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 September 30, 2001 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
BARR LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 22-1927534
(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
(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
Number of shares of common stock, par value $.01, outstanding as of September
30, 2001: 35,507,864
1
BARR LABORATORIES, INC.
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2001 and June 30, 2001 3
Consolidated Statements of Earnings
for the three months ended
September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
for the three months ended
September 30, 2001 and 2000 5
Notes to Consolidated Financial
Statements 6-10
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
BARR LABORATORIES, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
SEPTEMBER 30,
2001 JUNE 30,
(UNAUDITED) 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 299,806 $ 222,339
Accounts receivable, less allowances of $34,145 and $8,230 respectively 178,974 73,050
Other receivables 24,154 20,272
Inventories 116,765 115,615
Deferred income taxes 2,716 2,716
Prepaid expenses 8,778 2,782
--------- ---------
Total current assets 631,193 436,774
Property, plant and equipment, net of accumulated depreciation of $59,535
and $56,770, respectively 104,710 102,583
Other assets 4,294 4,037
--------- ---------
Total assets $ 740,197 $ 543,394
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 125,514 $ 120,921
Accrued liabilities 105,612 17,280
Current portion of long-term debt 3,341 3,185
Income taxes payable 44,157 10,174
--------- ---------
Total current liabilities 278,624 151,560
Long-term debt 24,620 24,899
Other liabilities 1,526 1,293
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 35,694,796 and 35,581,369, respectively 357 356
Additional paid-in capital 107,677 104,188
Additional paid-in capital - warrants 16,418 16,418
Retained earnings 311,416 244,356
Accumulated other comprehensive income 267 337
--------- ---------
436,135 365,655
Treasury stock, shares at cost: 186,932 and 176,932, respectively (708) (13)
--------- ---------
Total shareholders' equity 435,427 365,642
--------- ---------
Total liabilities and shareholders' equity $ 740,197 $ 543,394
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3
BARR LABORATORIES, INC.
Consolidated Statements of Earnings
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
-------- --------
Revenues:
Product sales $309,766 $ 99,680
Development and other revenue 5,563 3,456
-------- --------
Total revenues 315,329 103,136
Costs and expenses:
Cost of sales 186,404 68,384
Selling, general and administrative 16,402 12,112
Research and development 15,323 11,126
-------- --------
Earnings from operations 97,200 11,514
Proceeds from patent challenge settlement 7,938 7,000
Interest income 1,837 2,248
Interest expense 377 521
Other expense 13 2,526
-------- --------
Earnings before income taxes 106,585 17,715
Income tax expense 39,525 7,325
-------- --------
Net earnings $ 67,060 $ 10,390
======== ========
Earnings per common share $ 1.89 $ 0.30
======== ========
Earnings per common share - assuming dilution $ 1.80 $ 0.28
======== ========
Weighted average shares 35,465 35,059
======== ========
Weighted average shares - assuming dilution 37,348 37,613
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
BARR LABORATORIES, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2001 and 2000
(in thousands of dollars)
(unaudited)
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 67,060 $ 10,390
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
2,783 2,639
Deferred income tax benefit
(64) --
Loss on sale of assets
14 92
Gain on sale of marketable securities
-- (12)
Write-off of investment
-- 2,450
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net
(109,806) 598
Inventories
(1,150) (14,596)
Prepaid expenses
(5,996) (3,792)
Other assets
(296) (376)
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities
93,191 5,231
Income taxes payable
33,983 6,220
--------- ---------
Net cash provided by operating activities
79,719 8,844
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(4,891) (2,232)
Proceeds from sale of property, plant and equipment
-- 25
Purchases of marketable securities, net
-- (1,922)
--------- ---------
Net cash used in investing activities
(4,891) (4,129)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases
(156) (131)
Earnings from DuPont agreements applied to warrant receivable
-- 1,835
Purchases of treasury stock
(695) --
Proceeds from exercise of stock options and employee stock purchases
3,490 6,047
--------- ---------
Net cash provided by financing activities
2,639 7,751
--------- ---------
Increase in cash and cash equivalents
77,467 12,466
Cash and cash equivalents at beginning of period
222,339 155,922
--------- ---------
Cash and cash equivalents at end of period $ 299,806 $ 168,388
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ -- $ 55
========= =========
Income taxes $ 5,605 $ 1,605
========= =========
Non-cash transactions:
Equipment under capital lease $ -- $ 280
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5
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") (See Note 12).
