App Pharmaceuticals 10Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2006

¨	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

Abraxis BioScience, Inc.

(Exact name of registrant as specified in its charter)


Delaware		68-0389419
(State of Incorporation)		(I.R.S. Employer Identification No.)

11755 Wilshire Boulevard, Suite 2000 Los Angeles, CA		90025
(Address of principal executive offices)		(Zip Code)

(310) 883-1300

(Registrant’s telephone number, including area code)

N/A

(Former Name or Former Address, if Changed Since Last Report)

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. Yesþ No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated filer þ		Accelerated Filer ¨		Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as determined by rule 12b-2 of the Exchange Act). Yes¨ Noþ

As of November 3, 2006, the registrant had 165,741,552 shares of $0.001 par value common stock outstanding.

Abraxis BioScience, Inc.

INDEX


		Page
PART I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed consolidated balance sheets – September 30, 2006 and December 31, 2005	3

	Condensed consolidated statements of operations – Three and nine months ended September 30, 2006 and 2005	4

	Condensed consolidated statements of cash flows – Three and nine months ended September 30, 2006 and 2005	5

	Notes to condensed consolidated financial statements – September 30, 2006	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II. Other Information

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Submission of Matters to a Vote of Security Holders	47

Item 5.	Other Information	48

Item 6.	Exhibits	48

Signatures		49

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Abraxis BioScience, Inc.

Condensed Consolidated Balance Sheets


	September 30, 2006			December 31, 2005
	(Unaudited)			(Note 1)
	(in thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents	$	30,714		$	28,818
Short-term investments		149			54,455
Accounts receivable, net of allowances for doubtful accounts		38,000			61,868
Inventories		207,401			175,282
Prepaid expenses and other current assets		29,293			13,553
Deferred income taxes		46,671			16,936

Total current assets		352,228			350,912
Property, plant and equipment, net		225,757			152,630
Investment in Drug Source Company, LLC		4,955			2,728
Intangible assets, net of accumulated amortization		755,935			—
Goodwill		401,600			—
Deferred income taxes, non-current		—			5,993
Non-current receivables from related parties		435			649
Other non-current assets, net of accumulated amortization		11,876			11,317

Total assets	$	1,752,786		$	524,229

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	61,135		$	35,593
Accrued liabilities		57,202			46,356
Deferred revenue		39,225			18,404
Minimum royalties payable		1,007			1,020
Amounts due to officer/stockholder		—			1,255
Notes payable		70,910			—

Total current liabilities		229,479			102,628

Deferred income taxes, non-current		172,960			—
Long-term debt		180,500			190,000
Long-term portion of deferred revenue		167,979			—
Other non-current liabilities		6,684			1,400

Total liabilities		757,602			294,028
Minority interests		—			162,061
Stockholders’ equity:
Common stock - $.001 par value; 300,000,000 shares authorized; 165,724,512 and 164,992,101 shares issued and outstanding in 2006 and 2005, respectively		166			165
Additional paid-in capital		1,075,329			71,240
Retained (deficit) earnings		(23,966	)		51,380
Accumulated other comprehensive income		1,396			1,629
Less treasury stock at cost, 6,705,116 and 6,646,398 common shares in 2006 and 2005, respectively		(57,741	)		(56,274	)

Total stockholders’ equity		995,184			68,140

Total liabilities and stockholders’ equity	$	1,752,786		$	524,229

See notes to condensed consolidated financial statements.

Abraxis BioScience, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands, except per share amounts)
Net revenue	$	203,144		$	129,571		$	508,411		$	375,153
Cost of sales		85,413			64,360			211,170			167,167

Gross profit		117,731			65,211			297,241			207,986
Operating expenses:
Research and development		21,776			19,270			72,298			50,185
Selling, general and administrative		56,489			27,687			126,745			91,797
Amortization of merger related intangibles		13,508			—			24,766			—
Merger related in-process R&D charge		—			—			105,777			—
Other merger related costs		2,108			5,944			26,375			5,944
Equity in net income of Drug Source Company, LLC		(1,242	)		(283	)		(2,025	)		(1,808	)

Total operating expenses		92,639			52,618			353,936			146,118

Income (loss) from operations		25,092			12,593			(56,695	)		61,868
Interest income		1,047			329			3,387			970
Interest expense and other		(4,686	)		(2,401	)		(9,741	)		(3,610	)
Minority interests		—			(5,345	)		(11,383	)		(18,792	)

Income (loss) before income taxes		21,453			5,176			(74,432	)		40,436
Income tax expense		7,896			7,066			914			25,421

Net income (loss)	$	13,557		$	(1,890	)	$	(75,346	)	$	15,015

Income (loss) per common share:
Basic	$	0.09		$	(0.01	)	$	(0.47	)	$	0.10

Diluted	$	0.08		$	(0.01	)	$	(0.47	)	$	0.09

The composition of stock-based compensation included above is as follows:
Cost of sales	$	986		$	1,008		$	2,500		$	2,800
Research and development		1,736			214			3,329			595
Selling, general and administrative		4,033			2,555			9,151			7,105
Other merger related costs		—			—			8,999			—

	$	6,755		$	3,777		$	23,979		$	10,500

See notes to condensed consolidated financial statements.

Abraxis BioScience, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	13,557		$	(1,890	)	$	(75,346	)	$	15,015
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		4,684			3,606			13,510			10,463
Amortization		161			351			1,216			978
Amortization of product rights		4,110			—			4,110			—
Amortization of merger related intangibles		13,508			—			24,766			—
Merger related in-process R&D charge		—			—			105,777			—
Stock-based compensation		6,755			3,777			23,979			10,500
Loss on disposal of property, plant and equipment		5			36			16			61
Excess tax benefit from stock-based compensation		(98	)		(2,079	)		(1,220	)		(8,319	)
Deferred income taxes		3,282			409			(20,518	)		(4,612	)
Minority interest		—			5,345			11,383			18,792
Equity in net income of Drug Source Company, LLC, net of dividends received		(1,478	)		5,151			(2,227	)		3,453
Changes in operating assets and liabilities:
Accounts receivable, net		(4,096	)		9,368			23,770			(23,184	)
Inventories		(8,930	)		13,959			(32,119	)		(20,221	)
Amortization of merger related inventory step-up		4,680			—			12,480			—
Prepaid expenses and other current assets		(14,209	)		(7,108	)		(15,793	)		(5,267	)
Non-current receivables from related parties		95			(10	)		214			(28	)
Deferred revenue		(9,844	)		3,254			188,800			19,119
Minimum royalties payable		10			(14	)		(13	)		(93	)
Amounts due to officer/stockholder		—			113			(1,255	)		(641	)
Other non-current liabilities		—			—			(311	)		1,400
Accounts payable and accrued expenses		10,776			(10,608	)		32,852			6,772

Net cash provided by operating activities		22,968			23,660			294,071			24,188


Cash flows from investing activities:
Purchases of property, plant and equipment		(55,145	)		(12,865	)		(86,653	)		(40,101	)
Purchase of other non-current assets		553			(791	)		(2,232	)		(3,731	)
Purchase of product rights		—			—			(328,797	)		—
Net sale (purchase) of short-term investments		82			(13,230	)		54,306			35,190

Net cash used in investing activities		(54,510	)		(26,886	)		(363,376	)		(8,642	)


Cash flows from financing activities:
Proceeds from the exercise of stock options		1,000			2,894			7,155			10,072
Proceeds from issuance of debt		5,000			55,880			204,500			189,880
Proceeds from the sale of stock under employee retirement and stock purchase plans		1,609			1,621			3,274			3,129
Notes payable		1,313			—			70,910			—
Income tax benefit on stock option exercises		98			2,079			1,220			8,319
Repayment of borrowings		—			—			(214,000	)		(42,750	)
Payment of deferred financing costs		—			(125	)		(1,704	)		(585	)
Distribution of equity to acquire TRI		—			—			—			(20,000	)
Repurchase of preferred stock		—			(55,656	)		—			(55,656	)
Purchase of treasury stock		(1,467	)		—			(1,467	)		(67,500	)

Net cash provided by financing activities		7,553			6,693			69,888			24,909

Effect of foreign currency translation		652			340			1,313			204

(Decrease) increase in cash and cash equivalents		(23,337	)		3,807			1,896			40,659
Cash and cash equivalents at beginning of period		54,051			40,175			28,818			3,323

Cash and cash equivalents at end of period	$	30,714		$	43,982		$	30,714		$	43,982

See notes to condensed consolidated financial statements.

ABRAXIS BIOSCIENCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

(1) Basis of Presentation

On April 18, 2006, we, Abraxis BioScience, Inc., formerly known as American Pharmaceutical Partners, Inc., or APP, completed a merger with American BioScience, Inc., or ABI, our former parent, pursuant to the terms of an Agreement and Plan of Merger dated November 27, 2005 that we entered into with ABI and certain shareholders of ABI. On April 18, 2006, our certificate of incorporation was amended to change our name from American Pharmaceutical Partners, Inc. to Abraxis BioScience, Inc., or Abraxis.

The unaudited condensed consolidated financial statements include the assets, liabilities and results of operations of Abraxis and our wholly owned subsidiaries, including Pharmaceutical Partners of Canada, Inc., Chicago BioScience, LLC and our majority owned subsidiary Resuscitation Technologies, LLC and our investment in Drug Source Company, LLC, which is accounted for using the equity method.

For accounting purposes, the merger between us and ABI has been treated as a downstream merger with ABI viewed as the surviving entity, although APP was the surviving entity for legal purposes. As such, the merger has been accounted for in our consolidated financial statements as an implied acquisition of our minority interests using the purchase method of accounting. Under this accounting method, our accounts, including goodwill, have been adjusted to reflect the minority interests’ share of any differences between their fair values and book values as of the merger closing date. Our total fair value was based on the weighted average market price of our common stock for the period three trading days prior to and three trading days subsequent to the merger announcement date.

Furthermore, because ABI is treated as the continuing reporting entity for accounting purposes, our filed reports, as the surviving corporation in the merger, after the date of the merger will parallel the financial reporting required under generally accepted accounting principles in the United States and SEC reporting rules as if ABI were the legal successor to its reporting obligation as of the date of the merger. Accordingly, our financial statements, for all periods prior to the date of the merger, reflect this basis of accounting. The unaudited condensed consolidated financial statements include the assets, liabilities and results of operations of ABI for all periods presented.

The accompanying unaudited condensed consolidated financial statements 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 generally accepted accounting principles 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 months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006 or for other future periods. The balance sheet information at December 31, 2005 has been derived from the audited financial statements at that date, as restated for Statement of Financial Accounting Standards No. 123 (revised 2004),share-based payment, or FAS 123(R), but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. All material intercompany balances and transactions have been eliminated in consolidation and certain balances in prior periods have been reclassified to conform to the presentation adopted in the current period.

One of our wholly owned subsidiaries 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 operation. Research and development expense includes raw material purchases from Drug Source Company of $0.2 million and $2.0 million for the nine-month periods ended September 30, 2006 and 2005, respectively. Ending inventory included raw material purchased from Drug Source Company of $5.8 million at September 30, 2006 and $3.8 million at December 31, 2005.

Equity - Based Compensation

We account for stock-based compensation in accordance with FAS 123(R), which requires the recognition of compensation cost for all share-based payments (including employee stock options) at fair value. Effective January 1, 2006, we adopted the provisions of FAS 123(R) using a modified version of retrospective application. As a result, the fair value of stock-based employee compensation was recorded as an expense in the current year. In addition, our prior year results have been restated as if we had used the fair value method during previous periods. We use the straight-line attribution method to recognize share-based compensation expense over the vesting period of the award. Options currently granted generally expire ten years from the grant date and vest ratably over a four-year period, while awards under the RSU Plan II vest over a one-, two- or four-year period.

Stock-based compensation recognized in 2006 as a result of the adoption of FAS 123(R), as well as expense associated with the retrospective application, uses the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our stock participation plan. Additionally, expense related to the RSU Plans is based in the lower of the market price or $28.27 and is expensed on a straight line basis over the applicable vesting period. Pre-tax stock-based employee compensation costs for the nine-month periods ended September 30, 2006 and 2005 were $24.0 million, including $14.6 million relating to the RSU Plans, and $10.5 million, respectively. Also in connection with the retrospective application, our December 31, 2005 balance sheet presented reflects an increase in the deferred tax benefit of $2.1 million, an increase in minority interests of $0.6 million, an increase in additional paid-in capital of $9.3 million and a decrease in retained earnings of $8.8 million.

Refer to Note 8, Stock Compensation Plans, for a detail of financial statement changes caused by the retrospective application.

(2) Quarterly Periods

We use a 52-week fiscal year that ends on December 31, with quarters ending on March 31, June 30 and September 30. In 2005, APP used a 52-week fiscal year that ended on the Saturday nearest to December 31, with quarters ending on the Saturday nearest the end of the calendar quarter. For clarity of presentation, the comparative periods are presented as if the quarter ended on September 30. The change in quarterly periods did not have a material impact on the comparability of reported quarterly results.

(3) Earnings Per Share Information


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006			2005
	(in thousands, except per share amounts)
Basic and dilutive numerator:
Net income (loss)	$	13,557	$	(1,890	)	$	(75,346	)	$	15,015

Denominator:
Weighted average common shares outstanding - basic		159,002		158,035			158,755			157,511
Net effect of dilutive securities:
Stock options and restricted stock awards		966		—			—			2,180

Weighted average common shares outstanding - diluted		159,968		158,035			158,755			159,691

Income (loss) per common share - basic	$	0.09	$	(0.01	)	$	(0.47	)	$	0.10

Income (loss) per common share - diluted	$	0.08	$	(0.01	)	$	(0.47	)	$	0.09


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006			2005
	(in thousands, except per share amounts)
Number of shares excluded		2,252		2,424			2,661			125
Range of exercise prices per share	$	23.82- $56.02	$	2.00- $56.02		$	2.00- $56.02		$	49.20- $56.02

(4) Related Party Transactions

Historically, amounts due to officers and stockholders primarily consisted of compensation expense that had been recognized, but not yet paid by us. All amounts due at December 31, 2005 were paid during the first quarter of 2006. No interest was accrued, imputed or owed relating to the compensation amounts due.

In June 2005, Dr. Soon-Shiong, our controlling stockholder, sold to ABI his entire ownership interest in Transplant Research Institute, or TRI, comprising all of the outstanding capital stock of TRI, in exchange for $20.0 million in cash. TRI holds various intellectual property and other rights. TRI was formed and commenced operations in July 1991. In our consolidated financial statements and for income tax purposes, because the sale involved our controlling stockholder, the TRI acquisition was accounted for as an asset contribution using the stockholder’s historical cost basis, which was zero, and accounted for as a distribution of stockholders’ equity.

Non-current receivables from related parties consist of accounts and notes receivable from employees and officers that are due over periods ranging from 1 to 10 years. Total non-current receivables from related parties totaled $0.4 million and $0.6 million at September 30, 2006 and December 31, 2005, respectively. Of the total non-current receivables from related parties outstanding at September 30, 2006, $0.3 million of the amount is collateralized by property and our common stock. The notes receivable bear interest at rates ranging from 5.12% to 5.75% per annum. On March 1, 2006, we purchased a residential property in California for $3.7 million. A newly hired executive has leased the residence from us for an initial term of one year.

