Adams Respiratory Therapeutics (ARXT) 10-Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2005

Or

o 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: 000-51445

ADAMS RESPIRATORY THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization) 75-2725552
(I.R.S. Employer Identification No.)

425 Main Street
Chester, New Jersey 07930
(Address of principal executive offices including zip code)

(908) 879-1400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (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 Noo

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.
Large accelerated filero            Accelerated filero            Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ

Number of shares of common stock, par value $0.01, outstanding as of February 5, 2006: 34,264,601 shares.

ADAMS RESPIRATORY THERAPEUTICS, INC.

INDEX

	Page
Special Note Regarding Forward-looking Statements		3
Part I. Financial Information		3
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets — December 31, 2005 and June 30, 2005		5
Consolidated Statements of Operations — Three and six months ended December 31, 2005 and 2004		6
Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) —December 31, 2005		7
Consolidated Statements of Cash Flows — Six months ended December 31, 2005 and 2004		8
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		25
Item 4. Controls and Procedures		25
Part II. Other Information		26
Item 1. Legal Proceedings		26
Item 1A. Risk Factors		26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 4. Submission of Matters to a Vote of Security Holders		27
Item 6. Exhibits		28
Signatures		29
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I—FINANCIAL INFORMATION

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Some of the statements made under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q contain forward-looking statements that reflect our plans, beliefs and current views with respect to, among other things, future events and financial performance. We often identify these forward-looking statements by the use of forward-looking words such as “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “could,” “would,” “seek,” “predict,” “intend,” “plan,” “estimate,” “anticipate” or the negative version of those words or other comparable words. Specifically, this report contains, among others, forward-looking statements regarding:

• the increase in stock compensation expense and the reduction in the expected life of our stock options;

• our involvement in litigation having a material adverse impact on our business, financial condition, results of operations or cash flows;

• our obligations related to product returns;

• our ability to obtain sufficient quantities of raw materials, including guaifenesin and dextromethorphan;

• our intentions related to repurchasing the Fort Worth, Texas manufacturing assets and operations;

• our expectations of the seasonality of Mucinex sales and related revenue fluctuations;

• our intentions to market additional products, grow our business and expand our product portfolio;

• our ability to meet our anticipated operating needs with our revenues;

• the timing of the United States Patent and Trademark Office’s, or USPTO’s, reexamination of the patentability of our delivery system for guaifenesin and our ability to prevail in the reexamination process;

• our reliance on and continued consolidation of our top customers;

• our expectations of increased pricing pressures;

• our ability to leverage our brand name; and

• our exposure to credit rate and interest rate risk.

     Any forward-looking statements contained in this quarterly report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. In addition, there are or will be important factors that could cause our actual results to differ materially from those in the forward-looking statements. We believe these factors include, but are not limited to, those described in Part II, Item IA. Risk Factors.

     These cautionary statements should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this quarterly report. Moreover, we operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict these new risks or uncertainties, nor can it assess the impact, if any, that any such risks or uncertainties may have on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those projected in any forward-looking statement. Accordingly, the risks and uncertainties to which we are subject can be expected to change over time, and we undertake no obligation to update publicly or review the risks or uncertainties described herein. We also undertake no obligation to update publicly or review any of the forward-looking statements made in this quarterly report, whether as a result of new information, future developments or otherwise.

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     If one or more of the risks or uncertainties referred to in this quarterly report materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this quarterly report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, financial condition, growth strategy and liquidity. You should specifically consider the factors identified in this quarterly report and in our final prospectus filed with the SEC pursuant to Rule 424(b) on December 9, 2005 that could cause actual results to differ. We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

     As used herein, except as otherwise indicated by the context, references to “we,” “us,” “our,” or the “Company” refer to Adams Respiratory Therapeutics, Inc. and its subsidiaries.

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ITEM 1. FINANCIAL STATEMENTS.

Adams Respiratory Therapeutics, Inc.

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

	December 31,			June 30,
	2005			2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	143,479		$	24,655
Short-term investments		9,882			—
Accounts receivable, net of allowance for doubtful accounts of $179 December 31, 2005 and $166 at June 30, 2005		37,305			8,531
Inventories, net of reserve for obsolescence of $29 at December 31, 2005 and June 30, 2005		732			3,107
Prepaid expenses and other assets		6,408			4,727
Income taxes receivable		10,888			4,990
Deferred tax assets		5,727			5,455
Total current assets		214,421			51,465
Property, plant and equipment, net of accumulated depreciation of $647 at December 31, 2005 and $467 at June 30, 2005		2,645			1,925
Deferred tax assets		1,468			2,789
Intangible assets, net of accumulated amortization of $1,217 at December 31, 2005 and $799 at June 30, 2005		5,545			5,964
Other assets		1,000			1,697
Total assets	$	225,079		$	63,840
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	16,808		$	6,818
Accrued compensation and related items		2,813			866
Accrued returns, chargebacks, rebates and other sales allowances		9,293			9,947
Other current liabilities		4,986			1,098
Total current liabilities		33,900			18,729
Long-term liabilities:
Deferred gain on sale of plant assets		1,394			1,478
Accrued royalties		852			803
Total liabilities		36,146			21,010
Redeemable convertible preferred stock:
Series A, $0.01 par value:
Issued and outstanding shares — none at December 31, 2005 and 4,307 at June 30, 2005		—			98,705
Series B, $0.01 par value:
Issued and outstanding shares — none at December 31, 2005 and 6,328 at June 30, 2005		—			98,251
Series C, $0.01 par value:
Issued and outstanding shares — none at December 31, 2005 and 4,849 at June 30, 2005		—			119,499
Total redeemable convertible preferred stock		—			316,455
Stockholders’ equity/(deficit):
Preferred Stock, $0.01 par value:
Authorized shares — 50,000, Issued and outstanding — none		—			—
Common stock, $0.01 par value:
Authorized shares — 100,000, Issued and outstanding shares — 34,168 at December 31, 2005 and 8,737 at June 30, 2005		342			87
Additional paid-in capital		454,730			15,481
Accumulated deficit		(266,139	)		(289,193	)
Total stockholders’ equity/(deficit)		188,933			(273,625	)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity	$	225,079		$	63,840

See Notes to Consolidated Financial Statements which are an integral part of these statements.

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Adams Respiratory Therapeutics, Inc.

Consolidated Statements of Operations

(Amounts in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
	(unaudited)
Net sales	$	63,247		$	36,098		$	110,264		$	62,021
Cost of goods sold		13,920			7,139			22,441			13,350
Gross margin		49,327			28,959			87,823			48,671
Selling, marketing & administrative		29,693			22,937			45,562			30,768
Product development		4,096			1,584			7,522			3,059
Other, net		(1,862	)		(133	)		(2,788	)		(242	)
		31,927			24,388			50,296			33,585
Income before income taxes		17,400			4,571			37,527			15,086
Provision for income taxes		6,734			1,778			14,473			5,858
Net income		10,666			2,793			23,054			9,228
Accretion of preferred stock		—			(62,789	)		—			(125,578	)
Net income/(loss) applicable to common stockholders	$	10,666		$	(59,996	)	$	23,054		$	(116,350	)
Income/(loss) per common share
Basic	$	0.32		$	(10.00	)	$	0.75		$	(19.78	)
Diluted	$	0.29		$	(10.00	)	$	0.65		$	(19.78	)
Weighted-average of common shares used in income/(loss) per share calculation
Basic		33,464			6,001			30,676			5,883
Diluted		36,398			6,001			35,676			5,883

See Notes to Consolidated Financial Statements which are an integral part of these statements.

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Adams Respiratory Therapeutics, Inc.

Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Amounts in thousands)

																			Total
																			Redeemable												Total
	Preferred Stock																		Convertible							Additional					Stockholders’
	Series A						Series B						Series C						Preferred			Common Stock				Paid-In		Accumulated			Equity/
	Shares			Amount			Shares			Amount			Shares			Amount			Stock			Shares		Amount		Capital		Deficit			(Deficit)
Balance as of June 30, 2005		4,307		$	98,705			6,328		$	98,251			4,849		$	119,499		$	316,455			8,737	$	87	$	15,481	$	(289,193	)	$	(273,625	)
Stock compensation expense (unaudited)		—			—			—			—			—			—			—			—		—		2,177		—			2,177
Exercise of stock options (unaudited)		—			—			—			—			—			—			—			847		8		1,337		—			1,345
Exercise of warrants (unaudited)		—			—			—			—			—			—			—			160		2		714		—			716
Tax benefit of stock option exercises (unaudited)		—			—			—			—			—			—			—			—		—		12,253		—			12,253
Issuance of common stock (unaudited)		—			—			—			—			—			—			—			6,890		69		106,489		—			106,558
Conversion of preferred stock (unaudited)		(4,307	)		(98,705	)		(6,328	)		(98,251	)		(4,849	)		(119,499	)		(316,455	)		17,534		176		316,279		—			316,455
Net income (unaudited)		—			—			—			—			—			—			—			—		—		—		23,054			23,054
Balance as of December 31, 2005 (unaudited)		—		$	—			—		$	—			—		$	—		$	—			34,168	$	342	$	454,730	$	(266,139	)	$	188,933

See Notes to Consolidated Financial Statements which are an integral part of these statements.

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Adams Respiratory Therapeutics, Inc.

Consolidated Statements of Cash Flows

(Amounts in thousands)

	Six Months Ended
	December 31,
	2005			2004
	(unaudited)
Operating Activities
Net income	$	23,054		$	9,228
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		598			327
Stock compensation expense		2,177			179
Deferred taxes		1,049			4,942
Changes in operating assets and liabilities:
Accounts receivable		(28,774	)		(15,046	)
Inventories		2,375			664
Prepaid expenses and other current assets		(1,681	)		(832	)
Prepayment of advertising expense		—			(8,155	)
Other assets		—			(2,000	)
Accounts payable		9,990			2,566
Income taxes		(5,898	)		(144	)
Accrued expenses and other liabilities		5,670			2,942
Net cash provided by/(used in) operating activities		8,560			(5,329	)
Investing Activities
Purchases of property, plant and equipment		(900	)		(1,513	)
Purchases of restricted cash/short-term investments		(10,882	)		(9,948	)
Net cash (used in) investing activities		(11,782	)		(11,461	)
Financing Activities
Proceeds from exercise of stock options and warrants		2,061			171
Net proceeds from issuance of common stock		107,732			—
Excess tax benefit from exercise of stock options		12,253			—
Net cash provided by financing activities		122,046			171
Net increase/(decrease) in cash and cash equivalents		118,824			(16,619	)
Cash and cash equivalents at beginning of period		24,655			43,391
Cash and cash equivalents at end of period	$	143,479		$	26,772

See Notes to Consolidated Financial Statements which are an integral part of these statements.

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Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)

1. Summary of Significant Accounting Policies

Basis of Presentation

     The Company operates in one business segment, specialty pharmaceuticals. The Company’s “fiscal year” is from July 1 through June 30. Certain prior year amounts have been reclassified to conform to the current year presentation.

     The unaudited consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial statements include all adjustments, consisting only of normal recurring adjustments, that are considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. Operating results for the three and six months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. For a better understanding of the Company and its financial statements, the Company recommends reading these unaudited financial statements and notes in conjunction with the audited financial statements and notes to those financial statements for the year ended June 30, 2005, which are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

Principles of Consolidation

     The consolidated financial statements include the accounts of Adams Respiratory Therapeutics, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. In June 2005, the Company incorporated Adams Respiratory Therapeutics Products, Inc. and Adams Respiratory Therapeutics Commercial Operations, Inc. as wholly-owned subsidiaries.

Use of Estimates

     The financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the use of judgments and estimates by management that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Intangible Assets

     During fiscal year 2004, the Company paid $1,250 to enter into a development and license agreement with Pharmaceuticals Design L.L.C. (“PD”) for the rights to market respiratory products in patent-protected packaging configurations. In July 2005, the Company decided not to go forward with the development and license agreement with PD. To terminate this agreement, the Company paid and expensed $500 to selling, marketing and administrative expenses during the first quarter of fiscal year 2006. In addition, the Company wrote off the related intangible asset with a net book value of $900 to selling, marketing and administrative expenses as of June 30, 2005.

     In December 2004, the Company entered into an agreement with JMED Pharmaceuticals, Inc. (“JMED”), an affiliate of PD, for the ability to transfer the AlleRx™ license to Cornerstone Biopharma, Inc. (“Cornerstone”). The Company paid $2,000 in January 2005 towards the acquisition of this license, which is being amortized over five years. Upon completion of a valuation of the future royalties under the license agreement, JMED will have the right to either (i) convert the valuation amount in excess of the $2,000, if any, into the Company’s common stock at the initial public offering price, in which case the Company will become entitled to future AlleRx™ royalties or (ii) continue to receive the future AlleRx™ royalties and JMED will pay the Company 40% of future royalties, up to a maximum of $1,000.

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Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

     In connection with the AlleRx™ license transfer agreement with JMED, in February 2005, the Company entered into an agreement with Cornerstone in which it received the Humibid trademarks from Cornerstone and Cornerstone received the AlleRx™ trademarks from the Company. Additionally, the parties released each other from all claims and damages in a lawsuit that the Company filed in 2004. As part of this arrangement, the Company is contractually obligated to assume the financial responsibility for the first $1,000 of returned AlleRx™ product that was sold by the Company prior to February 15, 2005 and returned to Cornerstone during the 18-month period beginning February 15, 2005. Conversely, Cornerstone is financially responsible for the first $1,000 of Humibid product returns for the same 18-month period. After the $1,000 threshold is met, the Company will have the responsibility for all Humibid product returns, whether sold by it or Cornerstone, and Cornerstone will bear the same liability for AlleRx™ products. In connection with this agreement, the Company is obligated to pay to Cornerstone a royalty ranging from 1% to 2% of net Humibid sales for a period of three years after February 15, 2005, with an annual minimum royalty payment of $50.

     The Company recorded a $3,000 intangible asset, which represents the fair value of the Humibid trademark, and a corresponding $3,000 liability that the Company assumed in the transaction. The liability assumed represents the assumed returns liability in excess of the $1,000 threshold in this transaction. This asset is being amortized over its remaining estimated useful life of 15 years. The $3,000 liability is recorded in accrued returns, chargebacks, rebates and other sales allowances. As of December 31, 2005, the first $1,000 of Humibid inventory had been returned and was recorded in prepaid expenses and other assets as a receivable due from Cornerstone.

Other Assets

     Included in Other Assets as of December 31, 2005 was $1,000 of restricted cash as collateral for the Company's letter of credit for its new office facility in Chester, New Jersey.

     At June 30, 2005, there were $1,697 of deferred offering costs included in intangibles and other assets. An additional $694 was incurred during the six months ended December 31, 2005. These costs are specific incremental costs directly attributable to the initial public offering. The total deferred offering costs of $2,391 were applied against the proceeds of the initial public offering.

Income Taxes

     Income taxes are recorded in the Company’s quarterly consolidated financial statements based on the Company’s estimated annual effective income tax rate. The effective rates used in the calculation of income taxes were 38.7% and 38.9% for the three months ended December 31, 2005 and 2004, respectively, and 38.6% and 38.8% for the six months ended December 31, 2005 and 2004, respectively.

Revenue Recognition

     The Company recognizes product sales when title and risk of loss have transferred to the customer, when estimated provisions for product returns, rebates, chargebacks and other sales allowances are reasonably determinable and when collectibility is reasonably assured. Accruals for these provisions are presented in the financial statements as reductions to sales.

Sales Returns and Allowances

     When the Company’s products are sold, the Company reduces the amount of revenue recognized from such sale by an estimate of future product returns and other sales allowances. Other sales allowances include cash discounts, rebates, including Medicaid rebates, chargebacks, trade promotions and sales incentives relating to product sold in the current period.