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, 2001.
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year presentation.
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 September 30, 2001 and June 30, 2001, approximately $101,621 and
$96,820, 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.
3. OTHER RECEIVABLES
Other receivables consist primarily of patent challenge settlement
receivables and receivables related to development and other revenue (See
Note 5).
6
4. INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2001 2001
-------- --------
Raw materials and supplies $ 24,171 $ 22,656
Work-in-process 4,964 5,825
Finished goods 87,630 87,134
-------- --------
$116,765 $115,615
======== ========
Tamoxifen Citrate, purchased as a finished product, accounted for
approximately $69,378 and $66,890 of finished goods inventory as of
September 30, 2001 and June 30, 2001, respectively.
5. DEVELOPMENT AND OTHER REVENUE
Development and other revenue consists primarily of amounts received from
DuPont Pharmaceuticals Company ("DuPont"), which has since been acquired
by Bristol-Myers Squibb Company, 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.
Development and other revenue also includes royalty income earned under
licensing agreements with other third parties.
6. 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:
7
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
------- -------
EARNINGS PER COMMON SHARE:
Net earnings (numerator) $67,060 $10,390
Weighted average shares (denominator) 35,465 35,059
Net earnings $ 1.89 $ 0.30
======= =======
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Net earnings (numerator) $67,060 $10,390
Weighted average shares 35,465 35,059
Effect of dilutive options 1,883 2,554
------- -------
Weighted average shares - assuming dilution (denominator) 37,348 37,613
Net earnings $ 1.80 $ 0.28
======= =======
Share amounts in thousands
During the three months ended September 30, 2001 and 2000, there were
295,855 and 1,500, 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.
7. 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 months
ended September 30, 2001 and 2000 was $66,990 and $12,002, respectively.
8. NEW ACCOUNTING PRONOUNCEMENTS
Business Combinations/Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes
APB opinion No. 16, "Business Combinations" and amends or supercedes a
number of related interpretations of APB 16. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations, and
changes the criteria to recognize intangible assets apart from goodwill.
SFAS No. 142 supercedes APB opinion No. 17, "Intangible Assets." Under
SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. The Company plans to adopt
the provisions of SFAS No. 141 for any business combination that is
initiated after June 30, 2001. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001. The Company
will adopt SFAS No. 142 beginning in the first fiscal quarter of fiscal
2003.
8
The Company does not believe that the adoption of SFAS No's. 141 and 142
will have a material impact on its results of operations or financial
position.
9. COMMITMENTS AND CONTINGENCIES
Class Action Lawsuits
As of November 12, 2001, 38 class action complaints have been filed by
direct and/or indirect purchasers of Ciprofloxacin (Cipro(R)) from 1997
to present against the Company, Bayer Corporation, The Rugby Group, Inc.
and others. The complaints allege that the 1997 Bayer-Barr patent
litigation settlement agreement was in violation of federal antitrust
laws and/or state antitrust and consumer protection laws on the grounds
that the agreement was allegedly anti-competitive.
As of November 12, 2001 30 consumer or third party payor class action
complaints have been filed against Zeneca, Inc., AstraZeneca
Pharmaceuticals LP and the Company. The complaints allege, among other
things, 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. and Apothecon, Inc., both of
which are subsidiaries of Novartis AG, 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, but an adverse judgement could have a material impact on the
Company's consolidated financial statements. These actions have gone
through the discovery stage and a motion for summary judgement is
pending. If this motion is denied this matter may take several years to
be resolved.
