of these products could reach the market in late 2007, assuming no significant legal/regulatory hurdle, notes one firm (Lehman). In March 2006, Andrx and Teva amended their previous agreement which gave Teva exclusive rights to market Andrx’s generic Oral Contraceptives (OC). Under terms of the amended deal, Andrx agreed to pay Teva $4 million for the right to subcontract its generic OC manufacturing obligations. Upon acquisition by Watson, ADRX will transfer to Teva all its approved and pending OC ANDAs, as well as related technical & intellectual assets; and would also increase Teva’s share of net profits from generic OC sales. Andrx has filed an ANDA against Shire Pharmaceuticals’ Adderall XR. Shire has reviewed the certification from Andrx and may file patent infringement litigation. Shire is currently reviewing the details Zacks Investment Research Page 6 www.zackspro.com of the Andrx notice and this may delay the FDA approval or the launch of the drug because of lawsuits. Shire has settled lawsuits with Barr Laboratories and Impax Laboratories and is still in litigation against Teva Pharmaceutical. One firm (Buckingham) views this as a non-issue for Shire as Barr will come into the market with a generic Adderall XR and first-to-file exclusivity in 2009. Andrx continues to have about 30 ANDAs pending approval, the most valuable being generic Toprol XL, Cardizem XL and Concerta. The company currently has 24 products under development, which includes 15 controlled release products, 4 generic OCs, 2 orally disintegrating tablets and 3 immediate release drugs. In 2005, Andrx filed 7 ANDAs and received 5 final approvals compared to 14 filings and 10 approvals in 2004 and 12 filings and 13 approvals in 2003. One firm (Citigroup) believes that if these issues are not resolved, the FDA could impose more severe sanctions, potentially shutting down Andrx's operations which would allow Watson to walk away from the proposed acquisition. Branded Revs. Generic Revs. 2005A 2006E 2007E 2008E $17.6M $298.5M $0.0M $271.6M↓ $0.0M $347.6M↑ $0.0M $407.1M Est. Growth 0.3% ADRX continues to walk a tight rope in its generic business with significant potential upside for pipeline products including Lovenox, Biaxin XL, Concerta, and Toprol XL offset by the threat of competition for its generic Cardizem CD from KV Pharma (KV.A-SP) or Apotex. According to the Zacks Digest Report, 2Q06 distributed products revenue was $174.4 million, up 3.3% yo-y. Andrx reported 2Q06 distributed products revenue of $177.4 million, up 5.1% y-o-y. During 2Q06, distributed products revenues benefited from the launches of generic Pravachol and generic Zocor. Although the industry continues to experience price erosion on existing products, the top-line trend in the company’s distribution business returned to normal growth rates as generic versions of high sales volume brand products were launched. Distribution 2005A $667.7M 2006E $718.7M↑ 2007E $795.3M ↑ 2008E $829.0M Est. Growth 5.6%↑ Total Revenue Synopsis: Andrx reported 2Q06 revenue of $254.8 million, down 1.6% y-o-y. According to the Zacks Digest Report, 2Q06 generic product revenue was $67.7 million, down 13.6% y-o-y. Andrx reported 2Q06 generic product revenue of $68.5 million, down 12.5% y-o-y. The decline is primarily due to decreased revenues from the generic versions of Glucotrol XL, Glucophage, OTC generic Claritin-D, and Dilacor XR. These were partially offset by increased revenues from the generic versions of Tiazac and Cardizem CD, and Ventolin. In the generic products business, revenues continue to be affected by the lack of any significant product launches. Andrx reported 2Q06 licensing, royalties and other revenue of $8.8 million, down 40% y-o-y. The decrease was primarily due to decreased revenues from Sciele Pharma and expiration of revenue generating alliances with KUDCo and Ranbaxy. Total Revs. 2005A $1,038.7M 2006E $1,037.6M↑ 2007E $1,207M↑ 2008E $1,312.3M Est. Growth 1.8%↑ On July 7, 2006, Andrx announced that Andrx and Watson have agreed on an amended outside closing date of November 13, 2006. Firms in the Digest Group expect the Andrx/Watson merger to close by November 2006, subject to FTC approval and provided there is no material change in the agreement. Margins According to the Zacks Digest Report, 2Q06 SG&A expenses were $38.4 million, down 1.7% y-o-y and R&D expenses were $13.0 million, up 30.6% y-o-y. Andrx reported 2Q06 SG&A expenses of $41.0 million, up 4.8% y-o-y and R&D expenses of $13.0 million, up 3.1% y-o-y. The 2Q06 SG&A expenses Zacks Investment Research Page 7 www.zackspro.com included $3.8 million in merger-related expenses. The increase in the R&D expenses was attributed to an increase in the contract services R&D. The company submitted 3 ANDAs to the FDA in 2Q06. 