     Factors that are considered in the estimates of future product returns include an estimate of the amount of product in the trade channel, competitive products, the remaining time to expiration of the product, and the historical rate of returns.

10

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

     Consistent with industry practice, the Company maintains a return policy that allows its customers to return product within a specified period prior and subsequent to the expiration date.

     Factors that are considered in the estimates regarding other sales allowances include historical payment experience in relationship to revenues, estimated customer inventory levels and current contract prices and terms with both direct and indirect customers.

     The provision for chargebacks represents the amount payable in the future to a wholesaler for the difference between the invoice price paid to the Company by its wholesale customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product. The chargeback estimates take into consideration the current average chargeback rates by product and estimates wholesaler inventory levels. The Company continually monitors its assumptions, giving consideration to current pricing trends and estimated wholesaler inventory levels and makes adjustments to these estimates when it believes that the actual chargeback amounts payable in the future will differ from its original estimate.

     Rebates and sales incentives are recognized as a reduction of sales at the later of (i) the date at which the related revenue is recorded or (ii) the date at which the incentives are offered. Trade promotions include co-operative advertising arrangements and are recorded as a reduction of sales when the related revenue is recorded. In November 2005, the Company issued coupons that expired January 31, 2006. The Company estimates the cost of rebates, sales incentives and trade promotions based on its historical experience with similar programs.

     If actual future payments for product returns and other sales allowances exceed the estimates the Company made at the time of sale, its financial position, results of operations and cash flow would be negatively impacted.

Cardinal Health Profit Share Arrangement

     On April 1, 2004, the Company sold substantially all of its manufacturing assets located in Fort Worth, Texas to Cardinal Health PTS, LLC (“Cardinal Health”). In connection with the sale of its manufacturing assets, the Company entered into a supply agreement (the “Supply Agreement”) with Cardinal Health, whereby Cardinal Health manufactures substantially all of the Company’s products. Under the Supply Agreement, Cardinal Health is required to segregate direct manufacturing costs from indirect manufacturing costs, as defined in the Supply Agreement. As finished goods are completed and shipped to a Company-designated warehouse, Cardinal Health bills the Company for the actual direct manufacturing costs incurred plus a mark-up percentage. The mark-up percentage is strictly provided for interim billing and cash flow purposes and the final amount payable to Cardinal Health is calculated at the end of each contract year (March 31st) under a profit sharing formula. The amount that is subject to the profit sharing is calculated as net sales, as defined in the Supply Agreement, less the actual manufacturing cost of the goods sold during the contract year less freight and other logistics costs. The resulting gross profit is subject to profit sharing rates that decline as the total value of gross profit increases. At the end of the contract year, a reconciliation is completed and a billing adjustment is made to the extent that the actual calculated profit share is greater or lower than the total mark-up paid to Cardinal Health during the contract year. A true-up of the actual profit share amounts earned is compared to payments made to Cardinal Health at each March 31. The Company also makes estimates of the profit share amount earned by Cardinal Health at each balance sheet date and compares that to the payments made to Cardinal Health. The Company records a receivable or payable for the difference. At December 31, 2005, the Company had a receivable of $3,895 as a result of the mark-up billed by Cardinal Health exceeding the estimated March 31, 2006 contract year effective profit share amount, which is included in prepaid expenses and other assets.

     The accounting policy with regard to this arrangement is to record the actual direct manufacturing cost and estimated profit share as inventory. Each month as product is sold, the actual direct manufacturing cost plus the estimate of the profit share amount earned by Cardinal Health is charged to cost of sales. The estimated profit share amount considers for each contract year (i) the Company’s projected net product sales and gross profit, (ii) the projected profit share and (iii) the contractual minimum profit share amount.

     The Company is considering exercising its option to repurchase the Fort Worth, Texas manufacturing assets and operations back from Cardinal Health and may use a portion of the proceeds from the Company’s initial public offering for the repurchase.

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Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

Concentration of Credit Risk

     The Company sells its products principally to wholesalers and retailers, including mass merchandisers, grocery stores, membership clubs, and drug stores throughout the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. Beginning in fiscal year 2005, as a result of increased Mucinex sales, the Company reduced its concentration levels with certain customers and now sells to a combination of wholesalers, major retailers and mass merchandisers. The table below outlines the percentage of gross sales made to the following customers for the six months ended:

	December 31,
	2005			2004
Wholesaler		9	%		16	%
Major retailer — A		14	%		14	%
Major retailer — B		14	%		12	%
Major retailer/mass merchandiser		18	%		12	%

Accounting for Stock-Based Compensation

     Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R) –Share-Based Payment(“SFAS No. 123(R)”), which expands and clarifies SFAS No. 123,Accounting for Stock-Based Compensationas amended by SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure(“SFAS No. 123”), in several areas. The Company elected the prospective method for all grants in fiscal year 2006. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation. The Company uses the graded-vesting methodology to record the stock-based compensation expense over the vesting period, which generally ranges from three to five years. This methodology results in a greater amount of expense recognized towards the beginning of the vesting period as opposed to the straight-line method. Because subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing methods do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

     Prior to fiscal year 2006, the Company accounted for its stock-based compensation using the minimum value method as permitted for nonpublic companies under SFAS No. 123. However, after the Company’s July 20, 2005 initial public offering, the Company is no longer considered “nonpublic” and had to consider a volatility assumption in the calculation of fair value. Because the Company does not have much history as a public company to support its estimate of future volatility, a combination of peer companies in its industry with similar business cycles was used. This volatility assumption was used on options granted after July 20, 2005. The addition of this assumption materially increased the fair value of subsequent option grants.

Other, net

     For the three months ended December 31, 2005 and 2004, Other, net primarily consisted of interest income of $1,586 and $158, respectively. For the six months ended December 31, 2005 and 2004, Other, net primarily consisted of interest income of $2,537 and $295, respectively.

12

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

Income/(Loss) per Common Share

     Basic net income/(loss) per common share (“Basic EPS”) is computed by dividing net income/(loss) applicable to common stockholders by the weighted-average number of common shares outstanding. Diluted net income/(loss) per common share (“Diluted EPS”) is computed by dividing net income/(loss) applicable to common stockholders by the weighted-average number of common shares outstanding, plus potential dilutive common shares. The following table sets forth the computation of basic and diluted income per common share:

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2005		2004			2005		2004
Net income	$	10,666	$	2,793		$	23,054	$	9,228
Accretion of preferred stock		—		(62,789	)		—		(125,578	)
Net income/(loss) applicable to common stockholders	$	10,666	$	(59,996	)	$	23,054	$	(116,350	)
Average shares outstanding — basic		33,464,379		6,000,678			30,675,844		5,883,432
Preferred shares before conversion		—		—			1,905,845		—
Warrants		312,103		—			330,899		—
Stock options		2,617,306		—			2,760,546		—
Restricted stock units		4,037		—			2,780		—
Average shares outstanding — diluted		36,397,875		6,000,678			35,675,915		5,883,432
Income/(loss) per common share:
Basic	$	0.32	$	(10.00	)	$	0.75	$	(19.78	)
Diluted	$	0.29	$	(10.00	)	$	0.65	$	(19.78	)

     The following table shows common share equivalents outstanding for the period, which are not included in the above historical calculations, as the effect of their inclusion is anti-dilutive during each period:

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2005		2004		2005		2004
Warrants		—		3,362,378		—		3,362,378
Stock options		67,350		3,531,071		91,035		3,531,071
		67,350		6,893,449		91,035		6,893,449

2. Benefit Plan

     The Company provides a 401(k) benefit plan (the “Plan”) covering substantially all employees. Under the Plan, employees are eligible to participate in the Plan upon attaining the age of 21 and completing six months of service and can contribute up to 80% of their compensation each year subject to certain Internal Revenue Code limitations. The board of directors approved a match on employee contributions made during calendar year 2005, contingent upon an established sales threshold for fiscal year 2005. The match is on employee contributions starting on January 1, 2005. A match of $102 was accrued on the deferrals from January 1, 2005 to December 31, 2005, primarily in selling, marketing and administrative expenses. Of that total match, $2 and $41 was expensed for the three and six months ended December 31, 2005, respectively.