Fluoxetine Hydrochloride Patent Challenge
As disclosed in the Company's Form 10-K, on July 23, 2001, the Court of
appeals denied Eli Lilly & Company's ("Lilly") request for another
rehearing and on July 27, 2001 issued its mandate to the District Court
in Indianapolis instructing the District Court to enter a final order
invalidating the Prozac(R) patent. On July 30, 2001, the District Court
entered its order invalidating the Prozac patent and lifted the
injunction preventing Barr from launching Fluoxetine, its generic version
of Lilly's 20mg capsule Prozac product. On August 2, 2001, Barr launched
its generic version. Lilly has petitioned the U.S. Supreme Court to
review the Court of Appeals decision. The Supreme Court is not expected
to make a decision on the Prozac matter
9
for several months. If the Supreme Court overturns the Court of Appeals
decision, which Barr believes is unlikely, and reinstates the Prozac
patent, Barr may be liable for substantial damages which could have a
material adverse effect on Barr's operations and financial condition.
On August 1, October 31 and November 6, 2001, aaiPharma Inc. ("AAI")
filed lawsuits in the United States District Court for the Eastern
District of North Carolina against Barr and others claiming that the
generic versions of Prozac manufactured by those companies infringe AAI's
patents. If Barr is found to infringe the AAI patents, Barr may be liable
to AAI for damages that may reduce Barr's profits from its generic Prozac
product. The Company believes that the suits filed against it by AAI are
without merit and intends to defend its position vigorously. It is
anticipated that these matters may take several years to be resolved but
an adverse judgment could have a material adverse impact on the Company's
consolidated financial statements.
Other Litigation
As of September 30, 2001, 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.
10. SUBSEQUENT EVENT
On October 24, 2001, the Company completed its merger with Duramed
Pharmaceuticals, Inc. The merger is intended to be treated as a tax-free
reorganization and is being accounted for using the pooling-of-interest
method. Under the terms of the merger agreement, Barr could issue up to a
total of 8,696,786 shares of its common stock including shares needed to
cover options and warrants outstanding at the effective date of the
merger. Duramed common shareholders received a fixed exchange ratio of
0.2562 shares of Barr common stock for each share of Duramed common
stock. As a result of the merger, Duramed Pharmaceuticals, Inc. became a
wholly owned subsidiary of Barr Laboratories. These financial statements
do not reflect the effect of the merger.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Comparison of the Three Months Ended September 30, 2001 to the Three Months
Ended September 30, 2000 - (thousands of dollars)
Total revenues increased from $103,136 to $315,329 driven mainly by increased
product sales as well as increased development and other revenue.
Product sales increased $210,086 from $99,680 to $309,766 due mainly to the
launch of Fluoxetine 20mg capsules ("Fluoxetine"), as well as other new products
such as Norethindrone Acetate and Trexall and increased sales of Tamoxifen.
Tamoxifen sales increased 43.8% from $62,494 to $89,884. The increase was mainly
attributable to an increase in units sold as well as higher prices. The increase
in units sold was primarily due to changes in the timing of customers' purchases
due to the timing of last year's Tamoxifen price increase. In fiscal 2000, the
price increase occurred in May 2000 while in fiscal 2001, it occurred in
February 2001. As a result, the decline in Tamoxifen sales the Company has seen
historically between the fourth and first fiscal quarters did not occur.
Tamoxifen is a patent protected product manufactured for the Company by
AstraZeneca, the innovator. Currently, Barr is the only distributor of Tamoxifen
in the U.S. other than AstraZeneca, whose product is sold under the brand name
Nolvadex. The Company currently has a tentatively approved Abbreviated New Drug
Application ("ANDA") to manufacture the 10 mg tablet of Tamoxifen and is
awaiting approval of the 20 mg tablet application. After the patent expires in
August 2002, the Company expects that it will either continue to sell Tamoxifen
as a distributed product or as its own manufactured product. The Company expects
that additional competitors will enter the market upon patent expiry. Whenever
this occurs, Barr believes that while its revenues and market share will be
negatively affected, its gross margins on the sales of Tamoxifen will exceed
those it currently earns as a distributor.
Other product sales increased from $37,186 to $219,882. The increase was mainly
attributable to the August 2001 launch of the Company's Fluoxetine 20 mg
capsule, the generic equivalent of Eli Lilly's Prozac. Sales of Fluoxetine
during the quarter were approximately $175,000. The increase was also due to
sales of Norethindrone Acetate, which the Company launched in June 2001 and
revenues recognized from the previous launch of Trexall. Currently, Barr is the
only manufacturer of the generic 20mg Fluoxetine capsule. Barr does not expect
other generic competitors to launch competing products until late January 2002,
when Barr's exclusivity period ends. When that occurs, the Company expects
numerous additional generic equivalents to be launched, which should
substantially reduce Barr's sales and profits from Fluoxetine compared to those
earned during the exclusivity period.
