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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended December 31, 2000 or
[ ] 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 1-9860
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BARR LABORATORIES, INC.
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(Exact name of Registrant as specified in its charter)
NEW YORK 22-1927534
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(State or Other Jurisdiction of (I.R.S. - Employer
Incorporation or Organization) Identification No.)
TWO QUAKER ROAD, P. O. BOX 2900, POMONA, NEW YORK 10970-0519
-------------------------------------------------------------
(Address of principal executive offices)
845-362-1100
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(Registrant's telephone number)
(Former name, former address and former fiscal year, 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.
Yes X No
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Number of shares of common stock, par value $.01, outstanding as of December 31,
2000: 35,329,524
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BARR LABORATORIES, INC.
INDEX PAGE
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 2000 and June 30, 2000 3
Consolidated Statements of Earnings
for the three and six months ended
December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
for the six months ended
December 31, 2000 and 1999 5
Notes to Consolidated Financial
Statements 6-11
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 18-19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, JUNE 30,
2000 2000
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ASSETS
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Current assets:
Cash and cash equivalents $ 195,015 $ 155,922
Marketable securities - 96
Accounts receivable, less allowances of $5,003 and $4,140, respectively 65,318 54,669
Other receivables 23,082 23,811
Inventories 110,564 79,482
Prepaid expenses 4,246 1,428
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Total current assets 398,225 315,408
Property, plant and equipment, net of accumulated depreciation of $53,371
and $50,826, respectively 96,137 95,296
Other assets 7,999 13,149
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Total assets $ 502,361 $ 423,853
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 129,141 $ 94,529
Accrued liabilities 13,119 11,079
Deferred income taxes 1,036 1,036
Current portion of long-term debt 1,924 1,924
Income taxes payable 11,988 3,948
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Total current liabilities 157,208 112,516
Long-term debt 26,408 28,084
Other liabilities 1,377 519
Deferred income taxes 194 566
Commitments & Contingencies
Shareholders' equity:
Preferred stock $1 par value per share; authorized 2,000,000; none issued
Common stock $.01 par value per share; authorized 100,000,000;
issued 35,506,456 and 35,004,869, respectively 355 350
Additional paid-in capital 106,595 99,881
Retained earnings 208,780 180,034
Accumulated other comprehensive income 1,457 1,916
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317,187 282,181
Treasury stock at cost: 176,932 shares (13) (13)
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Total shareholders' equity 317,174 282,168
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Total liabilities and shareholders' equity $ 502,361 $ 423,853
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SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
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Revenues:
Product sales $ 121,756 $ 113,987 $ 221,436 $ 206,090
Development and other revenue 6,480 - 11,642 -
Proceeds from supply agreement 7,000 6,833 14,000 13,583
---------- ------------ ----------- -----------
Total revenues 135,236 120,820 247,078 219,673
Costs and expenses:
Cost of sales 87,986 81,326 155,658 143,299
Selling, general and administrative 12,367 10,387 25,062 20,797
Research and development 14,768 9,596 25,894 18,663
---------- ------------ ----------- -----------
Earnings from operations 20,115 19,511 40,464 36,914
Interest income 2,520 989 4,768 2,169
Interest expense 484 655 1,005 1,289
Other income (expense) 4,300 (15) 1,774 451
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Earnings before income taxes 26,451 19,830 46,001 38,245
Income tax expense 9,930 7,436 17,255 14,358
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Net earnings $ 16,521 $ 12,394 $ 28,746 $ 23,887
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Earnings per common share $ 0.47 $ 0.36 $ 0.82 $ 0.70
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Earnings per common share - assuming dilution $ 0.44 $ 0.35 $ 0.76 $ 0.67
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Weighted average shares 35,285 34,314 35,172 34,273
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Weighted average shares - assuming dilution 37,755 35,409 37,684 35,440
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SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
2000 1999
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CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net earnings $ 28,746 $ 23,887
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization 5,355 5,226
Loss (gain) on sale of assets 92 (482)
(Gain) loss on sale of marketable securities (4,301) 29
Write-off of investment 2,450 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net (9,920) (23,753)
Inventories (31,082) (28,525)
Prepaid expenses (2,818) (178)
Other assets (486) (809)
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities 36,918 4,396
Income taxes payable 8,040 5,459
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Net cash provided by (used in) operating activities 32,994 (14,750)
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CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,640) (7,468)
Proceeds from sale of property, plant and equipment 27 162
Proceeds from marketable securities, net 6,689 156
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Net cash provided by (used in) investing activities 1,076 (7,150)
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CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (1,696) (1,697)
Proceeds from exercise of stock options and employee stock purchases 6,719 2,690
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Net cash provided by financing activities 5,023 993
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Increase (decrease) in cash and cash equivalents 39,093 (20,907)
Cash and cash equivalents at beginning of period 155,922 94,867
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Cash and cash equivalents at end of period $ 195,015 $ 73,960
============ ==========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 1,018 $ 1,289
============ ==========
Income taxes $ 9,715 $ 8,053
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Non-cash transactions:
Write-off of equipment & leasehold improvements related to closed facility $ - $ 115
============ ==========
Equipment under capital lease $ 612 $ -
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SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Barr
Laboratories, Inc. and its wholly-owned subsidiaries (the "Company" or
"Barr").