13

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

3. Stockholders’ Equity (Deficit)

Initial Public Offering

     In July 2005, the Company completed its initial public offering of 9,142,500 shares of common stock at a price of $17.00 per share. The offering consisted of 6,889,500 newly issued shares sold by the Company and 2,253,000 shares sold by selling stockholders. The offering generated gross proceeds of approximately $117,000 and net proceeds of $106,672. Upon completion of the initial public offering, all three series of redeemable convertible preferred stock were converted into 17,533,696 shares of common stock.

Secondary Offering

     In December 2005, the Company completed a secondary offering of 5,660,890 shares of its common stock. All of the shares sold were sold by selling stockholders. The Company did not sell any shares in, or receive any proceeds from, the secondary offering. The Company paid approximately $700 of legal, printing, audit and other costs related to the secondary offering, which is included in selling, marketing and administrative expense.

Stock Compensation Plan

     In March 2005, the board of directors adopted, and in May 2005 the stockholders adopted, the 2005 Incentive Plan. Under the terms of the 2005 Incentive Plan, employees, directors and others designated by the board of directors may be granted awards in the form of incentive stock options, nonqualified stock options, stock appreciation rights, performance awards, restricted stock, stock units, dividend equivalents or other stock-based awards at the discretion of the compensation committee of the board of directors. Prior to the Company’s initial public offering, the Company issued awards under the 1999 Long-Term Incentive Plan, which had similar features to the 2005 Incentive Plan. The board of directors decided not to grant any additional awards pursuant to this plan after completion of the Company’s offering.

     The 2005 Incentive Plan is administered by the compensation committee. The compensation committee has the authority to designate participants, determine the type or types of awards to be granted to each participant and the number, terms and conditions of award. Options granted are subject to a vesting term, generally over three to five years from the grant date. Options are granted for a fixed number of shares with an exercise price equal to the fair value at the date of grant. For options granted prior to the Company’s initial public offering on July 20, 2005, the fair value was based on valuations performed by management and approved by the board of directors. For options granted on or after July 20, 2005, the fair value of the stock was equal to the NASDAQ closing price at the date of grant. New shares are issued upon exercise of the stock options.

     Because the Company does not have sufficient history as a public company to support its estimate of future volatility, the historical volatility of a combination of peer companies of similar nature and size were used to calculate the volatility assumption. The addition of the volatility assumption significantly increased the stock compensation expense from fiscal year 2005 to 2006, and this trend is expected to continue.

     In estimating the expected life of the options, the Company considered the vesting period of the grants, historical exercise patterns, the expected volatility of the stock, the lockup periods related to the public offerings, and employees’ ages and years of service. The Company reduced the expected life of the options from six years for fiscal year 2005 and prior down to approximately five years for those grants in fiscal year 2006 subsequent to the initial public offering. The Company assumed that options would be exercised sooner, because there is now a market for the stock and the increased stock volatility is expected to result in increased exercise activity in future periods when the lock-up periods expire.

     The Company uses the graded vesting methodology to record compensation expense over the vesting period. This methodology results in a greater amount of expense recognized towards the beginning of the vesting period as opposed to the straight-line method. Because subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing methods do not necessarily provide a reliable single measure of the fair value of its stock options.

14

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

     The Company recorded stock compensation expense of $1,134 and $90 for the three months ended December 31, 2005 and 2004, respectively, and $2,177 and $179 for the six months ended December 31, 2005 and 2004, respectively, primarily in selling, marketing and administrative expenses. The tax benefit recognized on the stock compensation expense for the three and six months ended December 31, 2005 was $102 and $433, respectively, and related to the nonqualified stock options granted during the period and disqualifying dispositions upon the exercise of incentive stock options. Compensation cost not yet recognized as of December 31, 2005 was $7,185 and is expected to be recognized over the next weighted average of 1.8 years.

     The following weighted-average assumptions were used in the calculation of fair value of options granted in the respective periods:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Expected life of the option	5.5 years			6 years			5 years			6 years
Risk-free interest rate		4.3	%		3.4	%		4.0	%		3.4	%
Volatility		52.8	%		0.0	%		66.4	%		0.0	%
Expected dividend yield		0	%		0	%		0	%		0	%
Weighted-average fair value per option granted	$	12.24		$	0.33		$	20.65		$	0.32
Intrinsic value of options exercised	$	31,565		$	294		$	34,380		$	327

     A summary of the Company’s stock option activity and related information is as follows:

				Weighted-
				Average
				Exercise
	Shares			Price per Option
Options outstanding at June 30, 2004		3,223,585		$	1.23
Granted		486,311			6.56
Canceled		(78,496	)		2.26
Exercised		(384,097	)		3.16
Options outstanding at June 30, 2005		3,247,303			1.68
Granted		883,826			18.82
Canceled		(11,132	)		9.57
Exercised		(848,228	)		1.59
Options outstanding at December 31, 2005		3,271,769		$	6.31

     The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2005:

			Options Outstanding						Options Exercisable
			Weighted-
			Average
			Years		Weighted-						Weighted-
Ranges			Remaining		Average						Average
of			On		Exercise		Aggregate				Exercise		Aggregate
Exercise	Number		Contractual		Price		Intrinsic		Number		Price		Intrinsic
Prices	Outstanding		Life		per Option		Value		Exercisable		per Option		Value
$0.40		1,509,414		7.1	$	0.40	$	60,769		926,511	$	0.40	$	37,301
$1.42-$2.22		418,430		8.2		1.57		16,357		33,536		1.55		1,311
$3.02-$4.56		169,643		7.4		3.40		6,321		58,569		4.11		2,141
$5.01-$5.70		178,233		8.8		5.03		6,351		9,612		5.31		340
$11.40		113,724		9.1		11.40		3,327		21,762		11.40		637
$17.00		791,291		9.6		17.00		18,722		—		—		—
$28.50-$45.37		91,034		9.8		34.39		596		—		—		—
		3,271,769					$	112,443		1,049,990			$	41,730

15

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

     The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value based on the Company’s closing price of $40.66 as of December 30, 2005, which would have been received by the option holders had all option holders exercised their options as of that date.

     The weighted-average grant date fair value per option for the following groups of options as of December 31, 2005 was:

			Weighted Average
	Number of		Grant Date
	Options		Fair Value per Option
Nonvested options at June 30, 2005		1,631,078	$	0.42
Nonvested options at December 31, 2005		2,221,773		4.46
Vested and exercisable at December 31, 2005		1,049,990		0.17
Granted during the six months ended December 31, 2005		883,826		20.65
Forfeited during the six months ended December 31, 2005		11,132		2.70

     During the six months ended December 31, 2005, 4,637 restricted stock units were granted to certain of the Company’s board members at a weighted average fair value of $24.39. During the period, 491 restricted stock units with a fair value of $17.00 were forfeited upon retirement of a board member. The restricted stock units vest in full at the first annual stockholders’ meeting following the date of grant. Upon vesting, the restricted stock units will automatically convert into deferred stock units, which will not be converted into the Company’s common stock until six months following a director’s termination of board service. The fair value of the restricted stock units is determined by using the grant date closing market price of the Company’s common stock. Stock compensation expense included $71 and $105 of expense associated with the restricted stock units for the three and six months ended December 31, 2005, respectively.

Warrants

     At December 31, 2005, the Company had the following outstanding warrants to purchase common stock:

	Outstanding		Exercise
	Warrants		Price
		1,989	$	0.03
		127,590	$	4.13
		114,649	$	4.56
Total		244,228

     These warrants have a term ranging from five to ten years, with the first warrants expiring in July 2006 and the last warrants expiring in June 2013.

4. Commitments and Contingencies

     The Company has obligations under noncancelable operating leases for buildings and certain equipment expiring in various years through August 2014. Future rental commitments are primarily for the office building in Chester, New Jersey, which terminates August 2014. In October 2005, the Company entered into a twelve-year operating lease for a new office facility in Chester, New Jersey, which will commence on or about March 1, 2006. The first three years’ rent is fixed at $816 per year and increases to $872 in years four through six; $920 in years seven through nine; and $1,000 in years ten through twelve. The Company is currently considering its plans for its existing facility in Chester, New Jersey.