Development and other revenue consists primarily 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). In the prior year $1,835 was recorded as an offset to shareholders'
equity, with the balance recorded as development and other revenue. Development
and other revenue also includes royalty income earned under licensing agreements
with other third parties.
11
Cost of sales increased to $186,404 from $68,384, primarily related to the
increase in product sales. Cost of sales includes the profit split due Apotex,
Inc., the Company's partner in the fluoxetine patent challenge. As a percentage
of product sales, cost of sales declined from 68.6% to 60.2%. The decrease in
cost of sales as a percentage of product sales was due to an improved mix in
product sales as lower margin products like Tamoxifen made up a smaller
percentage of sales, than in the prior year, due to new product launches such as
Fluoxetine.
Selling, general and administrative expenses increased from $12,112 to $16,402.
The increase was primarily due to higher insurance, freight and other costs
associated with the launch of Fluoxetine, as well as increased legal costs
related to ongoing patent challenges and the development of potential patent
challenge cases, higher personnel costs and higher advertising and promotions
costs.
Research and development expenses increased from $11,126 to $15,323. The
increase was primarily due to an increased investment in outside clinical
studies related to the development of SEASONALE(TM) and CyPat(TM). In addition,
the increase reflected headcount and related costs associated with proprietary
development.
Interest income decreased by $411 primarily due to a decrease in market rates on
the Company's short-term investments, which was partially offset by an increase
in the average cash and cash equivalents balance.
Interest expense decreased $144 primarily due to a decrease in variable interest
rates, as well as a decrease in the Company's debt balances.
Other expense decreased by $2,513 primarily due to the prior year including a
loss of approximately $2,500 resulting from the write-off of the Company's
investment in Gynetics, Inc.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased from $222,339 at June 30, 2001
to $299,806 at September 30, 2001. In connection with an Alternative Collateral
Agreement between the Company and the Innovator of Tamoxifen, the Company
increased the cash held in its interest-bearing escrow account from $96,820 at
June 30, 2001 to $101,621 at September 30, 2001 (See Note 2 to the Consolidated
Financial Statements).
Cash provided by operating activities was $79,719 for the three months ended
September 30, 2001, driven by net earnings of $67,060 and a decrease in working
capital. The working capital decrease was led by increases in accounts payable,
accrued liabilities and income taxes payable partially offset by an increase in
accounts receivable. The increase in accounts payable and accrued liabilities
was primarily the result of amounts accrued for the Fluoxetine profit split as
well as increased Tamoxifen purchases. Income taxes payable increased as a
result of increased taxable earnings and the timing of estimated tax payments.
Accounts receivable at September 30, 2001 were $178,974 or $105,924 higher than
those at June 30, 2000 primarily attributable to the launch of Fluoxetine. As
Barr's sales and profits from Fluoxetine decline for example, when other generic
manufacturers launch competing products at the end of Barr's exclusivity period,
operating cash flows from Fluoxetine are also expected to decline.
Approximately $7.9 million of the Company's quarterly cash flows from operations
relates to payments from its contingent non-exclusive supply agreement with
Bayer Corporation ("Bayer") related to its 1997 Cipro 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
12
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 $31 million per calendar year for the remainder of
the agreement, which are not related to sales of Cipro. 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. The supply agreement also provides that, six months prior to patent
expiry, if Barr is not already distributing the product, Barr will have the
right to begin distributing ciprofloxacin product manufactured by Bayer.
A portion of the Company's spending on proprietary product development is being
reimbursed by DuPont Pharmaceuticals Company, which has since been acquired by
Bristol-Myers Squibb Company, in accordance with the development agreement
entered into in March 2000. During the quarter ended September 30, 2001, the
Company earned approximately $5.3 million under the terms of the agreement.