(5) Inventories

Inventories consisted of the following at:


	September 30, 2006						December 31, 2005
	Approved		Pending Regulatory Approval		Total Inventory		Approved		Pending Regulatory Approval		Total Inventory
	(in thousands)
Finished goods	$	47,075	$	—	$	47,075	$	31,768	$	—	$	31,768
Work in process		33,885		1,056		34,941		11,613		2,987		14,600
Raw materials		123,916		1,469		125,385		122,449		6,465		128,914

	$	204,876	$	2,525	$	207,401	$	165,830	$	9,452	$	175,282

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, 2006, inventory included $2.5 million in cost relating to core hospital-based products pending FDA approval on that date. At September 30, 2006, inventory included 19 items that were awaiting FDA approval and individually no specific items were greater than 1% of total inventory. In the event that the FDA approval is unduly delayed or denied, we may have to provide for and expense all of, or a portion of, such inventory. At December 31, 2005, inventory included $9.5 million in cost relating to our core hospital-based products pending FDA approval on that date. Included in the amount pending approval at December 31, 2005 was $7.4 million of Ceftriaxone, which was approved by the FDA in February 2006.

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 our 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 Liabilities

Accrued liabilities consisted of the following at:


	September 30, 2006		December 31, 2005
	(in thousands)
Sales and marketing	$	26,738	$	18,728
Payroll and employee benefits		20,044		12,707
Legal and insurance		2,861		2,971
Accrued income taxes		1,108		6,992
Other		6,451		4,958

	$	57,202	$	46,356

(7) Long-Term Debt and Credit Facilities

Credit Facility

On April 18, 2006, in connection with the closing of our merger with ABI, the prior APP and ABI facilities were replaced with a three-year, $450 million, unsecured credit facility, with a sub-limit of $10 million for standby and commercial letters of credit and $20 million for swing line loans. In connection with the closing of the merger, the amount outstanding under the ABI facility was repaid with borrowings from the new facility. There was no outstanding balance under the APP facility as of such date. Interest rates under the new facility vary depending on the type of loan made and our leverage ratio as defined in the agreement. The agreement contains various restrictive covenants pertaining to the maintenance of minimum net worth, leverage and interest coverage ratios. In addition, the agreement restricts our ability to declare or pay dividends, make future loans to third parties and incur other indebtedness. Fees of $1.7 million associated with the new agreement were capitalized and will be amortized over the term of the agreement and the remaining $0.6 million in unamortized debt acquisition costs related to the prior facilities were written off in the second quarter of 2006 in conjunction with the closing of the merger.

As of September 30, 2006, $180.5 million was outstanding on our credit facility with a weighted average interest rate of 6.29%. As we are not obligated to repay our outstanding balances prior to termination of the facility in 2009, borrowings will be classified as non-current on the balance sheet. Outstanding letters of credit, which reduce overall available borrowings, were $0.7 million at September 30, 2006. We were in compliance with all covenants at September 30, 2006.

No interest was capitalized during the nine-month periods ended September 30, 2006 or 2005.

Note Payable

In connection with the Asset Purchase Agreement, with AstraZeneca UK Limited, we have agreed to pay $75 million of the purchase price upon the first year anniversary of the closing. This transaction closed on June 28, 2006. At September 30, 2006, we had recorded this amount at its discounted present value as a note payable within the current liability section of the balance sheet.

APP Prior Credit Facility and Debt Extinguishment

In September 2004, we entered into a three-year, $100 million, unsecured revolving credit and letter of credit facility which in August 2005 was increased to $150 million and the term of which was extended by one year. Interest rates under this credit facility varied depending on the type of loan made and our leverage ratio. The interest rate under the credit facility was LIBOR plus 75 basis points. The credit facility limited the amount of and assessed a 0.125% fee on the face amount of outstanding letters of credit. With respect to the capital stock held by ABI, the credit facility prohibited us from declaring or paying any cash dividends or making any other such cash distributions. Additionally, the terms of our August 2005 credit facility limited the principal amount of the intercompany demand note received from ABI to $23.0 million, among various other covenants and restrictions. Debt acquisition fees of approximately $0.5 million for our facility were being amortized over the life of the facility and the unamortized debt acquisition costs were written off in connection with the closing of the merger with ABI during the second quarter of 2006.

ABI Prior Credit Facility

In June 2005, ABI entered into a two-year, $200 million credit facility secured by substantially all of ABI’s assets, including 47.2 million shares of our common stock held by ABI. On March 6, 2006, ABI amended its $200 million credit facility to increase the allowed borrowings to $215 million. On April 18, 2006, $214 million was outstanding under the ABI facility, which was paid off in connection with the closing of the merger. ABI incurred $0.5 million in fees in connection with the facility, which were being amortized over the facility’s two-year term and the unamortized debt acquisition costs were written off in conjunction with the closing of the merger in the second quarter of 2006.

Chicago BioScience Mortgage

In connection with the acquisition of a development and manufacturing facility in July 2004 by Chicago BioScience, LLC, a wholly owned subsidiary of ABI, ABI obtained a $4.0 million mortgage due July 2005, which was secured by substantially all of the assets in the manufacturing facility and 65,000 shares of our common stock held by ABI. ABI repaid this mortgage in full in June 2005.

(8) Stock Compensation Plans

We sponsor the following stock compensation plans:

1997 Stock Option Plan

Under the 1997 Stock Option Plan, or the 1997 Plan, options to purchase shares of our common stock were granted to certain employees and the directors with an exercise price equal to the estimated fair market value of our common stock on the date of grant. The 1997 Plan stock options vested upon completion of our initial public offering in December 2001.

2001 Stock Incentive Plan

The 2001 Stock Incentive Plan, or the 2001 Plan, provides for the grant of incentive stock options and restricted stock to our employees, including officers and employee directors, non-qualified stock options to employees, directors and consultants and other types of awards. At September 30, 2006, there were 18,736,264 options available for grant and 23,142,546 common shares reserved for the exercise of stock options under the 2001 Plan. The number of shares reserved for issuance increases annually on the first day of each fiscal year by an amount equal to the lesser of a) 6,000,000 shares, b) 5% of the total number of shares outstanding as of that date or c) a number of shares as determined by our Board of Directors.

The compensation committee of our Board of Directors administers the 2001 Plan and has the authority to determine the terms and conditions of awards, including the types of awards, the number of shares subject to each award, the vesting schedule of the awards and the selection of the grantees. The exercise price of all options granted under the 2001 Plan will be determined by the compensation committee of our Board of Directors, but in no event will this price be less than the fair market value of our common stock on the date of grant.

2001 Non-Employee Director Stock Option Program

The 2001 Non-Employee Director Stock Option Program, or the 2001 Program, was adopted as part, and is subject to the terms and conditions, of the 2001 Plan. The 2001 Program establishes a program for the automatic grant of awards to our non-employee directors at the time that they initially join the board and at each annual meeting of the stockholders at which they are elected.

Restricted Stock

At September 30, 2006, 7,375 restricted shares of our common stock were outstanding with per share market values ranging from $14.69 to $34.03 and with vesting dates ranging from January 2006 to June 2011. Compensation expense related to restricted stock grants is based upon the market price on the date of grant and is charged to earnings on a straight-line basis over the applicable vesting period.

In connection with the merger, we also assumed two restricted stock unit plans established by ABI prior to the closing of the merger. Under the terms of the first restricted stock unit plan, or RSU Plan I, the units granted under that plan vested upon the completion of the merger. As a result, the holders of these units received the right to acquire an aggregate of 212,239 shares of our common stock upon the closing of the merger. The 212,239 shares of common stock issuable upon the vesting of these units reduced the number of shares otherwise issuable to the shareholders of ABI at the effective time of the merger under the terms of the merger agreement. Under the terms of the second restricted stock unit plan assumed by us in connection with the merger, or the RSU Plan II, one-half of the units granted thereunder will vest on the second anniversary of the merger and the remaining one-half of the units will vest on the fourth anniversary of the merger. On each vesting date, the value of the restricted stock unit award will convert into the right to receive a number of shares of our common stock equal to the value of the award divided by the average trading price of our common stock over the three trading days prior to vesting. In the event that the average trading price of our common stock for such period is less than $28.27, then the value of the award will be determined by multiplying the average trading price of our common stock over the three trading days prior to vesting by the number of vested units. In the event that the average trading price of our common stock for such period is greater than $28.27, then the value of the award will be computed by multiplying $28.27 by the number of vested units. We may elect to pay to the holder the cash value of our common stock that vests on each vesting date in lieu of delivery of our common stock. The maximum number of shares of our common stock that may be issuable under the RSU Plan II is 3,325,080 shares. Awards relating to the RSU plans with a value of $14.6 million were expensed during the nine-month period ended September 30, 2006.

On April 18, 2006, we entered into an agreement with RSU Plan LLC, or the RSU LLC, an entity that is beneficially owned and controlled by the ABI shareholders existing prior to the merger, including entities controlled by Dr. Soon-Shiong. RSU LLC owns a sufficient number of shares of our common stock to satisfy our obligations under the RSU Plan II. Under the terms of this agreement, the RSU LLC has agreed that prior to the date on which restricted stock units issued pursuant to the RSU Plan II become vested, RSU LLC will deliver, or cause to be delivered, to us the number of shares of our common stock, or cash, or a combination thereof, in an amount sufficient to satisfy the obligations to participants under the RSU Plan II of the vested restricted units. We are required to satisfy our obligations under the RSU Plan II by paying to the participants in the RSU Plan II cash and/or shares of our common stock in the same proportion as was delivered to us by the RSU LLC. The intention of this agreement is to have RSU LLC satisfy our obligations under RSU Plan II so that there would not be any further dilution to our stockholders as a result of our assumption of the RSU Plan II.

Employee Stock Purchase Plan

Under the 2002 Employee Stock Purchase Plan, or the ESPP, eligible employees may contribute up to 10% of their base earnings toward the semi-annual purchase and issuance of our common stock. The employees’ purchase price is the lesser of 85% of the fair market value of the stock on the first business day of the offer period or 85% of the fair market value of the stock on the last business day of the semi-annual purchase period. Employees can purchase no more than 625 shares of our common stock within any given purchase period. An aggregate of 9,458,736 shares of our common stock were reserved for issuance under the ESPP at September 30, 2006. The ESPP provides for annual increases in the number of shares of our common stock issuable under the ESPP equal to the lesser of: a) 3,000,000 shares; b) a number of shares equal to 2% of the total number of shares outstanding; or c) a number of shares as determined by our Board of Directors. During the nine month period ended September 30, 2006, 157,792 shares of our stock were issued under the ESPP for an aggregate purchase price of $3.3 million.

We account for stock-based compensation in accordance with FAS 123(R), which requires the recognition of compensation cost for all share-based payments, including employee stock options, at fair value. Effective January 1, 2006, we adopted the provisions of FAS 123(R) using a modified version of retrospective application. As a result, the fair value of stock-based employee compensation has been recorded as an expense in the current year. In addition, prior year results have been restated as if we had used the fair value method during previous periods. We use the straight-line attribution method to recognize share-based compensation expense over the vesting period of the award. Options currently granted generally expire ten years from the grant date and vest ratably over a four-year period, while grants under the RSU Plan II vest over on one-, two- or four-year period.

Stock-based compensation recognized in 2006 as a result of the adoption of FAS 123(R), as well as expense associated with the retrospective application, use the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under the company’s stock participation plan. The impact of compensation expense and the adoption of FAS 123(R) on the statements of operations and cash flows for the three and nine months ended September 30, 2006 was as follows:

Statements of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands, except per share amounts)
Cost of sales	$	986		$	1,008		$	2,500		$	2,800

Gross loss		(986	)		(1,008	)		(2,500	)		(2,800	)
Operating expenses:
Research and development		1,736			214			3,329			595
Selling, general and administrative		4,033			2,555			9,151			7,105
Other merger related costs		—			—			8,999			—

Total operating expenses		5,769			2,769			21,479			7,700

Loss from operations		(6,755	)		(3,777	)		(23,979	)		(10,500	)
Minority interests		—			1,162			1,431			3,231

Loss before income taxes		(6,755	)		(2,615	)		(22,548	)		(7,269	)
Benefit for income taxes		(2,486	)		(1,397	)		(8,256	)		(3,885	)

Net loss	$	(4,269	)	$	(1,218	)	$	(14,292	)	$	(3,384	)

(Loss) per common share:
Basic	$	(0.03	)	$	(0.01	)	$	(0.09	)	$	(0.02	)

Diluted	$	(0.03	)	$	(0.01	)	$	(0.09	)	$	(0.02	)

Cash flow from operations	$	6,755		$	3,777		$	23,979		$	10,500

Cash flow from financing activities	$	98		$	2,079		$	1,220		$	8,319

The following is a summary of the line items impacted by the restatement on the previously reported 2005 consolidated December 31, 2005 balance sheet:

FAS 123R Restatement

(in thousands)

Balance Sheet


	December 31, 2005
	As originally Reported			As Adjusted		Effect of Change
Deferred income taxes	$	14,871		$	16,936	$	2,065

Total current assets		348,847			350,912		2,065

Total assets	$	522,164		$	524,229	$	2,065

Accrued liabilities		45,634			46,356		722

Total current liabilities		101,906			102,628		722
Total liabilities		293,306			294,028		722
Minority interests		161,608			162,061		453
Common stock		5,875			15,131		9,256
Deferred stock-based compensation		(400	)		—		400
Retained earnings		60,146			51,380		(8,766	)
Total stockholders’ equity		67,250			68,140		890

Total liabilities and stockholders’ equity	$	522,164		$	524,229	$	2,065

In accordance with FAS 123(R), we will adjust stock-based compensation on a quarterly basis for revisions to the estimated rate of equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after January 1, 2005 will be recognized in the period the forfeiture estimate is changed. No changes in estimated rate of forfeitures were made during 2005 and 2006.

As of September 30, 2006, there was $25.1 million of total unrecognized compensation expense related to stock options granted under the company’s equity incentive plans which is expected to be recognized over a weighted average period of 1.4 years. Additionally, as of September 30, 2006, there was $31.1 million of total unrecognized compensation expense related to the RSU Plans which is expected to be recognized over a weighted average period of 1.3 years.

The fair values of options granted during the three and nine months ended September 30, 2006 and 2005 were determined using the Black-Scholes option pricing model, which incorporates various assumptions. The risk-free rate of interest for the average contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is zero as we do not anticipate paying any dividends. The expected term of awards granted is based upon the historical exercise patterns of the participants in our plans and expected volatility is based on the historical volatility of our stock over the expected term of the award. The weighted average estimated values of employee stock option grants and rights granted under our employee stock purchase plan as well as the weighted average assumptions that were used in calculating such values during the three and nine months ended September 30, 2006 and 2005 were based on estimates at the date of grant as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Stock Options
Risk-free rate		4.9	%		4.0	%		4.9	%		3.9	%
Dividend yield		—			—			—			—
Expected life in years		5			5			5			5
Volatility		61	%		66	%		61	%		66	%
Fair value of options granted	$	1,686,695		$	2,868,840		$	15,203,191		$	15,344,629
Weighted average grant date fair value of options granted	$	10.73		$	19.92		$	11.51		$	21.04
Employee Stock Purchase Plan
Risk-free rate		2.8	%		2.2	%		2.8	%		2.2	%
Dividend yield		—			—			—			—
Expected life in years		1.2			1.2			1.2			1.2
Volatility		48	%		46	%		48	%		46	%

Our stock options outstanding that have vested and are expected to vest as of September 30, 2006 were as follows:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (1)
Vested	1,744,835	$	14.80	5.07	$	22,647,958
Expected to Vest	2,082,013		31.36	8.79		—

Total	3,826,848	$	23.81	7.09	$	22,647,958

(1)	These amounts represent the difference between the exercise price and $27.78, the closing price of Abraxis stock on September 30, 2006.

The above options outstanding that are expected to vest are net of estimated future option forfeitures in accordance with the provisions of FAS 123(R). Options with a fair value of $7.3 million and $6.7 million vested during the nine months ended September 30, 2006 and 2005, respectively.