     In connection with the Supply Agreement, the Company is obligated to pay a minimum profit share to Cardinal Health of $3,000 each year for the contract years ending March 31, 2006 and 2007. As of December 31, 2005, the Company had exceeded the minimum profit share amount to Cardinal Health for the contract year ending March 31, 2006.

     The Company is a party to various claims and suits arising out of matters occurring during the normal course of business. However, as of December 31, 2005, there was no current proceeding or litigation involving the Company that the

16

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

Company believes will have a material adverse impact on its business, financial condition, results of operations or cash flows.

     On May 7, 2004, the Company filed a complaint in the U.S. District Court for the Southern District of New York against Carolina Pharmaceuticals, Inc. (“Carolina”). The Company filed an amended complaint on October 25, 2004, which added Cornerstone as a defendant. The amended complaint alleged trademark, false advertising and unfair competition claims and sought damages and injunctive relief. Carolina and Cornerstone filed counterclaims against the Company, alleging that the Company’s activities with respect to its single-entity Mucinex product violate the anti-monopoly provisions of the federal antitrust laws, that the Company had engaged in false advertising in violation of federal law with respect to single-entity Mucinex and the Company’s AlleRx™ and Aquatab products, and that the Company had violated state law in competing with the products of Carolina and Cornerstone. In February 2005, the Company entered into an agreement with Cornerstone in which it received the Humibid trademarks from Cornerstone and Cornerstone received the AlleRx™ trademarks from the Company. Additionally, the parties released each other from all claims and damages in the lawsuit. As part of this arrangement, the Company is contractually obligated to assume the financial responsibility for the first $1,000 of returned AlleRx™ product that was sold by the Company prior to February 15, 2005 and returned to Cornerstone during the 18-month period beginning February 15, 2005. Conversely, Cornerstone is financially responsible for the first $1,000 of Humibid product returns for the same 18-month period. After the $1,000 threshold is met, the Company will have the responsibility for all Humibid product returns, whether sold by the Company or Cornerstone, and Cornerstone will bear the same liability for AlleRx™ products. In connection with this agreement, the Company is obligated to pay Cornerstone a royalty ranging from 1% to 2% of net Humibid sales for a period of three years after February 15, 2005. During the first quarter of fiscal year 2006, a major wholesaler indicated that they were in possession of a significant amount of Humibid prescription inventory. The Company is currently evaluating whether it is responsible for these returns under the agreement with Cornerstone. The Company believes it can defend its position in accordance with the agreement; however, if it is determined that the Company is obligated for these returns, there could be an additional charge to pretax earnings of up to $3,600.

     In March 2004, the Company entered into a development and license agreement with PD, an affiliate of JMED, in which the Company licensed certain intellectual property to commercialize certain respiratory products. Pursuant to the agreement, the Company paid PD $1,250. In July 2005, the Company decided not to go forward with the agreement. As a result, the Company paid and expensed $500 to selling, marketing and administrative expenses in the first quarter of fiscal year 2006.

     In December 2004, the Company entered into an agreement with JMED for the ability to transfer the AlleRx™ license agreement to Cornerstone, and the Company paid JMED $2,000 in January 2005. In connection with the PD License agreement, JMED was granted the right to convert its on-going royalty interest in the AlleRx™ product to the Company’s common stock in the event of a public offering or change of control of the Company. The assignment of the JMED agreement to Cornerstone provided that JMED had the right to exchange its royalty interest for the Company’s common stock, as outlined under the PD license agreement. The valuation of the on-going royalty was scheduled to be performed prior to March 31, 2005. The parties have waived the March 31, 2005 deadline and are currently working toward obtaining a valuation. To the extent that the final appraisal exceeds the $2,000 previously paid, JMED will have the right to convert the excess into the Company’s common stock at the price per share in the initial public offering. Upon conversion of JMED’s royalty interest into the Company’s common stock, the Company will become the recipient of future royalties earned under the license agreement. If JMED does not elect to convert the excess royalty interest into the Company’s common stock, JMED will continue to collect royalties under the license agreement and the Company will be paid 40% of such royalties, up to a maximum of $1,000.

     During fiscal year 2004, Cardinal Health’s supplier of dextromethorphan, an active ingredient in Mucinex DM, notified Cardinal Health that they will be exiting the dextromethorphan manufacturing business. At such time, Cardinal Health requested of the supplier, and the supplier agreed, to commit to supplying Cardinal Health with an approximate four-year supply of dextromethorphan. Cardinal Health has made a commitment to the dextromethorphan supplier and is obligated to take delivery of the material over the course of three years beginning in September 2004. The Company provided Cardinal Health with a letter agreement, dated September 30, 2004, stating that the Company will reimburse Cardinal Health for Cardinal Health’s cost in obtaining any unused quantities of dextromethorphan at the first to occur of (i) expiration of the material or (ii) six years from the date of the letter agreement. In November 2005, the Company agreed to extend this contract to purchase an additional 45 metric tons of dextromethorphan through 2009, which the Company

17

Adams Respiratory Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited) — (continued)
($ in thousands, except per share amounts)

believes will meet its needs for at least the next four and one-half years. As of December 31, 2005, the remaining commitment for the entire contract was approximately $14,200.

     Cardinal Health obtains all of the guaifenesin for the Company’s products from two suppliers, Boehringer Ingelheim Chemicals, Inc. (“Boehringer Ingelheim”) and Delta Synthetic Co., LTD (“Delta”). According to Cardinal Health’s agreement with Boehringer Ingelheim, which expires in June 2006, Cardinal Health must purchase all of the guaifenesin used in Mucinex SE and at least 90% of the guaifenesin used in the Company’s products produced under all subsequent New Drug Applications. The Company recently received Food and Drug Administration ("FDA") approval to use Delta as a supplier of guaifenesin. Cardinal Health is currently purchasing guaifenesin from Delta and Boehringer Ingelheim due to Boehringer Ingelheim’s failure to supply the required amounts under the Company’s agreement with Boehringer Ingelheim.

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

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the MD&A, financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, together with our financial statements and related notes appearing elsewhere in this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this document, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review Part II, Item 1A. Risk Factors of this quarterly report and the heading “Risk Factors” in our final prospectus filed with the SEC pursuant to Rule 424(b) on December 9, 2005 for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

     We are a specialty pharmaceutical company focused on late-stage development, commercialization and marketing of over-the-counter, or OTC, and prescription pharmaceuticals for the treatment of respiratory disorders. We currently market three products: Mucinex SE, Mucinex DM and Mucinex D.

     Mucinex SE.Mucinex SE is a long-acting, single-ingredient guaifenesin OTC product and the only single-ingredient, long-acting guaifenesin product approved by the FDA. The FDA approved Mucinex SE in July 2002.

     Mucinex DM.Mucinex DM is an OTC product containing long-acting guaifenesin and the cough suppressant dextromethorphan and is the only FDA-approved, long-acting guaifenesin and dextromethorphan combination product. The FDA approved Mucinex DM in April 2004.

     Mucinex D. Mucinex D is an OTC product containing long-acting guaifenesin and the decongestant pseudoephedrine and is the only FDA-approved, long-acting guaifenesin and pseudoephedrine combination product. The FDA approved Mucinex D in June 2004, and we began to market Mucinex D in October 2005.

     Future Products.We have three additional products that have been approved by the FDA that we intend to market under the Humibid brand name in the future: a maximum strength long-acting, single-ingredient guaifenesin OTC product; a maximum strength OTC combination product containing long-acting guaifenesin and dextromethorphan; and a maximum strength OTC combination product containing long-acting guaifenesin and pseudoephedrine. Like Mucinex SE, Mucinex DM and Mucinex D, these additional products are the only FDA-approved products of their kind. We also intend to launch a line of immediate release guaifenesin pediatric products under the Mucinex brand name.