Payments under the Proprietary Product Development Agreement are reimbursements
of Barr's spending up to an aggregate of $45 million on three of its proprietary
products. This agreement provides for reimbursement of up to $4 to $5 million
per quarter through December 2003. As of September 30, 2001 the Company had
received approximately $25.3 million of the $45 million maximum.
During the first three months of fiscal 2002, the Company invested approximately
$5 million in capital assets, primarily related to upgrades and new equipment
for its facilities. The Company believes it may invest an additional $21 to $26
million in capital assets in fiscal 2002 primarily on investments in management
information systems and expansion in its distribution, research and development,
manufacturing and packaging capabilities. Over the past two years, capital
projects have been funded from cash flows provided by operations. Given the
extent and the long-term nature of some of the planned expenditures, the Company
may consider financing a portion of the expansion and believes it has the
capital structure and cash flow to take on additional debt.
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 $1,552 during the quarter ending December 31, 2001. The Company did
not use any funds available to it under its $20 million Revolving Credit
Facility during the current quarter. The facility expires in December 2001 and
the Company is currently evaluating an extension and/or expansion of such
facility.
On September 17, 2001, the Securities and Exchange Commission ("SEC") issued an
Emergency Order permitting companies to initiate common stock repurchase
programs without impacting pooling-of-interest accounting. As a result, the
Company's board of directors authorized the Company to spend up to $100 million
for such a common stock repurchase program. Such authorization was limited to
the time periods established by the SEC. On October 12, 2001, the SEC's order
expired and the Company's repurchase program ended. During the period the
Company repurchased 10,000 shares of its common stock at a total cost of
approximately $695. The Company does not intend to initiate for at least two
years another stock repurchase program that could jeopardize its
pooling-of-interest accounting for the Duramed merger.
On October 24, 2001, the Company completed its merger with Duramed
Pharmaceuticals, Inc. Barr expects to incur approximately $40 to $45 million in
costs related to this merger, the majority of which will be incurred in fiscal
2002. These costs include amounts to satisfy existing employment contracts,
estimated severance costs, duplicate facility expenses, as well as investment
banking, legal, accounting, regulatory agency filings, financial printing and
other related costs. In addition, at closing, Barr assumed approximately $37
million in debt. The Company may either refinance or retire
13
all or a portion of the debt assumed through existing cash balances, its
Revolving Credit Facility Agreement or other means that the Company may deem
appropriate.
As a result of the merger, Barr expects to earn taxable income sufficient to
utilize federal net operating losses of approximately $100 million generated by
Duramed over the past several years. The portion of the net operating loss Barr
can utilize to reduce federal income tax payments each year is limited in
accordance with IRS guidelines. The Company believes that it will be able to
utilize the net operating loss over the next several years and expects to lower
the amount of federal income taxes it pays by approximately $35 million over
that period.
The working capital costs associated with selling Tamoxifen are expected to
increase after Barr begins to manufacture and sell its own version of Tamoxifen.
For example, the Company's accounts payable are expected to decline
significantly due to lower costs to manufacture and shorter payment terms to the
Company's suppliers compared to those contained in Barr's distribution agreement
with AstraZeneca. In addition, inventory costs for Tamoxifen are expected to
decline significantly, as the cost to manufacture will be well below Barr's
current purchase price. Accounts receivable balances will be affected by lower
sales due to the launch of other generics and by longer payment terms offered to
customers. The exact amount of such an increase in working capital is dependent
upon several factors, some of which are outside Barr's control.
To expand its growth opportunities, the Company has and will continue to
evaluate and enter into various strategic collaborations or acquisitions. The
timing and amount of cash required to enter into these collaborations may be
significant, but are difficult to predict because they are dependent on several
factors, many of which are outside of the Company's control.
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.
14
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 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 timing of
product approval and launches, 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 as well as risk factors
contained in the Company's Registration Statement on Forms S-3 and S-4 as filed
with the Securities and Exchange Commission in May 2001 and August 2001,
respectively. 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 following forward-looking statements of forecasted results for the quarter
ending December 31, 2001 include the effect of the merger between Barr and
Duramed Pharmaceuticals, Inc. The merger was approved by the shareholders of
both companies and became effective on October 24, 2001. The merger is intended
to be treated as a tax-free reorganization pursuant to section 368 of the
Internal Revenue Code of 1986, as amended, and is being accounted for using the
pooling-of-interest method. Comments included in this Outlook section exclude
the impact of expensing costs associated with the merger including severance
costs, transaction fees and other related costs, which are not expected to recur
in future periods. However, such costs will be reflected in reported earnings.