Additional information with respect to our stock option activity is as follows:


	Options Outstanding				Exercisable Options
	Shares		Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding at December 31, 2005	3,571,997		$	21.38	1,774,537	$	11.31

Granted	1,320,650		$	29.16
Exercised	(579,834	)	$	12.53
Forfeited	(486,365	)	$	33.93

Outstanding at September 30, 2006	3,826,448		$	23.81	1,744,835	$	14.80

The following table summarizes information about our stock options outstanding at September 30, 2006:


	Options Outstanding				Options Exercisable
Exercise Price Ranges	Number of Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
$ 2.00—$ 5.60	766,823	3.3	$	2.94	766,823	$	2.94
$ 5.61—$ 11.20	224,948	5.2	$	8.68	209,722	$	8.51
$11.21—$ 16.81	393,996	6.1	$	13.01	265,501	$	12.99
$16.82—$ 22.41	145,075	9.5	$	20.07	10,586	$	20.07
$22.41—$ 28.01	270,572	7.5	$	25.17	120,343	$	25.20
$28.02—$ 33.61	1,248,048	9.1	$	30.24	80,856	$	30.54
$33.62—$ 39.21	117,112	7.5	$	36.05	50,911	$	35.89
$39.22—$ 44.82	152,000	8.4	$	41.48	77,368	$	41.18
$44.83—$ 50.42	474,049	8.0	$	46.33	153,541	$	46.32
$50.43—$ 56.02	34,225	7.8	$	53.41	9,184	$	53.36

	3,826,848	7.1	$	23.81	1,744,835	$	14.80

(9) Litigation

In December 2004, a former officer and employee and a former director of ABI filed a demand for arbitration with the American Arbitration Association against us and Dr. Soon-Shiong, our Chief Executive Officer. In August 2005, this individual filed an amended arbitration demand adding ABI as a defendant. In the arbitration, this individual asserts that we improperly terminated his employment and that the defendants breached various promises allegedly made to him. This individual is seeking various forms of relief, including monetary damages and equity interests in our common stock. We have filed a counterclaim in the arbitration claiming that the former employee breached his duties and obligations to us and was negligent in the performance of his duties. We are seeking unspecified damages. This individual filed a motion to dismiss our counterclaim in September 2006, and the motion is currently under submission with the arbitration panel. The arbitration has been set to begin in mid 2007.

In addition, in May 2006, this same former officer filed an action against us, ABI and certain of our directors in Cook County Illinois relating to the recently completed merger between us and ABI alleging that the defendants breached fiduciary duties to our stockholders by causing us to enter into the merger agreement. The complaint seeks $12 million in damages.

On or about December 7, 2005, several stockholder derivative and class action lawsuits were filed against us, our directors and ABI in the Delaware Court of Chancery relating to the merger between us and ABI. We are a nominal defendant in the stockholder derivative actions. The lawsuits allege that our directors breached their fiduciary duties to stockholders by causing us to enter into the merger agreement and for not providing full and fair disclosure to our

stockholders regarding the recently completed merger, which it is alleged caused the value of the shares held by our public stockholders to be significantly diminished. The lawsuits seek, among other things, an unspecified amount of damages and the recession of the merger.

On July 19, 2006 Élan Pharmaceutical Int’l Ltd. filed a lawsuit against us alleging that we willfully infringed upon two of their patents by asserting that Abraxane^{^®} uses technology protected by Élan -owned patents. Élan seeks unspecified damages and an injunction. In August 2006, we filed a response to Élan’s complaint contending that we did not infringe on the Élan patents and that the Élan patents are invalid. A trial date has not yet been set.

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, product liability 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.

(10) Total Revenue by Product Line

Total revenue by product line were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(in thousands)
Hospital-Based Products
Critical care	$	86,374	$	42,279	$	179,626	$	119,100
Anti-infective		50,662		39,461		157,290		129,137
Oncology		10,786		14,523		40,932		38,872
Contract manufacturing		2,229		478		6,424		598

Total Hospital-Based Revenue		150,051		96,741		384,272		287,707
Abraxane^®		52,320		32,053		118,763		86,277
Research revenue		773		777		5,376		1,169

Total Revenue	$	203,144	$	129,571	$	508,411	$	375,153

(11) Comprehensive Income (loss)

Elements of comprehensive income (loss), net of income taxes, were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
				(in thousands)
Foreign currency translation adjustments	$	652		$	340		$	1,313		$	204
Unrealized gain on marketable equity securities		(1,146	)		1,519			(1,546	)		807

Other comprehensive gain (loss), net of tax and minority interests		(494	)		1,859			(233	)		1,011
Net income (loss)		13,557			(1,890	)		(75,346	)		15,015

Comprehensive income (loss)	$	13,063		$	(31	)	$	(75,579	)	$	16,026

Supplemental comprehensive income information, net of tax:

Cumulative foreign currency translation gain adjustments							$	1,313		$	124
Cumulative unrealized gain (loss) on marketable equity securities								83			(1,369	)

(12) Merger and Acquisition of Assets

On April 18, 2006, we, Abraxis BioScience, Inc., formerly known as American Pharmaceutical Partners, Inc., or APP, completed a merger with American BioScience, Inc., or ABI, our former parent, pursuant to the terms of the Agreement and Plan of Merger dated November 27, 2005 that we entered into with ABI and certain shareholders of ABI. On April 18, 2006, our certificate of incorporation was amended to change our name from American Pharmaceutical Partners, Inc. to Abraxis BioScience, Inc.

For accounting purposes, the merger between us and ABI has been treated as a downstream merger with ABI viewed as the surviving entity, although we were the surviving entity for legal purposes. As such, effective as of the merger date, the merger has been accounted for in our consolidated financial statements as an implied acquisition of our minority interests using the purchase method of accounting. Therefore, the historical book value of the minority interests has been stepped up to its estimated fair values, and the historical shareholders’ equity of the accounting acquirer, ABI, has been retroactively restated for the equivalent number of shares received in the merger.

At the April 18, 2006 acquisition date, the minority shareholders owned 34.17% of the total outstanding common shares of APP. Based on a $39.14 price for our common stock, representing the weighted average price of our common stock for the period three trading days prior to and three trading days subsequent to the merger announcement date, the fair value of the minority interests as of April 18, 2006 totaled approximately $974.8 million. This amount represented the estimated fair market value assigned to the shares owned by minority interests and will be referred to as the purchase price attributed to minority interests. The purchase price attributed to minority interests was allocated to the minority interests’ pro-rata share of our tangible and identifiable intangible assets and liabilities based on their estimated fair values at the acquisition date. The excess of the purchase price attributed to minority interests over the minority interests’ pro-rata share of the fair values of our assets and liabilities has been reflected as goodwill. We expect that the amount allocated to goodwill will not be deductible for tax purposes.

The allocation of the purchase price to the estimated fair values of the assets and liabilities attributable to our minority interests as of the acquisition date is as follows (in thousands):


Working capital and other assets, net	$	132,562
Property, plant and equipment		49,152
Deferred tax assets		9,282
In-process research and development		105,777
Identifiable intangible assets		455,370
Goodwill		401,600
Deferred tax liability		(178,953	)

Total	$	974,790

The estimated step-up of the minority interests to fair value has been assigned to the following categories (in thousands):


Inventory	$	12,480
Deferred tax assets		9,282
In-process research and development		105,777
Identifiable intangible assets		455,370
Goodwill		401,600
Deferred tax liability		(178,953	)

Total step-up of minority interests	$	805,556

The above purchase price allocation is based in part on a third-party valuation of certain tangible and intangible assets, including in-process research and development and identifiable intangible assets.

In-process research and development

Approximately $105.8 million of the purchase price was allocated to in-process research and development and represents the minority interests’ share of the estimated fair value of our in-process research and development assets for projects that, as of the acquisition date, had not yet reached technological or regulatory feasibility and had no alternative future uses in their current states. The values assigned to in-process research and development projects include unapproved indications for Abraxane^{^®}. All of the $105.8 million of in-process research and development was expensed in the second quarter of 2006.

The estimated fair values of these projects were determined based on a discounted cash flow model. The estimated cash flows for each project were probability adjusted to take into account the risks associated with the successful commercialization of the projects. The estimated after-tax cash flows were then discounted using discount rates of approximately 20%.

The major risks and uncertainties associated with the timely and successful completion of the acquired in-process research and development projects consist of the ability to confirm the safety and efficacy of the technology based on the data from clinical trials and obtaining necessary regulatory approvals. The major risks and uncertainties associated with the core technology consist of our ability to successfully utilize the technology in future research projects. No assurance can be given that the underlying assumptions used to forecast the cash flows or the timely and successful completion of the projects will materialize, as estimated. For these reasons, among others, actual results may vary significantly from the estimated results.

Identifiable intangible assets

Acquired identifiable intangible assets primarily include core technology associated with Abraxane^{^®}, customer relationships and trade name.

The amounts assigned to each intangible asset class as of the acquisition date and the related weighted average amortization periods were as follows:


	Value of acquired intangibles		Weighted average amortization period
	(in thousands)
Core technology	$	158,863	7 yrs
Developed product technology		146,002	9 yrs
Customer relationships		124,027	11 yrs
Tradename		26,478	7 yrs

Total	$	455,370

Pro forma results of operations

The following unaudited pro forma information presents a summary of our consolidated results of operations as if the acquisition had taken place at the beginning of each period presented (in thousands, except per share data):


	Three months ended September 30			Nine months ended September 30
	2005			2006		2005
Total revenue	$	129,571		$	508,411	$	375,153
Net income (loss)		(4,887	)		32,082		1,076
Pro forma income (loss) per share:
Basic		(0.03	)		0.20		0.01
Diluted		(0.03	)		0.20		0.01

The pro forma net income and income per share for the nine-month period ended September 30, 2006, excludes the acquired in-process research and development charge of $105.8 million, or approximately $0.67 per share. In addition, the pro forma results of operations for the nine months ended September 30, 2006 include a non-recurring tax benefit of $17.9 million related to the removal of ABI’s valuation allowance against certain deferred tax assets. The pro forma information is not necessarily indicative of results that would have been achieved had the acquisition occurred as of January 1, 2006 and 2005, or indicative of results that may be achieved in the future.

(13) Acquisition of Assets

Acquisition of Manufacturing Plant

On April 25, 2006, we entered into a definitive purchase agreement with Pfizer Inc. in which we agreed to purchase Pfizer’s Cruce Dávila manufacturing facility in Barceloneta, Puerto Rico. The purchase includes a 56-acre site which consists of a 172,000 square foot validated manufacturing plant with capabilities of producing EU and US compliant injectable pharmaceuticals, as well as protein-based biologic and metered dosed inhaler capabilities. In addition, the acquisition includes a state-of-the-art, computer-controlled 90,000 square foot active pharmaceutical ingredients manufacturing plant and two support facilities housing quality assurance and laboratories totaling 262,000 square feet. This facility is expected to employ 400 to 500 people when fully operational and will provide a third manufacturing site using our proprietary

nanoparticle albumin bound, ornab™, technology to produce chemotherapeutics such as Abraxane^{^®}. Under the terms of the agreement, subsequent to closing, we will lease a portion of the manufacturing, along with the equipment it contains, facility back to Pfizer. We expect to close on the Cruce Davila facility in the fourth quarter of 2006 and are presently occupying portions of the property under a sublease agreement with Pfizer.

Abraxane^{^®} Co-Promotion and Product Acquisition Agreement

On April 26, 2006, we entered into a Co-Promotion and Strategic Marketing Services Agreement with AstraZeneca UK Limited, a wholly owned subsidiary of AstraZeneca PLC. Under the agreement:

•

Abraxis Oncology, one of our divisions, and AstraZeneca began co-promoting Abraxane^{^®}, our proprietary taxane oncology product, in the United States on July 1, 2006 for a term of five and one-half years;

•

AstraZeneca paid us a $200 million up-front signing fee in May 2006, which is being recognized as deferred revenue over the term of the agreement beginning July 1, 2006;

•

the parties are sharing in certain of the costs associated with advertising and promoting Abraxane^{^®} in the U.S. and the cost of certain clinical trials that are part of the product’s overall clinical development program. Any reimbursement from AstraZeneca relating to the cost sharing will be recorded as a reduction of operating expenses;

•

we will pay AstraZeneca a 22% commission on U.S. net sales of Abraxane^{^®} during the term of the agreement, with a trailing commission of ten percent for the first year and five percent for the second year following the end of the five and one-half year term. The related commission expense is recorded as a component of selling, general and administrative expenses. Payments will commence in November 2006; and

•

we will be entitled to receive certain milestone payments from AstraZeneca in the event of FDA approvals for new indications for Abraxane^{^®} are obtained within specific timelines.

Also, under the terms of this agreement, we granted AstraZeneca a right of first offer to license or co-promote Abraxane^{^®} outside the U.S., other than in certain countries, should we seek to co-license or promote Abraxane^{^®} outside of the U.S. and a right of first offer to license or co-promote nab™-docetaxel in the U.S. and certain other countries should we seek to license or co-promote nab™-docetaxel in those countries.

We also entered into an Asset Purchase Agreement with AstraZeneca UK Limited on April 26, 2006 to acquire AstraZeneca’s U.S. anesthetics and analgesic product portfolio, which includes Diprivan^{^®} (propofol), Naropin^{^®} (ropivacaine), as well as a variety of local anesthetics including EMLA^{^®} (Eutectic Mixture of Lidocaine and Prilocaine), Xylocaine^{^®} (lidocaine), Polocaine^{^®} (mepivacaine), Nesacaine^{^®} (chloroprocaine HCl Injection, USP), Sensorcaine^{^®} (bupivacaine), and Astramorph^{^®} (morphine sulfate injection, USP). Under the agreement, we paid AstraZeneca approximately $259 million at closing and will pay $75 million upon the first anniversary of closing, June 28, 2007, and these costs are being amortized, on a straight line basis, over twenty years. At the closing, AstraZeneca entered into an exclusive supply agreement with us under which AstraZeneca will supply these products to us for an initial term of five years. In addition, AstraZeneca has agreed that we will be its preferred partner for consideration of certain proprietary injectable products when patents on these products expire. Under the terms of the agreement, AstraZeneca has also granted us a right of first offer to purchase or license AstraZeneca’s anesthetics and analgesics portfolio outside of the U.S. should AstraZeneca decide to divest these assets. This transaction closed on June 28, 2006.

(14) Goodwill and Other Intangibles

We comply with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), to account for goodwill and other intangibles. SFAS No. 142 requires at least an annual review for impairment using a fair value methodology. We will conduct our annual review for impairment in the fourth quarter of 2006 or when events occur or circumstances change that would more likely than not reduce the fair value of the reported amounts below its carrying value.

Goodwill has a carrying value of $401.6 million resulting from the merger between us and ABI. The entire amount of goodwill relates to the APP segment. Substantially all of our intangible assets, other than goodwill, are subject to amortization. Amortization of intangible assets was approximately $28.9 million and $1.0 million for the first nine months of 2006 and 2005, respectively. As of September 30, 2006, the weighted average lives of intangibles was 13.4 years, with a net carrying value of $755.9 million.

The following table reflects the components of all other intangible assets, which have finite lives, as of September 30, 2006:


	Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Core technology	$	158,863	$	14,418
Developed product technology		146,002		3,234
Customer relationships		124,027		5,380
Tradename		26,478		1,734
Product rights		328,797		4,110
Other		1,835		1,191

Total		786,002		30,067

Aggregate amortization expense for the three and nine months ended September 30, 2006 was $17.6 million and $30.1 million, respectively. No amortization expense relating to these intangibles was recorded in 2005.