     Seasonality. We expect retail demand for our products to be higher between October 1 and March 31 due to the prevalence of cough, cold and flu. As a result, our shipments, and therefore revenues, are expected to be higher between July 1 and March 31 to support the retail demand through that season. We generally expect our revenues during the quarter ended June 30 to be lower than the other quarters.

Critical Accounting Policies and Estimates

     Accounting for Stock-Based Compensation.Effective July 1, 2005, we adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R)— Share-Based Payment, or SFAS No. 123(R), which expands and clarifies SFAS No. 123,Accounting for Stock-Based Compensation, as amended by SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure, in several areas. We elected the prospective method for all grants in fiscal year 2006. Prior to the adoption of SFAS 123(R), we accounted for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation. We used the graded-vesting methodology to record the stock-based compensation expense over the vesting period, which generally ranges from three to five years. This methodology results in a greater amount of expense recognized towards the beginning of the vesting period as opposed to the straight-line method. Because subjective input assumptions can materially affect

19

the fair value estimate, in management’s opinion, the existing methods do not necessarily provide a reliable single measure of the fair value of our stock options.

     Prior to fiscal year 2006, we accounted for our stock-based compensation using the minimum value method as permitted for nonpublic companies under SFAS No. 123. However, after our July 20, 2005 initial public offering, we are no longer considered “nonpublic” and had to consider a volatility assumption in the calculation of fair value. Because we do not have sufficient history as a public company to support an estimate of future volatility, we used a combination of peer companies in our industry with similar business cycles. We used this volatility assumption on options granted after July 20, 2005. The addition of this assumption materially increased the fair value of subsequent option grants.

     We have made no material changes to our other critical accounting policies, which are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

Results of Operations

     Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004

     Net Sales.Net sales increased by $27.1 million to $63.2 million for the three months ended December 31, 2005, as compared to $36.1 million for the three months ended December 31, 2004. The increase in net sales was primarily due to the impact of our consumer advertising campaign and the launch of Mucinex D. Net sales during the three months ended December 31, 2005 and 2004 approximated 92% of gross sales.

     The following table sets forth our net sales for the three months ended December 31, 2005 and December 31, 2004:

	Three Months Ended
	December 31,				Increase/
Product	2005		2004		(Decrease)
	(In thousands)
Mucinex SE	$	40,837	$	26,249	$	14,588
Mucinex DM		12,706		7,254		5,452
Mucinex D		9,704		—		9,704
Other products		—		2,595		(2,595	)
Net Sales	$	63,247	$	36,098	$	27,149

     Cost of Goods Sold.Cost of goods sold increased by $6.8 million to $13.9 million for the three months ended December 31, 2005, as compared to $7.1 million for the three months ended December 31, 2004. Cost of goods sold increased in dollar terms primarily as a result of the increase in Mucinex SE and Mucinex DM sales and the launch of Mucinex D. As a percentage of net sales, cost of goods sold during the three months ended December 31, 2005 and 2004 totaled approximately 22.0% and 19.8%, respectively. The increase in the percentage was due to the increased sales of higher cost products, such as Mucinex D and products packaged within display units, coupled with higher costs created by the inefficiencies in the production facility due to the limited guaifenesin supply. For the three months ended December 31, 2005 and 2004, cost of goods sold included $2.7 million and $1.9 million, respectively, of profit share earned by Cardinal Health.

     Selling, Marketing and Administrative.Selling, marketing and administrative expenses increased by $6.8 million to $29.7 million for the three months ended December 31, 2005, as compared to $22.9 million for the three months ended December 31, 2004. The increase during the three months ended December 31, 2005 was primarily due to: (i) approximately $2.5 million associated with various sales and marketing programs, including the training and systems for the 50 additional sales representatives hired in December 2004, professional marketing expenses, expansion of the trade sales department, and spending on the new consumer advertising campaign; (ii) $2.0 million of general and administrative expenses primarily related to new headcount, information technology and insurance; (iii) an increase of $877,000 for stock-based compensation; (iv) approximately $727,000 of additional expense related to distribution and shipping on the increased volume of Mucinex sales; and (v) $700,000 for legal, printing, audit and other costs related to the secondary offering. The increase in stock-based compensation was primarily due to the consideration of a volatility assumption in the calculation of fair value for the fiscal year 2006 stock option grants.

20

     Product Development.Product development expenses increased by $2.5 million to $4.1 million during the three months ended December 31, 2005, as compared to $1.6 million for the three months ended December 31, 2004. The increase for the three months ended December 31, 2005 was due to spending on Mucinex line extensions and start-up of the erdosteine Phase II clinical programs.

     Other, net.Other, net increased by $1.7 million to $1.9 million during the three months ended December 31, 2005, as compared to $133,000 for the three months ended December 31, 2004. The increase during the three months ended December 31, 2005 was primarily due to higher interest income reflecting earnings on the increased cash balances, which include the cash received from the initial public offering, coupled with higher interest rates.

     Income Taxes.Income tax expense for the three months ended December 31, 2005 and 2004 was $6.7 million and $1.8 million, respectively. Our effective tax rate for the three months ended December 31, 2005 and 2004 was 38.7% and 38.9%, respectively.

     Accretion of Preferred Stock.Accretion of our redeemable convertible preferred stock for the three months ended December 31, 2004 was $62.8 million, which reflects the adjustment to accrete the redeemable convertible preferred stock to fair value. Upon the closing of our initial public offering in July 2005, our redeemable convertible preferred stock converted into shares of common stock and, as a result, there was no accretion during the three months ended December 31, 2005.

     Six Months Ended December 31, 2005 Compared to Six Months Ended December 31, 2004

     Net Sales.Net sales increased by $48.2 million to $110.3 million for the six months ended December 31, 2005, as compared to $62.0 million for the six months ended December 31, 2004. The increase in net sales was primarily due to the impact of our initial consumer advertising campaign and the launch of Mucinex D. Net sales during the six months ended December 31, 2005 and 2004 approximated 91% and 87% of gross sales, respectively.

     The following table sets forth our net sales for the six months ended December 31, 2005 and December 31, 2004:

	Six Months Ended
	December 31,				Increase/
Product	2005		2004		(Decrease)
	(In thousands)
Mucinex SE	$	77,455	$	47,276	$	30,179
Mucinex DM		23,105		11,599		11,506
Mucinex D		9,704		—		9,704
Other products		—		3,146		(3,146	)
Net Sales	$	110,264	$	62,021	$	48,243

     Cost of Goods Sold.Cost of goods sold increased by $9.0 million to $22.4 million for the six months ended December 31, 2005, as compared to $13.4 million for the six months ended December 31, 2004. Cost of goods sold increased in dollar terms primarily as a result of the increase in Mucinex SE and Mucinex DM sales and the launch of Mucinex D. As a percentage of net sales, cost of goods sold during the six months ended December 31, 2005 and 2004 totaled approximately 20.4% and 21.5%, respectively. The decrease in the percentage was due to the benefit achieved on the Cardinal Health profit share percentage that declines as the profit increases. The decrease was tempered by increased sales of higher cost products, such as Mucinex D and products packaged within display units, coupled with higher costs created by the inefficiencies in the production facility due to the limited guaifenesin supply. For the six months ended December 31, 2005 and 2004, cost of goods sold included $5.0 million and $4.5 million, respectively, of profit share earned by Cardinal Health.

     Selling, Marketing and Administrative.Selling, marketing and administrative expenses increased by $14.8 million to $45.6 million for the six months ended December 31, 2005, as compared to $30.8 million for the six months ended December 31, 2004. The increase during the six months ended December 31, 2005 was primarily due to: (i) approximately $7.2 million associated with various sales and marketing programs, including the training and systems for the 50 additional sales representatives hired in December 2004, professional marketing expenses,

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expansion of the trade sales department, and spending on the new consumer advertising campaign; (ii) $3.5 million of general and administrative expenses primarily related to new headcount, information technology and insurance; (iii) an increase of $1.7 million for stock-based compensation; (iv) $500,000 relating to the fee to terminate the agreement with Pharmaceutical Design L.L.C.; (v) approximately $1.2 million of additional expense related to distribution and shipping on the increased volume of Mucinex sales; and (vi) $700,000 of legal, printing and audit costs related to the secondary offering. The increase in stock-based compensation was primarily due to the consideration of a volatility assumption in the calculation of fair value for the fiscal year 2006 stock option grants.