In the opinion of the Management of the Company, the interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Interim results are not necessarily indicative of the results that may be
expected for a full year. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended June 30, 2000 and quarterly report on Form 10-Q for the period ended
September 30, 2000.
In connection with the Company's Registration Statement on Form S-3 filed
on September 14, 2000 and amended on November 6, 2000 and December 11,
2000 the Company has received comments from the Division of Corporate
Finance of the SEC related to a routine review of the registration
statement. Specifically, the SEC staff has questioned the Company's
decision to immediately recognize as revenue the $24.6 million payment
received by Barr in January 1997 under the Settlement Agreement with Bayer
that resulted from the Ciprofloxacin patent challenge. The SEC staff has
also questioned the Company's decision to immediately expense the $16.4
million fair value of the fully vested and immediately exercisable
warrants issued to DuPont Pharmaceuticals Company in March 2000.
The Company and its independent auditors, Deloitte & Touche LLP, continue
to believe that the accounting treatment related to these agreements is in
accordance with generally accepted accounting principles and continue to
work with the staff to resolve these questions. Accordingly, no provision
for any adjustment that may result has been made in the Company's
financial statements for the fiscal year ended June 30, 2000 and the
quarters ended September 30 and December 31, 2000.
2. CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments,
including market auction securities with interest rates that are re-set in
intervals of 7 to 49 days, which are readily convertible into cash at par
value, which approximates cost.
As of December 31, 2000 and June 30, 2000, approximately $115,976 and
$74,011, respectively, of the Company's cash was held in an interest
bearing escrow account. Such amounts represent the portion of the
Company's payable balance with AstraZeneca Pharmaceuticals LP
("AstraZeneca"), which the Company has decided to secure in connection
with its cash management policy. The Company pays AstraZeneca a monthly
fee based on a rate multiplied by the average unsecured monthly Tamoxifen
payable balance.
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3. OTHER RECEIVABLES
Other receivables consist primarily of supply agreement receivables and
receivables related to development and other revenue (See Note 5).
4. INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2000 2000
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Raw materials and supplies $ 18,806 $ 16,884
Work-in-process 6,292 5,102
Finished goods 85,466 57,496
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$ 110,564 $ 79,482
================ ================
Tamoxifen citrate, purchased as a finished product, accounted for
approximately $69,649 and $42,730 of finished goods as of December 31,
2000 and June 30, 2000, respectively.
5. DEVELOPMENT AND OTHER REVENUE
In March 2000, the Company entered into two drug development agreements
with DuPont Pharmaceuticals Company ("DuPont"). Under the development
agreements, DuPont pays the Company for development work performed on
several proprietary products. The amounts received from DuPont are not
dependent upon the research being successful.
Development and other revenue for the three and six months ended December
31, 2000 included $6,480 and $11,080 related to these development
agreements, respectively.
6. OTHER INCOME (EXPENSE)
The Company recorded a gain of $4,289 in the quarter ended December 31,
2000, on the sale of a portion of its investment in Galen Holdings PLC.
In September 1998, the Company made an investment in Gynetics, Inc.
("Gynetics"), a privately owned company. The Company's investment
represented approximately 7% of Gynetics' outstanding voting shares. Barr
does not have the ability to exercise significant influence on Gynetics'
operations and therefore, the Company accounted for this investment using
the cost method of accounting.
In the quarter ended September 30, 2000, the Company reviewed the
valuation of its investment in Gynetics in light of numerous negative
events that occurred in the quarter including product development delays
and threatened litigation. Due to these events as well as continued
operating difficulties at Gynetics that included extensive losses and
negative operating cash flow, Barr concluded as of September 30, 2000,
that its investment in Gynetics should be written down
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to $0, the current realizable value. Other income (expense) in the
consolidated financial statements includes approximately $2.5 million
related to this write-off.
The prior year included a $343 gain resulting from the receipt of 500,000
warrants from Halsey Drug Company, Inc. in exchange for rights to several
pharmaceutical products.
7. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used
to calculate earnings per common share ("EPS") on the Consolidated
Statements of Earnings:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
EARNINGS PER COMMON SHARE:
Net earnings (numerator) $ 16,521 $ 12,394 $ 28,746 $ 23,887
Weighted average shares (denominator) 35,285 34,314 35,172 34,273
Net earnings $ 0.47 $ 0.36 $ 0.82 $ 0.70
============ ============ ============ ============
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Net earnings (numerator) $ 16,521 $ 12,394 $ 28,746 $ 23,887
Weighted average shares 35,285 34,314 35,172 34,273
Effect of dilutive options 2,470 1,095 2,512 1,167
------------ ------------ ------------ ------------
Weighted average shares - assuming
dilution (denominator) 37,755 35,409 37,684 35,440
Net earnings $ 0.44 $ 0.35 $ 0.76 $ 0.67
============ ============ ============ ============
Share amounts in thousands
During the three and six months ended December 31, 2000 and 1999, there
were 900, 1,500, 1,371,000 and 1,371,000, respectively, of outstanding
options and warrants that were not included in the computation of diluted
EPS, because the securities' exercise prices were greater than the average
market price of the common stock for the period.