Estimated amortization expense for identifiable intangible assets, other than goodwill, for the current and each of the five succeeding years are as follows:


For the year ending:	(in thousands)
12/31/06	$	46,495
12/31/07	$	70,475
12/31/08	$	70,475
12/31/09	$	70,475
12/31/10	$	70,475
12/31/11	$	70,475

(15) Segment Information

Operating primarily in North America, we have been organized, managed and reported in two business segments, each with discrete business objectives, management, operating and capital structures. The former operations of the ABI segment is a science-driven organization focused on development-stage biotechnology research, clinical progression and regulatory approval, primarily in products using its proprietary nanoparticle albumin bound, ornab^™, technology platform. The former operations of the APP segment has historically operated as a separate publicly traded entity focused on the late-stage development, manufacture and marketing of hospital-based injectable pharmaceutical products and Abraxane^{^®}.


Three Months Ended September 30, 2006	Total Revenue from External Customers			Income (Loss) from Operations			Interest Income			Interest Expense			Provision (Benefit) for Income Taxes			Depreciation and Amortization			Total Assets			Debt		Capital Expenditures
APP Operations	$	202,371		$	33,404		$	1,047		$	(4,686	)	$	10,805		$	8,094		$	1,733,731		$	180,500	$	55,112
ABI Operations		773			(8,312	)		—			—			(2,909	)		861			62,624			—		33
Eliminations		—			—			—			—			—			—			(43,209	)		—		—

Total	$	203,144		$	25,092		$	1,047		$	(4,686	)	$	7,896		$	8,955		$	1,752,786		$	180,500	$	55,145


Three Months Ended September 30, 2005	Total Revenue from External Customers			Income (Loss) from Operations			Interest Income			Interest Expense			Provision (Benefit) for Income Taxes			Depreciation and Amortization			Total Assets			Debt		Capital Expenditures
APP Operations	$	128,794		$	22,239		$	563		$	139		$	6,986		$	4,103		$	515,447		$	—	$	12,437
ABI Operations		777			(10,182	)		105			(2,879	)		(134	)		390			61,533			190,000		428
Eliminations		—			536			(339	)		339			214			(536	)		(52,751	)		—		—

Total	$	129,571		$	12,593		$	329		$	(2,401	)	$	7,066		$	3,957		$	524,229		$	190,000	$	12,865


Nine Months Ended September 30, 2006	Total Revenue from External Customers			Income (Loss) from Operations			Interest Income			Interest Expense			Provision (Benefit) for Income Taxes			Depreciation and Amortization			Total Assets			Debt		Capital Expenditures
APP Operations	$	503,036		$	(17,893	)	$	3,515		$	(5,457	)	$	3,824		$	17,505		$	1,733,371		$	180,500	$	82,551
ABI Operations		5,375			(39,338	)		262			(4,674	)		(5,119	)		1,867			62,624			—		4,102
Eliminations		—			536			(390	)		390			2,209			(536	)		(43,209	)		—		—

Total	$	508,411		$	(56,695	)	$	3,387		$	(9,741	)	$	914		$	18,836		$	1,752,786		$	180,500	$	86,653


Nine Months Ended September 30, 2005	Total Revenue from External Customers			Income (Loss) from Operations			Interest Income			Interest Expense			Provision (Benefit) for Income Taxes			Depreciation and Amortization			Total Assets			Debt		Capital Expenditures
APP Operations	$	373,984		$	86,418		$	1,646		$	101		$	31,061		$	11,961		$	515,447		$	—	$	39,298
ABI Operations		16,169			(11,157	)		228			(4,615	)		(600	)		1,087			61,533			190,000		803
Eliminations		(15,000	)		(13,393	)		(904	)		904			(5,040	)		(1,607	)		(52,751	)		—		—

Total	$	375,153		$	61,868		$	970		$	(3,610	)	$	25,421		$	11,441		$	524,229		$	190,000	$	40,101

(16) Revenue Recognition/Deferred Revenue

Research Revenue Recognition

development risk has been substantially eliminated. Achievement-based milestone payments are recognized as revenue when the milestone objective is attained. Reimbursement of development and other costs are recognized as revenue as the related costs are incurred. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends.

Product Revenue Recognition

We recognize revenue from the sale of a product and for contract manufacturing 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 these sales provisions was consistent across all periods presented. Historically, Medicaid rebates issued have not been material. Accruals for sales provisions are presented in our financial statements as a reduction of net sales 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.

Other Deferred Revenue

Other deferred revenue consists of upfront payments earned from our co-promotion agreement with AstraZeneca and our agreement with Taiho Pharmaceutical Co., LTD. Such deferred revenue is recognized as earned ratably over the term of each agreement.

Taiho Agreement and Revenue

On May 27, 2005, ABI licensed the rights to Abraxane^{^®} in Japan to Taiho Pharmaceutical Co., LTD, or Taiho, a subsidiary of Otsuka Pharmaceutical Ltd. Under the agreement, ABI and Taiho established a steering committee which will oversee the development of Abraxane^{^®} in Japan for the treatment of breast, lung, gastric, and other solid tumors for a term of seven years. The license provides for a non-refundable $20.0 million upfront payment, $38.5 million in potential milestone payments contingent upon the achievement of various clinical, regulatory and sales objectives; royalties based on net sales under the agreement; and an agreement under which we will supply Taiho with Abraxane^{^®} . Due to our continuing involvement under the licensing agreement, the $20.0 million non-refundable upfront payment has been deferred and the payment is being recognized as research revenue ratably over the estimated life of the product. We assumed this agreement in connection with the closing of the merger.

During 2006, we recorded revenue of $3.0 million relating to milestone payments received from Taiho. In addition, the revenue recognized in 2006 as a result of amortization of the $20.0 million upfront payment was $2.1 million. At September 30, 2006, unearned revenue associated with the Taiho agreement of $16.2 million was recorded as deferred revenue on the balance sheet.

Co-Promotion Agreement

On April 26, 2006, we entered into a Co-Promotion and Strategic Marketing Services Agreement with AstraZeneca UK Limited, a wholly owned subsidiary of AstraZeneca PLC. Under the agreement:

•

AstraZeneca paid us a $200 million up-front signing fee in May 2006, which is being be recognized as deferred revenue over the term of the 5.5 year agreement beginning July 1, 2006;

•

the parties are sharing in certain costs associated with advertising and promoting Abraxane^{^®} in the U. S. and the cost of certain clinical trials that are part of the product’s overall clinical development program. Any reimbursement from AstraZeneca relating to the cost sharing will be recorded as a reduction of operating expenses;

•

we will be entitled to receive certain milestone payments from AstraZeneca in the event of FDA approvals for new indications for Abraxane^{^®} are obtained within specific timelines.

Also, under the terms of this agreement, we granted AstraZeneca a right of first offer to license or co-promote Abraxane^{^®} outside the U.S., other than in certain countries, should we seek to co-license or promote Abraxane^{^®} outside of the U.S. and a right of first offer to license or co-promotenab™-docetaxel in the U.S. and certain other countries should we seek to license or co-promotenab™-docetaxel in those countries.

During three months ended September 30, 2006, we recorded revenue of $9.1 million relating to the previously deferred revenue associated with the co-promotion agreement. At September 30, 2006, unearned revenue associated with the co-promotion agreement of $190.9 million was recorded as deferred revenue on the balance sheet. The remaining deferred revenue will be recorded as revenue ratably over the remainder of the 5.5 year term. In addition, with respect to the products purchased from AstraZeneca we have recorded intangible assets of approximately $329 million which will be amortized over the estimated lives of the products, or twenty years. During the three months ended September 30, 2006, we expensed $4.1 million as a component of cost of goods sold relating to the amortization of the purchased product rights.

(17) Income Taxes

For financial statement purposes, because ABI and APP had filed separate, stand-alone federal income tax returns and ABI did not expect to realize the benefit of $17.9 million of net operating loss carry forwards, which are now available and were recognized in the 2006 second quarter in connection with the closing of the merger. Excluding this $17.9 million benefit, the impact of minority interests and other merger related tax adjustments, our effective rate was 36.8% and 137% for the three months ended September 30, 2006 and 2005, respectively, and 35.0% and 62.9% for the nine months ended September 30, 2006 and 2005, respectively.

(18) Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” (SFAS 155). SFAS 155 is effective for all financial instruments acquired or issued after January 1, 2007, and amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” We do not expect the adoption of SFAS 155 to have a material impact on our consolidated results of operations and financial condition.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140” (SFAS 156). This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. The impact of adopting SFAS 156 was not material to our consolidated results of operations and financial condition.

In June 2006, the FASB ratified the consensus reached by the EITF on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences” (or “EITF 06-2”). EITF 06-2 states that if all the conditions of paragraph 6 of FASB 43 are met, compensation costs for sabbatical and other similar benefit arrangements should be accrued over the requisite service period. Paragraph 6 of FASB 43 states that a liability should be accrued for employees’ future absences if the following are met: (a) the employer’s obligation is attributable to employees’ services already rendered; (b) the obligation relates to rights that vest or accumulate; (c) payment of the compensation is probable; and (d) the amount can be reasonably estimated. EITF 06-2 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of this statement to have a material impact on our consolidated results of operations and financial condition.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). This interpretation clarifies the accounting for uncertainty in income taxes recognized

in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our consolidated results of operations and financial condition.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and other documents we file with the Securities and Exchange Commission contain forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we may make forward looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. 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 success of the merger between APP and ABI;

•

the market adoption of and demand for existing and new pharmaceutical products, including Abraxane^{^®}and the U.S. branded products acquired from AstraZeneca;

•

the amount and timing of costs associated with Abraxane^{^®};

•

the actual results achieved in further clinical trials of Abraxane^{^®} may or may not be consistent with the 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 and to successfully validate, operationalize and integrate our new Puerto Rico manufacturing facility;

•

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

•

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

•

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

•

the ability to successfully integrate recent and future acquisitions;

•

the availability and price of acceptable raw materials and component from third-party suppliers;

•

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

•

inventory reductions or fluctuations in buying patterns by wholesalers or distributors; and

•

the impact of recent legislative changes to the governmental reimbursement system.

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

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise. Readers should carefully review the factors described in“Item 1A: Risk Factors” of Part II of our Form 10-Q for the period ended June 30, 2006, Item 1A of our Form 10-K/A for the period ended December 31, 2005 entitled “Factors that May Affect Future Results of Operations” and other documents we file from time to time with the Securities and Exchange Commission. Readers should understand that it is not possible to predict or identify all such factors. Consequently, readers should not consider any such list to be a complete set of all potential risks or uncertainties.

OVERVIEW

The overview section of Management’s Discussion and Analysis of Financial Conditions and Results of Operations, or MD&A, is designed to provide the reader with summary level information on: our merger with ABI, our history, and highlights of our nine months ended September 30, 2006. Following this overview, the third-quarter 2006 MD&A is organized as follows:

•

a discussion of the April 18, 2006 merger with ABI,

•

a discussion of our operating results for the three- and nine-month periods ended September 30, 2006,

•

a review of factors impacting our liquidity and cash flows and

•

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

The MD&A should be read in conjunction with our 2005 Annual Report on Form 10-K/A for the year ended December 31, 2005, including “Item 1: Business”; “Item 6: Selected Financial Data”; and “Item 8: Financial Statements and Supplemental Data,” and the information statement that we filed with the SEC on March 10, 2006.

Background

Abraxis BioScience, Inc., formerly known as American Pharmaceutical Partners, Inc., or APP, is an integrated global biopharmaceutical company dedicated to meeting the needs of critically ill patients. We develop, manufacture and market one of the broadest portfolios of injectable products and leverage revolutionary technology such as ournab™ platform to discover and deliver breakthrough therapeutics that transform the treatment of cancer and other life-threatening diseases. The first FDA approved product to use thisnab platform, ABRAXANE^{^®}, was launched in 2005 for the treatment of metastatic breast cancer. We believe that we are the only independent U.S. public company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried.

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

Our 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 are a Delaware corporation that was formed in 2001 as successor to a California corporation formed in 1996.

Our unaudited financial statements at September 30, 2006, include the assets, liabilities and results of operations of American BioScience and our wholly owned subsidiaries, including Pharmaceutical Partners of Canada, Inc., our majority owned subsidiary, Resuscitation Technologies, LLC and our investment in Drug Source Company, LLC, which is accounted for using the equity method.

Merger

On April 18, 2006, we completed a merger with American BioScience, Inc., or ABI, our former parent, pursuant to the terms of the Agreement and Plan of Merger dated November 27, 2005 that we entered into with ABI and certain shareholders of ABI. On April 18, 2006, our certificate of incorporation was amended to change our name from American Pharmaceutical Partners, Inc. to Abraxis BioScience, Inc.

For accounting purposes, the merger between us and ABI was treated as a downstream merger with ABI viewed as the surviving entity, although we were the surviving entity for legal purposes. As such, effective as of the merger date, the merger has been accounted for in our consolidated financial statements as an implied acquisition of our minority interests using the purchase method of accounting. Therefore, the historical book value of the minority interests has been stepped up to its estimated fair values and the historical shareholders’ equity of the accounting acquirer, ABI, has been retroactively restated for the equivalent number of shares received in the merger.

At the April 18, 2006 acquisition date, the minority shareholders owned 34.17% of our total outstanding common shares. Based on a $39.14 price for our common stock, representing the weighted average price of our common stock for the period three trading days prior to and three trading days subsequent to the merger announcement date, the fair value of the minority interests as of April 18, 2006 totaled approximately $974.8 million. This amount represented the estimated fair market value assigned to the shares owned by minority interests and will be referred to as the purchase price attributed to minority interests. The purchase price attributed to minority interests was allocated to the minority interests’ pro-rata share of our tangible and identifiable intangible assets and liabilities based on their estimated fair values at the acquisition date. The excess of the purchase price attributed to minority interests over the minority interests’ pro-rata share of the fair values of our assets and our liabilities has been reflected as goodwill. We expect that the amount allocated to goodwill will not be deductible for tax purposes.

The allocation of the purchase price to the estimated fair values of the assets and liabilities attributable to our minority interests as of the acquisition date is as follows (in thousands):


Working capital and other assets, net	$	132,562
Property, plant and equipment		49,152
Deferred tax assets		9,282
In-process research and development		105,777
Identifiable intangible assets		455,370
Goodwill		401,600
Deferred tax liability		(178,953	)

Total	$	974,790

The estimated step-up of the minority interests to fair value has been assigned to the following categories (in thousands):


Inventory	$	12,480
Deferred tax assets		9,282
In-process research and development		105,777
Identifiable intangible assets		455,370
Goodwill		401,600
Deferred tax liability		(178,953	)

Total step-up of minority interests	$	805,556

In-process research and development

Approximately $105.8 million of the purchase price was allocated to in-process research and development and represents the minority interests’ share of the estimated fair value of our in-process research and development assets for projects that, as of the acquisition date, had not yet reached technological or regulatory feasibility and had no alternative future uses in their current states. The values assigned to in-process research and development projects include unapproved indications for Abraxane. All of the $105.8 million of in-process research and development was expensed in the second quarter of 2006.

Identifiable intangible assets

Acquired identifiable intangible assets primarily include core technology associated with Abraxane, customer relationships and trade name.