2006E Margins: Digest Average Est. Gross Margin 23.2%↓ Operating Margin 3.3% Net Margin 3.0%↑ The company estimates R&D for FY06 to be around $50 million, which will include the company’s internal R&D efforts focused on the development of primarily controlled-release products. It would further support the contract services business and external R&D costs in connection with agreements reached with third parties relating to the development of immediate-release products. The company believes that the effective tax rate for FY06 would be approximately 38% and anticipates initiating income tax payments in 2006 (it was not required to pay any tax for the last 3 years). The company anticipates the most significant requirement in 2006 will be funding related to expansion of its Florida manufacturing facilities. The company anticipates FY06 capital expenditure of $47 million, compared to $29 million in FY05 and $88 million in FY04. The company is in late-stage discussions with overseas companies in India and China to leverage its low cost API and manufacturing to add more IR products to its generic pipeline. Andrx will focus more of its internal R&D on control-release and niche generic opportunities that will best leverage its broad technology platform and formulation capabilities. Earnings per Share According to the Zacks Digest Report, 2Q06 pro forma EPS was $0.08, down 31.8% y-o-y and GAAP EPS was $$0.02, down 81.8% y-o-y. Andrx reported 2Q06 GAAP EPS of $0.02. One firm (Lehman) believes that the bottomline results will have no effect on the investors’ view regarding the pending acquisition of the company by Watson. 2006E $0.52↑ $0.15 $0.52 Street Consensus Company Guidance Low Estimate High Estimate 2007E $0.99 $0.88 $1.12 Analysts believe that the brand business divesture has reduced some of the uncertainties about future quarters. The FDA inspection of the company’s facility is still ongoing and analysts believe that the future prospects though still unclear is very much dependant on the FDA ruling. As a result, one analyst (Wachovia) has still not considered any ANDA approval in 2006 as it believes that the OAI status may be lifted in 2H06. Target Price/Valuation Rating Distribution Positive Neutral Negative Avg. Target Price 0.0% 85.7%↑ 14.3% $24.88↑ The current price of $24.54 implies that the market is gradually converging to the bid price offered by Watson to acquire ADRX and this is the reason why all the analysts in the digest group have made an upward revision to their price targets for the stock. Looking at ADRX’s current price of $24.54, the stock trades at 47.2X 2006 EPS, above the peer group average of 21X. The Digest group predicts growth to be 17.8%, so the PEG based on 2006 EPS is 2.6X. This is above the large-cap pharma group average Zacks Investment Research Page 8 www.zackspro.com of approximately 1.5X. Of the three price targets quoted for ADRX, the lowest is $24.50 (Wachovia) and the highest is $25 (Citigroup, Lehman). The average target price is $24.88 per share (up from previous average). The digest group currently bears a neutral view on the stock given its manufacturing issues with the FDA, its impressive pipeline, and the prospective Watson deal. One firm (Wachovia) believes that given the announcement of the acquisition by Watson, the ADRX stock no longer trades on fundamentals. Potentially Severe Problems There are none other than those discussed in other section of this report. Long-Term Growth ADRX announced plans to restructure its business by divesting the brand unit and focusing on generic manufacture and distribution. The process may take some time and the brand unit will remain earnings dilutive until that time. Management stated that with the divesture, the company will refocus on its core competency in the development of controlled-release and niche generic products. However, ADRX is now building up a urology sales force in anticipation of the Cardura XL launch. Competitors entering the markets may act aggressively on pricing to gain share, which would negatively impact ADRX’s business since it is highly dependent on the two products, Concerta and Biaxin XL. The company met with the FDA and subsequently delivered a corrective action plan that is still in progress in reference to the manufacturing issues raised by the FDA. It is difficult to assess to what extent these manufacturing inefficiencies will impact ADRX’s generic pipeline catalysts as several FDA approvals have been granted despite the outstanding Form 483s. But currently, analysts are waiting for the resolution of this issue as they believe it will be instrumental for the future approval of the company’s ANDAs. The company has what several analysts regard as a less than optimal record of properly capitalizing on its development of products, citing Wellbutrin and Prilosec as examples. Still, there is time left