8. COMPREHENSIVE INCOME
Comprehensive income is defined as the total change in shareholders'
equity during the period other than from transactions with shareholders.
For the Company, comprehensive income is comprised of net income and the
net changes in unrealized gains and losses on securities classified for
Statement of Financial Accounting Standards ("SFAS") No. 115 purposes as
"available for sale". Total comprehensive income for the three and six
months ended December 31, 2000 and 1999 was $11,769, $25,606, $12,460 and
$24,152, respectively.
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9. NEW ACCOUNTING PRONOUNCEMENTS
Derivative Instruments
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended by SFAS No. 138 (collectively, SFAS
No. 133), provides accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters for all fiscal years beginning after June 15, 2000. The
Company implemented SFAS No. 133 on July 1, 2000 and its adoption did not
have a material impact on the Company's consolidated financial statements.
Revenue Recognition
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements" which summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The effective date of this bulletin is the
Company's fourth fiscal quarter ending June 30, 2001. Based on its current
accounting policies, the Company does not expect any material changes to
its consolidated financial statements as a result of adopting SAB 101.
10. STRATEGIC COLLABORATIONS
The Company, from time to time, enters into development or supply
collaborations or makes investments in third parties to support the
Company's business strategies. These collaborations include, but are not
limited to, agreements with suppliers for raw materials, licensing
technologies for generic or proprietary products and making equity or debt
investments in third parties. Financial terms may include cash payments
upon execution of an agreement or upon achieving certain milestones or
upon successful launch and commercialization of the developed product.
Such payments are either capitalized as other assets and amortized, or
expensed as research and development, depending upon the nature of the
payment. Many of these arrangements include termination provisions that
allow the Company to withdraw from a project if it is deemed no longer
appropriate by the Company.
11. FACILITY OPTIMIZATION CHARGES
During the quarter ended September 30, 2000, the Company recorded a $740
charge related to the ongoing rationalization of its New York and New
Jersey manufacturing operations as well as a reduction of several salaried
positions. The Company recorded a similar charge of $540 in the prior
year. These charges are included in selling, general and administrative
expenses in the Consolidated Statements of Earnings. The rationalization
plan was completed by September 30, 2000.
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12. COMMITMENTS AND CONTINGENCIES
Class Action Lawsuits
The Company has been named as a defendant in 34 putative class action
complaints alleging violation of federal antitrust laws and/or state
antitrust and consumer protection laws on the grounds that the 1997
Bayer-Barr settlement agreement was allegedly anti-competitive. The
Company has filed responses in the state actions. All federal cases have
been consolidated in the Eastern District of New York. Pending the filing
of consolidated amended complaints, the Company has not yet filed
responses in any of the federal actions.
In the three months ended December 31, 2000, six private antitrust class
action complaints were filed against Zeneca, Inc., AstraZeneca
Pharmaceuticals LP and the Company. The complaints allege that the 1993
settlement of patent litigation between Zeneca, Inc. and the Company
insulates Zeneca, Inc. and the Company from generic competition and
enables Zeneca, Inc. and Barr to charge artificially inflated prices for
Tamoxifen citrate.
The Company believes that each of its agreements with Bayer Corporation
and Zeneca, Inc., respectively, is a valid settlement to a patent suit and
cannot form the basis of an antitrust claim. Although it is not possible
to forecast the outcome of these matters, the Company intends to
vigorously defend itself. It is anticipated that these matters may take
several years to be resolved but an adverse judgement could have a
material adverse impact on the Company's consolidated financial
statements.
Invamed, Inc./Apothecon, Inc. Lawsuit
In February 1998 and May 1999, Invamed, Inc., which has since been
acquired by Geneva Pharmaceuticals, Inc. a subsidiary of Novartis AG, and
Apothecon, Inc., a subsidiary of Bristol-Meyers Squibb, Inc.,
respectively, named the Company and several others as defendants in
lawsuits filed in the United States District Court for the Southern
District of New York, charging that the Company unlawfully blocked access
to the raw material source for Warfarin Sodium. The two actions have been
consolidated. The Company believes that these suits are without merit and
intends to vigorously defend its position. These actions are currently in
the discovery stage. It is anticipated that this matter may take several
years to be resolved but an adverse judgement could have a material impact
on the Company's consolidated financial statements.
Other Litigation
As of December 31, 2000, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions.
Management of the Company, based on the advice of legal counsel, believes
that the ultimate disposition of such other lawsuits will not have any
significant adverse effect on the Company's consolidated financial
statements.