The forecasted results are compared to the unaudited combined results from the
prior year quarter. A table of the prior year combined results is presented
below.
SELECTED PRO-FORMA COMBINED FINANCIAL RESULTS
QUARTER ENDED DECEMBER 31, 2000 (IN THOUSANDS)
15
(UNAUDITED)
Product sales $145,516
Development and other revenue 6,480
--------
Total revenues 151,996
Research and development 15,721
Selling, general and administrative 18,577
Operating income 16,165
Income before tax and preferred stock dividends 28,261
Income taxes 10,564
Income before preferred stock dividends 299
Net income $ 17,399
Earnings per common share - assuming dilution 0.39
Weighted average shares 44,581
Revenues
Product sales:
Product sales are expected to be dramatically higher in the quarter ending
December 31, 2001 compared to the prior year driven by sales of Fluoxetine,
which Barr launched in August 2001 as well as higher sales of Tamoxifen, higher
sales of other products such as Cenestin, a hormone replacement product, and
generic oral contraceptives including Aviane and Apri.
Tamoxifen increases are expected to be driven primarily by the timing of
customer purchases in anticipation of a price increase. Barr increases its
selling price at the time the innovator initiates a price increase. Last fiscal
year, the innovator raised Tamoxifen prices in February 2001, which was two to
three months earlier than in prior years. As a result, Barr's customers who
historically increase their purchases in advance of the price increase, did not
purchase the same quantities as in the past. This year, customers appear to be
anticipating an earlier price increase and may increase purchases accordingly.
Fluctuations in quarterly Tamoxifen sales based on the timing of price increases
are not unusual and have occurred over the past several years. Tamoxifen sales
tend to be lower in the quarter following a price increase as customer purchases
decline.
Sales of Cenestin, Apri and Aviane are expected to increase significantly versus
the prior year due to increasing market shares for each product.
Development and other revenue:
Development and other revenue is expected to range from $3 to $5 million in the
quarter ending December 31, 2001 down from nearly $6.5 million last year. The
decline is primarily due to the prior year including $2 million related to
Trexall, which was completed at the end of March 2001.
16
Margins:
Overall margins on product sales are expected to be up significantly compared to
the prior year, primarily due to a lower percentage of Tamoxifen sales in the
current year compared to the prior year. Tamoxifen, which the Company
distributes, has a margin of approximately 14-15% per year, which is
substantially lower than the margin Barr earns on products it manufactures.
Research and development:
Research and development spending in the quarter is expected to be in the $18 to
$20 million range compared to $15.7 million in the prior year. A portion of this
increase is related to expected spending on the products in the DuPont
proprietary drug development agreement. The balance of the expected increase is
due mainly to anticipated increases in clinical trial costs associated with the
Company's generic drug development effort.
Selling, general and administrative:
Selling, general and administrative is expected to be up significantly from the
prior year to $30 to $32 million range compared to approximately $19 million in
the prior year. The largest component of the year over year increase is due to
the increased marketing expenses related to higher Cenestin sales. Under the
terms of the Company's agreement with Solvay Pharmaceuticals ("Solvay"), Solvay
receives 80% of the gross profits on Cenestin sales. Solvay's share of Cenestin
gross profits is included in marketing costs. Also contributing to the expected
increase will be higher sales and marketing costs associated with supporting the
Company's recently launched products such as Trexall and Fluoxetine as well as
supporting expected product launches in the quarter. Other selling, general and
administrative expense increases are expected to include higher distribution
costs due to higher sales volumes and higher legal costs related primarily to
patent challenge activities.
Interest income:
Interest income is expected to increase slightly from the prior year quarter as
significantly higher cash balances are nearly offset by significantly lower
interest rates.