The amounts assigned to each intangible asset class as of the acquisition date and the related weighted average amortization periods are as follows:


	Value of acquired intangibles		Weighted-average amortization period
	(in thousands)
Core technology	$	158,863	7 yrs
Developed product technology		146,002	9 yrs
Customer relationships		124,027	11 yrs
Tradename		26,478	7 yrs

Total	$	455,370

Pro forma results of operations


	Three months ended September 30			Nine months ended September 30
	2005			2006		2005
Total revenue	$	129,571		$	508,411	$	375,153
Net income (loss)		(4,887	)		32,082		1,076
Pro forma income (loss) per share :
Basic		(0.03	)		0.20		0.01
Diluted		(0.03	)		0.20		0.01

The pro forma net income and income per share for each period above excludes the acquired in-process research and development charge of $105.8 million, or approximately $0.67 per share. In addition, the pro forma results of operations for the nine months ended September 30, 2006 include a non-recurring tax benefit of $17.9 million related to the removal of our valuation allowance against certain deferred tax assets. The pro forma information is not necessarily indicative of results that would have been achieved had the acquisition occurred as of January 1, 2006 and 2005, or indicative of results that may be achieved in the future.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2006 and September 30, 2005

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)


	Three months ended September 30,						Change Favorable/ (Unfavorable)
	2006			2005			$			%
Hospital-Based Products
Critical Care	$	86,374		$	42,279		$	44,095		104	%
Anti-infective		50,662			39,461			11,201		28	%
Oncology		10,786			14,523			(3,737	)	-26	%
Contract manufacturing		2,229			478			1,751

Total Hospital-Based Revenue		150,051			96,741			53,310		55	%
Abraxane		52,320			32,053			20,267		63	%
Research revenue		773			777			(4	)

Total revenue		203,144			129,571			73,573		57	%
Cost of sales		85,413			64,360			(21,053	)	-33	%

Gross profit		117,731			65,211			52,520		81	%

Percent to total revenue		*58.0*	%		*50.3*	%
Research and development		21,776			19,270			(2,506	)	-13	%
Selling, general and administrative		56,489			27,687			(28,802	)	-104	%
Amortization of merger related intangible assets		13,508			—			(13,508	)
Merger-related in-process research and development charge		—			—			—
Merger and transaction expense		2,108			5,944			3,836
Equity income		(1,242	)		(283	)		959

Total operating expenses		92,639			52,618			(40,021	)

Percent to total revenue		*45.6*	%		*40.6*	%
Income from operations		25,092			12,593			12,499
Percent to total revenue		*12.4*	%		*9.7*	%
Interest income		1,047			329			718
Interest expense		(4,686	)		(2,401	)		(2,285	)
Minority interests		—			(5,345	)		5,345

Income before income taxes		21,453			5,176			16,277
Income tax expense		7,896			7,066			830

Net income (loss)	$	13,557		$	(1,890	)	$	15,447

Net income (loss) per share:
Basic	$	0.09		$	(0.01	)

Diluted	$	0.08		$	(0.01	)

Weighted average common shares outstanding:
Basic		159,002			158,035

Diluted		159,968			158,035

Total Revenue

Total revenue for the three months ended September 30, 2006, increased $73.6 million, or 57%, to $203.1 million as compared to the same 2005 quarter.

Abraxane^{^®} revenue for the three months ended September 30, 2006 increased $20.3 million to $52.3 million as compared to $32.1 million in the same quarter of 2005. The increase was primarily due to increased market penetration, the inclusion of $9.1 million of previously deferred revenue recognized relating to the co-promotion agreement with AstraZeneca and a $3.0 million reduction in reserves as a result of our periodic review of rebate and chargeback activity. Excluding the recognition of previously deferred revenue and the impact of lower rebate and chargeback experience, total Abraxane^® revenue increased to $40.2 million, or 25%, from the previous year’s comparable quarter.

Total revenue of our core hospital-based products, excluding Abraxane^{^®}, for the third quarter of 2006 increased $53.3 million, or 55%, to $150.1 million, versus $96.7 million for the same quarter of 2005. This increase was due primarily to product sales relating to the newly acquired products from AstraZeneca. The 55% increase in total revenue from our core hospital-based products over the prior year quarter, excluding Abraxane^{^®}, was comprised of a 30% overall unit volume increase and a 2% overall increase in price. Third quarter sales of critical care products increased $44.1 million, or 104%, to $86.4 million as compared to the prior year third quarter due primarily to $41.0 million of net product sales relating to the newly acquired products from AstraZeneca. Net sales of anti-infective products increased $11.2 million, or 28%, to $50.7 million driven by both recently launched antibiotics and strong demand for existing anti-infective products. Net sales of oncology products, excluding Abraxane^{^®}, decreased $3.8 million, or 26%, to $10.8 million due to decreased demand for pamidronate as a result of the impact of reimbursement changes which became effective in 2005 and market price pressure on several higher volume products.

Gross Profit

Gross profit for the three months ended September 30, 2006 was $117.7 million, or 58.0% of total revenue, inclusive of the recognition of $9.1 million of revenue previously deferred under the AstraZeneca co-promotion agreement, a $4.7 million charge related to the one-time write-up of finished goods inventory in the merger and a $4.1 million charge relating to the amortization of intangible product rights associated with the AstraZeneca product purchase, as compared to $65.2 million, or 50.3% of total revenue in the same quarter of 2005. Excluding the deferred revenue recognized as part of the co-promotion agreement, impact of the non-cash merger adjustments and non-cash items associated with the AstraZeneca agreement, gross margin as a percentage of total revenue was 59.9%, with the increase over the same quarter of 2005 due primarily to the extended Melrose Park re-validation process in 2005, which did not occur in 2006 and slightly stronger gross margin in hospital-based product lines during the current year third quarter.

Research and Development (“R&D”)

Research and development expense for the third quarter of 2006 increased $2.5 million, or 13%, to $21.8 million as compared to the same quarter in 2005. The increase was due primarily to expense associated with the transfer of products to the new Puerto Rico facility, increased clinical trial activity relating to Abraxane^{^®}and Abraxane^{^®} scale-up toward EU compliant production in our Grand Island facility. These costs were partially offset by the cessation of development spending in our Switzerland facility, which began commercial production in the first quarter of 2006.

Selling, General and Administrative (“SG&A”)

Selling, general and administrative expense for the third quarter of 2006 increased $28.8 million to $56.5 million or 27.8% of total revenue from $27.7 million or 21.4% of total revenue for the same period in 2005. The increase was due primarily to additional Abraxane^{^®}costs for commission expense relating to the co-promotion agreement with AstraZeneca, the recent expansion and marketing activities relating to Abraxane^{^®} and to a lesser extent costs associated with the launch of Abraxane^{^®} in Canada, increased professional fees and stock compensation expense relating to the RSU plans assumed in connection with the merger. The increase in selling, general and administrative expense was partially offset by the cost sharing agreement between us and AstraZeneca.

Amortization and Merger Costs

The third quarter of 2006 included $13.5 million of merger related amortization and approximately $2.1 million in direct merger and transaction related costs and professional fees.

Other Income

Drug Source Company, LLC is 50% owned by one of our wholly owned subsidiaries 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 equity income in Drug Source Company for the three months period ended September 30, 2006 was $1.2 million versus $0.3 million in the comparable period of 2005. Research and development expense includes raw material purchases from Drug Source Company of $0.1 million and $0.3 million for the three-month periods ended September 30, 2006 and 2005, respectively. Ending inventory included raw material purchased from Drug Source Company of $5.8 million at September 30, 2006 and $3.8 million at December 31, 2005.

Other Non-Operating Items

Interest income consists primarily of interest earned on invested cash. Interest income increased to $1.0 million for the three months ended September 30, 2006 from $0.3 million for the comparable period in 2005.

Interest expense and other consists primarily of interest expense, the impact of foreign currency charges on intercompany trading accounts and other financing costs. The increase in interest expense was primarily the result of higher average debt levels between the third quarter of 2006 and the third quarter of 2005 and interest expense related to the note payable due to AstraZeneca in June 2007.

Minority interest charges represent the net earnings attributable to minority shareholders prior to the closing of the merger. Subsequent to the merger no minority interests charges will be recorded. The three month period ended September 30, 2005, included a $5.3 million charge relating to minority interests.

Provision for Income Taxes

Prior to our merger with ABI, ABI and APP had filed separate, stand-alone federal income tax returns. As a result, ABI did not expect to realize the benefit of $17.9 million of net operating loss carry forwards. These net operating loss carry forwards are now available and were recognized in the second quarter of 2006 in connection with the closing of the merger. Excluding this $17.9 million benefit, the impact of minority interests and other merger related tax adjustments, our effective rate was 36.8% and 137% for the three months ended September 30, 2006 and 2005, respectively.

Nine Months Ended September 30, 2006 and September 30, 2005

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)


	Nine months ended September 30,						Change Favorable/ (Unfavorable)
	2006			2005			$			%
Hospital-Based Products
Critical Care	$	179,626		$	119,100		$	60,526		51	%
Anti-infective		157,290			129,137			28,153		22	%
Oncology		40,932			38,872			2,060		5	%
Contract manufacturing		6,424			598			5,826

Total Hospital-Based Revenue		384,272			287,707			96,565		34	%
Abraxane		118,763			86,277			32,486		38	%
Research revenue		5,376			1,169			4,207

Total revenue		508,411			375,153			133,258		36	%
Cost of sales		211,170			167,167			(44,003	)	-26	%

Gross profit		297,241			207,986			89,255		43	%

Percent to total revenue		*58.5*	%		*55.4*	%

Research and development		72,298			50,185			(22,113	)	-44	%
Selling, general and administrative		126,745			91,797			(34,948	)	-38	%
Amortization of merger related intangible assets		24,766			—			(24,766	)
Merger-related in-process research and development charge		105,777			—			(105,777	)
Merger and transaction expense		26,375			5,944			(20,431	)
Equity income		(2,025	)		(1,808	)		217

Total operating expenses		353,936			146,118			(207,818	)

Percent to total revenue		*69.6*	%		*38.9*	%
(Loss) income from operations		(56,695	)		61,868			(118,563	)
Percent to total revenue		*-11.2*	%		*16.5*	%
Interest income		3,387			970			2,417
Interest expense and other		(9,741	)		(3,610	)		(6,131	)
Minority interests		(11,383	)		(18,792	)		7,409

(Loss) income before income taxes		(74,432	)		40,436			(114,868	)
Income tax expense		914			25,421			(24,507	)

Net (loss) income	$	(75,346	)	$	15,015		$	(90,361	)

Net (loss) income per share:
Basic	$	(0.47	)	$	0.10

Diluted	$	(0.47	)	$	0.09

Weighted average common shares outstanding:
Basic		158,755			157,511

Diluted		158,755			159,691

Total revenue

Total revenue for the nine-month period ending September 30, 2006, increased $133.3 million, or 36%, to $508.4 million, as compared to the same period in 2005.

Abraxane^{^®} revenue for the first nine months of 2006 increased $32.5 million, or 38%, to $118.8 million as compared to $86.3 million in the prior year period. The increase was primarily due to increased market penetration as the product matures and inclusion of a full nine months’ sales in 2006 as compared to 2005 in which Abraxane^{^®} launched in February and the inclusion of $9.1 million of previously deferred revenue recognized relating to the co-promotion agreement with AstraZeneca.

Total revenue of our hospital-based products, excluding Abraxane^{^®}, increased $96.6 million to $384.3 million, versus $287.7 million in 2005. The increase was primarily due to product sales relating to the newly acquired products from AstraZeneca, favorable market conditions, newly launched products and stronger demand for products manufactured at our Melrose Park facility. The 34% increase, which excludes Abraxane^{^®}revenue, was comprised of a 9% unit volume increase and a 7% overall increase in price. Total revenue for the period ending September 30, 2006 for critical care products increased $60.5 million, or 51%, to $179.6 million as a result of $41.0 million of net product sales relating to the newly acquired products from AstraZeneca, continued strong demand and favorable market conditions for certain products. Total revenue for anti-infective products increased $28.2 million, or 22%, to $157.3 million in the first nine months of 2006 as compared to the prior year period driven by recently launched antibiotics and strong demand for previously existing products. Total revenue for oncology products, excluding Abraxane^{^®}, increased $2.1 million, or 5%, to $40.9 million due to recently launched products and stronger demand for products manufactured at our Melrose Park facility.

Research revenue increased to $5.4 million in the first nine months of 2006 as compared to $1.2 million in the prior year period due to achievement of a $3.0 million milestone payment received and recognition of $1.2 million in deferred revenue, both resulting from the 2005 licensing of Abraxane in Japan to Taiho.

Gross Profit

Gross profit in the first nine months of 2006 was $297.2 million, or 58.5% of total revenue, inclusive of the recognition of $9.1 million of revenue previously deferred under the AstraZeneca co-promotion agreement, a $12.5 million charge related to the one-time write-up of finished goods inventory in the merger and a $4.1 million charge relating to the amortization of intangible product rights associated with the AstraZeneca product purchase, as compared to $208.0 million, or 55.4% of total revenue in the same period of 2005. Excluding deferred revenue recognized as part of the co-promotion agreement, the impact of the non-cash merger adjustments and non-cash items associated with the AstraZeneca agreement, 2006 gross margin as a percentage of total revenue for the nine months ended September 30, 2006, was 61.0% with the increase over 2005 due primarily to the prior year extended Melrose Park re-validation process and slightly stronger gross margin in hospital-based product lines during the current year.

Research and Development

Research and development expense for the nine months ended September 30, 2006, increased $22.1 million, or 44%, to $72.3 million as compared to comparable period in 2005 due primarily to increased Abraxane clinical trial activity, expense associated with the transfer of products to the new Puerto Rico facility, stock compensation expense related to the RSU plans assumed in connection with the merger and Abraxane^{^®} scale-up toward EU compliant production in the Grand Island facility. The costs were partially offset by the cessation of development spending in our Switzerland facility, which began commercial production in the first quarter of 2006.

Selling, General and Administrative

Selling, general and administrative expense for the nine months ended September 30, 2006 increased $34.9 million to $126.7 million or 24.9% of total revenue from $91.8 million or 24.5% of total revenue, for the comparable period in 2005. The increase was due primarily to additional Abraxane^{^®}related expenses including, costs associated with the recent expansion and marketing activities, additional Abraxane^{^®}costs for commission expense relating to the co-promotion agreement with AstraZeneca, and to a lesser extent costs associated with the launch of Abraxane^{^®} in Canada, increased professional fees and stock compensation expense relating to the RSU plans we assumed in connection with the merger. The increase in selling, general and administrative expense was partially offset by the cost sharing agreement between us and AstraZeneca.

Amortization and Merger Costs

Amortization and merger costs for the nine months ended September 30, 2006, included $156.9 million of merger related expenses, including a one-time non-cash charge of $105.8 million related to the valuation of acquired in-process research and development, $24.8 million in amortization of merger-related intangible assets, $9.0 million in stock-compensation expense related to shares issued to ABI employees in the merger and approximately $17.4 million in direct merger and transaction related costs and professional fees.

Other Income

Drug Source Company, LLC is 50% owned by one of our wholly owned subsidiaries, 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 equity income in Drug Source Company for the nine months ended September 30, 2006 was $2.0 million versus $1.8 million in the respective 2005 period. Research and development expense includes raw material purchases from Drug Source Company of $0.2 million and $2.0 million for the nine-month periods ended September 30, 2006 and 2005, respectively. Ending inventory included raw material purchased from Drug Source Company of $5.8 million at September 30, 2006 and $3.8 million at December 31, 2005.

Other Non-Operating Items

Interest income consists primarily of interest earned on invested cash. Interest income increased to $3.4 million in the first nine months of 2006 from $1.0 million for the prior year period as a result of higher average cash and short-term investment balances and higher interest rates.

Interest expense and other consists primarily of interest expense, the impact of foreign currency charges on intercompany trading accounts and other financing costs. The increase in interest expense was primarily the result of higher average debt levels between 2006 and 2005 and interest expense related to the note payable due to AstraZeneca in June 2007.