Administrative Matters
In 1998 and 1999, the Company was contacted by the Department of Justice
("DOJ") regarding the March 1993 resolution of the Tamoxifen patent
litigation. Barr continues to cooperate with the DOJ in this examination,
and believes that the DOJ will ultimately determine that the settlement
was appropriate and a benefit to consumers. The DOJ has not contacted the
Company about this matter since June 1999.
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On June 30, 1999, Barr received a civil investigative demand and a
subpoena from the Federal Trade Commission ("FTC"), that, although not
alleging any wrongdoing, sought documents and data relating to the January
1997 agreements resolving patent litigation involving Ciprofloxacin
hydrochloride, which had been pending in the U.S. District Court for the
Southern District of New York. The FTC is investigating whether the
Company, through settlement and supply agreements, has engaged or are
engaging in activities in violation of the antitrust laws. Barr continues
to cooperate with the FTC in this investigation.
The Company believes that the patent challenge process under the
Hatch-Waxman Act represents a pro-consumer and pro-competitive alternative
to bringing generic products to market more rapidly than might otherwise
be possible. Barr believes that once all the facts are considered, and the
benefits to consumers are assessed, that these DOJ and FTC investigations
will be satisfactorily resolved. However, consideration of these matters
could take considerable time, and while unlikely, any adverse judgement in
either matter could have a material adverse effect on the Company's
consolidated financial statements.
Fluoxetine Hydrochloride Patent Challenge
As disclosed in the Company's previous public filings, the U.S. Court of
Appeals, Federal Circuit in Washington D.C., ruled in favor of Barr's
challenge to Eli Lilly Company's ("Lilly") patent protecting Prozac(R). On
October 6, 2000, Lilly filed a petition asking the full panel of the Court
of Appeals to rehear the case. The Court of Appeals has not yet ruled on
Lilly's petition, and Lilly is expected to seek review by the U.S. Supreme
Court if the Court of Appeals does not reverse the present ruling. If the
litigation is successfully resolved, the Company and its partners will
share in a success fee, payable to its attorneys, currently estimated to
be approximately $5 million. The Company's share of the success fee is
estimated to be between $2 and $2.5 million.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Comparison of the Three Months Ended December 31, 2000
to the Three Months Ended December 31, 1999 - (thousands of dollars)
Total revenues increased approximately 12% as a result of increased product
sales and development and other revenue.
Tamoxifen sales increased 10% from $75,201 to $82,667. The increase was due to
higher prices and an expansion in the use of Tamoxifen. In October 1998,
Tamoxifen was approved to reduce the incidence in breast cancer in women at high
risk of developing the disease. Tamoxifen is a patent protected product
manufactured for the Company by AstraZeneca.
Other product sales increased approximately 1% from $38,786 to $39,089. The
increase was primarily due to sales of ViaSpan(R), which Barr began distributing
on August 1, 2000, which more than offset price declines and higher discounts on
certain existing products.
Development and other revenue consists of amounts received from DuPont
Pharmaceuticals Company ("DuPont") for various development and co-marketing
agreements entered into in March 2000. As the Company incurs research and other
development activity costs, Barr records such expenses as research and
development and invoices and records the related revenue from DuPont as
development and other revenue (See Note 5 to the Consolidated Financial
Statements).
Cost of sales increased to $87,986 or 72.3% of product sales from $81,326 or
71.3% of product sales. The increase in both dollars and percent of product
sales was due mainly to increased sales of Tamoxifen and an increased percentage
of Tamoxifen sales to total product sales. Tamoxifen is distributed by the
Company and has lower margins than most of Barr's other products.
Selling, general and administrative expenses increased from $10,387 to $12,367.
The increase was primarily due to an increase in sales and marketing expenses
and legal spending. Sales and marketing expenses increased primarily due to
royalty payments related to ViaSpan sales. The increase in legal spending was
primarily related to an increase in spending related to on-going patent
challenges, legal research and preparation related to several additional patent
challenges and the Invamed, Inc./Apothecon, Inc. litigation.
Research and development expenses increased from $9,596 to $14,768. The increase
was primarily due to the Company's increased payments to clinical research
organizations for clinical and bio-study services associated with the Company's
proprietary development activities, raw material purchases and raw material
development agreements.
Interest income increased by $1,531 primarily due to an increase in the average
cash and cash equivalents balance, as well as an increase in the market rates on
the Company's short-term investments.
Interest expense decreased $171 primarily due to lower fees paid on the average
unsecured Tamoxifen payable balance (See Note 2 to the Consolidated Financial
Statements), as well as a decrease in the Company's debt balances.
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Other income increased by $4,315 primarily due to the gain realized on the sale
of a portion of the Company's investment in Galen Holdings PLC ("Galen") (See
Note 6 to the Consolidated Financial Statements).
Results of Operations:
Comparison of the Six Months Ended December 31, 2000
to the Six Months Ended December 31, 1999 - (thousands of dollars)
Total revenues increased approximately 12% as a result of increased product
sales and development and other revenue.
Tamoxifen sales increased 11% from $130,471 to $145,161. The increase was due to
higher prices and an expansion in the use of Tamoxifen. In October 1998,
Tamoxifen was approved to reduce the incidence in breast cancer in women at high
risk of developing the disease.