     Product Development.Product development expenses increased by $4.4 million to $7.5 million during the six months ended December 31, 2005, as compared to $3.1 million for the six months ended December 31, 2004. The increase for the six months ended December 31, 2005 was due to spending on Mucinex line extensions, coupled with expenses related to start-up costs of the erdosteine Phase II clinical program. The six months ended December 31, 2005 also included a $650,000 milestone payment made to Edmond Pharma SRL for erdosteine and $335,000 for stock-based compensation.

     Other, net.Other, net increased by $2.5 million to $2.8 million during the six months ended December 31, 2005, as compared to $242,000 for the six months ended December 31, 2004. The increase during the six months ended December 31, 2005 was primarily due to higher interest income reflecting earnings on the increased cash balances, which include the cash received from the initial public offering, coupled with higher interest rates.

     Income Taxes.Income tax expense for the six months ended December 31, 2005 and 2004 was $14.5 million and $5.9 million, respectively. Our effective tax rate for the six months ended December 31, 2005 and 2004 was 38.6% and 38.8%, respectively.

     Accretion of Preferred Stock.Accretion of our redeemable convertible preferred stock for the six months ended December 31, 2004 was $125.6 million, which reflects the adjustment to accrete the redeemable convertible preferred stock to fair value. Upon the closing of our initial public offering in July 2005, our redeemable convertible preferred stock converted into shares of common stock and, as a result, there was no accretion during the six months ended December 31, 2005.

Liquidity and Capital Resources

     In July 2005, we completed our initial public offering of 9,142,500 shares of common stock at a price of $17.00 per share. The offering consisted of 6,889,500 newly issued shares sold by us and 2,253,000 shares sold by selling stockholders. The offering generated gross proceeds to us of approximately $117.0 million. From inception through the completion of our initial public offering, we financed our operations primarily through the net proceeds from private placements of common stock, redeemable convertible preferred stock, notes convertible into redeemable convertible preferred stock, a revolving bank line of credit, and cash generated from our product sales.

     As of December 31, 2005, we had approximately $143.5 million of cash and cash equivalents, $9.9 million of short-term investments and working capital of $180.5 million, as compared to cash and cash equivalents of $24.7 million and working capital of $32.7 million as of June 30, 2005. The increase in both cash and cash equivalents and working capital is primarily due to the $106.7 million net proceeds received from our initial public offering in July 2005. We do not have any outstanding debt balances.

     Our principal liquidity requirements are to meet the operating expenses of our growing business. Our operating expenses include selling, marketing and administrative and product development expenses and contractual commitments related to operating leases, raw material purchase commitments, minimum profit share payments to Cardinal Health under the Cardinal Health Supply Agreement, and royalty payments on our Mucinex and Humibid products.

     Purchases of our finished product inventory from Cardinal Health are paid at an amount equal to Cardinal Health’s actual manufacturing cost plus a mark-up. The mark-up payments to Cardinal Health are trued up each March 31st to the actual profit share amount. Any excess of the mark-up payments over the actual profit share amount are refunded to us. Conversely, if the actual profit share amount exceeds the payments paid to Cardinal Health during the contract year, the shortfall would be paid to Cardinal Health. As of December 31, 2005, we have a receivable of $3.9 million due

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from Cardinal Health based on the estimated annual effective profit share amount for the contract period ending March 31, 2006. The purpose of the mark-up payments is to provide Cardinal Health with an interim cash flow prior to the actual profit share calculation. The mark-up percentages are defined in the Cardinal Health Supply Agreement as follows:

	Mark-Up
Contract Year Ending	Percentage
March 31, 2005		75	%
March 31, 2006		50	%
March 31, 2007 through 2015		30	%

     Consequently, our liquidity will be impacted on an interim basis by the difference between the stated mark-up percentages per the Cardinal Health Supply Agreement and the effective mark-up percentage resulting from the contract year-end profit share calculation. We are considering exercising our option to repurchase the Fort Worth, Texas manufacturing assets and operations back from Cardinal Health.

     We expect to increase our selling, marketing and administrative and our product development expenses. We anticipate our selling and marketing expenses to increase as we seek to (i) continue to switch long-acting guaifenesin and combination prescription products into OTC sales of Mucinex products; (ii) expand the market for long-acting guaifenesin and combination products and (iii) increase our share of the OTC cough, cold, allergy, and sinus markets. Therefore, we believe that we may need to increase our number of professional sales representatives beyond the current 100 and increase our consumer advertising spending. We anticipate that our administrative expenses will increase to support our current growth plans and position as a public company. Our product development expenses will likely increase as a result of our current plans to (i) expand the Mucinex product line with OTC and prescription line extensions and (ii) in-license or acquire specialty pharmaceutical respiratory products and trademarks that may require additional development expenditures to achieve FDA marketing approval. We believe that our cash outflows related to acquiring products and entering into licensing agreements may increase as we pursue our product portfolio expansion initiative. Additionally, if sales of our current products continue to increase or we increase the number of products in our portfolio, we may find it necessary to consider alternative manufacturing capabilities, which may include the acquisition of manufacturing facilities and equipment and participating in capital expenditures under contract manufacturing relationships.

     We believe our cash and cash equivalents, including amounts from our initial public offering and cash flow from operations, will be sufficient to meet our anticipated operating needs for at least the next two years. We continually evaluate new opportunities for late-stage or currently-marketed complementary product candidates and, if and when appropriate, intend to pursue such opportunities through the acquisitions of companies, products or technologies and our own development activities. Our ability to execute on such opportunities in some circumstances may be dependent, in part, upon our ability to raise additional capital on commercially reasonable terms. There can be no assurance that funds from these sources will be available when needed or on terms favorable to us or our stockholders. If additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock.

Cash Flows

     Six months ended December 31, 2005 compared to six months ended December 31, 2004.Net cash provided by operating activities was $8.6 million for the six months ended December 31, 2005, and cash used by operating activities was $5.3 million for the six months ended December 31, 2004. The increase in net cash provided by operations during the six months ended December 31, 2005 was primarily due to the increase in net income and accounts payable, offset by an increase in accounts receivable and income tax receivable.

     Net cash used in investing activities was $11.8 million for the six months ended December 31, 2005, as compared to $11.5 million for the six months ended December 31, 2004. The net cash used in investing activities in both periods reflected purchases of short-term investments. The short-term investments for the six months ended December 31, 2005 included $1.0 million of restricted cash as collateral for our letter of credit for our new office building in Chester, New Jersey.

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     Net cash provided by financing activities was $122.0 million during the six months ended December 31, 2005, as compared to $171,000 for the six months ended December 31, 2004. During the six months ended December 31, 2005, the proceeds from financing activities included the $107.7 million net proceeds from the issuance of common stock in our initial public offering and $12.3 million excess tax benefit from the exercise of nonqualified stock options. We paid $1.1 million of deferred offering costs through June 30, 2005.

Commitments

     During fiscal year 2004, Cardinal Health’s supplier of dextromethorphan, an active ingredient in Mucinex DM, notified Cardinal Health that they will be exiting the dextromethorphan manufacturing business. At that time, Cardinal Health requested of the supplier, and the supplier agreed, to commit to supplying Cardinal Health with an approximate four-year supply of dextromethorphan. Cardinal Health made a commitment to the dextromethorphan supplier and is obligated to take delivery of the material over the course of three years beginning in September 2004. We provided Cardinal Health with a letter agreement, dated September 30, 2004, stating that we will reimburse Cardinal Health for Cardinal Health’s cost in obtaining any unused quantities of dextromethorphan at the first to occur of (i) expiration of the material or (ii) six years from the date of the letter agreement. In November 2005, we agreed to extend this contract to purchase an additional 45 metric tons of dextromethorphan through 2009, which we believe will meet our needs for at least the next four and one-half years. As of December 31, 2005, the remaining commitment for the entire contract was approximately $14.2 million.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market risk is confined to our cash and cash equivalents. We invest in high-quality financial instruments, primarily money market funds, federal agency notes, asset backed securities, corporate debt securities and United States treasury notes, with the effective duration of the portfolio less than nine months and no security with an effective duration in excess of two years, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Evaluation of Disclosure Controls and Procedures.We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and 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 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely basis.