Minority interests decreased to $11.4 million in the first nine months of 2006 from $18.8 million in the same period last year, the decrease resulting primarily from the closing of the merger. Minority interest charges represent the net earnings attributable to minority shareholders prior to the closing of the merger. Subsequent to the merger, no minority interests charges will be recorded.

Provision for Income Taxes

Prior to our merger with ABI, ABI and APP had filed separate, stand-alone federal income tax returns. As a result, ABI did not expect to realize the benefit of $17.9 million of net operating loss carry forwards. These net operating loss carry forwards are now available and were recognized in the second quarter of 2006 in connection with the closing of the merger. Excluding this $17.9 million benefit, the impact of minority interests and other merger related tax adjustments, our effective rate was 35.0% and 63% in the nine month periods ended September 30, 2006 and 2005, respectively.

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, 2006			December 31, 2005
	(in thousands)
Summary Financial Position:
Cash, cash equivalents and short-term investments	$	30,863		$	83,273

Working capital	$	122,749		$	248,284

Total assets	$	1,752,786		$	524,229

Total stockholders’ equity	$	995,184		$	68,140


	Nine Months Ended September 30,
	2006			2005
	(in thousands)
Summary of Sources and (Uses) of Cash and Cash Equivalents:
Operating activities	$	294,071		$	24,188

Purchase of property, plant and equipment	$	(86,653	)	$	(40,101	)

Purchase of product license rights and other	$	(331,029	)	$	(3,731	)

Sale of short-term investments	$	54,306		$	35,190

Financing activities	$	69,888		$	24,909

Capital Requirements

Our future capital requirements depend on numerous factors including:

•

working capital requirements and production, sales, marketing and development costs required to support Abraxane^{^®}, the newly acquired AstraZeneca products and our core injectable products;

•

R&D, including clinical trials, spending to develop further product candidates and ongoing studies;

•

the need for manufacturing expansion and improvement;

•

the cost to upgrade and expand our product development and research capabilities;

•

the requirements of any potential future acquisitions, asset purchases or equity investments, including the acquisition of our own stock; and

•

the amount of cash generated by operations, including potential milestone and license revenue.

We presently anticipate that our 2006 capital expenditure requirements will approximate $50 million, excluding the acquisition of a $46.5 million aircraft and the $32.5 million Puerto Rico facility from Pfizer.

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. We were in compliance with all debt covenants at September 30, 2006.

Sources of Financing

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 will be sufficient to finance our operations, 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

During the nine months ended September 30, 2006, net cash provided by operating activities was $294.1 million as compared to the $24.2 million of cash provided by operations in the first nine months of 2005. The increase in cash provided by operations for the first nine months of 2006 was due primarily to $200.0 million received with respect to the Abraxane^{^®} co-promotion agreement with AstraZeneca, net $23.9 million in cash proceeds from accounts receivable and strong operating results, exclusive of the impact of the merger purchase accounting.

Investing Activities

Our investing activities have consisted principally of capital expenditures necessary to expand and maintain our manufacturing and research capabilities and infrastructure and, to a lesser extent, outlays necessary to acquire various product or intellectual property rights.

During the nine months ended September 30, 2006, investing activities included a use of cash of $329 million relating to the purchase of products from AstraZeneca. Also included in investing activities in the first nine months of 2006 and 2005 were proceeds of $54.3 million and $35.2 million, respectively, related to our net sales of short-term, highly liquid, available for sale, municipal variable rate demand notes. These investments were recorded at cost and could generally be redeemed upon seven days notice.

Net cash used for the acquisition of property, plant and equipment totaled $86.7 million and $40.1 million in the first nine months of 2006 and 2005, respectively, and in both periods was due primarily to investment in our core manufacturing and development capabilities, exclusive of the corporate aircraft purchased in 2006 for $46.5 million.

Financing Activities

Financing activities generally include proceeds from borrowing under our credit facility, cash flows from the proceeds from the exercise of employee stock options and the issuance or repurchase of our stock. Net cash provided by financing activities totaled $69.9 million in the first nine months of 2006 as compared to $24.9 million in the same period last year, which includes the $75.0 million note payable associated with the AstraZeneca agreement.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles 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

Research Revenue Recognition

Research revenue generally consists of amounts earned from the development and research to advance the commercial application of pharmaceutical compounds for third parties. Such research revenue may include upfront license fees, milestone payments and reimbursement of development and other costs, and royalties. Non-refundable upfront license fees under which we have continuing involvement in the form of development, manufacturing or commercialization are recognized as revenue ratably over either: the development period if the development risk is significant, or the estimated product useful life if development risk has been substantially eliminated. Achievement based milestone payments are recognized as revenue when the milestone objective is attained. Reimbursement of development and other costs are recognized as revenue as the related costs are incurred. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends.

Product 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 these sales provisions was consistent across all periods presented. 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 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 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 and updated for any applicable changes in available information provides a reliable basis for such estimates.

Sales to our three major wholesale customers comprised 69% of total revenue for the nine months ended September 30, 2006. We periodically review the wholesale supply levels of our more 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. Based on these activities, we attempt to keep a consistent wholesale stocking level of approximately two- to six-weeks across our core hospital-based 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 core hospital-based distribution channels has not had a significant impact on our historic sales comparisons or sales provisions.

Other Deferred Revenue

Sales Provisions

Our sales provisions totaled $538.4 million and $448.7 million in the first nine months of 2006 and 2005, respectively, and related reserves totaled $162.1 million and $84.7 million at September 30, 2006 and December 31, 2005, respectively. The increase in reserves relates primarily to chargeback reserves associated with the sales of products purchased from AstraZeneca, as well as, the timing of the related chargeback payments.

Chargebacks

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. However, as most of these selling prices will be reduced to a lower end-user contract price, at the time of sale revenue is reduced by, and a provision recorded for, the difference between the list price and estimated end-user contract price multiplied by the estimated wholesale units outstanding pending chargeback that will ultimately be sold under end-user contracts. When the wholesaler ultimately sells the product to the end user at the end-user contract price, the wholesaler charges us, a chargeback, for the difference between the list price and the end-user contract price and such chargeback is offset against our initial estimated contra asset. The most significant estimates inherent in the initial chargeback provision relate to wholesale units pending chargeback and 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.

Our net chargeback reserve totaled $124.2 million and $47.8 million at September 30, 2006 and December 31, 2005, respectively. The methodology used to estimate and provide for chargebacks was consistent across all periods presented. Due to information constraints in the distribution channel, 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. A one percent decrease in our estimated end-user contract-selling prices would reduce total revenue for the nine months ended September 30, 2006 by $0.6 million and a one percent increase in wholesale units pending chargeback at September 30, 2006 would decrease total revenue for the nine months ended September 30, 2006 by $0.7 million.

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 $14.9 million at September 30, 2006, comparable to the $12.2 million balance at December 31, 2005. A one-percent increase in the estimated rate of contractual allowances to sales at September 30, 2006 would increase the provision for contractual allowances by $2.8 million at that point in time. Contractual allowances are reflected in the financial statements as a reduction of total revenue 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 $10.9 million and $16.2 million at September 30, 2006 and December 31, 2005, respectively. At September 30, 2006, a one percent increase in the estimated reserve requirements for customer credits and product returns would have decreased total revenue for the first nine months of 2006 by $3.1 million.

We generally offer our customers a standard cash discount on our core hospital-based products 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. A provision for cash discounts 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

At September 30, 2006, inventory included $2.5 million in cost relating to hospital-based products pending FDA approval on that date. At September 30, 2006, inventory included 19 items that were awaiting approval and individually no specific items were greater than 1% of total inventory. In the event that the FDA approval is unduly delayed or denied, we may have to provide for and expense all or a portion of, such inventory. At December 31, 2005, inventory included $9.5 million in cost relating to core hospital-based products pending FDA approval on that date. Included in the amount pending approval at December 31, 2005 was $7.4 million of Ceftriaxone, which was approved by the FDA in February 2006.

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.

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. In addition, for the nine months ended September 30, 2006, cost of sales included amortization of the inventory step-up associated with our merger with ABI of $12.5 million and amortization of product rights purchased from AstraZeneca of $4.1 million.

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. Research and development costs also include costs associated with our Puerto Rico and Switzerland facilities activities prior to commercial production. 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.

Stock-Based Compensation

We account for stock based compensation in accordance with FAS 123(R), which requires the recognition of compensation cost for all share-based payments (including employee stock options) at fair value. Effective January 1, 2006, we adopted the provisions of FAS 123(R) using a modified version of retrospective application. As a result, the fair value of stock-based employee compensation was recorded as an expense in the current year. In addition, our prior year results have been restated as if we had used the fair value method during previous periods. We use the straight-line attribution method to recognize share-based compensation expenses over the applicable vesting period of the award. Options currently granted generally expire ten years from the grant date and vest ratably over a four year period, while awards under the RSU II plan vest over a one, two or four year period.

Stock-based compensation recognized in 2006 as a result of the adoption of FAS 123(R), as well as expense associated with the retrospective application, uses the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our stock participation plan. Additionally, expense related to the RSU plans is based on the lower of the market-price or $28.27 and is expensed on a straight line basis over the applicable vesting period. Pre-tax stock-based employee compensation costs for the nine-month periods ended September 30, 2006 and 2005 were $24.0 million, including $14.6 million relating to the RSU plans, and $10.5 million, respectively. Also in connection with the retrospective application, our December 31, 2005 balance sheet reflects an increase in the deferred tax benefit of $2.1 million, an increase in minority interests of $0.6 million, an increase in additional paid-in capital of $9.3 million and a decrease in retained earnings of $8.8 million.

Refer to Note 8, Stock Compensation Plans, in the footnotes to the condensed consolidated financial statements for a detail of financial statement changes caused by the retrospective application.

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.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures, as such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e), that 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 that such information is accumulated and communicated to management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance we necessarily were required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. 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. 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 the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation and subject to the foregoing, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2006.

Management determined that, as of September 30, 2006, there were no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Certain of our legal proceedings are reported in our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. The following discussion is limited to material developments and should be read in conjunction with those earlier reports. Unless otherwise indicated, all legal proceedings discussed in those earlier reports remain outstanding.

In August 2006, we filed a response to Elan’s complaint contending that we did not infringe on the Elan patents and that the Elan patents are invalid.

In September 2006, a motion to dismiss our counterclaim was filed in the arbitration matter with our former officer and employee. This motion is currently under submission with the arbitration panel.

ITEM 1A. RISK FACTORS

The following items are representative of the risks, uncertainties and assumptions that could affect the outcome of our forward looking statements and actual results could be materially different.

The recently completed merger is expected to result in benefits, but we may not realize those benefits due to challenges associated with integrating the merged companies or other factors.

The success of the merger will depend in part on the success of our management in integrating APP’s operations, technologies and personnel with those of ABI. Our inability to meet the challenges involved in integrating successfully these operations or otherwise to realize any of the anticipated benefits of the merger could seriously harm our results of operations. In addition, the overall integration of the two companies may result in unanticipated operations problems, expenses, liabilities and diversion of management’s attention. The challenges involved in integration include:

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integrating the two companies’ operations, technologies and products;

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coordinating and integrating sales and marketing, research and development and manufacturing functions;

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demonstrating to our customers that the merger will not result in adverse changes in business focus;

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assimilating the personnel of both companies and integrating the business cultures of both companies;

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consolidating corporate and administrative infrastructures and eliminating duplicative operations; and

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maintaining employee morale and motivation.

We may not be able to successfully integrate our operations in a timely manner, or at all, and we may not realize the anticipated benefits of the merger, including synergies or sales or growth opportunities, to the extent or in the time frame anticipated. The anticipated benefits and synergies of the merger are based on assumptions and current expectations, not actual experience, and assume a successful integration. In addition to the potential integration challenges discussed above, our ability to realize the benefits and synergies of the business combination could be adversely impacted to the extent that our relationships with existing or potential customers, suppliers or strategic partners is adversely affected as a consequence of the merger, or by practical or legal constraints on our ability to combine operations. Furthermore, financial projections based on these assumptions relating to integration may not be correct if the underlying assumptions prove to be incorrect.

Our historical financial statements and any pro forma financial statements that we have filed may not be indicative of our future financial condition or results of operations.

Our historical financial statements and any pro forma financial statements that we have filed or may file may not be indicative of the combined company’s financial condition or results of operations following the merger for several reasons.

Our historical statements will not be indicative of the future results of operations of the combined company, which will integrate additional operations and expenses. The pro forma financial statements will be derived from the financial statements of APP and ABI and certain adjustments and assumptions have been made regarding the combined company after giving effect to the merger. The information upon which these adjustments and assumptions will be made is preliminary, and these

kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the pro forma financial statements will not reflect all costs that were incurred by the combined company in connection with the merger. For example, the impact of any incremental costs incurred in integrating the two companies will not be reflected in the pro forma financial statements. As a result, the actual financial condition and results of operations of the combined company may not be consistent with, or evident from, the pro forma financial statements.

If Abraxane^{^®} does not achieve strong market acceptance, our future profitability could be adversely affected and we would be unable to recoup the investments made to commercialize this product.

We have made and will continue to make a significant investment in Abraxane^{^®}, including costs associated with conducting clinical trials and obtaining necessary regulatory approvals for the use of Abraxane^{^®} in other indications and settings, expansion of our marketing, sales and manufacturing staff, the acquisition of paclitaxel raw material, and the manufacture of finished product. The success of Abraxane^{^®} in the Phase III trial for metastatic breast cancer and other clinical trials may not be representative of the future clinical trial results for Abraxane^{^®} with respect to other clinical indications. The results from clinical, pre-clinical studies and early clinical trials conducted to date may not be predictive of results to be obtained in later clinical trials, including those ongoing at present. Further, the commencement and completion of clinical trials may be delayed by many factors that are beyond our control, including:

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slower than anticipated patient enrollment

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difficulty in finding and retaining patients fitting the trial profile or protocols

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adverse events occurring during the clinical trials

Although approved by the U.S. Food and Drug Association, or the FDA, for the indication of metastatic breast cancer in January 2005, Abraxane^{^®} may not generate sales sufficient to recoup our investment. For the nine months ended September 30, 2006 total Abraxane^{^®} revenue was $118.8 million, including $9.1 million of previously deferred revenue recognized relating to the co-promotion agreement with AstraZeneca. Abraxane^{^®} revenue represented approximately 23.4% of our total revenue. We anticipate that sales of Abraxane^{^®} will remain a significant portion of our revenue over the next several years. However, a number of pharmaceutical companies are working to develop alternative formulations of paclitaxel and other cancer drugs and therapies, any of which may compete directly or indirectly with Abraxane^{^®} and which might adversely affect the commercial success of Abraxane^{^®}. Our inability to successfully manufacture, market and commercialize Abraxane^{^®} could cause us to lose some of the investment we have made and will continue to make to commercialize this product.

If we are unable to develop and commercialize new products, our financial condition will deteriorate.

Profit margins for a pharmaceutical product generally decline as new competitors enter the market. As a result, our future success will depend on our ability to commercialize the product candidates we are currently developing, as well as develop new products in a timely and cost-effective manner. We have approximately 60 new product candidates under development with 27 Abbreviated New Drug Applications for new injectable products currently pending at the FDA. Successful development and commercialization of our product candidates will require significant investment in many areas, including research and development and sales and marketing, and we may not realize a return on those investments. In addition, development and commercialization of new products are subject to inherent risks, including:

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failure to receive necessary regulatory approvals

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difficulty or impossibility of manufacture on a large scale

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prohibitive or uneconomical costs of marketing products

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inability to secure raw material or components from third-party vendors in sufficient quantity or quality or at a reasonable cost

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failure to be developed or commercialized prior to the successful marketing of similar or superior products by third parties

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lack of acceptance by customers

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impact of authorized generic competition

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infringement on the proprietary rights of third parties

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grant of new patents for existing products may be granted, which could prevent the introduction of newly-developed products for additional periods of time

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grant to another manufacturer by the FDA of a 180-day period of marketing exclusivity under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, as patents or other exclusivity periods for brand name products expire

The timely and continuous introduction of new products is critical to our business. Our financial condition will deteriorate if we are unable to successfully develop and commercialize new products.