Other product sales increased approximately 1% from $75,619 to $76,275. The
increase was primarily due to sales of ViaSpan, which Barr began distributing on
August 1, 2000, which more than offset price declines and higher discounts on
certain existing products.
Development and other revenue consists of amounts received from DuPont
Pharmaceuticals Company ("DuPont") for various development and co-marketing
agreements entered into in March 2000. As the Company incurs research and other
development activity costs, Barr records such expenses as research and
development and invoices and records the related revenue from DuPont as
development and other revenue (See Note 5 to the Consolidated Financial
Statements).
Cost of sales increased to $155,658 or 70.2% of product sales from $143,299 or
69.5% of product sales. The increase in both dollars and percent of product
sales was due mainly to increased sales of Tamoxifen and an increased percentage
of Tamoxifen sales to total product sales. Tamoxifen is distributed by the
Company and has lower margins than most of Barr's other products.
Selling, general and administrative expenses increased from $20,797 to $25,062.
The increase was primarily due to an increase in sales and marketing expenses
and legal spending. Sales and marketing expenses increased primarily due to
royalty payments related to ViaSpan sales. The increase in legal spending was
primarily related to an increase in spending related to on-going patent
challenges, legal research and preparation related to several additional patent
challenges and the Invamed, Inc./Apothecon, Inc. litigation. Selling, general
and administrative expenses for the six months ended December 31, 2000 also
includes a $740 charge related to the Company's on-going rationalization of its
New York and New Jersey manufacturing operations, as well as a reduction of
several salary positions. The Company recorded a similar charge of $540 in the
prior year (See Note 11 to the Consolidated Financial Statements).
Research and development expenses increased from $18,663 to $25,894. The
increase was primarily due to increased payments to clinical research
organizations for clinical and bio-study services associated with the Company's
proprietary development activities and payments for strategic collaborations and
raw material development agreements.
Interest income increased by $2,599 primarily due to an increase in the average
cash and cash equivalents balance, as well as an increase in the market rates on
the Company's short-term investments.
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Interest expense decreased $284 primarily due to lower fees paid on the average
unsecured Tamoxifen payable balance (See Note 2 to the Consolidated Financial
Statements) as well as a decrease in the Company's debt balances.
Other income increased by $1,323 primarily due to the gain realized on the sale
of a portion of the Company's investment in Galen, partially offset by the
charge related to the write-off of the Company's investment in Gynetics, Inc.
The prior year amount reflects the gain recognized on the warrants received from
Halsey Drug Company, Inc. (See Note 6 to the Consolidated Financial Statements).
Liquidity and Capital Resources
The Company's cash and cash equivalents increased from $155,922 at June 30, 2000
to $195,015 at December 31, 2000. During the six months ended December 31, 2000,
the Company increased the cash held in its interest-bearing escrow account from
$74,011 at June 30, 2000 to $115,976 (See Note 2 to the Consolidated Financial
Statements).
Cash provided by operating activities totaled $32,994 for the six months ended
December 31, 2000 driven by net earnings of $28.7 million and non-cash charges
such as depreciation and an investment write-off, as well as a slight decrease
in working capital. The working capital decrease was led by increases in
accounts payable and income taxes payable partially offset by an increase in
inventories and accounts receivable. The increase in inventory and accounts
payable was almost entirely related to an increase in Tamoxifen inventory. The
Tamoxifen increases were based on management's decision to increase its
Tamoxifen purchases and was consistent with past trends. Accounts receivable at
December 31, 2000 were $65,318 or $10,649 higher than those at June 30, 2000
primarily attributable to increased product sales in the three months ended
December 31, 2000 versus the three months ended June 30, 2000. Income taxes
payable increased as a result of increased taxable earnings and the timing of
estimated tax payments.
Approximately $7 million of the Company's quarterly cash flow from operations
relates to payments from its contingent supply agreement with Bayer Corporation
("Bayer") related to its 1997 Cipro(R) patent challenge. Under that agreement,
Bayer has, at its option, the right to allow Barr and its partner (collectively
Barr) to purchase Cipro at a predetermined discount or to provide Barr quarterly
cash payments. This contingent supply agreement expires in December 2003. If
Bayer does not elect to supply Barr with product, Barr would receive
approximately $28 to $31 million per year. However, there is no guarantee that
Bayer will continue to make such payments. If Bayer elected to supply product to
Barr for resale, the earnings and related cash flows, if any, Barr could earn
from the sale of Cipro would be entirely dependent upon market conditions.
During the first six months of fiscal 2001, the Company invested approximately
$5.6 million in capital assets primarily related to upgrades and new equipment
for its facilities. The Company believes it may invest an additional $10 to $12
million in capital assets in fiscal 2001 primarily on manufacturing equipment
for the Company's Virginia facility. The Company currently leases approximately
48,000 square feet of office space for its selling and administration functions,
which expires May 2003. Barr is currently evaluating an expansion of its Pomona
facility to accommodate these functions as well as additional expansion of its
research and development facilities. The cost of this expansion could be between
$15 and $20 million. In addition, the Company realized approximately $8.7
million in proceeds on the sale of a portion of its investment in Galen. The
Company expects to sell additional shares of its holdings in the quarter ending
March 31, 2001 and realize proceeds of approximately $3
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million. The Company also expects to exercise the remaining warrants in Galen
for approximately $1 million.