Interest expense:
Interest expense is expected to be lower than in the prior year quarter due to
lower debt balances and lower interest rates.
Other income:
Other income is expected to be down substantially compared to the prior year.
The prior year's quarter included the gain on the sale of a portion of the
Company's investment in Galen Holdings, PLC.
Preferred stock dividends:
No preferred stock dividends are expected in the quarter as the previously
outstanding preferred stock was converted to common stock in late September
2001.
17
Tax rate:
The prior year's tax expense has been recast to reflect the removal of a portion
of Duramed's valuation allowance that the Company believes is no longer
necessary on a combined basis. After adjusting for the valuation allowance, the
combined prior year tax rate was approximately 37%, which is consistent with
expectations for the current year. As a result of the combination, the future
cash benefit attributable to the utilization of the remaining net operating
losses on a prospective basis will be accounted for as an increase to
shareholders' equity in accordance with SFAS No. 109, "Accounting for Income
Taxes."
Earnings per share:
Previously, Barr indicated that it expected to earn approximately $1.30 to $1.40
per share in the second quarter ending December 31, 2001, excluding the effect
of the merger and related non-recurring merger costs. The Company currently
expects that earnings per share for the quarter ending December 31, 2001 will
increase to $1.40 to $1.50 per share, excluding the effect of the merger and
related non-recurring merger costs. The expected increase in earnings per share
is attributable to higher than expected sales of Tamoxifen and other
manufactured products as well as continued strong sales of Fluoxetine.
Based on the information provided above, the Company expects combined second
quarter earnings per share to be $1.25 to $1.35, which includes approximately
8.6 million shares issued to complete the merger and excludes merger related
costs of approximately $40 to $45 million. This expected combined earnings per
share does not include potential earnings contributions of products pending
approval at the U.S. Food and Drug Administration, which could be launched prior
to the end of the second quarter.
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
that cannot be predicted or quantified and, consequently, actual results may
differ materially from those expressed or implied by such forward-looking
statements. 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 court decisions on patent
challenges, including the Supreme Court; the court and FDA decisions on
exclusivity periods; market and customer acceptance and demand for new
pharmaceutical products; the 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," "should," "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 2001 Annual Report on Form 10-K, the Company's exposure to
market risk from changes in interest rates, in general, is not material.
19
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 are class action complaints on behalf of direct
and/or indirect purchasers for Cipro from 1997 to present
against the Company along with Bayer Corporation and the Rugby
Group, Inc. and others alleging violation of federal antitrust
laws and/or state antitrust and consumer protection laws. The
following actions have been filed, on the date indicated, in
state court: Donna Moore (California Superior Court, Sonoma
County 10/25/01); Alan Moore (California Superior Court,
Sonoma County 10/29/01); Senior Action Network, on behalf of
the Citizens of the State of California (California Superior
Court, San Francisco County 10/30/01).
Tamoxifen Citrate Class Action Suits
The following complaints represent putative consumer or
third-party payor class action complaints, brought under
federal and state antitrust and/or consumer protection
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 high prices for Tamoxifen Citrate. Plaintiffs
seek to recover both Barr's and Zeneca's profits and treble
damages, where appropriate, for the alleged antitrust
violations. The following actions have been filed in state
courts: Cobalt (DC 10/5/01); Steward (KS 10/22/01). The
following actions have been filed in or removed to United
States District Courts: Platt (M.D. Fla. 7/27/01); Underwood
(D. Minn. 8/1/01); Donega (D. Mass. 8/7/01); Teamsters Local
237 (E.D. NY 8/7/01); Lynch (E.D. NY 8/21/01); Callaway (D. KS
9/18/01); Maloney (S.D. Fla. 10/9/01); IBEW (E.D. NY
10/23/01); A.F. of L. (E.D. NY 10/23/01); Mechanical
Contractors (E.D. NY 10/23/01); Sheet Metal Workers (E.D. NY
10/23/01); Local 1199 National Benefit Fund (E.D. NY
10/23/01).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Exhibit
-------------- -------
None
(b) There were no reports filed on Form 8-K in the quarter ended
September 30, 2001.
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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: November 14, 2001 /s/ William T. McKee
------------------------------------
William T. McKee
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
21