to profit from the 150mg Wellbutrin launch, according to analysts. Andrx anticipates approval for several additional generic OCs to add to its current portfolio of three generics, which will provide its marketing partner Teva with greater leverage to gain more market share. Andrx would be responsible for marketing while its potential partners would be responsible for development and manufacture. Watson Pharmaceuticals has proposed an acquisition of ADRX which may take place in the coming months but depending on the possible resolution of the manufacturing issues with the FDA. Andrx's manufacturing, R&D, controlled-release technology, distribution network, and employees, in combination with Watson's excellent team and capabilities, can create a significant vertically integrated company in the specialty pharmaceutical industry. Consummation of the merger is subject to the satisfaction of certain customary conditions including, among others, (i) an approval of the merger by Andrx's stockholders, (ii) the expiration of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, and (iii) no material adverse effect having occurred in respect of Andrx, subject to certain exceptions. Dates for closing the acquisition and for Andrx's stockholders' meeting to vote on the merger have not yet been determined. Capital structure/Solvency/Cash flow/Governance/Other On October 3, 2006 Shire Plc announced that it has bought the rights to use an experimental technology from privately owned Warren Pharmaceuticals to develop treatments for kidney and genetic disorders. Shire said it had licensed the worldwide rights to Warren's tissue protective cytokine (TPC) technology for use in treating non-nervous system diseases. Shire declined to disclose financial terms of the deal. Zacks Investment Research Page 9 www.zackspro.com On September 12, 2006, ADRX certified that each representation and warranty of the company contained in the merger agreement, as amended, with Watson Pharmaceuticals is true and correct as of September 12, 2006. The merger agreement, as amended, provides that in the event that the representations and warranties made by Andrx in the merger agreement are true and correct on September 12, 2006, then such representations and warranties will be deemed to be true on all dates subsequent to September 12, 2006. In addition, in the event that no material adverse effect has occurred with regard to Andrx or its ability to consummate the merger on September 12, 2006, then if a material adverse effect were to occur after September 12, 2006, such material adverse effect will not affect the consummation of the merger. The merger, which remains subject to Federal Trade Commission approval, is anticipated to close in the fourth quarter of 2006, but not later than November 13, 2006. One firm (B. of America) believes Watson’s desire to acquire Andrx’s assets has strategic merit, as it adds to Watson’s pipeline and R&D capabilities both on the branded and generic side. The firm hopes it will mitigate potential impact from Ferrlecit competition. Upcoming Events Date Event Comments 2006 2006 2H06 Launch of Lovenox Launch of Generic Concerta. Expected trial on Biaxin XL Delayed due to late filing. Due to PI granted to Abott Individual Analyst Opinions POSITIVE RATINGS (0%) None NEUTRAL RATINGS Buckingham – Neutral: October 3, 2006. INVESTMENT SUMMARY: The firm expects the Andrx/Watson transaction to close on schedule and expects Watson to benefit from Andrx’s manufacturing status of Andrx’s pipeline. Citigroup – Hold ($25): August 10, 2006. INVESTMENT SUMMARY: Although the firm is bullish on Andrx's pipeline, it is also concerned about the indefinite delay in the approvals for the pipeline products due to the company's failure to rectify manufacturing deficiencies identified by FDA inspectors. Lehman – Equal weight ($25): September 20, 2006. INVESTMENT SUMMARY: The firm believes that one more FDA reinspection would be required before the manufacturing issue can be resolved. However, the firm is not certain about the timing of the event. Wachovia – Market perform ($24.50): August 8, 2006. INVESTMENT SUMMARY: With no substantial regulatory hurdle for the proposed transaction with Watson Pharmaceuticals, and low prospect of a competing bid, the firm expects ADRX shares to trade near its take-out value of $25. NEGATIVE RATINGS Zacks Investment Research Page 10 www.zackspro.com J.P. Morgan – Under weight: August 14, 2006. INVESTMENT SUMMARY: Given the pending merger with Watson, the firm does not see meaningful upside to the stock and believes the transaction would close with the required regulatory approvals. Appendix-A Analysts’ EPS, sales by product, and a consensus income statement can be found in the file ADRX.xls. Copy Editor: Uttara G. Zacks Investment Research Page 11 www.zackspro.com