Debt balances declined slightly during the quarter due to scheduled repayments
on the Company's debt. Scheduled principal repayments on the Company's existing
debt will be $124 during the quarter ending March 31, 2001. The Company did not
use any funds available to it under its $20 million Revolving Credit Facility
during the current quarter.
The Company previously stated its expectation that it would increase its
research and development spending to $58 to $62 million in fiscal 2001. That
total represents a 40% to 50% increase over the prior year's total. This
increase is expected to be driven by higher spending on generic and proprietary
development projects, as well as additional patent challenges. The Company
expects to file 18 to 22 generic product ANDAs during fiscal 2001 and has filed
seven through December 31, 2000.
A portion of the increased spending on proprietary product development is being
reimbursed by DuPont Pharmaceuticals Company in accordance with two development
agreements entered into in March 2000. During the quarter ended December 31,
2000, the Company earned approximately $6 million under the terms of the two
agreements. Payments of $2 million per quarter over the past four quarters,
related to one of the agreements which ended on December 31, 2000. The Company
will receive a $1 million bonus payment if it receives approval on a product
pending at the FDA prior to March 31, 2000. Payments under the second
development agreement are reimbursements of Barr's spending on two of its
proprietary products. This agreement provides for reimbursement of up to $4 to
$5 million per quarter through December 2003.
To expand its growth opportunities, the Company has and will continue to
evaluate and enter into various strategic collaborations (See Note 10 to the
Consolidated Financial Statements). The timing and amount of cash required to
enter into these collaborations is difficult to predict because it is dependent
on several factors, many of which are outside of the Company's control. However,
the Company believes, that based on arrangements in place at December 31, 2000,
it could spend between $2 and $4 million over the next twelve months for these
collaborations. The $2 to $4 million excludes any cash needed to fund strategic
acquisitions the Company may consider in the future.
In September 2000, the Company filed a registration statement on Form S-3 to
register for sale 3,500,000 shares of Barr's common stock. The registration
statement is not yet effective and no offering of the common stock has
commenced. Of the 3,500,000 shares being registered, 3,000,000 are being offered
by Dr. Bernard Sherman, who beneficially owns approximately 42% of Barr's common
shares, and 500,000 are being offered by Barr. Though the Company has registered
to sell 500,000 shares, the decision to sell will be dependent upon the market
price at the time the offering is to be commenced.
The Company believes that its current cash balances, cash flows from operations
and borrowing capacity, including unused amounts under its existing $20 million
Revolving Credit Facility, will be adequate to meet the operations described
above and to take advantage of strategic opportunities as they occur. To the
extent that additional capital resources are required, such capital may be
raised by additional bank borrowings, equity offerings or other means.
Outlook
The following section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
The generic pharmaceutical industry is characterized by relatively short product
lives and declining prices and margins as competitors launch
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competing products. The Company's strategy has been to develop generic products
with some barrier to entry to limit competition and extend product lives and
margins. The Company's expanded efforts in developing and launching proprietary
products is also driven by the desire to market products that will have limited
competition and longer product lives. The Company's future operating results are
dependent upon several factors that impact its stated strategies. These factors
include the ability to introduce new products, patient acceptance of new
products and new indications of existing products, customer purchasing
practices, pricing practices of competitors, spending levels including research
and development and patent activities. In addition, the ability to receive
sufficient quantities of raw materials to maintain its production is critical.
While the Company has not experienced any interruption in sales due to lack of
raw materials, the Company is continually identifying alternate raw material
suppliers for many of its key products in the event that raw material shortages
were to occur. The Company's operating results are expected to be significantly
impacted by a favorable final decision regarding its challenge of the Prozac(R)
patent. The timing and impact of the launch of Prozac in fiscal 2001 is
dependent on several factors. The Company has not provided guidance on the
impact of Prozac on its consolidated financial statements and therefore it has
been excluded from the following outlook section.
Total revenues are expected to increase in the quarter ending March 31, 2001
compared to the same quarter of fiscal 2000 due primarily to higher product
sales. Higher product sales are expected to result from higher Tamoxifen sales
and new product launches, including ViaSpan, which should more than offset
declining prices on certain existing products. Tamoxifen revenues for the
quarter ending March 31, 2001 are expected to increase in a range similar to the
year-over-year increase seen in the first half of fiscal 2001. Non-Tamoxifen
sales in the quarter ending March 31, 2001 are expected to increase from the
prior year period as new product introductions and ViaSpan revenues should more
than offset declining prices on certain existing products. Development revenues
in the third quarter are dependent on the Company's spending on products covered
by the proprietary development agreement with DuPont including Seasonale(TM) and
CyPat(TM) and are expected to be approximately $3 to $5 million including a $1
million bonus payment the Company is entitled to if it receives approval on a
product pending at the FDA prior to March 31, 2001.