If sales of our key products decline, our business may be adversely affected.

Our top ten products, including Abraxane^{^®}, comprised approximately 57.3% of our total revenue for the nine months ended September 30, 2006. Our key products could lose market share or revenue due to numerous factors, many of which are beyond our control, including:

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lower prices offered on similar products by other manufacturers

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substitute or alternative products or therapies

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development by others of new pharmaceutical products or treatments that are more effective than our products

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introduction of other generic equivalents or products which may be therapeutically interchanged with our products

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interruptions in manufacturing or supply

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changes in the prescribing practices of physicians

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changes in third-party reimbursement practices

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migration of key customers to other manufacturers or sellers

Any factor adversely affecting the sale of our key products may cause our revenues to decline.

Proprietary product development efforts may not result in commercial products.

We intend to maintain an aggressive research and development program for our proprietary pharmaceutical products. Successful product development in the biotechnology industry is highly uncertain, and statistically very few research and development projects produce a commercial product. Product candidates that appear promising in the early phases of development, such as in early stage human clinical trials, may fail to reach the market for a number of reasons, including:

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the product candidate did not demonstrate acceptable clinical trial results even though it demonstrated positive pre-clinical trial results;

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the product candidate was not effective in treating a specified condition or illness;

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the product candidate had harmful side effects in humans or animals;

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the necessary regulatory bodies, such as the FDA, did not approve a product candidate for an intended use;

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the product candidate was not economical to manufacture and commercialize;

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other companies or people have or may have proprietary rights to a product candidate, such as patent rights, and will not let the product candidate be sold on reasonable terms, or at all; or

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the product candidate is not cost effective in light of existing therapeutics.

If we or our suppliers are unable to comply with ongoing and changing regulatory standards, sales of our products could be delayed or prevented.

Virtually all aspects of our business, including the development, testing, manufacturing, processing, quality, safety, efficacy, packaging, labeling, record-keeping, distribution, storage and advertising and promotion of our products and disposal of waste products arising from these activities, are subject to extensive regulation by federal, state and local governmental authorities in the United States, including the FDA and the Department of Health and Humans Services Office of Inspector General (OIG). Our business is also subject to regulation in foreign countries. Compliance with these regulations is costly and time-consuming.

Our manufacturing facilities and procedures and those of our suppliers are subject to ongoing regulation, including periodic inspection by the FDA and foreign regulatory agencies. For example, manufacturers of pharmaceutical products must comply with detailed regulations governing current good manufacturing practices, including requirements relating to quality control and quality assurance. We must spend funds, time and effort in the areas of production, safety, quality control and quality assurance to ensure compliance with these regulations. We cannot assure that our manufacturing facilities or those of our suppliers will not be subject to regulatory action in the future.

Our products generally must receive appropriate regulatory clearance before they can be sold in a particular country, including the United States. We may encounter delays in the introduction of a product as a result of, among other things, insufficient or incomplete submissions to the FDA for approval of a product, objections by another company with respect to our submissions for approval, new patents by other companies, patent challenges by other companies which result in a 180-day exclusivity period, and changes in regulatory policy during the period of product development or during the regulatory approval process. The FDA has the authority to revoke drug approvals previously granted and remove from the market previously approved products for various reasons, including issues related to current good manufacturing practices for that particular product or in general. We may be subject from time to time to product recalls initiated by us or by the FDA. Delays in obtaining regulatory approvals, the revocation of a prior approval, or product recalls could impose significant costs on us and adversely affect our ability to generate revenue.

Our inability or the inability of our suppliers to comply with applicable FDA and other regulatory requirements can result in, among other things, warning letters, fines, consent decrees restricting or suspending our manufacturing operations, delay of approvals for new products, injunctions, civil penalties, recall or seizure of products, total or partial suspension of sales and criminal prosecution. Any of these or other regulatory actions could materially adversely affect our business and financial condition.

State pharmaceutical marketing compliance and reporting requirements may expose us to regulatory and legal action by state governments or other government authorities.

In recent years, several states, including California, Vermont, Maine, Minnesota, New Mexico and West Virginia, in addition to the District of Columbia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs and file periodic reports on sales, marketing, pricing and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and available guidance is limited. Unless we are in full compliance with these laws, we could face enforcement action and fines and other penalties and could receive adverse publicity, all of which could harm our business.

We may be required to perform additional clinical trials or change the labeling of our products if side effects or manufacturing problems are identified after the products are on the market.

If side effects are identified after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of products, additional clinical trials, changes in labeling of products, and changes to or re-approvals of our manufacturing facilities may be required, any of which could have a material adverse effect on sales of the affected products and on our business and results of operations.

After any of our products are approved for commercial use, we or regulatory bodies could decide that changes to our product labeling are required. Label changes may be necessary for a number of reasons, including: the identification of actual or theoretical safety or efficacy concerns by regulatory agencies or the discovery of significant problems with a similar product that implicates an entire class of products. Any significant concerns raised about the safety or efficacy of our products could also result in the need to reformulate those products, to conduct additional clinical trials, to make changes to our manufacturing processes, or to seek re-approval of our manufacturing facilities. Significant concerns about the safety and effectiveness of a product could ultimately lead to the revocation of its marketing approval. The revision of product labeling or the regulatory actions described above could be required even if there is no clearly established connection between the product and the safety or efficacy concerns that have been raised. The revision of product labeling or the regulatory actions described above could have a material adverse effect on sales of the affected products and on our business and results of operations.

The manufacture of our products is highly exacting and complex, and if we or our suppliers encounter production problems, our business may suffer.

All of the pharmaceutical products we make are sterile, injectable drugs. We also purchase some such products from other companies. Additionally, the process for manufacturing the nano-particle product Abraxane^{^®} is relatively new and unique. The manufacture of all our products is highly exacting and complex, due in part to strict regulatory requirements and standards which govern both the manufacture of a particular product and the manufacture of these types of products in general. Problems may arise during their manufacture due to a variety of reasons including equipment malfunction, failure to follow specific protocols and procedures, and environmental factors. If problems arise during the production of a batch of product, that batch of product may have to be discarded. This could, among other things, lead to loss of the cost of raw materials and components used, lost revenue, time and expense spent in investigating the cause, and, depending on the cause, similar losses with respect to other batches or products. If such problems are not discovered before the product is released to the market, recall costs may also be incurred. To the extent we experience problems in the production of our pharmaceutical products, this may be detrimental to our business, operating results and reputation.

Our markets are highly competitive and, if we are unable to compete successfully, our revenue will decline and our business will be harmed.

The markets for injectable pharmaceutical products are highly competitive, rapidly changing and undergoing consolidation. Most of our products are generic injectable versions of brand name products that are still being marketed by proprietary pharmaceutical companies. The first company to market a generic product is often initially able to achieve high sales, profitability and market share with respect to that product. Prices, revenue and market size for a product typically decline, however, as additional generic manufacturers enter the market.

We face competition from major, brand name pharmaceutical companies as well as generic manufacturers such as Hospira, Bedford Laboratories, Baxter Laboratories (including Elkin-Sinn), Sicor Inc. (recently acquired by Teva) and Mayne Pharma (pending acquisition by Hospira, Inc.) and, in the future, increased competition from new, foreign competitors. Smaller and foreign companies may also prove to be significant competitors, particularly through collaboration arrangements with large and established companies. Abraxane^{^®} competes, directly or indirectly, with the primary taxanes in the market place, including Bristol Myers’ Taxol^{^®} and its generic equivalents, Aventis’ Taxotere^{^®} and other cancer therapies. Many pharmaceutical companies have developed and are marketing, or are developing, alternative formulations of paclitaxel and other cancer therapies that may compete directly or indirectly with Abraxane^{^®}. Many of our competitors have significantly greater research and development, financial, sales and marketing, manufacturing, regulatory and other resources than us. As a result, they may be able to devote greater resources to the development, manufacture, marketing or sale of their products, receive greater resources and support for their products, initiate or withstand substantial price competition, more readily take advantage of acquisition or other opportunities, or otherwise more successfully market their products.

Any reduction in demand for our products could lead to a decrease in prices, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, or loss of market share. These competitive pressures could adversely affect our business and operating results.

We face uncertainty related to pricing and reimbursement and health care reform.

In both domestic and foreign markets, sales of our products will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers, health maintenance organizations and other health care-related organizations. Reimbursement by such payors is presently undergoing reform and there is significant uncertainty at this time how this will affect sales of certain pharmaceutical products. There is possible U.S. legislation or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including under Medicaid and Medicare, the importation of prescription drugs that are marketed outside the U.S. and sold at prices that are regulated by governments of various foreign countries.

Medicare, Medicaid and other governmental reimbursement legislation or programs govern drug coverage and reimbursement levels in the United States. Federal law requires all pharmaceutical manufacturers to rebate a percentage of their revenue arising from Medicaid-reimbursed drug sales to individual states. Generic drug manufacturers’ agreements with federal and state governments provide that the manufacturer will remit to each state Medicaid agency, on a quarterly basis, 11% of the average manufacturer price for generic products marketed and sold under abbreviated new drug applications covered by the state’s Medicaid program. For proprietary products, which are marketed and sold under new drug applications, manufacturers are required to rebate the greater of (a) 15.1% of the average manufacturer price or (b) the difference between the average manufacturer price and the lowest manufacturer price for products sold during a specified period.

Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation, rules and regulations designed to contain or reduce the cost of health care. Existing regulations that affect the price of pharmaceutical and other medical products may also change before any of our products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we develop in the future. In addition, third-party payers are increasingly challenging the price and cost-effectiveness of medical products and services and litigation has been filed against a number of pharmaceutical companies in relation to these issues. Additionally, significant uncertainty exists as to the reimbursement status of newly approved injectable pharmaceutical products. Our products may not be considered cost effective or adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an adequate return on our investment.

If we are unable to maintain our key customer arrangements, sales of our products and revenue would decline.

Almost all injectable pharmaceutical products are sold to customers through arrangements with group purchasing organizations, or GPOs, and distributors. The majority of hospitals contract with the GPO of their choice for their purchasing needs. We currently derive, and expect to continue to derive, a large percentage of our revenue from customers that are members of a small number of GPOs. Currently, fewer than ten GPOs control a large majority of sales to hospital customers.

We have purchasing arrangements with the major GPOs in the United States, including AmeriNet, Inc., Broadlane Healthcare Corporation, Consorta, Inc., MedAssets Inc., Novation, LLC, Owen Healthcare, Inc., PACT, LLC, Premier Purchasing Partners, LP, International Oncology Network, or ION, National Oncology Alliance, or NOA, and U.S. Oncology, Inc. In order to maintain these relationships, we believe we need to be a reliable supplier, offer a broad product line, remain price competitive, comply with FDA regulations and provide high-quality products. The GPOs through which we sell our products also have purchasing agreements with other manufacturers that sell competing products and the bid process for products such as ours is highly competitive. Most of our GPO agreements may be terminated on short notice. If we are unable to maintain our arrangements with GPOs and key customers, sales of our products and revenue would decline.

The strategy to license rights to or acquire and commercialize proprietary, biological injectable or other specialty injectable products may not be successful, and we may never receive any return on our investment in these product candidates.

We may license rights to or acquire products from third parties. Additionally, we are in the process of establishing our capabilities in biologic generic products so that we may be able to offer such products when regulatory approvals and patents allow for such products. Other companies, including those with substantially greater financial and sales and marketing resources, will compete with us to license rights to or acquire these products. We may not be able to license rights to or acquire these proprietary or other products on acceptable terms, if at all. Even if we obtain rights to a pharmaceutical product and commit to payment terms, including, in some cases, significant up-front license payments, we may not be able to generate product sales sufficient to create a profit or otherwise avoid a loss.

A product candidate may fail to result in a commercially successful drug for other reasons, including the possibility that the product candidate may:

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be found during clinical trials to be unsafe or ineffective;

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fail to receive necessary regulatory approvals;

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be difficult or uneconomical to produce in commercial quantities;

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be precluded from commercialization by proprietary rights of third parties; or

•

fail to achieve market acceptance.

The marketing strategy, distribution channels and levels of competition with respect to any licensed or acquired product may be different from those of our current products, and we may not be able to compete favorably in any new product category.

We are subject to restrictive and negative covenants under our $450 million three-year revolving credit facility, which may prevent us from capitalizing on business opportunities and taking some actions.

On April 18, 2006, we entered into a credit agreement with a syndicate of banks for a $450 million three-year unsecured revolving credit facility, with a sub-limit for up to $10 million for standby and commercial letters of credit and $20 million for swing line loans. Among other things, the credit agreement restricts the payment of dividends by us, and restricts our ability to incur indebtedness and make future loans to third parties, other than under circumstances set forth in the credit agreement. In addition, our ability to borrow under this credit facility is subject to our ongoing compliance with certain financial and other covenants, such as minimum net worth, maximum funded debt to EBITDA ratio and maximum EBITDA to interest expense ratio. These operational and financial covenants could hinder our ability to finance future operations or capital needs or to pursue available business opportunities, including the purchase of additional facilities. A breach of any of these covenants or our inability to maintain the required financial ratios could result in a default under this credit facility. If a default occurs, the relevant lenders could elect to declare the outstanding indebtedness, together with accrued interest and other fees, to be immediately due and payable. Further, we may require additional capital in the future to expand business operations, acquire businesses or facilities, or replenish cash expended sooner than anticipated and such additional capital may not otherwise be available on satisfactory terms.

Entities affiliated with our Chief Executive Officer own a significant percentage of our common stock and could exercise significant influence over matters requiring stockholder approval, regardless of the wishes of other stockholders.

As of November 3 , 2006, entities affiliated with our chief executive officer owned approximately 83.7% of our common stock. Accordingly, they have the ability to significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of significant corporate transactions such as mergers, consolidations and sales of assets. Although these entities have executed a corporate governance and voting agreement in connection with the merger, that agreement will terminate by its terms no later than the 2007 annual stockholders’ meeting. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a

merger or consolidation, takeover or other business combination, which could cause the market price of our common stock to fall or prevent our stockholders from receiving a premium in such a transaction. This significant concentration of stock ownership may adversely affect the market for and trading price of our common stock if investors perceive that conflicts of interest may exist or arise.

We depend heavily on the principal members of our management and research and development teams, the loss of whom could harm our business.

We depend heavily on the principal members of our management and research and development teams, Each of the members of the executive management team is employed “at will”. Only Carlo Montagner, president of Abraxis Oncology, a division of our company, and Lisa Gopalakrishnan , our chief financial officer, have employment agreements with us. The loss of the services of any member of the executive management team may significantly delay or prevent the achievement of product development or business objectives.

To be successful, we must attract, retain and motivate key employees, and the inability to do so could seriously harm our operations.

To be successful, we must attract, retain and motivate executives and other key employees. Our employees may experience uncertainty about their future roles with the combined company until or after strategies for the combined company are announced or executed. These circumstances may adversely affect our ability to attract and retain key personnel. We also must continue to attract and motivate employees and keep them focused on our strategies and goals, which effort may be adversely affected as a result of the uncertainty and difficulties with integrating APP and ABI.

We depend on third parties to supply raw materials and other components and may not be able to obtain sufficient quantities of these materials, which will limit our ability to manufacture our products on a timely basis and harm our operating results.