     Changes in Internal Control Over Financial Reporting.There has been no change in our internal control over financial reporting that occurred during the second quarter of fiscal year 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

     We are a party to various claims and suits arising out of matters occurring during the normal course of business. However, as of December 31, 2005, we are involved in no current proceeding or litigation that we believe will have a material adverse impact on our business, financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS.

     Our final prospectus filed with the SEC pursuant to Rule 424(b) on December 9, 2005 includes a detailed discussion of our risk factors. The information presented below amends, updates and should be read in conjunction with the risk factors and information disclosed in our final prospectus filed with the SEC on December 9, 2005.

Risks Relating to Our Business

We depend heavily on the success of two of our existing products, Mucinex SE and Mucinex DM, and the strength of the Mucinex brand. If we are unable to continue to successfully commercialize Mucinex SE and Mucinex DM and build the Mucinex brand, with the introduction of products like Mucinex D, our results of operations and future prospects will suffer.

     Mucinex SE, Mucinex DM and Mucinex D are our only commercial products. Sales of Mucinex SE accounted for approximately 86.2% and 73.3% of our revenue in fiscal years 2004 and 2005, respectively, and approximately 64.6% and 70.2% of our revenue for the three and six months ended December 31, 2005, respectively. Sales of Mucinex DM accounted for approximately 23.9% of our revenue in fiscal year 2005 and approximately 20.1% and 21.0% of our revenue for the three and six months ended December 31, 2005, respectively. We launched Mucinex D, a product combining long-acting guaifenesin with pseudoephedrine, in October 2005. Sales of Mucinex D accounted for approximately 15.3% and 8.8% of our revenue for the three and six months ended December 31, 2005, respectively. In the near term, we anticipate that our ability to generate revenues and establish our Mucinex brand will depend largely on the continued success of Mucinex SE and Mucinex DM and the successful commercialization of Mucinex D and additional products that utilize the Mucinex brand name. Any failure or delay in our efforts to successfully commercialize our products could have a negative impact on our revenues and ability to execute our business strategy.

We depend on a limited number of customers for a large portion of our sales, and demands made by, or the loss of, one or more of these customers could significantly reduce our margins or sales and adversely affect our business and financial results.

     For fiscal year 2005, our top five and top ten customers accounted for an aggregate of approximately 62% and 82% of our gross sales, respectively. For the three months ended December 31, 2005, they accounted for an aggregate of approximately 55% and 72%,of our gross sales, respectively, and for the six months ended December 31, 2005, our top five and ten customers accounted for an aggregate of approximately 59% and 76% of our gross sales, respectively. CVS, McKesson Corporation, Walgreens, and Wal-Mart each accounted for greater than 10% of our gross sales for fiscal year 2005. For the three months ended December 31, 2005, Walgreens and Wal-Mart each accounted for greater than 10% of our gross sales, and for the six months ended December 31, 2005 Walgreens, CVS and Wal-Mart each accounted for greater than 10% of our gross sales. In future periods, we expect that our top five and top ten customers will, in the aggregate, continue to account for a large portion of our sales. In addition, retailers have demanded, and may continue to demand, increased service and other accommodations, as well as price concessions. As a result, we may face downward pressure on our prices and increased expenses to meet these demands, which would reduce our margins. Given the growing trend toward consolidation of retailers, we expect demands by customers and the concentration of our sales in a small number of customers to increase. The loss of one or more of our top customers, any significant decrease in sales to these customers, pricing concessions or other demands made by these customers, or any significant decrease in our retail display space in any of these customers’ stores could reduce our sales and margins and could have a material adverse effect on our business, financial condition and results of operations.

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Risks Relating to Intellectual Property

Our U.S. patent no. 6,372,252 was recently subject to a request for reexamination, which the USPTO granted upon petition to the USPTO Director. If the USPTO cancels our patent or substantially narrows the claims of our patent such that it no longer protects our products from competition, our business will be materially harmed.

     On April 20, 2005, an anonymous third party filed a request for reexamination with the USPTO of our U.S. patent no. 6,372,252, which contains claims covering a long-acting guaifenesin product, including an immediate-release portion and an extended-release portion that yields a certain pharmacokinetic profile. On June 23, 2005, the USPTO denied the request for reexamination and found that the third party did not raise a substantial new question of patentability based on prior art. On July 22, 2005, the third party who filed the request for reexamination sought review of the USPTO’s denial of its request for reexamination by petition to the Director of the USPTO. The USPTO advised us on August 18, 2005 that the Director had granted the petition and ordered reexamination, and on December 29, 2005, the USPTO advised us of its initial, non-final determination to reject the claims of our U.S. Patent no. 6,372,252. Under typical procedural practices at the USPTO, this preliminary finding was made prior to Adams presenting its arguments in favor of affirming the claims under this patent. We have until February 23, 2006, to present our arguments and respond to the USPTO’s initial determination. Under a reexamination proceeding and, upon completion of the proceeding, the USPTO may leave the patent in its present form, narrow the scope of the claims of the patent or cancel all of the claims of the patent. Pursuant to this reexamination, the USPTO will reconsider the patentability of our delivery system for guaifenesin. We expect the USPTO to complete its review in nine to 12 months, and the entire reexamination process, from this point forward, could take up to as much as five additional years, including the potential for two separate appeals.

     We intend to vigorously defend our patent position and believe we will prevail in the reexamination process. We may not be successful, however, in maintaining our patent or the scope of its claims during reexamination and can offer no assurance as to the outcome of a reexamination proceeding. If the USPTO does not confirm our patent or substantially narrows the claims of our patent following a reexamination, then our competitive position could be weakened and we may face stronger and more direct competition, which would negatively impact our business and operating results.

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

     We filed a registration statement on Form S-1 (file no. 333-123585) with respect to the offer and sale of 7,950,000 shares of our common stock, $0.01 par value, and an additional 1,192,500 shares of our common stock sold solely to cover over-allotments. Of the 7,950,000 shares offered pursuant to the registration statement, we offered 5,697,000 shares and selling stockholders offered 2,253,000 shares. We offered all of the shares sold in the over-allotment. The SEC declared the registration statement effective on July 20, 2005.

     The net offering proceeds to us have been invested into short-term investment-grade securities and money market accounts. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) on July 21, 2005.

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

     At our Annual Meeting of stockholders, held on December 16, 2005, the following proposals were voted upon by the stockholders as indicated below:

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     1. To elect three Class I directors to serve on our board of directors for a three-year term expiring in fiscal year 2009.

	Number of Shares
	For		Withheld
Donald J. Liebentritt		29,238,322		3,160
John N. Lilly		29,238,122		3,360
Andrew N. Schiff, M.D.		29,228,622		12,860

     The terms of our Class II directors, Steven A. Elms, Joan P. Neuscheler and William C. Pate, and our Class III directors, Kirk K. Calhoun, Harold F. Oberkfell, and Michael J. Valentino, continued after the meeting.

2. To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year 2006.

For	Against		Abstain
29,237,565		1,703		2,214

ITEM 6. EXHIBITS.

Exhibit
Number		Description
10.1	—	Agreement dated October 31, 2005 between WR&E – Chester, LLC and Adams Respiratory Therapeutics, Inc. (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated November 3, 2005).
31.1*	—	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	—	Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	—	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed with this Quarterly Report.

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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.

	ADAMS RESPIRATORY THERAPEUTICS, INC.
Date February 10, 2006	/s/ DAVID BECKER
	By: David Becker
	Its: Executive Vice President and Chief Financial Officer

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