Selling, general and administrative spending is impacted by several factors such
as the timing and number of legal matters, including patent challenges being
pursued by the Company, the level of government affairs spending and promotional
and advertising activities. Barr expects that selling, general and
administrative expenses will approximate $13.5 million in the quarter ending
March 31, 2001, driven by legal costs and sales and marketing costs associated
with new product launches, including ViaSpan.
Research and development costs are expected to approximate $58 to $62 million in
fiscal 2001 compared to $40.5 million in fiscal 2000. The increase is due to
substantial increases in both generic and proprietary product development
activities. In its generic development area, the Company expects to file between
18 and 22 ANDAs in fiscal 2001 compared to 11 filed in fiscal 2000. While the
number of applications filed is not the only measure of research and development
activity, a higher number of filings generally requires higher raw material and
clinical study costs. Research and development spending is expected to be
approximately $15 to $17 million for the quarter ending March 31, 2001.
Barr expects its effective tax rate to be approximately 37.5%, which is in line
with the quarter ended September 30, 2000 and December 31, 2000.
Diluted shares outstanding are based on shares outstanding and the dilutive
effect of warrants and options that are outstanding. The dilutive effect of
outstanding warrants and options is based on the
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strike price of such warrants and options and Barr's average stock price during
the quarter. Shares outstanding during the quarter could be impacted by shares
issued in connection with option exercises and the additional shares
contemplated in the stock offering discussed earlier. Barr expects diluted
shares outstanding to be approximately 38 million for the quarter ending March
31, 2001 and the balance of the fiscal year.
In connection with the Company's Registration Statement on Form S-3 filed on
September 14, 2000 and amended on November 6, 2000 and December 11, 2000 the
Company has received comments from the Division of Corporate Finance of the SEC
related to a routine review of the registration statement. Specifically, the SEC
staff has questioned the Company's decision to immediately recognize as revenue
the $24.6 million payment received by Barr in January 1997 under the Settlement
Agreement with Bayer that resulted from the Ciprofloxacin patent challenge. The
SEC staff has also questioned the Company's decision to immediately expense the
$16.4 million fair value of the fully vested and immediately exercisable
warrants issued to DuPont Pharmaceuticals Company in March 2000.
The Company and its independent auditors, Deloitte & Touche LLP, continue to
believe that the accounting treatment related to these agreements is in
accordance with generally accepted accounting principles and continue to work
with the staff to resolve these questions.
If the Company were to amend its filing to revise its accounting for the initial
payment under the Settlement Agreement to amortize it over the life of the
related Supply Agreement which terminates in 2003, the expected effect would be
to reduce reported pre-tax earnings in fiscal 1997 by approximately $23 million
and to increase pre-tax earnings in fiscal years 1998-2003 by approximately $3.5
million per year. If the Company were to amend its filing to revise its
accounting for the DuPont warrants, it would recognize the $16.4 million fair
value over time beginning at the date of issuance. The magnitude of the impact,
if any, on net earnings of future periods depends on the resolution of these
issues with the SEC. If either or both revisions were made, there would be no
impact on Barr's financial condition, cash position or liquidity, however, the
ultimate outcome on the Company's reported or forecasted earnings and related
disclosures cannot be determined. Accordingly, no provision for any adjustment
that may result has been made in the Company's financial statements for the
fiscal year ended June 30, 2000 and the quarters ended September 30 and December
31, 2000.
Forward-Looking Statements
Except for the historical information contained herein, this Form 10-Q contains
forward-looking statements, all of which are subject to risks and uncertainties.
Such risks and uncertainties include: the timing and outcome of legal
proceedings; the difficulty of predicting the timing of FDA approvals; the
difficulty in predicting the timing and outcome of FDA decisions on patent
challenges; the timing and outcome of discussions with the SEC; market and
customer acceptance and demand for new pharmaceutical products; ability to
market proprietary products; the impact of competitive products and pricing;
timing and success of product development and launch; availability of raw
materials; the regulatory environment; fluctuations in operating results; and,
other risks detailed from time-to-time in the Company's filings with the
Securities and Exchange Commission. Forward-looking statements can be identified
by their use of words such as "expects," "plans," "will," "believes," "may,"
"estimates," "intends" and other words of similar meaning. Should known or
unknown risks or uncertainties materialize, or should our assumptions prove
inaccurate, actual results could vary materially from those anticipated.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed in the 2000 Annual Report on Form 10-K, the Company's exposure to
market risk from changes in interest rates, in general, is not material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Class Action Lawsuits
Ciprofloxacin (Cipro) Class Action Suits
The Company has been named as a defendant in several actions
related to its settlement of the Cipro patent challenge. The
following complaints represent indirect purchaser class-action
complaints alleging violation of federal antitrust laws and/or
state antitrust and consumer protection laws on the grounds that
the 1997 Bayer-Barr settlement agreement was allegedly
anti-competitive. Plaintiffs seek to recover overcharges paid as
a result of the allegedly anti-competitive activities and, where
appropriate, treble damages. The following plaintiffs have filed,
on the dates indicated, class-action complaints against Bayer and
Barr in state court: Patricia Nelson et al filed in Minn.