The manufacture of our products requires raw materials and other components that must meet stringent FDA requirements. Some of these raw materials and other components are available only from a limited number of sources. Additionally, our regulatory approvals for each particular product denote the raw materials and components, and the suppliers for such materials, we may use for that product. Obtaining approval to change, substitute or add a raw material or component, or the supplier of a raw material or component, can be time consuming and expensive, as testing and regulatory approval is necessary. In the past, we have experienced shortages in some of the raw materials and components we purchase. If our suppliers are unable to deliver sufficient quantities of these materials on a timely basis or we encounter difficulties in our relationships with these suppliers, the manufacture and sale of our products may be disrupted, and our business, operating results and reputation could be adversely affected.

Other companies may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling our products.

Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties. The manufacture, use and sale of new products with conflicting patent rights have been subject to substantial litigation in the pharmaceutical industry. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. Infringement litigation is prevalent with respect to generic versions of products for which the patent covering the brand name product is expiring, particularly since many companies which market generic products focus their development efforts on products with expiring patents. A number of pharmaceutical companies, biotechnology companies, universities and research institutions may have filed patent applications or may have been granted patents that cover aspects of our products or our licensors’ products, product candidates or other technologies.

Future or existing patents issued to third parties may contain claims that conflict with our products. We are subject to infringement claims from time to time in the ordinary course of our business, and third parties could assert infringement claims against us in the future with respect to our current products, products we may develop or products we may license. Litigation or interference proceedings could force us to:

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stop or delay selling, manufacturing or using products that incorporate or are made using the challenged intellectual property

•

pay damages

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enter into licensing or royalty agreements that may not be available on acceptable terms, if at all

Any litigation or interference proceedings, regardless of their outcome, would likely delay the regulatory approval process, be costly and require significant time and attention of key management and technical personnel.

Our inability to protect our intellectual property rights in the United States and foreign countries could limit our ability to manufacture or sell our products.

We rely on trade secrets, unpatented proprietary know-how, continuing technological innovation and patent protection to preserve our competitive position. Our patents and those for which we have or will license rights, including for Abraxane^{^®}, may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection or competitive advantages to us. We and our licensors may not be able to develop patentable products. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us. Third-party patents could reduce the coverage of the patents licensed, or that may be license to or owned by us. If patents containing competitive or conflicting claims are issued to third parties, we may be prevented from commercializing the products covered by such patents, or may be required to obtain or develop alternate technology. In addition, other parties may duplicate, design around or independently develop similar or alternative technologies.

We may not be able to prevent third parties from infringing or using our intellectual property. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite our efforts to protect this proprietary information, however, unauthorized parties may obtain and use information that we regard as proprietary. Other parties may independently develop similar know-how or may even obtain access to our technologies.

The laws of some foreign countries do not protect proprietary information to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign countries.

The U.S. Patent and Trademark Office and the courts have not established a consistent policy regarding the breadth of claims allowed in pharmaceutical patents. The allowance of broader claims may increase the incidence and cost of patent interference proceedings and the risk of infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights.

We may become subject to federal false claims or other similar litigation brought by private individuals and the government.

The Federal False Claims Act allows persons meeting specified requirements to bring suit alleging false or fraudulent Medicare or Medicaid claims and to share in any amounts paid to the government in fines or settlement. These suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that a health care company will have to defend a false claim action, pay fines and/or be excluded from Medicare and Medicaid programs. Federal false claims litigation can lead to civil monetary penalties, criminal fines and imprisonment and/or exclusion from participation in Medicare, Medicaid and other federally funded health programs. Other alternate theories of liability may also be available to private parties seeking redress for such claims. A number of parties have brought claims against numerous pharmaceutical manufacturers, and we cannot be certain that such claims will not be brought against us, or if they are brought, that such claims might not be successful.

We may need to change our business practices to comply with changes to, or may be subject to charges under, the fraud and abuse laws.

We are subject to various federal and state laws pertaining to health care fraud and abuse, including the federal Anti-Kickback Statute and its various state analogues, the federal False Claims Act and marketing and pricing laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs such as Medicare and Medicaid. We may have to change our advertising and promotional business practices, or our existing business practices could be challenged as unlawful due to changes in laws, regulations or rules or due to administrative or judicial findings, which could materially adversely affect our business.

We may be required to defend lawsuits or pay damages for product liability claims.

Product liability is a major risk in testing and marketing biotechnology and pharmaceutical products. We may face substantial product liability exposure in human clinical trials and for products that we sell after regulatory approval. Historically we have carried product liability insurance and we expect to continue such policies. Product liability claims, regardless of their merits, could exceed policy limits, divert management’s attention and adversely affect our reputation and the demand for our products.

Failure to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and negatively impact our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each Annual Report on Form 10-K, management’s assessment of the effectiveness of our internal control over financial reporting. Furthermore, our independent registered public accounting firm is required to attest to whether management’s assessment of the effectiveness of internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting. ABI, as a privately held company, was not required to review or assess its internal control procedures. Following the merger, we are required to modify and apply the disclosure controls and procedures, internal controls and related corporate governance policies to include the current operations of ABI. If we fail to timely complete the development of the combined company’s internal controls and management is unable to make this assessment, or if the independent registered public accounting firm cannot timely attest to this assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal control and the reliability of our financial statements, which ultimately could negatively impact our stock price.

Any future acquisitions and other material changes in our operations likely will require us to expand and possibly revise our disclosure controls and procedures, internal controls and related corporate governance policies. In addition, the new and changed laws and regulations are subject to varying interpretations in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. If our efforts to comply with new or changed laws and regulations differ from the conduct intended by regulatory or governing bodies due to ambiguities or varying interpretations of the law, we could be subject to regulatory sanctions, our reputation may be harmed and our stock price may be adversely affected.

Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect its reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way it conducts business. For example, on December 16, 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or FAS 123(R). FAS 123(R) requires that employee stock-based compensation be measured based on its fair-value on the grant date and treated as an expense that is reflected in the financial statements over the related service period. We adopted FAS 123(R) in the first quarter of 2006 using the modified retrospective approach. Under this approach, the fair value of stock-based employee compensation was recorded as an expense in the current year. In addition, our prior year results have been restated as if we had used the fair value method during previous periods. The adoption of FAS 123(R) is expected to have a material adverse effect on our results of operations for 2006 and subsequent periods. However, we do not believe the application of FAS 123(R) will have a direct impact on our overall financial position or liquidity.

Our earnings per share could decline as a result of the merger, which may adversely affect the market price of our common stock

The merger is expected to be dilutive to our near-term earnings per share over the next several years due to the number of our shares of common stock that were issued, the limited amount of revenue acquired, incremental expenses, ABI’s restricted stock unit plan, the amortization of the purchase price step-up and other acquisition-related changes.

Future sales of substantial amounts of our common stock may adversely affect our market price.

In connection with the merger, we have issued a significant number of additional shares of our common stock to a small number of former shareholders. Although such shares are not immediately freely tradable, we have granted registration rights to the former shareholders to permit the resale of the shares of our common stock that they have received in the merger. Future sales of substantial amounts of our common stock into the public market, or perceptions in the market that such sales could occur, may adversely affect the prevailing market price of our common stock.

Our stock price has been volatile in response to market and other factors.

The market price for our common stock has been and may continue to be volatile and subject to price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:

•

the concentration of the ownership of our shares by a limited number of affiliated stockholders may limit interest in our securities;

•

variations in quarterly operating results from the expectations of securities analysts or investors;

•

revisions in securities analysts’ estimates or reductions in security analysts’ coverage;

•

announcements of technological innovations or new products or services by us or our competitors;

•

reductions in the market share of our products;

•

the inability to increase the market share of Abraxane^{^®} at a sufficient rate;

•

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

•

general technological, market or economic trends;

•

investor perception of our industry or prospects;

•

insider selling or buying;

•

investors entering into short sale contracts;

•

regulatory developments affecting our industry; and

•

additions or departures of key personnel.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)

We held our 2006 Annual Meeting of Stockholders on August 1, 2006.

(b)

Omitted pursuant to Instruction 3.

(c)

The two items voted upon at the annual stockholders meeting were to: (i) elect eight directors to hold office until the 2007 Annual Meeting of Stockholders (“Item One”); and (ii) ratify and approve the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006 (“Item Two”).

The voting was as follows:


	In Favor	Against (“Withheld” for purposes of Item One)	Abstain	Broker Non-Votes
Item One
Patrick Soon-Shiong, M.D.	152,752,015	2,217,225	—	—
David S. Chen, Ph.D.	154,690,852	268,115	—	—
Stephen D. Nimer, M.D.	154,709,833	259,407	—	—
Leonard Shapiro	154,691,609	277,631	—	—
Kirk K. Calhoun	154,693,232	276,008	—	—
Sir Richard Sykes	154,452,478	619,762	—	—
Michael D. Blaszyk	154,466,128	603,112	—	—
Michael S. Sitrick	149,816,277	5,152,963	—	—
Item Two	154,798,194	149,995	13,187	—

All nominees for the Board of Directors were declared to have been elected as directors to hold office until the 2007 Annual Meeting of Stockholders, or until their successors are elected and qualified or until their earlier death, resignation or removal. Item Two was declared to have been approved.

(d)

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits are as set forth in the Exhibit Index.

SIGNATURES

Pursuant to the requirements 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.


ABRAXIS BIOSCIENCE, INC.

By:		/s/ Lisa Gopalakrishnan
		Lisa Gopalakrishnan
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

Date: November 9, 2006

Exhibit Index



2.1(12)		Agreement and Plan of Merger, dated as of November 27, 2005, by and among American Pharmaceutical Partners, Inc., American BioScience, Inc. and, with respect to specified matters, Patrick Soon-Shiong and certain other ABI shareholders

3.1(1)		Amended and Restated Certificate of Incorporation of the Registrant

3.2(1)		Bylaws of the Registrant

3.3(13)		Certificate of Merger of American BioScience, Inc. into American Pharmaceutical Partners, Inc., dated April 18, 2006

4.1		Reference is made to Exhibits 3.1, 3.2 and 3.3

4.2(13)		Specimen Stock Certificate of the Registrant

4.3(3)		First Amended Registration Rights Agreement, dated as of June 1, 1998, between the Registrant and certain holders of the Registrant’s capital stock

4.4(13)		Registration Rights Agreement, dated April 18, 2006, by and among APP, Patrick Soon-Shiong and certain other ABI shareholders set forth therein

4.5(13)		Corporate Governance and Voting Agreement, dated April 18, 2006, by and among APP, Patrick Soon-Shiong and certain other ABI shareholders set forth therein

10.1(4)		Form of Indemnification Agreement between the Registrant and each of its executive officers and directors

10.2(3)		1997 Stock Option Plan

10.3(11)		2001 Stock Incentive Plan, including forms of agreements thereunder

10.4(3)		2001 Employee Stock Purchase Plan, including forms of agreements thereunder

10.5(3)		Lease Agreement dated December 4, 2000, between the Registrant and AMB Property II, L.P.

10.6(4)		Tax Sharing and Indemnification Agreement dated July 25, 2001, between the Registrant and American BioScience

10.7(4)		Agreement, dated as of July 25, 2001, between the Registrant and American BioScience

10.8(2)		License Agreement, dated as of November 20, 2001, between the Registrant and American BioScience

10.9(7)		Lease Agreement between Manufacturers Life Insurance Company (U.S.A.) and the Registrant for 1501 E. Woodfield Road, Suite 300 East in Schaumburg, Illinois, known as Schaumburg Corporate Center

10.10(5)		Agreement dated as of March 11, 2004, between the Registrant and American BioScience

10.11(6)		Credit Agreement dated September 2, 2004 among the Registrant, Fifth Third Bank, Wachovia Bank, and various lenders

10.12(7)		Description of the 2005 Corporate Bonus Plan

10.13(7)		2005 Base Salaries for Named Executive Officers

10.14(8)		Description of Non-Employee Director Cash Compensation Program

10.15(8)		Amended and Restated 2001 Non-Employee Director Option Program

10.16(9)		Total Commitment Increase Agreement and First Amendment to Credit Agreement, dated August 2, 2005

10.17(10)		American BioScience, Inc. Restricted Stock Unit Plan I, including a form of agreement thereunder

10.18(10)		American BioScience, Inc. Restricted Stock Unit Plan II, including a form of agreement thereunder

10.19(13)		Escrow Agreement, dated April 18, 2006, by and among APP, Patrick Soon-Shiong and Fifth Third Bank

10.10(13)		Credit Agreement dated April 18, 2006 among the Registrant, Fifth Third Bank, Wachovia Bank, and various lenders

10.11(13)		Purchase and Sale Agreement, dated April 24, 2006, between the Registrant and Pfizer Inc.

10.12(15)		Employment Agreement, dated January 25, 2006, between the Registrant and Carlo Montagner.



10.13(15)*		Co-Promotion Strategic Marketing Services Agreement, dated April 26, 2006, between the Registrant and AstraZeneca UK Limited

10.14(15)*		Asset Purchase Agreement, dated April 26, 2006, between the Registrant and AstraZeneca UK Limited

10.15(15)*		Amendment to the Asset Purchase Agreement, dated June 28, 2006, between the Registrant and AstraZeneca UK Limited.

10.16(15)		Agreement, dated April 18, 2006, between Registrant and RSU LLC.

10.17(15)*		Manufacturing and Supply agreement, dated June 28, 2006 between the Registrant and AstraZeneca LP.

10.18(15)*		Manufacturing and Supply agreement, dated June 28, 2006 between the Registrant and AstraZeneca Pharmaceuticals LP.

10.19(14)		Employment Agreement, dated July 3, 2006, between the Registrant and Lisa Gopalakrishnan.

10.20		Standard Form Office Lease, dated March 24, 2006, between the Registrant and California State Teachers’ Retirement System, as amended on May 26, 2006, for the premises located at 11755 Wilshire Boulevard, Los Angeles, California.

10.21*		Aircraft Purchase and Sale Agreement

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to 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 adopted 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 adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Description


(1)		Incorporated by reference to Registrant’s Registration Statement filed on Form S-1/A, file number 333-70900, filed with the Securities and Exchange Commission on December 11, 2001.

(2)		Incorporated by reference to Registrant’s Registration Statement filed on Form S-1/A, file number 333-70900, filed with the Securities and Exchange Commission on December 13, 2001.

(3)		Incorporated by reference to Registrant’s Registration Statement filed on Form S-1, file number 333-70900, filed with the Securities and Exchange Commission on October 3, 2001.

(4)		Incorporated by reference to Registrant’s Registration Statement filed on Form S-1/A, file number 333-70900, filed with the Securities and Exchange Commission on November 20, 2001.

(5)		Incorporated by reference to the Registrant’s report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2004.

(6)		Incorporated by reference to the Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2004.

(7)		Incorporated by reference to the Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2005.

(8)		Incorporated by reference to the Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2005.

(9)		Incorporated by reference to the Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2005.

(10)		Incorporated by reference to Registrant’s Registration Statement filed on Form S-8, file number 333-133364, filed with the Securities and Exchange Commission on April 18, 2006.

(11)		Incorporated by reference to the Registrant’s Definitive Proxy Statement on Form 14A filed with the Securities and Exchange Commission on April 29, 2005.


(12)		Incorporated by reference to the Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on November 29, 2005.

(13)		Incorporated by reference to Registrant’s report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2006.

(14)		Incorporated by reference to Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on August 7, 2006.

(15)		Incorporated by reference to Registrant’s report on Form 10-Q/A filed with the Securities and Exchange Commission on August 10, 2006.

*	Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Avg

App Pharmaceuticals (ABBI) Inactive 10-Q2006 Q3 Quarterly report

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