District Ct. (11/15/00); Maurice Stewart et al filed in the
District of Columbia Superior Ct. (12/18/00). The following
actions have been removed to or have been filed in U.S. District
Courts: Mark Aston (C.D. Cal. 10/10/00); Donna Franck et al (M.D.
Fla. 10/13/00); John Coleman (S.D. Cal. 10/16/00); David Green
(E.D.N.Y. 10/16/00); Adele Brody (S.D.N.Y. 10/18/00); Ellen
Relles et al (C.D. Cal. 10/24/00); Greg Amluxen (E.D. Penn.
10/24/00); Rebecca Sandhaus (D. Kan. 10/26/00); Charles McKenzie
(D. Arizona 10/27/00); For Love & Money Inc. d/b/a RX Jennifers
Pharmacy (S.D. Ill. 10/27/00); Shosana Samole (N.D. Cal.
10/31/00); Barbara Meyers (E.D. Wis. 11/6/00); Barry Garber (N.D.
Cal. 11/7/00); John Irons (C.D. Cal. 11/10/00); Caroline M.
Loesch et al (S.D. Fla. 11/13/00); Peggy Lee (N.D. Cal.
11/14/00); Mary Ann Scott (N.D. Cal. 11/22/00); Kimberly McCullar
(N.D. Cal. 12/12/00); Madeline Eisenhauer et al (E.D.N.Y.
12/15/00).
The following complaints represent direct purchaser class action
complaints alleging violation of federal antitrust laws on the
grounds that the 1997 Bayer-Barr settlement agreement was
allegedly anti-competitive. Plaintiffs seek to recover
overcharges paid as a result of the allegedly anti-competitive
activities and, where appropriate, treble damages. The following
plaintiffs have filed class-action complaints against Bayer and
Barr, which have been removed to or filed in U.S. District Court:
CVS Meridian, Inc. et al (S.D.N.Y. 10/18/00); Arthur's Drug
Store, Inc. (S.D.N.Y. 12/4/00).
Tamoxifen Citrate Class Action Suits
The following complaints represent putative consumer class action
complaints, brought under federal and nineteen state anti-trust
statutes, arising out of Zeneca's and Barr's 1993 settlement of a
patent infringement action. The complaints allege that the 1993
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settlement insulates Zeneca and the Company from generic
competition and enables Zeneca and Barr to charge artificially
inflated prices for Tamoxifen citrate. Plaintiffs seek to recover
both Barr's and Zeneca's profits and treble damages for the
alleged anti-trust violations. The following are the plaintiffs
that have filed actions in state court: Koonan filed in Calif.
State Ct. (12/8/00). The following are plaintiffs that have filed
in U. S. District Court: Joblove (E.D.N.Y. 10/6/00); Knee
(E.D.N.Y. 11/8/00); Bennish (E.D. Mich. 11/9/00).
The following complaints represent putative third-party payor
class action complaints, brought under federal and nineteen state
anti-trust statutes, arising out of Zeneca's and Barr's 1993
settlement of a patent infringement action. The complaints allege
that the 1993 settlement insulates Zeneca and the Company from
generic competition and enables Zeneca and Barr to charge
artificially inflated prices for Tamoxifen citrate. Plaintiffs
seek to recover both Barr's and Zeneca's profits and treble
damages for the alleged anti-trust violations. The following are
plaintiffs that have filed in U. S. District Court: Allied
Services Division Welfare Fund (E.D.N.Y. 11/1/00); DeJesus as
Trustee for Local 485 Health & Welfare Fund (E.D.N.Y. 12/13/00).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Barr Laboratories, Inc. was held on
October 26, 2000, at the Plaza Hotel in New York City. Of the 35,169,337 shares
entitled to vote, 29,929,744 shares were represented at the meeting by proxy or
present in person. The meeting was held for the following purposes:
1. To elect a Board of Directors. All eight nominees were elected based
on the following votes cast:
FOR SHARES
Paul M. Bisaro 29,692,175
Robert J. Bolger 29,685,170
Edwin A. Cohen 29,690,766
Bruce L. Downey 29,691,940
Michael F. Florence 29,811,328
Jacob M. Kay 29,813,518
Bernard C. Sherman 29,690,388
George P. Stephan 29,812,712
2. To consider approval of an amendment to the Company's 1993 Stock
Incentive Plan. The number of votes cast for, against and abstained
were 26,524,868, 3,360,841 and 44,035, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Exhibit
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27.0 Financial data schedule
(b) There were no reports filed on Form 8-K in the quarter ended
December 31, 2000.
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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.
BARR LABORATORIES, INC.
Dated: February 12, 2001 /s/ William T. McKee
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William T. McKee
Chief Financial Officer
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